by Bob Woodward
The implausible had become plausible. Greenspan realized it was the soft landing that made his reappointment possible. Without it, his future would likely be different. It had taken years—saving the banks, Clinton’s 1993 economic plan, the rebirth of the overall economy and the building of consumer confidence. Greenspan knew he had helped hand Clinton what he called “a pro-incumbent-type economy.”
In many respects, it was more than that. Inflation was about 3 percent—for the fifth year in a row, which was the best economic performance since the Kennedy administration. At the end of January, unemployment was at 5.6 percent, lower than most economists thought possible without triggering inflation. The Dow Jones was at 5381, up almost 40 percent from the previous January. Overall economic growth was between 2 and 3 percent. But most important, there had been no recession.
Clinton understood the power of the economy in a presidential election. The 1990–91 recession—and the economic doldrums and pessimism of 1992—had been the foundation of his first presidential campaign. The campaign’s memorable slogan “It’s the economy, stupid,” devised by political strategist James Carville, contained a pledge that Clinton would be engaged and in touch with the forces that affected people’s daily lives. The last three presidents to lose—Ford, Carter and Bush—had failed in part because they had mismanaged the economy, or had been perceived to have mismanaged the economy.
• • •
Ten days later, at the January 31, 1996, FOMC meeting, the bank presidents and governors presented some evidence that the economy was slowing. Business investment in computers was slowing. Motor vehicle inventories were up, meaning sales were down. The forecast was that the economy most likely would pick up over the year, but Greenspan said that the risk of a drop in growth was significant. Given the low amount of inflation, he saw only a limited risk in a slight easing. He proposed another 1/4 percent cut in rates.
Some noted that postponing the rate cut could be defended, given the uncertainty of the situation and the possibility that the weakness in the economy was quite temporary. If this were so, an interest rate cut could help create inflationary pressures. Still others remarked that the sluggishness could be read as a call for a more significant rate cut.
Greenspan had found the middle course, and his 1/4 percent cut was approved unanimously.
• • •
Meanwhile, Tyson spoke with Greenspan by phone about the Rohatyn nomination. This was the way the president wished to proceed.
Greenspan sent a simple message: He could live with it. It would be okay, he was not going to block it.
Several key Republicans on the Senate Banking Committee, which would have to vote to confirm him, soon voiced public opposition to Rohatyn. Fed governors each had to come from different Federal Reserve districts, and the New York slot was filled by Greenspan. Rohaytn was trying to figure out a way to use the residence he was building in Wyoming as a way to serve from another district, but the whole issue posed a technical obstacle that critics could use to derail the nomination.
Tyson warned Rohatyn that trouble was brewing. It looked as if he didn’t have a single Republican vote on the Senate Banking Committee, and Republicans controlled the Senate.
“I know a lot of Republicans,” Rohatyn responded. Many were his friends.
“Good,” Tyson said. “Then use them.”
Rohatyn had served on the board of directors for Universal MCA, the giant film and music conglomerate, with Howard Baker, Reagan’s chief of staff and a former Senate Republican leader. He asked Baker, who was now in private law practice in Washington, to make some calls.
Baker made a bunch of calls to Republican senators to tell them how Felix had saved the credit of New York City, that he wanted the Fed vice chairmanship and that they would be lucky to have him. But Baker couldn’t get a handle on it. It was pretty clear to him that someone was poisoning the well, but he couldn’t tell who.
When Tyson spoke with Rubin, she could see he was uncomfortable.
It is not the right thing, he said. It wouldn’t be good for the Fed, and he didn’t think it would be good for the president to stake out a firm position on Rohatyn, because they could lose.
Next, Tyson heard from a senior member of the White House staff in charge of liaison with the Senate about a likely Rohatyn nomination. “Do you know what Alan Greenspan is doing?” the senior staffer asked.
No, she did not.
