Maestro

by Bob Woodward

  Kelley didn’t expect to have his ass chewed out so thoroughly, especially at this moment in his life, but he answered. The Fed didn’t intend to kick anyone. Their decisions were an effort to make the economy better in the long run.

  Baker made it clear he didn’t believe it.

  Interest rate worries soon subsided, and Baker and Greenspan were soon very happy. Bush was elected president in November.

  • • •

  After he was chairman more than a year, Greenspan’s operating style was beginning to emerge—intellectual engagement, tempered by emotional detachment; near obsession with economic data, tempered by a steady stream of doubt and uncertainty over the impact; indirectness as a means of achieving a desired outcome, tempered by sudden directness and a desire to have it his way; and a pronounced deference to political power.

  Greenspan had learned to adapt early on. He was born in 1926 in New York City to Rose and Herbert Greenspan, both of whom were Jewish. They divorced when Greenspan was about three, and Greenspan, their only child, moved with his mother to her parents’ home in the Washington Heights section of upper Manhattan. She worked as a furniture store salesperson. He responded to the stress and confusion by losing himself in baseball. He became a master of the stats and wanted to become a ball player himself.

  In 1935, when Greenspan was eight, his father, Herbert, a self-educated stock market analyst, published a book called Recovery Ahead, predicting that the New Deal would generate an economic and stock market recovery the next year. Greenspan’s father was an adherent of Keynesian economics, which held, in part, that government spending could stimulate an economic recovery. Herbert Greenspan’s forecast initially came true in 1936, but then the market collapsed in 1937.

  Herbert put a handwritten inscription in the copy of his book that he gave to his son. It read: “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.”

  It was as if the father passed on to his son a tendency toward convoluted prose and wandering sentences. Perhaps the son also saw the value of obscuring the message, particularly if your own conclusions and sentiments were not clear or were best not revealed. In the mature Alan Greenspan, the result was a verbal caution that could be maddening, a series of loose boards and qualifications in sentences that would allow him an exit ramp from nearly everything he said.

  Greenspan attended George Washington High School on West 192nd Street, three years behind Henry Kissinger. He loved math but was average in most of his other course work. A lifelong lover of music, he decided after graduation to enter the Juilliard School of Music—then known as the Institute of Musical Art—where he studied clarinet and piano. After two years at Juilliard, he dropped out and joined the Henry Jerome Band, a 1940s-style big band noted for its bebop stands in New York City and on tour across the country. He played tenor saxophone, but he also doubled on clarinet and flute—and he always played “by the sheets,” meaning that he wasn’t a good improviser. Like many musicians, he thought of becoming a conductor, but it wasn’t his style to stand up front and lead. Greenspan also dabbled in composition, ending up with what he called “crazy stuff on piano” that never really went anywhere. By the end of his run with the Henry Jerome Band, he knew that he was a skilled musician—but he also knew that exceptional talent was innate.

  During his stint with the band, Greenspan rediscovered his own talent with numbers. While other young musicians drank, smoked dope and stayed up all night, he read economics and business books and eventually became the band’s bookkeeper. After a year touring, he enrolled at New York University to study economics. He graduated summa cum laude in 1948 and went on to complete a master’s degree in economics at NYU in 1950.

  After NYU, Greenspan began a doctorate in economics at Columbia University, where he studied under Arthur Burns, whose staunch views about the evils of budget deficits influenced Greenspan strongly.

  “What causes inflation?” Burns once asked his students in a seminar. Everybody in the room got a turn to provide an answer, and then Burns revealed his own.

  “Excess government spending causes inflation,” he said. That lesson was not to be lost on Greenspan. Deficits create more money to chase the same amount of goods—a classic precursor to inflation.

  Greenspan discontinued his doctoral work to go to work for the National Industrial Conference Board, an economic research group, where he started off as a steel industry analyst. In 1952, he married Joan Mitchell, a painter. Less than a year later, the two realized that their expectations were incompatible, received an annulment and remained friends. It was Mitchell who introduced Greenspan to Ayn Rand.

