by Bob Woodward
On February 24, 1986: For another account of this event, see also William Greider’s thorough account of the Volcker Fed, Secrets of the Temple (1987), 698–701.
Baker left unsure: In his interview with the author on May 15, 2000, Howard Baker said that his meeting with Volcker at the Federal Reserve was an effort to try to find out whether Volcker wanted to be reappointed, not an effort to convince him to stay. A June 3, 1987, story in The Wall Street Journal reported that Volcker declined renomination during the meeting, and that Baker then asked Volcker to reconsider. According to one of Baker’s top aides quoted in the Journal story, Baker told Volcker, “Paul, I hope you will think about this while you’re fishing this weekend because I can tell you the president will want to talk to you about staying.” According to the Journal, Baker “continued to hope that Mr. Volcker would reconsider,” but Baker was not interviewed for the Journal story. In his interview with the author, Howard Baker said this was the first time he was giving the complete version of what really happened. See Gerald F. Seib and Ellen Hume, “Change at the Fed: Volcker’s Decision to Quit Fed Was Sealed at Gathering in Reagan’s Living Quarters,” The Wall Street Journal, June 3, 1987, A20.
Yes, he said in milliseconds: Greenspan quoted from “Change at the Fed,” cited above.
CHAPTER 1
Most of the information in this chapter comes from the author’s interviews with three primary knowledgeable sources. The first source was interviewed about the matters covered in this chapter five times between 1992 and 2000. The second source was interviewed eight times over that same period, and the third source was interviewed four times.
“We spent all morning”: Transcript, Federal Open Market Committee Meeting, August 18, 1987, 24. All quotations from FOMC meetings and conference calls from the period 1987–94 come directly from transcripts released by the Federal Reserve. Historically, the Fed had never made transcripts public, but in 1993 Greenspan publicly acknowledged that the FOMC tape-recorded its meetings for certain in-house purposes. A number of public officials in turn demanded that the Fed release transcripts to the public, and after a long back-and-forth, the Fed agreed to release “lightly edited” transcripts of its meetings, with a five-year lag. As of the writing of this book, only the transcripts through 1994 were publicly available. Specific mentions of confidential information—the names of specific companies that have privately shared information, for example—are at times deleted. Knowledgeable sources say that no substantive changes are made and that the edits are solely for grammar and clarity.
starting to go straight up: Lead times are the amount of time that it takes for a factory or warehouse to deliver an item after the initial order for that item has been placed. Rising lead times means that it is taking longer and longer for people to get what they’ve ordered. The scarcity often leads to rising prices.
The staff report: In the weeks before each FOMC meeting, the Fed staff prepares a report, known at the Fed as the Greenbook, which includes a description of the present state of the economy and a forecast of what the economy will look like over the next year. Until 1995, the staff built a specific monetary policy into its forecast, specifying anticipated interest rate increases or decreases. The members of the FOMC could then either agree or disagree with it. Beginning in 1995, at the urging of Governors Alan Blinder and Janet Yellen, the Greenbook began to incorporate some alternatives. Regardless of whether everybody agrees with its outlook, the Greenbook is the basis from which discussion of the economy during FOMC meetings begins.
“While the staff”: Dialogue through “the real world” taken from Transcript, Federal Open Market Committee Meeting, August 18, 1987, 25.
“The risk of snuffing out”: Transcript, Federal Open Market Committee Meeting, August 18, 1987, 33.
It was the first increase: The Fed had last raised the discount rate in April of 1984, when the rate went up from 81/2 percent to 9 percent; since then, the Fed had lowered the rate to 51/2 percent.
In 1968: Greenspan met Nixon after running into Leonard Garment, a Nixon law partner who had played in the Henry Jerome Band with Greenspan during the 1940s. Garment was advising Nixon and brought Greenspan to meet him.
In the summer of 1974: Nixon had asked Greenspan to come to the Council of Economic Advisers twice before, but Greenspan had refused him both times. Arthur Burns, Greenspan’s mentor at Columbia and chairman of the Federal Reserve from 1970 to 1978, pushed Greenspan hard to take the CEA job in 1974, saying that Greenspan was badly needed in the post.
“There is always something”: Dialogue through “evidence of actual inflation” taken from Transcript, Federal Open Market Committee Meeting, September 22, 1987, 34–35.
“The actions we are taking”: Greenspan quoted from Transcript, Federal Open Market Committee Meeting, September 22, 1987, 42.