He’s setting up all the chips so that it won’t happen, the staffer said. Republicans were frustrated with Clinton, and the Republican attack machine was always poised to strike at his nominees. Republican Senate Banking Committee members took their cues from Greenspan, and though the chairman wasn’t opposing Rohatyn, he wasn’t saying that he wanted him, either. It was subtle, but it was happening.
Tyson couldn’t find any hard evidence of Greenspan’s direct involvement, but clearly the negatives were building.
Senator Connie Mack, Florida Republican and a key member of the banking committee, went after Rohatyn—publicly declaring him a dangerous, big-government, liberal interventionist.
Rubin learned from some Democratic senators that he could get a confidential reality check about Rohatyn from Senator Bennett, the Republican on the banking committee.
“What will happen if we send you Greenspan as chairman and Rohatyn as vice chairman?” Rubin asked Bennett.
“We will confirm Greenspan in a heartbeat,” Bennett said, “and Rohatyn will not get out of committee.” If for some reason Rohatyn got approved by the banking committee, his nomination would be filibustered on the floor of the Senate, Bennett added.
“Yeah, but they go together,” Rubin said, not tipping his hand. “We’ll send them up together.”
“It will take a nanosecond to separate them,” Bennett said, “and Greenspan will be confirmed . . . and Rohatyn will be filibustered until Connie Mack doesn’t have a breath left in his body.”
“Senator,” Rubin said, “thank you for your candor.” It was what he had been telling the White House, and they wouldn’t believe him. Now maybe they would.
On Monday, January 29, The Washington Post ran a front-page story reporting that most economists, including Greenspan, did not believe higher sustained economic growth over many years was possible. The next week, on February 4, Stanford University economist Paul R. Krugman weighed in in The New York Times Magazine declaring that higher-growth proponents like “financier-pundit Felix Rohatyn” were living with a “delightful fairy tale.” Krugman wrote, “In fact, the so-called revolutions in management, information technology and globalization are vastly overrated by their acolytes.”
• • •
It was now clear to Rohatyn that neither the White House nor Greenspan was going to make the required effort. He calculated that he might spend three months fighting to win the post, and it would be a big nuisance for all—Clinton, the Fed and himself—with no assurance he could win it. The low level of enthusiasm was so evident that he felt he could almost touch it. After all, he had powerful forces on his side—much of the business community, the president and even the conservative editorial page of The Wall Street Journal. But they all seemed not to matter. On February 12, Rohatyn faxed a withdrawal letter to the White House. White House Chief of Staff Leon Panetta urged him to hold off for a day. Rohatyn said no.
He exchanged perfunctory phone calls with Rubin and Greenspan.
Yeah, it was too bad, they all agreed. After all, it was an election year, and the Republicans were playing politics.
• • •
Clinton needed a new candidate. Tyson walked over to the office of Alice Rivlin, 64, the petite, intellectually powerful budget director. In the first 18 months of the Clinton administration, Rivlin had been the deputy budget director to Leon Panetta, who had been the high-profile, outspoken director. Now that Panetta was White House chief of staff and Rivlin the budget director, Panetta still tended to act as if Rivlin were his deputy. Tyson thought that it was time
for her to get out.
“Alice,” Tyson said, “I have a really good job for you.”
“Let me think about it,” Rivlin said.
Rivlin, a Ph.D. economist, had perhaps the most impressive policy credentials of anyone in the Clinton administration. She had written or coauthored books on education, socioeconomics, social action, economic choices, the Swedish economy, the elderly and the American dream. She had been founding director of the nonpartisan Congressional Budget Office, which gave Congress its first real handle on the complex federal budget, from 1975 to 1983.
Moving in and out of the Brookings Institution, a leading moderate-to-liberal Washington think tank, Rivlin was a premier deficit hawk, arguing aggressively and sometimes in an impolitic manner that cutting the federal deficit was central for Clinton’s credibility and an improving economy. She was a charter member of the Smart Women’s Club, an informal luncheon group that included Donna Shalala, Clinton’s secretary of health and human services, and Meg Greenfield, longtime editor of the editorial page of The Washington Post. She went to see the president.
