Maestro

by Bob Woodward

  McDonough’s role as the speaker after the chairman was first to say, I support the chairman, and second to give his reasons. Because he was the contact person with the financial markets and the chief players in New York, no one would challenge or debate him on his analysis of the market perceptions of their various actions. McDonough, a suave, gracious, well-dressed man with bushy eyebrows that dance when he talks, was a Democrat who had been with the First National Bank of Chicago for 22 years before joining the New York Fed. He had previously discussed the productivity issues with Greenspan and agreed with his analysis. It was difficult but necessary to discard the old orthodoxy, because the economy was creating jobs for those who needed them most. Though that didn’t solve the problems of the inner city, it helped. McDonough was convinced it was the single most important thing they could do—provide jobs for minorities and the urban and rural poor. Keeping unemployment low and getting it lower if possible was the chief task at hand as long as inflation could be kept down. The Fed could not operate as if the most dangerous thing in America was the last poor guy who found a job.

  The other critical factor was the anti-inflation credibility that the Fed had established with its preemptive rate hikes in 1994–95, when rates went from 3 to 6 percent. The New York financial markets, McDonough knew, had been very impressed with the dramatic moves to keep on top of inflation, even when no inflation was in sight. The willingness to take bold preemptive action back then had given the Greenspan Fed an anti-inflation medal of honor in the eyes of the markets, McDonough believed. The markets would trust the decision not to raise rates.

  McDonough, eyebrows in motion, gave a passionate summary of his views. It was critical they stick together and stick with the chairman. They had to be united. It was a version of the speech that Greenspan had given back in February 1994 when they had started to raise rates. McDonough said he would vote to support Greenspan, as he always had.

  Rivlin also said she supported the chairman and would vote for no rate increase. She was delighted to see herself anchoring the dovish faction with the chairman and the FOMC vice chairman.

  Yellen was torn. Despite her conviction that something different was going on with worker insecurity and productivity increases, she wished that Greenspan had proposed a rate hike. It would have been smart to go up 1/4 percent, she felt, and it was becoming difficult to be intellectually honest and not admit they needed to raise rates. The economy was likely growing too fast. Though sympathetic to Greenspan, she thought they were beginning to take too great a risk by not going up.

  She finally said that if she had her druthers, she would vote to increase, but she added that she could support the chairman’s proposal to hold steady. The force of Greenspan’s personality and his strong desire carried her. She also realized that he was not asking them to never raise rates. He was saying only, Let’s hold off for now and then revisit the question in light of more information in six weeks. She felt enormous pressure not to oppose him, and as the votes were taken she realized the others felt it, too.

  There was frequently a sharp contrast between the hawkish statements of some of the members and their dovish votes to go along with the chairman. If there had been a secret ballot, Yellen mused to herself, Greenspan almost certainly would have lost. If the members could write their votes on little pieces of paper and anonymously throw them in a hat, she calculated that there would probably be nine votes against the chairman. He would receive as few as three votes—his own, McDonough’s and Rivlin’s. Yellen, who considered herself a dove, realized she would have voted to raise rates in a secret ballot. But out in the open, she voted with Greenspan. That disturbed her.

  The sense of urgency for an immediate rate increase dissipated as all but Gary Stern, president of the Minneapolis bank, voted with the chairman to hold steady. Stern believed the low unemployment rate of 5.1 percent would eventually be associated with rising inflation.

  “Fed Avoids Rate Hike,” ran the headline in an unusual front-page story in The Washington Post the next morning, reporting on a decision not to act. The New York Times ran a front-page story headlined “Federal Reserve Makes No Change in Interest Rates.” The stories contained no real details about why the Fed had not moved or about any of the internal tension.

  “With the economic outlook unusually uncertain and a presidential election around the corner,” the Post story read, “Chairman Alan Greenspan and other Fed policymakers chose to leave rates alone.” The story noted accurately that “the decision on rates was a close call for the Fed” and quoted analysts who believed that “the nearness of Election Day may have tipped the balance in favor of leaving them unchanged.”