Johnson took out a one-inch-thick binder: The staff at the New York Federal Reserve Bank had prepared a confidential document called “Summary Papers on Risks in the U.S. Financial System,” begun while Volcker was chairman. The document sketches out a variety of potential catastrophes and possible responses to them and contains a seven-page section on the stock market that was finalized on September 25, 1987.
“The Federal Reserve”: Federal Reserve statement quoted from “After the Crash—On the Spot: Stock Market’s Frenzy Puts Fed’s Greenspan in a Crucial Position,” The Wall Street Journal, October 21, 1987, A1.
By about 11:30 a.m.: The account of the events of Tuesday, October 20, contains information from a number of the author’s interviews; this section also uses information from The Wall Street Journal’s series on the crash: James B. Stewart and Daniel Hertzberg, “Terrible Tuesday,” November 20, 1987, A1; James B. Stewart and Daniel Hertzberg, “The Crash of ’87—Before the Fall,” December 11, 1987, A1; Randall Smith, Steve Swartz and George Anders, “The Crash of ’87—Black Monday,” December 16, 1987, A1; and Steve Swartz and Bryan Burrough, “The Crash of ’87—The Aftermath,” December 29, 1987, A1.
“very temporary”: Ruder quoted from “The Crash of ’87—Black Monday,” The Wall Street Journal, December 16, 1987, A1.
The specialists on the stock exchange floor: Specialists are small but powerful firms required by the New York Stock Exchange to buy and sell assigned stocks during volatile times to keep prices as orderly as possible. Otherwise known as “market makers,” the specialists are supposed to be an investor’s last resort; in normal times, they are the reason an investor can buy or sell a stock when no other investors are in the market. If they invest wisely, specialists can make quite a bit of money—but they got hammered during the 1987 crash. Without any other buyers, some specialist firms were forced to buy huge quantities of stock out of their own capital in order to comply with what was required of them. Most specialist firms keep something in the neighborhood of $60 million on hand, which was nothing next to the billions of dollars in sell orders that came through. See the series in The Wall Street Journal, cited above.
CHAPTER 2
Most of the information contained in this chapter comes from three primary knowledgeable sources. The first source was interviewed four times, the second source was interviewed five times and the third source was interviewed seven times.
“Passing a Test”: See Alan Murray, “Passing a Test: Fed’s New Chairman Wins a Lot of Praise on Handling the Crash,” The Wall Street Journal, November 25, 1987, A1.
“The financial system came close to gridlock”: The Brady Report quoted from James B. Stewart and Daniel Hertzberg, “The Brady Report—Market Medicine: Brady Panel Proposals Underscore Worries ’87 Crash Could Recur,” The Wall Street Journal, January 11, 1988, A1.
“One thing about this meeting”: Greenspan quoted, through “break the stock market,” from Transcript, Federal Open Market Committee Meeting, February 9–10, 1988, 44–45.
“My congratulations”: Boehne-Greenspan dialogue quoted from Transcript, Federal Open Market Committee Meeting, February 9–10, 1988, 76.
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br /> “use a sledgehammer”: Greenspan quoted from Transcript, Federal Open Market Committee Meeting, February 9–10, 1988, 52.
“we will feel the necessity”: Greenspan quoted from Rose Gutfelt, “Greenspan Criticizes Top Treasury Aide for Attempting to Influence Fed’s Policy,” The Wall Street Journal, February 25, 1988, A3.
The next day’s headline: See John M. Berry, “Greenspan Tells Administration to Stop Pressure,” The Washington Post, February 25, 1988, B1. For another description of the political pressure and Greenspan’s reaction to it, see Steven Beckner’s book about Greenspan’s early tenure as Fed chairman, Back from the Brink: The Greenspan Years (1996), 76–80.
“If the inflation rate”: Corrigan quoted from Transcript, Federal Open Market Committee Meeting, June 29–30, 1988, 16.
On Tuesday, August 9: For a full explanation of the Greenspan-Seger scene and the preparations for the August 1988 rate increase, see Louis Uchitelle, “Alan Greenspan; Caution at the Fed,” The New York Times Magazine, January 15, 1989, 18.
“a sound reason”: Fitzwater quoted from Robert D. Hershey Jr., “Federal Reserve Steps Up Interest to Slow Inflation,” The New York Times, August 10, 1988, A1.
