by Bob Woodward
On December 19, 1991, the Board of Governors voted 6 to 1 to lower the discount rate a full 1 percent to 31/2 percent, the lowest it had been since 1964. Angell was the lone dissent.
The announcement made a splash on Wall Street and at the White House. The Washington Post quoted Scott Pardee, chairman of a securities firm in New York, saying, “It’s sort of Merry Christmas and Happy New Year from the Fed.” Bush issued a public statement praising the Fed move, and the next day Greenspan went to the White House, where Bush and his advisers were very happy.
Several days later, The Wall Street Journal published a long front-page story about the new bold Fed that extended the holiday metaphor. “It was a Christmas Eve conversion to rival that of Ebenezer Scrooge,” the account began. Greenspan was cast as the stingy old man who led his colleagues but also allowed himself to be led at times. Mullins was portrayed as the hero, the one who “laid the intellectual groundwork” for the 1 percent decrease. Because of the rate cut, the article said, indebted businesses and homeowners would be able to refinance loans and optimistically projected that billions of dollars would go to consumers—“as swiftly and surely as a tax cut.”
On the day after Christmas, December 26, Greenspan met with Bush again.
Over the course of 1991, in ten separate moves, the FOMC had also lowered the fed funds rate from 7 percent to 4 percent, a sure sign that the economy was in trouble.
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GREENSPAN HOPED that Bush would win reelection in 1992. As a citizen he was allowed to have his preference, but as Fed chairman he wasn’t supposed to involve himself in politics. It was delicate. When he met with the president, he conveyed his support. Budget Director Darman, who had been present at several sessions, was hoping to use Greenspan’s obvious leaning to convince him to cut interest rates more and faster.
Darman was increasingly convinced that Greenspan was grossly mishandling the money supply. He also believed Greenspan was wrong to insist that the economy could not grow more than about 21/2 percent a year without producing inflation. He had charts and his Harvard Business School education to reinforce his arguments. There was an immutable law, a mathematical formula, about the relationship of economic growth and inflation to the money supply.
Greenspan didn’t disagree with the formula, but the key variable, the velocity—or number of times money changed hands—could no longer be measured accurately for a variety of reasons that were accepted by most economists. That was why the Fed was essentially just setting the fed funds rate, not attempting to target the money supply directly. Greenspan reiterated his view to Darman that the Fed had been unable to control or even accurately measure the money supply for years. The notion that it was possible was outdated.
Darman persisted, convinced that Greenspan wanted to go into the history books as the super–inflation fighter, at almost any cost, including Bush’s reelection. He sent Greenspan memos and faxes urging lower rates.
After several years of sparring, Darman had begun to take Greenspan’s obstinacy somewhat personally. He began telling associates that the chairman resembled the character Woody Allen plays in his movies, a man of some intellect but simultaneous insecurity. Greenspan wasn’t leading. Darman wanted him to get up and declare, “I’m lowering rates. Your Fed is with you. I’m not going to let this happen to this country.”
Darman also found it odd that Greenspan said he telephoned his mother almost daily and visited her weekly, traveling on the shuttle to New York. This was not ordinary in Darman’s mind, and he suggested sarcastically that there were parallels with Norman Bates, the mother-obsessed character in Alfred Hitchcock’s Psycho. We can’t be sure the mother exists, Darman joked. In any case, he suggested that Greenspan’s mother had a strange and unnatural power over her son. And he and the administration seemed to have too little.
Darman would not go away. He argued to Greenspan that the chairman of the Fed was a crucial character in the confidence game of building support and national optimism. Greenspan had almost an obligation to cut rates—perhaps just for two or three months, as a vote of confidence in the economy, in Bush, in America. That would be a near-zero-risk operation for Greenspan, Darman said. If the chairman would get up and say, We are confident the economy can grow, and then act accordingly, it would.
Greenspan listened but did not budge. He disagreed with Darman. That was just not how the economy worked.