  • • •

  In October, Slifman and Corrado invited some key economists from the Commerce Department and the Bureau of Labor Statistics over to the Fed for a working session on their productivity findings.

  Rivlin got word of the meeting and decided to attend, but she had to hunt for the small conference room in the nether regions of the Fed building, where the meeting was being held. When she arrived, she was surprised to see the chairman himself—coat off, sleeves rolled up—in heated debate with about 10 government productivity experts. She sat down.

  “Well, no, Alan,” Bob Parker, now chief statistician at the Bureau of Economic Analysis at Commerce, was saying, “you’re not right about that.” Nobody at the Fed called him “Alan” in meetings. Rivlin realized that these were Greenspan’s people and that position in the hierarchy meant nothing. Information and analysis alone counted. Memories and relationships seemed deeply embedded—Greenspan’s equivalent of the playing fields of early adulthood and labor statistics debates from the 1970s and 1980s. Greenspan had known Parker for 25 years.

  Again calling the chairman “Alan,” Parker insisted that it was hard to measure productivity in non-manufacturing businesses. Coming at the issue from the profitability of businesses, as Greenspan wanted to, was insufficient, Parker said. What about the discrepancies in translating the statistics of income into wage, salary and profit components?

  Later in the meeting, Rivlin called Greenspan “Mr. Chairman” after she had made a point to the group. Parker was embarrassed and wanted to crawl under his chair.

  The group reached no conclusion, but it was clear that the economy was growing, unemployment was down, inflation and wages weren’t going up much and profits were up. They all seemed to agree that productivity had to be going up, but they weren’t measuring it. Why? No one had a clear answer as they shared their puzzlement.

  For Greenspan, the issue was serious but the process great fun.

  • • •

  In November, Clinton won reelection with 49 percent of the vote. Former Senate Majority Leader Bob Dole, the Kansas Republican, received 41 percent, and Ross Perot received 8 percent.

  Republican Greenspan was not unhappy.

  In the course of their regular breakfasts and almost daily phone conversations, the firm of Greenspan & Rubin continued their discussions of the skyrocketing stock market. Over the last five years, the Dow had advanced from about 2500 to over 6000 that fall—more than doubling. The increase by December of 1996 was a lofty 26 percent for the year.

  Rubin couldn’t believe how high the market had gone. Never in his lifetime had he seen anything like it, and he was deeply worried. People had lost their discipline in making financial decisions. The market was dramatically and perhaps dangerously overvalued.

  Did Treasury and the Fed have an obligation to do or at least say something? It was the one element in the economy that was out of balance. The Japanese had provided a telling lesson: After a meteoric rise, their stock market had plummeted and their economy was in the doldrums.

  Rubin was aware that nobody could know for sure. Anything that was obvious would already be reflected in the market, he believed. But was there something that wasn’t obvious that they should try to figure out?

  Both Rubin and Greenspan knew that the treasury secretary could hardly speak
out against the stock market and issue a warning. The White House would have to be involved, and the president’s political advisers considered the bull market a badge of honor. Several times, somebody at the White House had proposed that the president should ring the bell at the New York Stock Exchange, and Rubin had to go to battle station to stop it. He told the president that he would live with that film clip forever if the market went down. From the beginning of the administration, Rubin had told Clinton, If the economy does well, you ought to talk about it—but if the markets do well, don’t use that as your credential because markets go up and markets go down. Since pride in the stock market run-up was part of the psychology at the White House for at least some, Rubin could hardly try to unring the bell.

  Greenspan decided to give it a try.

  He had agreed to accept the Francis Boyer Award at the American Enterprise Institute, a conservative think tank in Washington, in early December and to speak at the black-tie dinner ceremony.