Clinton said he was worried that 1996 would turn out to be like 1994, with the Fed raising interest rates. He wanted to reappoint Greenspan, but he wanted Democrats in the two other openings to fill Blinder’s seat and that of John LaWare, who was also leaving. Clinton said he sought to balance Greenspan with people who would be more pro-growth. He wanted credible economists. Rivlin was enough of a deficit hawk that the Republican Senate should easily confirm her. How about it?
No, Rivlin told the president. She loved working as the budget director, being a cabinet member. She wanted to stay on.
Privately, however, Rivlin found the White House endlessly difficult. In some ways, she was exhausted by the confusion she encountered there. She would come in early in the morning, confident of the six things she was going to do that day, and by 8:30 a.m. they would have her doing six other or additional things.
Clinton asked for a second meeting. He was up for reelection, he said, a year not to be taken lightly. He indicated that what would happen at the Fed with interest rates could be as important as anything. He needed a package—Greenspan and two Democrats. The loss of the Congress in the 1994 elections had been devastating. The party could not afford to lose the presidency in 1996. The Republican Senate would be reluctant to approve his nominations in the presidential election year, but the pairing of Greenspan and Rivlin might carry it.
Rivlin felt there were some strong arguments for getting back to a more normal life. But if she accepted the offer, she knew it would be more to solve a problem for the president than because she really wanted to be at the Fed. She finally said yes.
• • •
Tyson called Blinder to inform him that Rivlin would be his replacement.
Blinder was astonished. He hadn’t thought that Rivlin would have any interest at all. As budget director, she had what Blinder saw as a “real position,” a cabinet post that wasn’t worth leaving to be the Fed’s vice chairman. Why would someone voluntarily move from A list to B list?
With Rivlin’s acceptance, Clinton finally had his package: Greenspan, Rivlin as vice chair and Laurence H. Meyer, a Democrat with impeccable academic credentials, who would fill the other vacancy on the Fed board. Meyer, 51, was an economics professor in St. Louis, and he also headed one of the most successful economic forecasting firms in the country. He had worked extensively with the Reagan and Bush White House economic advisers and had credibility in Republican circles.
The president wanted a team that would be confirmed quickly so that they would affect the upcoming decisions on interest rates.
At a fund-raising dinner at the Sheraton Hotel in New York City on February 15, Clinton took the podium. He was in full campaign mode, even though the Republicans were chewing each other up in the presidential primaries and he was unopposed. Too many people were playing politics, he said.
“An example of what should not be done that most people in this room are familiar with was the outrageous political treatment of my intention to nominate Felix Rohatyn to be the vice chairman of the Federal Reserve,” Clinton said. He asked Rohatyn, who was in the audience, to take a bow. Clinton said they ought to have the debate about how fast the economy could grow.
“That’s why I wanted to put Felix Rohatyn on the Federal Reserve. But the politics of Washington said, No, we insist on the conventional wisdom; we insist on holding people down; we don’t think it’s worth debating—over and out.” He went on to denounce the cynicism of the age.
Erskine Bowles, the deputy chief of staff, knew of Rubin’s quiet but strong opposition to Rohatyn’s nomination. Yet Rubin hadn’t left any fingerprints. Even the president didn’t know. Bowles realized that even presidents didn’t always get their way, especially when the forces they were pushing against were both powerful and concealed.
• • •
A week later, just before 5 p.m. on February 22, Clinton stepped into a press conference in the Oval Office.
“Today I am pleased to announce my decision,” Clinton said after a brief introduction, “. . . to reappoint Alan Greenspan as the chairman of the Federal Reserve. He brings his years of experience as a prominent economist and, I might add, a leading Republican.”
He announced the nominations of Rivlin and Meyer.
“Mr. President, do you think these three people will be able to engage in the kind of debate you were talking about last week?” a reporter asked.
