Maestro

by Bob Woodward

  In the Oval Office, the president did not, of course, mention his doubts about Greenspan’s rate increases in 1994 and 1999. Instead, he noted that the economic success was due to many factors. “It seems clear that it is the result of the convergence of a number of forces: a great entrepreneurial spirit; stunning technological innovations; well-managed businesses; hardworking and productive men and women in our workforce; expanding markets for our goods and services; a complete commitment to fiscal discipline; and of course, a Federal Reserve that has made independent, professional and provably wise judgments.”

  Of Greenspan, Clinton added, “He was also, I think it’s worth noting, one of the very first in his profession to recognize the power and the impact of new technologies on the new economy, how they changed all the rules and all the possibilities. In fact, his devotion to new technologies has been so significant, I’ve been thinking of taking Alan.com public; then, we can pay the debt off even before 2015.” Greenspan’s willingness to stay in the job should be “a cause of celebration in this country and around the world.”

  “Mr. President,” Greenspan responded, “I first wish to express my deep appreciation to you for the confidence you’ve shown me over the years.” He had loved every minute of being chairman, especially working with Clinton’s treasury secretaries—Bentsen, Rubin and Summers. Turning to Clinton, he said, “And I must say you have been a good friend to America’s central bank. Thank you, sir.”

  “Is the market irrational?” asked Helen Thomas, the veteran reporter from United Press International. “Do you stick by your previous statements on the stock market?”

  “You surely don’t want me to answer that,” Greenspan replied.

  “Yes, I do.”

  “You do?” he asked. “Well, I don’t think I will.”

  Why stay? inquired another reporter.

  “There is a certain, really quite unimaginable intellectual interest,” Greenspan said, “that one gets from working in the context where you have to put broad theoretical and fairly complex conceptual issues to a test in the marketplace.

  “It’s a type of activity which forces economists like ourselves to be acutely aware of the fact that our actions have consequences.”

  • • •

  The stock market continued to soar in the months after Greenspan’s reappointment, but in the spring the Nasdaq exchange—almost entirely comprising New Economy high-technology stocks—plunged 30 percent. Many dot.com stocks dropped 80 or 90 percent, and the Dow seemed to stabilize between 10,000 and 11,000.

  Greenspan and his FOMC continued the push to raise rates, with the fed funds rate reaching 61/2 percent on May 16, but then they paused at the June meeting. Productivity growth was running in the range of 4 percent a year and was keeping down both labor costs and inflation. But Greenspan was worried, almost as if he had been playing a winning hand for too long. No one was more aware of the remote chances of such an unprecedented winning streak.

  The 61/2 percent fed funds rate was 1/2 percent higher than the 6 percent rate at the height of the 1994–95 tightening cycle. It was the highest the rate had been since early 1991. Was he on his way to achieving a second soft landing, as the economy continued its record expansion into a tenth year? He was holding his breath. It was a question no one, including Greenspan, could answer. When would the boom end? When would he goof? What was the hidden factor or brewing crisis that no one was anticipating? Stock market, banks, oil prices, Asia, Russia, hedge funds, an environmental crisis, a health catastrophe, drought, famine, scandal, war?

  EPILOGUE

  IN GREENSPAN’S December 5, 1996, speech, when he deliberately slipped in his highly quotable “irrational exuberance” remark about the high stock market, he also said, “The Fed must be as transparent as any agency of government. It cannot be acceptable in a democratic society that a group of unelected individuals are vested with important responsibilities, without being open to full public scrutiny and accountability.”

  Greenspan’s policy of expanding openness and transparency has done more than merely increase the Fed’s accountability. It has focused attention on the Fed and himself. If specific interest rate decisions were basically secret and front-page news only in the financial sections of the newspapers, as they were before 1994, they would be like trees falling in the forest that no one hears. Now the announcement of the FOMC interest rate decisions is a media event. “Only eleven days until the Fed meeting,” declare the cable television financial channels. CNBC runs a countdown clock on the screen on the day of the meeting, anticipating a 2:15 p.m. announcement and treating it like a space shuttle blastoff or the New Year.

  When the portion of the Humphrey-Hawkins Act that requires the chairman to testify twice a year before Congress lapsed in early 2000, Greenspan volunteered to continue his appearances. He can speak out twice a year in his cryptic code to make sure his tree is heard when it falls. He cannot help but know that such appearances only further cement the sense of his preeminence.

  So much of his life is interior—inside his mind, with its private calculations and thoughts. Greenspan considers himself an introvert. His demeanor suggests that he hates expediency, prefers detachment and rigor. Yet he has a tendency also toward the political calculation and manipulation that have become necessary for longevity in Washington. He plays the game skillfully.

  Greenspan’s mastery of process, both inside the Fed and in Washington, has brought about a subtle transfer of political power to the Fed chairman. His 13-year stint is a textbook case of consolidation of power in an institution where others have equal votes. Outside the Fed, hardly anybody can muster the courage to criticize him anymore. No presidential candidate would think of saying anything negative about him. Success shields him not only from criticism, but also from the obvious question: Who elected you?

