Maestro

by Bob Woodward

  On April 2, The New York Times front-page headline read: “Once Unthinkable, Criticism Is Raised Against Greenspan.” Reporter Richard W. Stevenson wrote, “With the decade-old economic expansion in danger, stock prices tumbling and the Federal Reserve no longer seeming omnipotent or omniscient, Alan Greenspan, who at 75 is in his 14th year as chairman of the central bank, is being second-guessed as never before.” He quoted a number of analysts, conservatives and liberals with various critiques. Some said Greenspan had been too bold in raising rates in 2000. Others said he was too timid in cutting rates in the current easing cycle. Greenspan felt they had done it about right and had no second thoughts.

  • • •

  In the late 1990s, Greenspan had been praised. People would come up to him and say, as did one woman, “Oh, thanks for my 401(k)”—referring to the large growth in her pension plan.

  He had replied, “Madam, I had nothing to do with your 401(k).”

  Now people were blaming him. His conviction was that the economy was at risk in the short term, but in the long run he believed the American economy, even the world economy, was far more dynamic, flexible and capitalistic than it had been 20 or 30 years ago. It now had much more long-term potential. All he could do was proceed with the aggressive rate cutting.

  On Monday, April 9, Greenspan sent out the usual 48-hour warning that he would convene a conference call of the FOMC on April 11. He might want to make another move. By the time the committee convened on the phone, circumstances had changed. The markets had been particularly volatile, and a sudden Fed move might be too much of a shock and too much of a risk. They agreed to wait a week.

  On April 18, Greenspan got the FOMC members on the phone and won unanimous approval for another 1/2 percentage point cut—taking the rate down to 4 1/2 percent—the fourth big cut since the beginning of the year. The surprise inter-meeting move sent the Nasdaq up more than 8 percent.

  But business investment and profits continued to stay down. The relatively high productivity growth and consumer spending were all that was keeping the economy going. The result was a steady flatness. That was the story, Greenspan realized. His forecast in January that they would know overall where the economy was heading had turned out to be very wrong.

  By the end of April, Greenspan felt that the longer term outlook was still positive, putting a floor under the whole economy. But the short-term risk continued. On May 15, the committee lowered rates another 1/2 percentage point, to 4 percent. The vote was 9 to 1. The lone dissenter, Thomas H. Hoenig, president of the Kansas City bank, wanted only a 1/4 percent cut.

  In late May, Congress passed President Bush’s tax cut, which amounted to $1.35 trillion over ten years. Though there was some short-term stimulus for the economy in the form of immediate rebates of up to $600, most of the cuts were in the later years. On June 27 the FOMC cut only 1/4 percentage point. The vote was again 9 to 1. William Poole, the president of the St. Louis bank, wanted them to stop cutting rates. Again, on August 21, the FOMC cut another 1/4 point.

  Over eight months, a full 3 percentage points had been cut from the fed funds rate, one of the most aggressive series of easing moves in history. The actions had some positive impact on the economy, Greenspan was sure. Mortgage rates had come down, triggering more refinancing. Home sales stayed up, with many homeowners taking substantial amounts of cash out after a sale for consumer spending. The lower short-term rates also made it easier for corporations to reissue bonds. He did not believe monetary policy had failed—to say that, as some had, was to demonstrate a lack of understanding about its limits. But Greenspan realized there might be far larger forces out there that could send the economy down further.

  By September, Greenspan was telling people privately, “I cannot say to you that the stock market is undervalued.” In other words, further lows were possible. He also reiterated his long-held view: “The business cycle is not dead.”

  Because of the slowdown, the federal government was collecting less tax revenue and the projected surpluses for the current year and perhaps the next had disappeared. Democrats who had opposed the tax cut were having a field day; it was the Bush economy that was stagnant as hundreds of thousands of people lost their jobs.

  • • •

  The title of this book, Maestro, was chosen carefully, and was intended to convey that Greenspan is conducting the orchestra but does not play an instrument. He sets the conditions for the players to play well, if they so choose and if they are capable. His approach is often subtle, never the obvious, baton-waving, savage-faced leader driving the orchestra. He prefers at times to let the orchestra, the players in the economy, set its own tempo. At other times, such as the present, he may have no choice.

  As the economy has turned down and criticism of Greenspan increases, he is, to some extent, a victim of his successes. In the old traditional business cycle of every two to three years, it was rational for businesses, investors and consumers to see a high degree of risk in the next six months. An economic downturn was always around the corner, or seemed to be. That made people more cautious. But in the long boom of ten years, it was rational for everyone to think the next six months would be more like the last six months, more of the same continuing growth. Greenspan found that psychologically it was very tough to remember, in an emotional sense, the bad times, which seemed so long ago. The process was, he reasoned, similar to the way that people say they can’t remember pain. So the risks seemed less. Capital investment increased and the expansion picked up. But there was a breaking point.