Darman started whispering around town that Greenspan was to blame for the 1990–91 recession—or at least, as the budget director put it, anywhere from 50 to 80 percent of the blame belonged to Greenspan.
• • •
Treasury Secretary Brady picked up where Darman left off. If the money supply were managed properly, interest rates would be much lower. He wanted the fed funds rate, which was now at 4 percent, down to 1 percent or even lower. Inflation was under control, the government was cutting its spending and the Fed should keep feeding the money supply.
Brady considered lower rates to be an insurance policy. Why aren’t you flooding the economy with money? The downsides are negligible. If inflation popped up, the Fed could tighten. Brady warned Greenspan: You’re going to get into a cul-de-sac where you can’t get out, and you’re going to be a day late and a dollar short with rate cuts. Then the economy will tank and it will take dramatic rate reductions to help bring it back.
The risks as you view them are wholly different from the risks I see, Greenspan replied. Once inflation began, the genie would be out of the bottle and it would take months or more to clamp down. The economy had to grow on its own. The Fed couldn’t make it happen—perhaps artificially for a few months, but the benefit would be so small compared to the risk.
Brady, who had risen to head Dillon, Read, had probably been a good market person, Greenspan concluded charitably. His knowledge was subliminal, making the right moves and judgments about markets. “I feel it in my bones” was a frequent Brady refrain. But when he tried to articulate it, the words could sound like hash. Perhaps his state of knowledge was not at a level where it was verbal, Greenspan concluded. In any case, Brady’s words made no economic sense.
“Look, Nick,” Greenspan finally said, “don’t complain to me. Call the board members. I have no objection.”
So Brady took to the phone. He called board member Kelley, Jim Baker’s old friend. The Fed should ease more aggressively, he urged.
“Thank you very much, Nick,” Kelley said. “I appreciate your call. It’s nice of you to take your time to communicate with us, and we’ll certainly take that into consideration.” Period. Good-bye.
Several governors mentioned to Greenspan that Brady had called them. If Brady kept it up, Greenspan concluded, he might trigger a vote to raise rates. The problem with the treasury secretary was that he didn’t realize that, and he didn’t know how the economy really worked.
By March 1992, Greenspan had not lowered rates for three months, and Brady canceled his weekly breakfast or lunch with him. “You only get his attention if he’s not included,” Brady said at one White House discussion. He agreed with Darman that Greenspan was a political animal, subject to manipulation if he perceived himself excluded. He soon concluded he would have to go further, playing on what he believed was Greenspan’s status anxiety, his concern about his social standing. He cut off all regular social contact with the chairman—no parties, no dinners. “Whoosh! Boom! Stop!” Brady said. “The only way to really get his attention is to sort of make him an outcast.”
As the treasury secretary, Brady was the senior economic spokesman for Bush. He would not allow Darman or any other person less senior to have regular meetings with Greenspan. In no way would he accede that important turf to Darman, whom he thought brilliant but immature and self-important. Bush’s economic advisers were so divided that Bush himself had to take over the Greenspan account. In the spring, the president began meeting with the chairman to make the case.
“I don’t want to bash the Fed,” Bush sa
id at one meeting. The president, who had majored in economics at Yale, said he had heard from businessmen that the Fed should be increasing the money supply. A lot of people are saying this is a problem. How should I be looking at this? Bush asked.
We’re as concerned and frustrated sometimes as you, Greenspan replied. Rates were at a historic low, and normally the money supply should be way above where it currently was. Because of the collapse of the savings and loan industry and other technical issues, the Fed was struggling with the money supply, Greenspan acknowledged. Our ability to control the money supply is not as facile as it used to be.
The president said that he just wanted to understand what the Fed was doing.
It was not an adversarial discussion, and Greenspan left feeling better. He thought Bush had a legitimate right to know what was going on. The chairman was delighted to deal with Bush. Though the president’s undergraduate degree in economics did not make itself overly apparent in these discussions, Greenspan found Bush, as he put it carefully, “not unknowledgeable.”