  America’s fixation on the economy and the historic and continuing expansion has come to reside in Greenspan. He has become both a symbol and a means of explaining and understanding the economy.

  Unlike many economists, he has never been rule driven or theory driven. The data drive. Some of his most significant decisions may lie in what he has not done, the times he has stayed his hand. His is an unusual intellectual journey, from the cautious and nervous beginner during the 1987 stock market crash to the innovative technician who spotted productivity growth in the 1990s and refused to raise interest rates when the traditional economic models and theories cried out for it.

  Greenspan can subtly confound his audience. His congressional testimony is now televised on cable channels and his statements combed for meaning, but almost never does he surrender a sound bite. He does not provide a clear declaration about the condition of the economy or the likely direction of interest rates. His long, convoluted sentences seem to take away at the end what they have given at the beginning, as they flow to new levels of incomprehensibility. He uses what he calls “constructive ambiguity.”

  He never appears on talk or interview shows where he might be subjected to journalistic interrogation. In the first months of his tenure, Greenspan made one such appearance, Sunday, October 4, 1987, on ABC television’s This Week with David Brinkley. During the course of the interview, he projected his conflict. He said that there were no signs that inflation was picking up but also that those signs might be around the corner. The Fed might have to raise rates, but they might not. He has not done a television talk show since. His public words are carefully filtered and weighed. When someone at a party once asked Greenspan how he was, he jokingly replied, “I’m not allowed to say.”

  Several years ago, when it looked as if President Clinton had said something that contradicted Greenspan’s view, Gene Sperling phoned Greenspan to give him a heads-up that the press would be making inquiries.

  “I’ll just say a little bit this way,” Greenspan told Sperling, “and a little bit that way, and I’ll completely confuse them so there’ll be no story.” There was not.

  • • •

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sp; In this culture, politicians, actors and nearly all public figures are produced and handled. Greenspan emerges as one of the few who seems to maintain a steady and sober detachment. Most other powerful figures have a television persona, often defined by glibness and efforts at cleverness. The public gets a flash of B-roll stock footage of the chairman walking across the street—arriving at an FOMC meeting, he always looks the same—grim, even gloomy, briefcase under his arm, an unrevealing look on his face. Though it isn’t, it could be the same suit year after year. It is the same street and the same briefcase.

  Although his words are almost unbearably opaque, he appears to be doing something rare—telling the truth. The very act of thinking, the strain in his wrinkled forehead, can be seen in the video footage of him before the microphone. At times it seems painful. But the public has rewarded his caution, reflection and the results with their confidence. That he is the unelected steward of the economy is simply accepted. Yet even with increased public exposure, somehow the mystery deepens.

  Straight out of central banker casting, Greenspan is one of the elders who allows the economic party to continue. In The Wizard of Oz, when the man behind the curtain emerges, we are let down. With Greenspan, we find comfort. He helps breathe life into the vision of America as strong, the best, invincible. The fascination with Greenspan has become one of the ways in which the country expresses confidence in itself and in its future.

  Greenspan also represents something more than the confidence wing of the American personality. He stands at the point where the country’s eternal optimism meets up with the country’s abiding suspicion that something will go wrong. As citizens get happier about the boom and grow more prosperous, the fear of impending doom seems to grow, though it may often be unstated. Mention the boom, and the words that come to most lips are “When will it end?” Americans always keep one eye cocked at the clock that will run out, or the exit ramp, or circumstances that might bring us down.

  That fear also creates a kind of excitement and anticipation. Greenspan stands at the crossroads of optimism and pessimism. Each of us is a character in the nation’s great economic soap opera; Greenspan is both director and producer.

  Yet his biggest role may lie in the future. No one knows whether the economic expansion will continue for years or whether it is at its summit. But some day, in some form, the economic boom will end. Someone, an authoritative voice, is going to have to tell us when the party is over. Someone with credibility will have to explain and answer questions. What happened? Why? What might it mean? Who is responsible? Someone will have to propose a course of action and outline what has to be done.

  AFTERWORD: AFTER THE BOOM

  THE HARDBACKedition of Maestro was published in November 2000 in the midst of 36 days of uncertainty over the outcome of the Bush-Gore presidential race. The good economic times seemed to be continuing.

  By early September 2001, it was apparent that the United States, if not the world, was in a significant and painful economic slowdown. Economic growth in the United States had approached or hovered around zero. The terrorist attacks of September 11 changed the American economy and, at least temporarily, severely damaged it. By any realistic assessment currently available, the economic party, the celebrated boom that improved the economic lives of most Americans, is over.

  What happened? What does it mean? And what can be done?

  For Greenspan, the slowdown of 2000 was not a surprise; in fact it was what he wanted. The extent of the slowdown and the swiftness with which it occurred was the surprise. As reported earlier in this book, Greenspan shared in the general euphoria in 1999 after the various international crises passed without doing in the U.S. economy, as many, including Greenspan, had feared. Because the economy had weathered these storms, the future seemed bright as far as the eye could see—even to the cautious Greenspan. His analysis of the new technology and the new economy showed that businesses had used only half or less of the high-technology advances currently available to them. That was important good news for future growth. More improvements could be expected in productivity as well as substantial innovations.