  Greenspan realized that the high-technology bubble of wild overexpansion and ridiculously high stock prices had largely caused the economic downturn and dislocation of 2001. He believed he had publicly warned about this. “I kept saying the emperor has no clothes and no one would listen,” he said privately. Actually, he had said it forcefully only once, and that was his 1996 “irrational exuberance” comment about the stock market. He had later modified it or so dressed it up with ambiguity that no one knew what he was saying or where he stood. If Greenspan can be faulted, it is his failure to issue clear and repeated but careful warnings about businesses—such as the large Internet companies—with large value that were earning meager profits or none at all. These were not sound investments. Investors put money in stocks instead of more secure bonds, particularly U.S. Treasuries, because they anticipated they would earn more. Greenspan had even joked privately during the high-tech bubble that someone ought to see if activity in the casinos had gone down because the players had moved to the stock market. It was a silly and crazy time. He knew it could not last.

  No one knew better or was more aware of the consequences than Greenspan. He believed that he had done all he could. He had spoken in 1996, and all the stock market did was go up. If he had said more, he contended, he might have slowed the exuberance a bit, but in the end it might have made the bubble worse. He would speak out, the markets would slow down for a bit and then take back off, and the economy’s aura of invincibility would only increase. That would help create a larger bubble down the road, which would eventually break and have disastrous consequences. All he might have done was postpone the day of reckoning. Why? Because he would be fighting human psychology—the perceived self-interest and greed of investors.

  Could Greenspan have raised rates and broken the back of the bubble? Probably yes, he believed, but that would have meant raising the fed funds rate to something like 15 percent—an unimaginably authoritarian and inappropriate action by unelected officials such as himself.

  But I think he could have made a greater, more visible and prolonged effort—a careful and repeated warning about exuberance and greed might have tamed the markets. Even if he had failed, it might have been worth trying. In a sense, he held back his greatest asset: his immense knowledge and experience. It could have been his most important forecast.

  So in early September, like the rest of the nation and the world, the chairman was waiting to see what might happen next. W
ould the economy start to recover or tip into recession? At times he thought that after the battering of 2001, the most remarkable fact might be that the economy was still standing. The economic impact of the September 11 terrorist attacks in New York City and Washington is only beginning to be measured as I write this. Dramatic action may be required.

  (1) Alan Greenspan and President Gerald Ford on September 5, 1974, just after Greenspan had become chairman of the President’s Council of Economic Advisers, the top White House economic post. Ford depended on Greenspan’s advice and frequently asked, “Where’s Alan?”

  (2) Greenspan in 1975, looking like Adlai Stevenson, another egghead, with a hole in his shoe. His father, Herbert Greenspan, authored a book in 1935 called Recovery Ahead. He wrote an inscription in the copy he gave his son, then age eight: “May this my initial effort with a constant thought of you branch out into an endless chain of similar efforts so that at your maturity you may look back and endeavor to interpret the reasoning behind these logical forecasts and begin a like work of your own. Your Dad.”

  (3) Greenspan with outgoing Fed chairman Paul Volcker and President Ronald Reagan on June 2, 1987, when the change at the nation’s central bank was announced.

  (4) Treasury Secretary James A. Baker III, Paul Volcker and Greenspan in July 1987, at a going-away party for Volcker. When Volcker asked not to be reappointed, Baker told a New York friend, “We got the son of a bitch.”

  (5) Greenspan in August 1987, in the Federal Reserve Board room where the Board of Governors and the Federal Open Market Committee meet. At his first FOMC meeting, Greenspan was surprised to find that no one mentioned the stock market, which had run up 30 percent since the beginning of the year.

  (6) A Federal Open Market Committee meeting in 1988 with Greenspan presiding from the far end of the table. “We have to find the mechanism by which we are perceived to be in general consensus,” Greenspan told them. “There are elections coming up and we are turning out to be the only people who are minding the store.”

  (7) E. Gerald Corrigan, president of the New York Fed and vice chairman of the Federal Open Market Committee, the key interest rate–setting body. During the 1987 stock market crash, Corrigan told Greenspan, “Alan, you’re it. Goddammit, it’s up to you. This whole thing is on your shoulders.”

  (8) Manley Johnson, board vice chairman from 1987 to 1990, said that during the crash, despite certain banking regulations, their rules would have to be relaxed temporarily. “Let the money go,” Johnson said. “We’ll clean this up later.” Greenspan just nodded.

  (9) Greenspan and President George Bush on July 10, 1991, when Bush, after some internal White House and Treasury Department squabbling and uncertainty, announced that he was reap-pointing Greenspan to a second four-year term. Bush later said he felt his 1992 reelection defeat was Greenspan’s fault because the chairman didn’t lower interest rates dramatically enough to make the economic recovery more visible to the public.

  (10) Greenspan with Treasury Secretary Nicholas F. Brady in 1990. By 1992, Brady had canceled his weekly breakfast or lunch with Greenspan. “You only get his attention if he’s not included,” Brady said at one White House discussion.

  (11) The Federal Reserve Board in the early 1990s. Front row, seated, left to right: Vice Chairman David W. Mullins Jr., Greenspan, Governor Susan M. Phillips. Back row, standing, left to right: Governors John P. LaWare, Edward “Mike” Kelley Jr., Lawrence B. Lindsey and Wayne D. Angell.

  (12) David Mullins, board vice chairman from 1990 to 1994, pushed for rate cuts. During his first 21/2 years on the Fed, short-term interest rates were cut from 88/4 to 3 percent.