In Greenspan’s first 18 months at the Fed, Ronald Reagan had never wanted to know any of these things.
• • •
On June 23, in an interview with The New York Times, President Bush said, “I’d like to see another lowering of interest rates.”
At the FOMC meeting a week later, only one member of the board, Lawrence Lindsey, a former Harvard economics professor appointed by Bush, mentioned Bush’s remark. He said he didn’t like it.
Greenspan didn’t say anything about the public comment, but he proceeded with an extra dimension of caution. He noted that the extended discussions by the members were very mixed concerning the economy, and he admitted his own confusion. The gloomy data from the most recent weeks could turn out to be “phony,” he noted. Yet since they had eased rates 22 times since May 1989, “which has to be some sort of record,” at some point the economy could start to show “some significant vibrancy.”
The chairman proposed what he called “a mildly asymmetric directive toward ease, but with the requirement that before any action is taken there be a telephone conference to explain why.” He was being exceedingly careful. “I am not sure that captures everybody; I suspect it probably does not. But having thought about trying to find where the central tendency is—where one captures the largest number of views and concerns of this committee—that’s pretty much where I come out.” The FOMC approved his proposal by a 10–2 margin.
The next day, July 2, the Labor Department released unemployment data. The unemployment rate had risen to 7.8 percent from 7.2 percent, an alarmingly sharp increase. The Board of Governors immediately voted 7 to 0 in favor of a 1/2 percent cut in the discount rate. Greenspan convened a conference call of the FOMC to propose a 1/2 percent cut in the fed funds rate as well. There was no dissent.
On September 4, Greenspan lowered the federal funds rate by another 1/4 percent, two months before the presidential election. That move put the fed funds rate at 3 percent, the lowest it had been in 20 years. The normal medicine was not working. The extreme reduction to 3 percent, with inflation at about 3 percent, meant that the real interest rate was effectively 0 percent. In some respects, it was a bold decision to overstimulate the economy.
On October 6, The Wall Street Journal published a front-page article that gave a great deal of credit for the rate cuts of the last two years to Vice Chairman Mullins. With its trademark black-and-white etching of the scholarly, bespectacled Mullins, the article quoted an unnamed official saying of the vice chairman, “He’s like the wave washing against the shore. He’s constantly pounding against Greenspan.”
The FOMC convened that day. The economy was growing, but at a subdued pace, and the outlook for future growth was uncertain.
Mullins attempted to make a modest case for a rate cut, saying that he expected negative data in the coming weeks. “We likely will be confronted with a persuasive case for a rate cut,” he said. “Indeed, I think the case is fairly persuasive now. The timing and execution are difficult.”
“This has to be one of the most difficult periods for policy making that I remember,” Greenspan said after the others had spoken. “We have a very touchy problem here. I’m aware, as you all are, that everyone expects us to ease, and that becomes a self-fulfilling activity. While the case for easing right now is quite strong, I would be far more inclined to wait for a short while.” He moved for an asymmetric directive toward ease, aware that the committee might have to lower rates in the very near future.
“I say this without a great conviction because anyone who has a great conviction at this stage about what the economy is doing or what proper policy is, I think, is under a mild state of delusion.
“I wish we had the luxury to sit back and do nothing until after the election, as is the conventional procedure. I don’t think we have that luxury. However, I don’t think the markets have been viewing anything we have been doing as politically motivated. There are obviously those who make those statements, but I don’t think that’s a serious issue confronting us. So, I would dismiss that as a consideration.” If the economy didn’t pick up, they would have to move toward ease no matter what.
“Let me just say something that I think is important for us to focus on,” Greenspan added after hearing from everyone. “This is a very close call here, and what I don’t want to do is convey a sense that I have some strong conviction as to what is involved here. I want to make certain that we’re not getting a committee vote which merely acquiesces in a view that I have stipulated because, as we have all indicated around this table, this is an extremely difficult period. I want to make certain that we get a vote which is essentially a committee vote rather than acquiescence to the position of the chairman.