Greenspan had learned to adapt early on: Most of the biographical information about Greenspan comes from the author’s own interviews and research, but a few articles were particularly helpful for background. See Joseph Vitale, “Alan Greenspan,” NYU Business, 1983, 28–33; John Cassidy, “The Fountainhead,” The New Yorker, April 24 and May 1, 2000, 162–175.
In 1935, when Greenspan was eight: Herbert Greenspan episode is recounted, and quoted, from Louis Uchitelle, “Alan Greenspan; Caution at the Fed,” The New York Times Magazine, January 15, 1989.
Branden wrote in his memoir: See Nathaniel Branden, Judgment Day: My Years with Ayn Rand (1989), 131–133, 241.
“He was almost too good a loser”: Kavesh quoted from an interview on February 16, 1993, conducted by David Greenberg, the author’s assistant at that time.
CHAPTER 3
Most of the information in this chapter comes from five knowledgeable sources. The first four sources were interviewed numerous times over a period of eight years. The fifth source was Robert Parker, who was interviewed on the record on August 3, 2000.
“I frankly don’t recall”: Greenspan quoted from Transcript, Federal Open Market Committee Meeting, February 7–8, 1989, 47.
“I think it is very important”: Greenspan quoted, through “said my piece,” from Transcript, Federal Open Market Committee Meeting, February 7–8, 1989, 50.
Greenspan issued a blunt warning: Greenspan quoted from John Berry and Paul Blustein, “Price Rise Is Fastest Since 1987; Fed Chief Finds Data ‘Disturbing,’ ” The Washington Post, February 23, 1989, A1.
“If we had complete capability”: Greenspan quoted from Transcript, Federal Open Market Committee Conference Call, June 5, 1989, 4.
“I’m concerned”: Greenspan quoted from Transcript, Federal Open Market Committee Meeting, July 5–6, 1989, 49–50.
who had been described by Newsweek: See Thomas M. DeFrank and Ann McDaniel, “Say Hello to Charmin’ Darman,” Newsweek, June 5, 1989, 24.
Nine months earlier: See Richard Darman, Who’s in Control? (1996), 201–2.
Darman said he feared: Darman quoted from Transcript, NBC’s Meet the Press, Sunday, August 13, 1989, 11.
Sunday’s papers: See Paul Blustein, “Fed Ready with Cash to Cool Market Fears,” The Washington Post, October 15, 1989, A1; Clyde H. Farnsworth, “Federal Reserve Moves to Provide Cash to Markets,” The New York Times, October 15, 1989, A1. The Wall Street Journal did not run a similar story because the Journal appears only on weekdays.
Corrigan blasted: Corrigan quoted from Transcript, Federal Open Market Committee Conference Call, October 16, 1989, 2.
“I think any official policy position”: Greenspan quoted from Transcript, Federal Open Market Committee Conference Call, October 16, 1989, 5.
Savings and loans (S&Ls), known as “thrifts”: Much of the history of the S&L industry provided here is taken from a section called “A Short History of S&L’s” in Kitty Calavita, Henry N. Pontell and Robert H. Tillman’s book about the S&L scandal, Big Money Crime: Fraud and Politics in the Savings and Loan Crisis (1997), 8–16.
William Seidman, the man who chaired: Seidman quoted from Big Money Crime: Fraud and Politics in the Savings and Loan Crisis (1997), 15.
Greenspan had written a seven-page letter: Greenspan letter quoted from Big Money Crime: Fraud and Politics in the Savings and Loan Crisis (1997), 107.
“Of course I’m embarrassed”: Greenspan quoted, through “doesn’t make sense,” from Nathaniel Nash, “Greenspan’s Lincoln Savings Regret,” The New York Times, November 20, 1989, D1.
CHAPTER 4
Most of the information in this chapter comes from the author’s interviews with five knowledgeable sources, each of whom was interviewed on numerous occasions.
On August 2: See also Bob Woodward, The Commanders (1991), 218–261.
“The odds of an actual war”: Greenspan quoted, through “providing a degree of stability,” from Transcript, Federal Open Market Committee Meeting, August 21, 1990, 36–38.
The committee members voiced: See Transcript, Federal Open Market Committee Meeting, August 21, 1990, 38–44.
“I don’t think I have asked”: Greenspan quoted, through “substantial consensus,” from Transcript, Federal Open Market Committee Meeting, August 21, 1990, 45.
“There is a lot of ‘real stuff’ ”: Greenspan quoted, through “not responding to a real budget agreement,” from Transcript, Federal Open Market Committee Meeting, August 21, 1990, 42–48.
