It's Greenspan, stupid!
By MARGO HAMMOND
© St. Petersburg Times, published November 19, 2000
In the coming months, partisans no doubt will continue to wrangle over who was really elected president and the financial markets will continue to fluctuate nervously. But the economic and political reality may be that our nation's future is already in the hands of a balding, bespectacled numbers cruncher whose name has never appeared on any ballot: Alan Greenspan.
As chairman of the Federal Reserve, a post he will hold until 2004, Greenspan could be the man who wields the most power in this country for the next four years. Largely credited for orchestrating the phenomenal economic boom of the past decade, he may very well hold the key to preventing its collapse (or at least cushioning its landing).
That is the underlying thesis of Bob Woodward's latest book of investigative journalism, Maestro: Greenspan's Fed and the American Boom, out this week.
"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," writes Woodward. "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?"
The answer, of course, is no one -- and everyone. Greenspan was appointed by President Ronald Reagan after James A. Baker III (yes, the same Baker who has been maneuvering for George W. Bush) muscled out Greenspan's Democratic predecessor Paul Volcker. He was then reappointed by George Bush, who subsequently blamed his loss to Bill Clinton on Greenspan's decision to raise interest rates. Finally he was reappointed twice by Bill Clinton, most recently in January for a fourth term.
But as the architect or at least the caretaker of our long-running prosperity, this wizard behind the curtain gets everybody's vote. And whoever ends up calling 1600 Pennsylvania Avenue home for the next four years would be well advised to listen to him. Bill Clinton did, and he was richly rewarded with a robust economy that propelled him to two terms despite scandals and legislative deadlock.
"It's the economy, stupid" was the James Carville-inspired campaign slogan that fired up Clinton's first campaign. The phrase still is uppermost in most Americans' minds. The next president will not be judged by the programs he rams through Congress (with the House and Senate split nearly down the middle politically, there won't be many anyway). He will be judged by that famous Reagan question that may come back to haunt the country's 43rd president: "Are you better off than you were four years ago?"
Woodward, whose book provides a rare inside look at how decisions were made by the country's central bank during the past decade, traces our current economic good fortune to the alliance forged between Clinton and Greenspan in the days just before Clinton first took the oath of office. Invited down to Little Rock for a meeting with the president-elect, Greenspan decided to give the new president an economic lesson.
To help the recovering economy, reduce the federal deficit, he told Clinton. Such a reduction would provoke a drop in long-term interest rates, a move that could trigger a whole series of payoffs for the economy: a demand for new mortgages, a subsequent increase in consumer spending, an expansion of the economy, a robust stock market and increased employment. Without it, the economy could fall on its face.
Clinton paid attention. The following August, his deficit reduction plan squeaked past Congress, 218-116 in the House and 51 to 50 in the Senate, with Vice President Gore casting the tie-breaking vote. "Not a single Republican had voted for the plan, which cut $500-billion from the deficit over the next four years by increasing taxes and cutting some federal spending," writes Woodward. "The only real Republican support had come from Greenspan." The Republican Greenspan even learned to live with Clinton's tax increase for the wealthy. It brought down the deficit, didn't it?
Meanwhile, like a maestro adjusting the volume and intensity of his orchestra, Greenspan lowered interest rates and then raised them in an ever-delicate recalibration of the economy, fending off inflation on one end and recession on the other.
Seven years later, those payoffs he promised Clinton came to fruition.
"Who would have thought, seven years before their first meeting in Little Rock, that such economic conditions were even possible -- steady economic growth, low inflation, unemployment hovering at an unheard-of 4 percent and the Dow above 11,000," writes Woodward. "More than 20-million new jobs had been created since Clinton took office. Some economists would have put the odds at one in 1-million. Greenspan, ever a stickler about probability, couldn't even calculate it."
Much of the boom, of course, has had to do with the new economy. Woodward makes much of Greenspan's early discovery that computers and the Internet have been at the root of the country's extraordinary increase in productivity -- and his interest in those who could provide him with more data on that subject. When Clinton's White House informed Greenspan that they were appointing Roger Ferguson, an African-American, to the Fed, Woodward reports that Greenspan was less than enthusiastic. Greenspan wanted someone who was experienced in regulatory and technical banking issues; Ferguson only had a Ph.D. in economics from Harvard. But after Ferguson came on board and showed an expertise in technology, computers and productivity, the chairman termed him "outstanding."
Woodward, by the way, directly quotes Greenspan on this matter, but he never says he interviewed the Fed chairman. Throughout Maestro, in fact, he records the words -- and sometimes even the unspoken thoughts and reflections -- of dozens of people whom he does not claim to have interviewed. For events before 1994 Woodward did have the use of tape recordings of the official meetings of the Federal Reserve Board, which are now released to the public after a five-year lag. But for the most part the author simply asks us to trust him on how he got his information: In the book's notes, he rather uselessly lists the number, ranging from five to 14, of "knowledgeable" but unnamed sources he used in each chapter.
Still, despite Woodward's usual annoying sleight of hand with sources and the questions that invariably raises, his latest book is an important lesson in just how power operates in America. How ironic that the Republican Greenspan, a man who once was tight with the ultra-capitalist Ayn Rand, found his highest degree of influence under a Democratic President, a president whose election (more irony still) was assured by the enormous deficits run up by his Republican predecessors.
Greenspan, Woodward points out, receives nearly rock-star treatment from the press (from Fortune's "In Greenspan We Trust" to the New York Times' "Who Needs Gold When We Have Greenspan"). Woodward's book goes a long way in perpetuating the Greenspan legend. But it also underscores just how much Greenspan's success has depended on the wisdom of the man who sits in the Oval Office. If Junior does gain the White House, he would do well to learn from the mistakes of Bush the elder, who failed to teach the American people that economic lesson Greenspan gave Clinton.
And what of Greenspan himself, the man whose every word can make markets rise and fall? We will no doubt never know what he thinks of Woodward's book -- or any book that tries to dissect him. "When someone at a party once asked Greenspan how he was, he jokingly replied, "I'm not allowed to say,' " reports Woodward.
But it is, after all, Greenspan's very lack of glibness, his steady and sober detachment that give him his extraordinary power. "Straight out of central banker casting, Greenspan is one of the elders who allows the economic party to continue," writes Woodward. "In The Wizard of Oz, when the man behind the curtain emerges, we are let down. With Greenspan, we find comfort."
And it looks like in this political season, we will be needing all the comfort we can get.
MAESTRO: Greenspan's Fed and the American Boom
By Bob Woodward
Simon & Schuster, $25
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