  He had closely monitored a slowdown in 2000. The weekly steel capacity utilization rates showed that steel plants in the United States, which had been operating at close to 95 percent capacity in the spring, had slowed to the 70 percent range as the end of 2000 approached. Steel was not the critical economic indicator it had been in decades past, but to Greenspan it was still almost the closest approximation to a durable good. The drop in steel use showed weakening in the heavy-goods industry—still an important part of the American economy.

  This downturn was exactly what Greenspan and his colleagues on the FOMC wanted; he even termed it “benevolent.” Perhaps the rate increases of 1999 and early 2000 were getting some traction in slowing the economy. The 4 percent plus annual growth of the last several years had not been sustainable. Now the brakes were working, and growth could be brought down to a sustainable rate of, say, 3 percent or 2 percent. This adjustment process in the economy was occurring through the spring and into the summer of 2000 at a fairly rapid pace. That was fine with Greenspan. The economy was possibly coming in for a neat soft landing with no jarring sudden downturn or recession. Just slower, more reasonable, less overheated economic growth. It was the very comfortable Goldilocks economy some were referring to in print—not too hot, not too cold, just right. He didn’t want to do anything but practice his notorious hands-off laissez faire.

  Then in the first days of December 2000, all of a sudden, the bottom fell out of the American economy. In his dispassionate way, Greenspan found it remarkable. It was as though everybody was waiting for the gun to go off and they would dive together, buy and invest less. It was so quick that there was no cumulative data, no reports assembling weeks or months of information to show a definite trend. But Greenspan was bombarded with letters, calls and various advice. As he traveled the reception, dinner and party circuit, he had a series of what he called “30-second conversations” in which people unloaded their views of economic distress. The Fed staff and district banks conducted surveys, finding very broad anecdotal nationwide information. It was not scientific, but it was good enough to paint a vivid picture, too vivid. Automobile sales, one of Greenspan’s favorite indicators, had plummeted. Consumer confidence was down. Many businesses reported shortfalls in sales and earnings. Purchases of computers, software and communications equipment had dropped markedly. At Cisco, the supplier of Internet networking systems and the darling stock of the 1990s, they had been trying to push production to accumulate sufficient inventory—and then, in a matter of weeks, orders and sales dropped at an awesome rate. Poor John Chambers, Greenspan thought, referencing the CEO of Cisco. Other CEOs had similar stories. They had never seen anything like it before. Cash flow dropped and profit margins were crushed.

  Greenspan realized that the same new technology that gave businesses almost instant sales, inventory and order information, which in recent years had added substantial efficiencies and increased productivity, was working in reverse. What was true on the way up, he reasoned, was almost certainly true on the way down. The pace was condensed, resulting in a kind of synchronous decision making. In the past, some businesspeople would think things were getting better and others might think they were getting worse. The optimism would often cancel out the pessimism or at least slow the process of reaching a consensus. This time everyone seemed to have reached the same negative conclusion at almost the same time. It was like a thunderclap and everyone jumped on the same pessimistic bandwagon.

  The FOMC met on December 19, 2000, just before Christmas, and a week after the Supreme Court ruled in favor of Bush. The committee’s directive from the previous meeting was asymmetric, with a bias stating that they thought the greatest risk to the economy was future inflation. Greenspan wanted to change that bias and declare publicly that the risks of economic weakness outweighed the risks of inflation. He considered this a double change, moving
from November’s stated concern about inflation, through neutral—skipping the symmetric statement—to a declared concern about risks being tilted toward future economic weakness. To also cut rates would in effect be a triple move and too extraordinary, he believed. They had to be careful. Though something dramatic had occurred, the chairman did not want to suggest it was more than what businesses and the public had already detected. The announcement of the change in bias would have some impact in itself and hint that rate cuts were likely coming. He told the committee he contemplated that unless something fairly dramatic happened on the positive side they should lower rates right after the first of the year, or about a month before the next scheduled FOMC meeting. He said he would convene a conference call before acting.

  After four and a half hours, the vote was unanimous to change the bias and announce it publicly.

  Two weeks later, January 3, 2001, Greenspan convened the FOMC conference call. The news was worse. Manufacturing was especially soft, notably automobile sales. Overall retail sales for the holidays had been below expectations, the worst since the recession of 1990–91. Many businesses and analysts were forecasting declining profits. Greenspan wanted to move immediately, drop the short-term rate 1/2 percent—double the normal 1/4 percentage cut—as the Fed began what would look like a substantial easing cycle. If they acted, they would be in front of a series of negative economic reports that would come out during the month. He didn’t want to move on a day in which there were one or two significant statistics publicly released. If they acted on one of those days, people would conclude that was the reason for the move. Greenspan had always argued strenuously that the Fed did not react to a single number, but with so many economic indicators it was becoming increasingly impossible to avoid a coincidence. Better to move sooner rather than later, he reasoned. The 1/2 percent cut would be forceful, larger than expected in the markets. He received unanimous support, and the announcement was made early that afternoon.