“we go down 1/4 percent”: What Greenspan actually said was “we go down 25 basis points,” but the author has changed it to 1/4 percent, here and elsewhere in the book. Economists divide each 1 percent into 100 basis points. If the rate goes from 51/2 percent to 6 percent, the rate has gone up 50 basis points in the jargon of the Fed and Wall Street. For consistency and ease of reading throughout the narrative, the author has changed the form of those references into fractions, which are used in most news accounts.
“reward to the boys on the Hill”: Seger quoted from Transcript, Federal Open Market Committee Meeting, August 21, 1990, 55.
“It is not a good precedent”: Angell quoted from Transcript, Federal Open Market Committee Meeting, August 21, 1990, 54.
Greenspan held his ground: Greenspan quoted from Transcript, Federal Open Market Committee Meeting, August 21, 1990, 58.
Corrigan cautioned the chairman: Corrigan-Greenspan dialogue quoted from Transcript, Federal Open Market Committee Meeting, August 21, 1990, 59.
A furious debate: See also the author’s four-part series, “Making Choices: Bush’s Economic Record,” The Washington Post, October 4–7, 1992.
“Slowing inflation”: Greenspan quoted, through “too dangerous,” from Transcript, Federal Open Market Committee Meeting, November 13, 1990, 42.
Citibank, which six years earlier: For more information on Citibank in particular and the crisis of the banks during this period in general, see Richard B. Miller, Citicorp: The Story of a Bank in Crisis (1993).
“But recessions always end”: Greenspan quoted, through “overdo it,” from Transcript, Federal Open Market Committee Meeting, December 18, 1990, 35.
CHAPTER 5
The bulk of the information in this chapter comes from the author’s interviews with seven knowledgeable sources. The first six were each interviewed on numerous occasions on background, and the seventh, Fed Governor Wayne Angell, was interviewed on the record about these events three times: September 18, 1992; November 30, 1992; and December 17, 1992.
“We’re in slowdown”: Bush quoted from Mark Memmott, “White House Concedes USA Is in Recession,” USA Today, January 3, 1991, 3B.
he laid down almost a challenge: All quotations from this scene taken from Transcript, Federal Open Market Committee Conf
erence Call, February 1, 1991, 2–3.
“I don’t know whether you consider this”: Melzer quoted from Transcript, Federal Open Market Committee Conference Call, February 1, 1991, 2.
A story had run: See Louis Uchitelle, “Federal Reserve Acts Warily in Combating This Recession,” The New York Times, January 11, 1991, A1.
Greenspan appointed a number of Fed economists: See Transcript, Federal Open Market Committee Meeting, February 5–6, 1991, 1.
the task force presented: For the full task force presentation and discussion, see Transcript, Federal Open Market Committee Meeting, March 26, 1991, 1–7.
Johnson wrote in his newsletter: All quotations taken from “Fed Confrontations Create Gridlock,” A Johnson Smick International Report, April 2, 1991, 1–2.
The Wall Street Journal ran short article: See Alan Murray, “Dispute Flares Up at Fed Over Greenspan’s Authority,” The Wall Street Journal, April 4, 1991, A3.
the Journal ran its long front-page article: See Alan Murray, “The New Fed: Democracy Comes to the Central Bank, Curbing Chief’s Power,” The Wall Street Journal, April 5, 1991, A1.
More stories appeared: See John Berry, “Greenspan’s Sway Over Rates Topic of Internal Fed Debate,” The Washington Post, April 5, 1991, F1; Louis Uchitelle, “Greenspan’s Authority Curtailed on Interest Rates, Officials Say,” The New York Times, April 8, 1991, A1.
On April 10: See David Wessel, “Greenspan Is Doing ‘Fine Job’ at Fed, Says White House—Money Managers Endorse Chief’s Reappointment as His Term Nears End,” The Wall Street Journal, April 10, 1991, A2.
Greenspan convened an early conference call: All quotations from this conversation taken from Transcript, Federal Open Market Committee Conference Call, April 12, 1991, 1–8.
William Greider’s 1987 best-selling book: Greider’s book about the Fed under Volcker provides a comprehensive description of how the Fed makes monetary policy. The book also makes the somewhat controversial point that inflation is better for the underclass than prolonged periods of stable prices. The fundamental argument is that inflation reduces debt burden, because mortgages and other personal debts can be paid off in inflated dollars. Though wages rise, so do the prices of everything else—and most economists now believe inflation kills off jobs and that unemployment rises in times of high inflation.