  He began work on his speech while taking his ritual early morning soak in the bathtub. His tub was deep and narrow, with armrests so he could comfortably read and write. He decided to voice his concerns about the stock market in a long historical discussion of the notion of prices. He would carefully pose those concerns in the form of a question. How do we know, he wrote, when—and the phrase just popped into his head—“irrational exuberance” has unduly escalated the value of stocks?

  He knew the phrase “irrational exuberance” would have market consequences. The market was overvalued. But on another level, by phrasing it as a question, he was giving himself cover. He would just be professing his uncertainty, because who could know for sure?

  He circulated the draft speech to others at the Fed.

  It was a typical makes-my-eyes-glaze-over Greenspan speech, but at the end Rivlin saw a cloaked but clear warning about “irrational exuberance” in the stock market. It seemed like an offhand remark, not necessarily related to the rest of the speech. All the same, Rivlin feared that it might be taken too seriously. She walked next door to Greenspan’s office, a marked-up copy in hand.

  “Do you really want to say that?” she inquired.

  “I think I do,” he replied.

  After delivering the speech, Greenspan returned to his table, where his girlfriend, Andrea Mitchell, was also seated.

  “So what was the most important thing I said?” he asked her.

  She looked perplexed, not at all sure. He was sure.

  • • •

  After the speech, the markets in Japan, which were still open, began to drop sharply. The Dow fell 145 points in the first half hour of trading the next day but rebounded, ending the day off only 55 points at 6381.

  In his office four days later, Greenspan said to a trusted senior Fed staffer, “Every business cycle is the same with the exception of some fundamental difference that characterizes that particular cycle, and rarely, if ever, is in evidence in other cycles. The crucial issue is to identify what that particular phenomenon is.”

  Perhaps it was the stock market, perhaps not. Was it a bubble or not? He was sure that job insecurity was part of the mystery, keeping inflation down. Clearly productivity growth was another factor. But how much, he didn’t know.

  Earlier that month, The Washington Post had published a story stripped across the top of page one by John M. Berry, the paper’s respected Fed watcher. Headlined “U.S. Sails on Tranquil Economic Seas, Recessions No Longer Seem Inevitable,” the story quoted many prominent economists saying they didn’t expect a recession in the next five years.

  Greenspan also didn’t see a recession coming. It would take six months for it to build, he thought. Yet he had said that before, only to find three months later that he was eating crow.

  • • •

  Greenspan had been virtually living with Mitchell, who was 20 years younger, for nearly 12 years. Their first connection had been through music: she played the violin quite well as a child. Greenspan, a devotee of baroque music, and Mitchell went to classical concerts at the Kennedy Center, often using the presidential box.

  At the end of 1996, Greenspan began to think about proposing. At a birthday dinner for Mitchell with a dozen close friends at Galileo, one of Washington’s best Italian restaurants, Greenspan gave a glowing toast to her. A number of guests felt it was as near to a proposal of marriage as possible, with the expected next sentence to be a request that she marry him. But it never came.

  He later confided to one person that he actually proposed to Mitchell twice before she accepted, but either she had not understood what he was saying or it had failed to register. His verbal obscurity and caution were so ingrained that Mitchell didn’t even know that he had asked her to marry him. She found it difficult to understand the depth of his emotional commitment to her.

  On Christmas Day, Greenspan finally asked, flat out, “Do you want a big wedding or a small wedding?” It was a message no one could miss.

  Mitchell was taken by surprise but accepted at once.

  They announced their engagement at a going-away party they threw for Laura Tyson, who was leaving as director of Clinton’s National Economic Council.