“I do,” Clinton said, adding, “I think that the truth is that we’re entering a new economy and it’s a subject that ought to be open to honest debate.”
After the announcement, the president and Greenspan chatted for a few minutes. The back-and-forth, the challenging discussion that the president wanted at the Fed, was already taking place, Greenspan assured Clinton. He seemed put off that anyone would suggest otherwise. “The FOMC is a debating forum,” he said.
After Clinton’s press conference, Tyson held a press conference in the White House briefing room to describe the process involved in picking the three nominees.
“A number of people on the Street today,” a reporter said, referring to Wall Street, “are concluding that after ginning up this big debate about—or saying that he wanted to gin up a debate about—the growth rate and how fast the economy could grow without raising the risk of inflation, that in the end, after pressure from the banking committee, the president has backed off that, chosen two economists who are not known for making statements that look anything like the sort of statements that Felix Rohatyn has made. And that essentially has put forward nominees which are safe, right in the middle of the road, very sort of mainstream.
“Any reason why we shouldn’t regard this as a sort of chickening out by the administration?” the reporter asked.
Tyson ducked the question.
• • •
“Knowing what’s going on with profits is critical,” Greenspan again reminded Steve Sharpe, the meticulous, mild-mannered Ph.D. economist on the Fed staff. Sharpe’s job as a staff economist was to track corporate profits for the Fed, and Greenspan wanted regular reports and memos with data. The chairman knew that profits were absolutely central to businesses, and he wanted the information mined as much as possible. If there was any indicator of the health of the economy, it was profits.
Greenspan looked regularly at a monthly report from a firm called I/B/E/S, which provided a comprehensive estimate of earnings for the next three to five years for the main Standard & Poor’s 500 companies. For a year he had been surprised at the extraordinary growth in expected profits. The companies anticipated average profit growth in the lofty range of 14 percent a year, and Greenspan was skeptical. The estimates were biased, because I/B/E/S compiled them from Wall Street securities analysts. Such analysts, Greenspan knew, had to be optimists. Pessimistic or bearish analysts generally didn’t work on Wall Street, because they couldn’t sell stocks. But the bias of the analysts was constant, bec
ause the same people—or people from the same bullish culture—provided the estimates year after year. What concerned Greenspan more was that the I/B/E/S reports were weighted by the total stock value of the firms. In an era of heightened stock prices, the result might contribute to an exaggeration of expectations. Greenspan asked Sharpe if it were possible to take the data and reweight it by earnings—the amounts the firms were actually making.
Sharpe wrote a computer program that showed that earnings per stock share were expected to grow above 11 percent annually over the next several years—still quite a large number.
Greenspan knew the importance of profits from his years of working for businesses. Profits drove businesses. It was simple and basic, but the new generation of economists that had come out of the universities over the last 20 to 30 years was heavily focused on econometrics, the branch of the profession that relied on sophisticated mathematical modeling. As Greenspan knew, for somebody with mathematical capability, econometrics was like a drug. He would have been sucked in himself, but such study was not available when he was a student at New York University and Columbia in the late 1940s and early 1950s. He was a generation too early. So he had focused on the nuts and bolts of standard businesses, examining, among other things, their profits and how those profits related to the overall health of each company. His work on building forecasting models for the rolled steel strip used for appliances and the heat-treatable aluminum plate used for F-4 U.S. Navy Phantom jets had demonstrated to him that expectations for soaring profits didn’t occur in a vacuum. Something else had to be going on.
Greenspan went through the basic algebra using fairly reasonable assumptions. He saw little or no increase in prices, no real increases in labor costs, but simultaneous giant profit increases. Again, the only explanation was rising labor efficiency, more productivity. Workers were making more goods per hour. Mathematically, it was the only answer. He couldn’t prove it, but he was certain. There was no way, he realized, that without his business experience he could have looked at those numbers and reached these conclusions. At 70, Greenspan realized it was a blessing not just of experience, but also simply of age.