“Ordinarily,” he added, “I would never say such a thing!”
The members laughed.
“I want to read off my notes to be sure that I have gotten everyone’s view and priorities correctly. Accordingly, I’m going to poll each of you.”
Greenspan finally got to the wave that was supposedly pounding constantly against his shore. Governor Mullins? he asked.
“I think there’s a case,” Mullins began, “for ease now, but I—”
“But,” Greenspan cut in, “that’s not the question.”
Mullins said he would go with Greenspan’s asymmetric proposal.
“That there is a case for ease now is unquestioned,” Greenspan continued, “but what’s your priority?”
He made Mullins say it twice: He would go with the chairman.
Greenspan finally declared, “There is a majority for asymmetric toward ease in the form which I originally stipulated it.” He then called for the vote, and his proposed directive won 8 votes, including Mullins’s. Four were against. The shore had won.
“Okay,” Greenspan said. “Let’s go have lunch.”
Four days later, October 10, Greenspan attended the fall meeting of the Business Council at the secluded Homestead resort in Hot Springs, Virginia. Although traditionally the Fed didn’t act in the month before an election, he rejected the idea that the Fed would hold off out of any fear of appearing to bow to pressure from the Bush administration.
“This would be an irresponsible action on our part,” Greenspan said. “I wish to emphasize that we at the Federal Reserve will continue to observe and evaluate the economy the way we always do and will not, if we believe it is necessary, abstain from taking actions largely or solely because there is an election and a campaign under way.”
But he did not cut rates.
• • •
On Election Day, Tuesday, November 3, 1992, Arkansas Governor Bill Clinton beat Bush, with only 43 percent of the popular vote. Bush had 38 percent and Texas billionaire Ross Perot 19 percent. All the polls and most of the analysis showed that the main issue in voters’ minds was the economy. Clinton had promised presidential action to fix it. Bush seemed out of touch.
It was tragic, Greenspan felt. Bush,
who Greenspan believed had done a flawless job on the nation’s most important policy issues—the confrontation with, and eventual collapse of, the Soviet Union and also the Gulf War—deserved reelection. Of course, Greenspan thought, it was exactly what had happened to Winston Churchill, who had been thrown out of office after victory in World War II.
• • •
David Mullins thought the Bush loss had much to do with a failure of the administration to address the wreckage of the 1980s that Bush had inherited. He had a list of 10 negative economic conditions that Bush had faced in January 1989 when he took office: 1. lots of debt for government—the federal deficit plus state and local deficits; 2. high business and consumer debt; 3. commercial real estate overbuilding; 4. the so-called junk bond collapse; 5. Department of Defense budget cuts after the fall of the Soviet Union; 6. a Democratic Congress that wouldn’t give Bush much maneuvering room; 7. American business restructuring and layoffs; 8. the Japanese economic troubles; 9. decrease in exports; 10. an uncooperative Fed.
Mullins felt in retrospect that Bush should have gotten out the bad economic news early in his administration, perhaps with a call-to-arms speech about the trouble. He could have taken the political hit up front and diminished expectations right away. But Bush hadn’t wanted to do anything that would imply criticism of his political godfather, Ronald Reagan. In addition, Mullins thought that Brady hadn’t faced up effectively to the economic problems at hand in the fall of 1991. Brady had recognized that there was a long-term problem, but he wanted to gut it out rather than acknowledge to the public that there would have to be a period of adjustment and slower growth. This failure to explain the situation—both to the president and to the public—was one of Brady’s greatest failures as treasury secretary, in Mullins’s view. Mullins thought that the personal closeness between Bush and Brady had freed Brady from having to persuade the president with logical or politically viable arguments. And so, in some sense, Brady’s philosophy of hope and optimism as a cure had become Bush’s. Over time, the cure had become the disease. The result was a hands-off economic policy, which to many voters appeared as indifference.
