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"Be Careful What You Wish for, Al..."

November 27, 2000

To: Al Gore

From: Bob Rubin

Subject: For your consideration

Dear Al,

The strain of the last two weeks has exhausted you, I am sure. But at the risk of adding to the load, I want to broach some troubling thoughts of mine concerning the economy. My hope is that this will help you decide whether to press your legal battle if the recount now under way leaves G.B. ahead in total votes.

The problems in the economy are barely visible as yet, but they could conceivably turn into crises far more challenging and painful than either you or G.B. might now imagine. Before I say anything else, let me make clear that this is the Wall Street side of me speaking -- nearly forty years of it -- and not the Democratic partisan who rarely uttered a discouraging word in public during his four-and-a-half years as Treasury Secretary. I also speak as a longtime friend, one who greatly admires your ability and who wishes you all possible success in your political career.

You have campaigned hard, Al, and I fully understand why you are contesting the November 7 results so aggressively. As a matter of principle, I'm behind you 100 percent. You rightly deserve the victory, and no one I've talked with seems to doubt that you would win hands-down if Florida were to hold another election tomorrow. I don't know much more than what's been reported in The Times and on Jim Lehrer's show, of course, but it sounds as though Dave, Bill, Warren and the rest of your team have a pretty good handle on the legal issues. Still, I'm sure it has been nerve-wracking for you, Tipper, and the girls, and I hope for your sake as well as the nation's that a final decision comes soon.

As difficult as this is for me to say to you, I hope it is your opponent who takes the oath in January. Better George Bush than you, Al, and here is why. The economy has begun to slide toward a recession that I believe could become quite severe. First it was the technology sector that flashed warnings of a slowdown, but it is becoming clearer with each passing week that retail, autos and banking and some other key sectors are starting to slip as well. Given the record-high levels of private and corporate indebtedness at this time, as well as the complete absence of household savings, there are strong reasons to think that the next recession will not be a mild cyclical downturn such as we experienced in 1990-91.

If I am right, a sharp and prolonged downturn would likely deal a devastating blow to the next president, to his party and to whatever political goals they might have wished to pursue. To put it another way, I think it's more than remotely possible that that the next man in the White House may be stepping into the kind of economic minefield that Herbert Hoover entered when he took office seven months before the 1929 Crash.

I know this doesn't sound like the Bob Rubin you knew when I was at Treasury. But trust me, even though I did my share of cheerleading for the Team Clinton's economic policies, I never quite trusted the boom, nor the supposition that Alan Greenspan could keep it going for long without paying a heavy price.

I said as much after I left Washington last year, but I'm not sure anyone was listening. Do you remember the speech I gave last February at the London School of Economics? It received almost no coverage in the U.S., although to their credit, Bloomberg News put the whole scary speech out on the wire. I've got the hard copy right here, Al, and I think the words are even more relevant now than they were back then. Let me quote for you some excerpts from the story that Bloomberg put out on the wire:

"The chairman of the executive committee of Citigroup Inc., the biggest U.S. financial services company, said the world faces 'serious and continuing' danger of a crisis like Asia's in 1997 and 1998…Rubin attacked the premise that the new computer technology that's boosting U.S. productivity removes the risk of investment.

"He said he had been 'struck' since returning to New York [by] the pervading 'assumption that all will always be well' in financial markets. Instead, he said, investors would do well to consider risks….'Record trade deficits, tight labor markets, exceedingly low personal savings rates and stock valuations dramatically high by any conventional measures -- all are dismissed as minor caveats to the positive outlook of the U.S. and global economies instead of being seen as possible excesses and imbalances that may pose real risk to our economic well-being.' "

Well, I don't have to tell you that all of these problems have only worsened since I gave that speech, Al. Nor do I have to lecture you on basic economics, since we probably took many of the same courses at Harvard. Nowhere were we taught that the astronomical levels of private and corporate borrowing that have prevailed over the last few years would form the bedrock of a stable and healthy economy. What we've got, actually -- and to a much greater degree than nearly anyone seems to suspect -- is a boom that has been floating on the hot air of a reckless credit expansion.

There will surely be a price to pay, and my great fear is that that price could be a much deeper recession than any we have experienced in the post-War period. Even if we only get the mild recession that a growing number of economists seem to expect, it would probably catapult the opposition party to a solid congressional majority in the 2002 elections. And if the downturn is worse than just mild, as I strongly believe it will be, it could leave the incumbents struggling politically for the next twenty years. Why not let it be the Republicans who struggle? And the Democrats who rise to the challenge, just as FDR did, mounting an insurgency that left them productively in charge of Washington for the next forty years?

It's not that I think you can't handle the job, Al -- only that the economic risks and potential political downside over the next few years are considerable, to say the least. By bowing out gracefully now, you would not only spare the nation the ravages of a protracted legal and political battle, you would also secure the high ground for another run at the White House in 2004.

Think about it. I don't expect you to call a press conference and furlough your lawyers before the final results are in. But do keep in mind that if the hand count leaves you a few votes short, it could be worse.

As always,



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