  At one point, Greenspan argued to Rand’s circle that his own existence could not be proven beyond doubt. Absolute certainty was impossible. All that one could count on were degrees of probability. Rand and Nathaniel Branden, one of her disciples, came to call Greenspan “The Undertaker.”

  Branden wrote in his memoir that Greenspan had finally conceded his existence. He told Rand the news: “Guess who exists?”

  “What?” Rand exclaimed. “You’ve done it? The Undertaker has decided he exists?”

  Greenspan was never a complete Rand acolyte. He had a separate career and identity, which caused some to mistrust him. He was a dedicated networker who liked to attend social functions in New York. Branden wrote that he and Rand admired Greenspan’s mind but sometimes thought of him as too much of a social climber, too occupied with worldly status. For Greenspan, it was critical to be in contact with people, and social events were an efficient medium of exchange—even though he was visibly uncomfortable and mingled reluctantly, often making a beeline for someone he knew.

  • • •

  In 1957, after his move to Townsend-Greenspan, Greenspan attempted to determine how much steel inventory was in the hands of steel users or manufacturers so that he could forecast steel production for the next year. Using data and methods from the government’s controlled material plans in World War II and the Korean War, he evaluated raw materials, inventories and consumption, discovering that shipments of steel were higher than consumption. That meant inventories were increasing and less production would be needed. Greenspan forecast a sharp reduction in steel production for 1958.

  It was a shocking prediction to some of his clients. The chairman of Republic Steel told Greenspan, then 32, that what he’d done was interesting but that Republic did not see it that way at all. In 1958, things fell apart in a recession and steel production was down some 20 percent. Though the Republic chairman had disagreed, Republic had been cautious about how much raw material—coke and iron ore, for example—they purchased. It was perhaps Greenspan’s best forecast, and he continued to work with Republic until they merged with another company years later. He learned that bad news, if it was accurate, could be as important and useful as good news.

  As he worked his way through the business and political world, Greenspan discovered that avoiding confrontation served him well. Confrontation only empowered his opponent. Robert Kavesh, Greenspan’s former classmate at NYU and a friend, saw Greenspan display this trait on the tennis court. “He was almost too good a loser,” Kavesh said. “Sometimes you like someone you beat to smolder. He didn’t smolder. He would just shower and go back to work.” Greenspan didn’t have screaming matches with colleagues, and he very rarely, if ever, raised his voice. Sober explication and a kind of studied nonchalance were his only armor.

  Greenspan had long had the habit of reaching out to the politically powerful. In 1974, when he went to work as Ford’s CEA chairman, Greenspan quickly ingratiated himself as both friend and adviser to Ford, elevating the CEA to a status not seen since the Kennedy years. Greenspan used his experience with advising CEOs of major companies to figure out how to make himself indispensable to the president. Once, at a Wh
ite House lunch for the world’s finance ministers, Ford noticed that Greenspan’s seat was empty.

  “Where’s Alan?” the president asked.

  An aide said that Greenspan was testifying before Congress and then offered to go and get him.

  “No, don’t get him,” Ford responded, sounding like a concerned parent. “I just want to know where he is!” The finance ministers went home recounting that the president of the United States couldn’t turn his head without knowing Greenspan’s whereabouts.

  Greenspan’s increasingly personal relationship with Ford had its downside. His one-on-one meetings with Ford caused friction with colleagues, who thought Greenspan circumvented the established process of group decision making. Some saw him as conspiratorial, willing to climb in through the Oval Office back window for time alone with the president.

  In the late 1970s, NYU finally awarded Greenspan his Ph.D. for a collection of previously published writings.