  Four months later, they were married in a private seven-minute civil ceremony at a plush country inn in the Virginia hunt country outside Washington, the Inn at Little Washington. Supreme Court Justice Ruth Bader Ginsburg, Clinton’s first appointee to the High Court, performed the ceremony. About 75 guests attended, including former chairman of the Joint Chiefs of Staff Colin Powell, Democratic lawyers Bob Strauss and Lloyd Cutler, Henry Kissinger, Alice Rivlin, Mike Kelley of the Fed, media figures Katharine Graham, Ben Bradlee, Sally Quinn, Jim Lehrer, Barbara Walters, Tim Russert (Mitchell’s bureau chief), David Brinkley, Al Hunt and Judy Woodruff and Senators John Warner, Virginia Republican, and Daniel P. Moynihan.

  Several days after his wedding, Greenspan told an associate, “I should have done it sooner.”

  12

  * * *

  As 1997 began, Greenspan reminded himself of his maxim “If you’re not nervous, you shouldn’t be here.”

  On February 26, he testified before the Senate Banking Committee and hit the stock market again. “Caution seems especially warranted with regard to the sharp rise in equity prices during the last two years,” he said. “These gains have obviously raised questions of sustainability.” Since the beginning of 1995, the Dow had jumped a staggering 80 percent.

  A week later, at the House Banking Committee, the chairman attempted to deny that he was trying to “jawbone” the stock market.

  “That’s not what I was intending to do,” he said. “It can’t be done.”

  Greenspan was claiming impotence about the stock market while trying doggedly to influence it. He was attempting a subtle distinction. The suggestions about “irrational exuberance” and “sustainability” indicated that the stock market might be relevant to the Fed as they evaluated their monetary policy. It was a fact that the market was very, very high. He was not necessarily saying that it was too high or that the Fed would try to bring it down. If the Fed did try to bring the market down, their problems would only grow worse. Congress and others would want to know when the stock market was too low and at what point the Fed might be expected to boost stock prices. Greenspan didn’t want to get close to setting a trading range—the maximum permissible high and the maximum permissible low. It was not the Fed’s job. He didn’t think they could do it if they tried.

  Nonetheless, he wanted to issue a clear warning: The stock market was unusually high, the Fed was watching vigilantly, and they had to consider the possible impact on the economy and consumer spending. It made him nervous.

  • • •

  At the end of March, Dr. Laurence H. Meyer had been a governor at the Fed for nine months. Appointed by Clinton the previous year, Meyer would never forget the day he came to Washington to be interviewed by President Clinton in the White House residence. They met for about 45 minutes, and the president
did nearly all of the talking, trying to relax Meyer, speaking about the history of various White House rooms and his overall economic goals. If the president had asked the basic question—Do you think the economy can grow faster without inflation?—Meyer was prepared to say no, that there was a lot of loose economic talk going on that was contrary to his understanding of how the economy worked. Meyer believed that if unemployment were too low, it would spark inflation—and in his view, the economy was already in the danger zone, quite close to the NAIRU. But Clinton never asked the question, and Meyer was nominated and confirmed.

  With a Ph.D. from MIT, he had founded Laurence H. Meyer and Associates, a successful economic forecasting business in St. Louis, in the early 1980s. Working with economic advisers in the Reagan, Bush and Clinton administrations, he had been known for the accuracy of his economic forecasts. For a single three-year period in the 1990s, his forecast for the growth of the consumer price index was off by only 1/10 percent. He had received many national awards, including the Annual Forecast Award from a panel of blue chip economists as the nation’s most accurate forecaster in 1993 and 1996. For Meyer, a data-driven intellectual, forecasting was all sophisticated, rigorous economic modeling.

  At his first FOMC meeting, Meyer had come to the realization that the committee meetings were mostly prepackaged. During his first presentation, he found himself speaking at 100 miles an hour, almost out of control, and he burst out saying, “This is even more fun than I thought it was going to be.”

  The room broke into laughter.

  But Meyer was struggling now in the spring of 1997. All of his training, all of the models and concepts that had worked with such precision, told him that higher economic growth and lower unemployment would soon trigger a rapid increase of dangerous inflation. He wasn’t buying Greenspan’s argument about productivity growth. He thought it bordered on fantasy. But he had not dissented thus far.