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    Former US Treasury secretaries sound alarm

    Paulson, Rubin fear EU crisis could derail US

    Robert E. Rubin (left) and Henry M. Paulson Jr. were keynote speakers at the annual BIO convention in Boston.
    Jonathan Wiggs/Globe Staff
    Robert E. Rubin (left) and Henry M. Paulson Jr. were keynote speakers at the annual BIO convention in Boston.

    Former US Treasury secretaries Henry M. Paulson Jr. and Robert E. ­Rubin, who each fended off financial calamities over the past two decades, warned Tuesday that urgent political action is needed on both sides of the Atlantic to prevent a new global meltdown.

    “We have a cliff coming,” said Rubin, who served as Treasury secretary under President Bill Clinton in the 1990s. “The idea is to avoid the cliff.”

    “Under the best of circumstances, this will drag on for a long time, and there will be a lot of strains,” said Paulson, who had the job under President George W. Bush. “When markets collide with politics, markets will win. Markets will have the last word.”


    The two men, keynote speakers at the Biotechnology Industry Organization’s annual convention in Boston, engaged in an hourlong discussion before several thousand life sciences executives. It was moderated by BIO’s chief executive, James Greenwood, an ex-Pennsylvania congressman.

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    While the tone was relaxed and collegial, Paulson and Rubin were pessimistic about the European debt crisis and its potential to drag down the still fragile US economy.

    “I’m not optimistic in the short term on Europe,” Paulson told the biotechnology luncheon forum. “One of the problems we have in Western democracies is voters wanting things they don’t want to pay for . . . The likely case is, although Europe is a drag, the US economy will continue to muddle along, but at a pace that doesn’t make a dent in unemployment.”

    Paulson, a former chief executive of investment bank Goldman Sachs & Co., defended his own decision to support a $700 billion bailout of troubled US financial institutions during the 2008 crisis. But he acknowledged that he erred in communicating the move to the public. The ex-secretary said that he should have made it clear that the bailout was intended to stabilize the nation’s financial system and prevent a collapse that would have hurt ordinary Americans.

    “What I never was able to make the public understand was that the rescues weren’t for the banks, they were for the public,” he said. “Every rescue, every bailout we did, I have no regrets because it was better than the alternative ... The money we put out, it prevented a collapse.”


    Rubin, who led US efforts aimed at propping up the Mexican and several Asian economies, defended those Clinton-era bailouts.

    “On the whole, we got it right,” said Rubin, a former director of banking giant Citigroup.

    Both men acknowledged, however, that their bailout decisions could have invited “moral hazard” at big banks where, in Rubin’s words, “the creditors feel that in very large measure they have been protected against the consequences of their actions.”

    Paulson agreed there was a danger of moral hazard — that if you protect people from the fallout of their risky behavior, they will continue to engage in such behavior. But he said that he was entirely focused on averting a catastrophe in the US and global markets. “You never really break the cycle [of financial bubbles] in market-based economies,” he said. “The most you can hope for is to mitigate it.”

    Both said decisive political action is needed in Europe and the United States, by next year at the latest, to prevent a new financial meltdown that would be felt worldwide. Rubin said the world’s largest economies — the United States, the European Union, and Japan — all face unsustainable levels of debt that their leaders have avoided confronting.


    “All three of these, roughly speaking, have the same problems,” Rubin said. “They have unsound, unsustainable, and deeply dangerous fiscal situations. In each of these major regions, the problem has been kicked down the road rather than addressed.”

    Paulson said “if you look for root causes, they’re almost always about bad government policies” that encourage excessive consumer borrowing or overstimulate the housing market. What is needed, Paulson and Rubin agreed, was bipartisan policies that would raise revenue, reform the tax system, and bring down the mounting federal deficit.

    While they offered some rays of hope, citing the historic resilience of the US political system, both agreed it will be difficult to solve the financial problem in the current polarized environment — and impossible before the US election in November.

    In the European Union, where a solution would involve multiple sovereign countries, it will be even harder, they said. “The [European] monetary union is not sustainable unless you forge something that looks much more like political union,” Paulson said.

    Both former Treasury secretaries said they remained hopeful a financial disaster can be averted. “As to what’s possible politically,” Rubin said, “you only find that out when you all get together in a room.”

    “Deep down inside, I have the feeling, we’ll get through this,” Paulson said. “We always have.”

    Robert Weisman can be reached at