  Greenspan cultivated relationships with any number of people involved in politics, always making people think that he was on their side. “I felt in him a kindred philosophical spirit,” wrote David Stockman, Reagan’s first budget director, in his 1986 memoir, The Triumph of Politics. Greenspan’s attentiveness—his willingness to take a phone call immediately, arrange breakfast or a private meeting the next day—left many with the feeling that they had an exceptional relationship with the chairman. He had dozens of such relationships.

  3

  * * *

  AFTER BUSH’S election, Greenspan and the FOMC continued to raise rates, each time by 1/4 percent. The fed funds rate was up to 9 percent by the beginning of 1989.

  “I frankly don’t recall an economy that at least on the surface looks more balanced than the one that we have,” Greenspan said happily at the FOMC meeting on February 8, 1989, during the third week of the new Bush administration. Supply and demand for goods and services were in healthy balance. Inflation was still too high, at more than 4 percent, so he said he anticipated that they would have to continue to raise rates—but he was willing to wait, given some differences that had surfaced within the committee. He proposed that the committee hold off but adopt an asymmetric directive toward tightening, granting him the authority to increase rates if data came in during the next six weeks showing some signs of inflation.

  Like a decision to raise or lower the fed funds rate, the asymmetric directive was not made public, and it did not commit the chairman to action. The directive simply indicated that the entire committee was leaning toward increasing rates and that the chairman could move the rate slightly—tradition dictated that it usually be no more than 1/4 percent—during the intermeeting period.

  Fighting inflation had to do with their credibility, Greenspan said. Doing a little cheerleading, he added that their credibility was building.

  “I think it is very important for the credibility of this committee to try to find some consensus,” the chairman said.

  “It would be very useful if we could find a means to accommodate each other in such a way that we can have a policy that we all can essentially go along with, though we all may not feel fully comfortable with it. So I’ve said my piece.”

  After a long discussion, he won 10 to 2. He raised the fed funds rate 1/4 percent several days later.

  On February 22, in testimony before Congress, Greenspan issued a blunt warning. “If inflation worsens, a recession will move up on us more quickly than you can imagine, and it will be prolonged.” Consumer prices had risen in January about .6 percent—an annual rate of more than 7 percent. Using his authority the next day, February 23, Greenspan quietly raised the fed funds rate 1/2 percent to 93/4 percent—the most he had ever moved the rate on his own. The rate was now the highest it had been in four years. It had been a long march up since the crash.

  Over the next months, when Greenspan analyzed data, he saw that the future orders were down in a wide range of businesses. That meant that demand for goods was falling and economic growth was slowing.

  Greenspan tapped into his network of business contacts in New York. One was E. F. “Andy” Andrews, who wrote the monthly National Association of Purchasing Management Business Survey for 19 years. Greenspan knew Andrews from back in the 1970s, when Andrews had made the survey available to Greenspan, who was then a private citizen, a day in advance. From the survey and his contact with Andrews, Greenspan gained an understanding of who was buying what and in what amounts in a wide range of businesses.

  He also phoned the purchasing managers at various companies, including some former clients. To his delight, he was now able to get information from his clients’ competitors as well, information previously off-limits to him. Those competitors were now more than happy to respond to the Federal Reserve chairman, and he pledged to keep the information confidential.

  Another of his regular contacts was Robert P. Parker, 49, the associate director for national income, expenditure and wealth accounts at the Bureau of Economic Analysis in the Department of Commerce. He had known Parker for 18 years, going back to his New York and White House days, and they had kept in touch. Parker had been struck that Greenspan was the only private forecaster who had produced a monthly gross national product statistical series for his clients. Greenspan had also been the first to notice that houses, which had shot up in value in the late 1970s, were being sold for large gains—and the profits used for consumer spending. It was a statistic that the government didn’t measure, but the gains and the spending that resulted from them created additional inflationary pressures.

  Greenspan also phoned Jack Welch, the CEO of General Electric. GE had its tentacles just about everywhere, Greenspan found. Welch provided sales data on current products—light bulbs and the like—and also on long-lead products, such as engines, that were helpful to Greenspan.