  (13) William J. McDonough, the president of the New York Fed after 1993. During a financial crisis his job was to make sure that things didn’t blow up. In a private meeting in 1998, McDonough urged Greenspan to cut rates, but the chairman seemed very reluctant. Was he just appearing to be reluctant? McDonough wondered. How Machiavellian was Greenspan?

  (14) Treasury Secretary Lloyd Bentsen and Greenspan. In a confidential discussion in early 1993, Greenspan urged Bentsen to have the new administration adopt a plan to cut the federal deficit by $140 billion in four years. It was precisely the deficit reduction target Clinton eventually approved.

  (15) Treasury Secretary Robert Rubin and Greenspan. The two became so close that Greenspan felt it was as if they were working for the same firm.

  (16) Alan Blinder, vice chairman from 1994 to 1996, concluded that Greenspan did not want anyone else to have a significant role in the great interest rate game.

  (17) The Federal Reserve Board after 1996: Front row, seated, left to right: Vice Chairman Alice Rivlin, Greenspan, Governor Janet Yellen. Back row, standing, left to right: Governors Laurence H. Meyer, Susan M. Phillips, Edward “Mike” Kelley Jr. and Lawrence B. Lindsey.

  (18) Treasury Secretary Rubin swearing in Greenspan for his third term in 1996. Greenspan is laughing because Rubin temporarily forgot the words of the oath. NBC correspondent Andrea Mitchell is moderating. She and Greenspan were married in 1997.

  (19) Treasury Secretary Larry Summers succeeded Robert Rubin in 1999. Initially, Summers was not convinced that Greenspan was correct when he said that productivity growth was being undermeasured. “Alan,” Summers told Greenspan, “maybe there’s a constant error, and it should’ve been plus 1 percent for the last 40 years. How do you know it’s accelerated?”

  (20) Greenspan and President Clinton on January 4, 2000, just before the president announced that Greenspan would be reappointed to a fourth term. In the president’s private dining room are (clockwise from left) Greenspan, National Economic Council director Gene Sperling, Chairman of the Council of Economic Advisers Martin N. Baily, Treasury Secretary Larry Summers, White House Chief of Staff John Podesta and Clinton. Greenspan and Clinton were linked to each other’s greatest successes as the economic expansion continued.

  (21) Alice Rivlin, vice chairman from 1996 to 1999, took the job more to solve a problem for President Clinton than out of a desire to move from the budget director’s job to the Fed. Clinton wanted a Democrat on the Fed who could be confirmed when he was running for reelection.

  (22) Roger Ferguson, a Ph.D. economist and lawyer who was appointed vice chairman in 1999, knew a great deal about the check payment system, technology, computers and productivity.

  (23) Greenspan and his wife, Andrea Mitchell. Few Washington couples were more prominent on the A-list social scene. Greenspan found the events useful for gathering information and gossip about politics—who was up or down, in or out.

  (24) Greenspan at his favorite sport. He regularly played tennis with important political figures, including former Republican Senate leader Howard Baker, Treasury Secretary Lloyd Bentsen, Fed board members and his wife.

  (25) Greenspan in his office at the Fed. With a stroke of Button A on his computer, he could check the financial markets—the status of the Treasury bond market, the Dow, foreign currency exchange markets, gold and oil prices, 50 charts in all. On a calm day he checked only once every half hour.

  (26) The modest entrance to Greenspan’s office, room 2046, with his secretary in the background in the reception area.

  (27) An unusual photograph of Greenspan’s office at the Fed. He usually receives visitors in the seating area in the back and takes the far right corner chair. The office was the command center in the days after the 1987 stock market crash. He likes quiet and attempts to keep meetings and appointments to three or four a day, leaving time for reading and study.

  (28)

  (29) The many faces of Alan Greenspan.

  (30)

  (31) Listening.

  (32) Explaining.

  (33) Perplexed.

  THE GREENSPAN YEARS: 1987 to 2000

  Opposite page:

  The charts for gross domestic product, the unemployment rate and inflation reflect the most historically accurate revised statistics currently available. Some of the numbers in these charts may differ somewh
at from those in the text of the book. The book’s narrative reflects the real-time statistics available to Fed policy makers during given months or years.

  (34) The Marriner S. Eccles Federal Reserve Building on Constitution Avenue in Washington, D.C., named after the chairman of the Federal Reserve from 1934 to 1948. The marble structure was built in the 1930s.

  (35) Greenspan testifying in 1995. The wrinkled brow became one symbol of his concentration and focus.

  ACKNOWLEDGMENTS

  Simon & Schuster and The Washington Post once again have backed me completely on this project, giving me the necessary time and independence to pursue it.

  Alice Mayhew, who has been my editor at Simon & Schuster for the past 28 years, provided the idea for this book. We first considered a book about the leading figures in the American economic boom, their minds and the way their thinking drove the expansion. Though I pursued this broader project initially, she instantly saw that the central figure was Greenspan. She was right. And, as always, she was willing to devote her considerable energy and keen eye to conceiving the book and then improving three full drafts of the manuscript.