  Sounding out his long list of contacts took a great deal of time, and Greenspan eventually set up a system in which Fed staff members would formally call a long list of companies each week to get their real-time numbers.

  Only a small fraction of Greenspan’s information came to him orally, though he listened to the British Broadcasting Corporation. Reading was more efficient, and he kept up with the newspapers and specialty magazines such as Aviation Week. He tried not to over-schedule himself, making only three or four appointments or meetings a day. The rest was for study and reading.

  • • •

  As he looked at the economy in the spring of 1989, it was clear to him that the economy was slowing, reducing inflationary pressures. It was quite a turnaround from earlier in the year. The optimism of only a few months earlier was quietly turning into anxiety.

  At the May 16 FOMC meeting, the committee took no action on rates but agreed that Greenspan might need to lower rates on his own between meetings. On June 5, 1989, after the release of some discouraging employment numbers, Greenspan notified the committee he was effectively lowering the fed funds rate to about 91/2 percent. He didn’t know if it was the right move. “If we had complete capability of seeing into the future, this would be an easy job,” he said, “but we obviously don’t have that.”

  By the July 6, 1989, meeting, it was clear the economy was even weaker.

  “I’m concerned that the worst thing that can happen to us,” Greenspan said, “as far as policy is concerned, is that we are perceived to be easing too fast and in a manner which would open up the possibilities of inflationary expectations.” He proposed another small 1/4 percent cut in the fed funds rate, and the committee agreed 11 to 1.

  • • •

  On Sunday, August 13, Greenspan was relaxing at the home of Senator John Heinz, the Pennsylvania Republican, and his wife, Teresa, on the island of Nantucket, off Massachusetts. The heir to the Heinz 57 fortune had a perfect retreat, with cool breezes and an ocean view. Heinz had been on Greenspan’s Social Security Commission in the early 1980s and had voted for the commission’s consensus compromise.

  Greenspan tuned in to the morning televis
ion talk shows. Richard G. Darman, Bush’s budget director who had recently been described by Newsweek as “the most brilliant intellect and political gamesman in the government,” was on NBC’s Meet the Press. Nine months earlier, when Bush had announced Darman’s appointment, Greenspan had phoned Darman. “When your appointment was uncertain, I was thinking of tearing up my tickets to the inaugural,” Greenspan had said flatteringly, indicating that he thought Darman’s role was crucial to a Bush presidency.

  Darman had been Jim Baker’s top assistant in the White House and later his deputy treasury secretary. There was no finer mind in the Bush administration. Greenspan had in recent months urged Darman to come up with a federal budget that would cut the mounting inflationary federal deficit. Darman in turn had been urging lower interest rates to help the economy.

  On Meet the Press, when the Federal Reserve came up, Darman said he feared the Fed “may have been a little bit too tight,” adding, “If we do have a recession, I think it will be because they erred on the side of caution.”

  “What!?” Greenspan shouted at the television set. It made no sense. Public bashing by the president’s top economic advisers would only encourage the opposite of what they wanted, forcing the Fed to assert its independence and delay lowering interest rates. In addition, the Fed’s interest rate policy had to be credible. A particular fed funds rate had to be seen by the markets as the best rate for the economy, not as an artificially low rate influenced by political pressure.

  Darman went on a binge of criticizing the Fed. He flooded Greenspan with memos and faxes. His core argument was that the Fed was mismanaging the money supply.

  Technically, the Fed raised or lowered interest rates by decreasing or increasing the money supply in the economy. They did this by buying or selling government bonds in open market operations. Debates in academic and economic policy circles had raged for years about whether it was possible any longer to measure money supply accurately. How much money was out there? Cash, bank deposits, checking accounts, money market funds? Economists weren’t sure. Many people were moving money to mutual funds, which made it almost impossible to track and measure the money supply.