Maestro

by Bob Woodward

  Angell was astonished at the change, and even more at Greenspan’s strident insistence that a failure to cut rates would entail such a risk. But he waited for his turn to speak.

  They could either do nothing, Greenspan continued, or they could do what he proposed—a 1/2 percent cut in the discount rate and a 1/4 percent cut in the fed funds rate. “I’d be curious to get people’s views,” he said. He then called on Corrigan, his vice chair.

  “I, for one,” Corrigan said, “would favor a 1/2-point discount rate cut and a 1/4-point funds rate reduction.”

  Like clockwork, Angell thought.

  Next, three bank presidents spoke in full support of the proposal. Bang, bang, bang—in lockstep. All of a sudden, it looked like a railroad job to Angell. Five yes votes for the rate decrease, even though the day before Greenspan had talked about openness and listening.

  “I’m very interested in what I’m hearing,” Angell said when his turn came. He proceeded slowly. “I guess I’m going to express caution and a real preference not to move,” he said. He noted that the last six months of rate cuts were in anticipation of causing the very CPI drop that they were witnessing. Now to cut rates again on the announcement made little sense and was slightly disconcerting. “I may indeed be in a minority,” he said.

  Several bank presidents and governors immediately chimed in, agreeing with Angell and voicing reluctance and reservations. It sounded as if Greenspan had no more than the five initial votes. Angell was even more astonished.

  “So, gentlemen,” Greenspan finally said, “what I hear at this particular stage is a mixed view or willingness to do perhaps a 1/4 point.” Rather than summarize his own embarrassing position or call for a vote that he might lose, Greenspan simply adjourned the conference call, asking the governors to stay on the line.

  With the governors alone on the line, he again made a strong case for a discount rate cut.

  Angell couldn’t believe it. He said he thought there was no support for cutting the discount rate, either. The other governors agreed with Angell.

  Afterward, Angell thought Greenspan had made a significant mistake. Failing to take a vote in the FOMC conference call, which would make a public record of the decision, only exposed the Fed to further suspicion that it was a cloistered, remote financial priesthood trying to prop up the bond market and protect the investments of the rich—the kind of argument made in William Greider’s 1987 best-selling book on the Volcker Fed, Secrets of the Temple. In addition, the law specified that the Fed keep a record of any “action” and the “reasons underlying the action” and report those to Congress annually. Rejection of a proposal by the chairman surely merited recording, but a summary of the April 12 conversation did not appear in the Fed’s annual report to Congress for 1991.

  Some of the other governors believed that the April 12 conference call was more an informational conversation than a formal meeting of the FOMC, and Greenspan didn’t like to take formal votes on conference calls. But Greenspan realized he may have made a mistake in trying to move impulsively on the basis of one CPI drop.

  On the most sensitive issue of whether there was any connection between Greenspan’s efforts to push for lower rates and the pending reappointment decision, Angell decided he had too much respect for Greenspan to even think about it. At the same time, he knew that the temptation to make deals was always there.

  Angell was often an extreme voice for tight money on the FOMC. He was not afraid to dissent from the majority, and he enjoyed standing apart from the others, playing what he called “the polar role.” He thought that his positions broadened the debate within the committee and gave Greenspan more room to work. At the same time, Angell felt that he actually had more influence at the FOMC when he voted with Greenspan’s majority than when he dissented. When he voted with the majority, Angell felt, it was because Greenspan was able to create a consensus that was broad enough to accommodate his views.

  During their regular tennis matches, Greenspan and Angell often talked shop, though their discussions were seldom very long. Greenspan thought of Angell as a straight shooter—a bit quirky, maybe, but someone who didn’t prevaricate or mislead. At one point as Greenspan’s reappointment was up in the air, the two sat up in an alcove at Greenspan’s private tennis club in suburban Virginia after a match and had another talk.

  “Alan,” Angell said, “I want you to know how proud I am to be serving in the Greenspan Fed. I know that in terms of achieving what I want to achieve, you are the instrument of doing it.

  “I don’t want to do anything that lessens the chances of your reappointment. I don’t want to do anything that makes it more difficult for you during this period.”

  It was a subtle circling of the wagons around the chairman.

  On April 18, The Washington Post ran a front-page story quoting three Fed bank presidents, Corrigan of New York, Lee Hoskins of Cleveland and Robert Black of Richmond, disavowing on the record that there had been any revolt against Greenspan. They all insisted that Greenspan’s authority was fully intact.

  Less than two weeks later, on April 30, Greenspan unilaterally lowered rates 1/4 percent to 53/4 percent. He convened a conference call of the FOMC to explain his action. Auto sales and consumer spending were still off, he said, and several other economic indicators were down as well. “In my judgment the inflationary pressures are easing very considerably,” he said. No one questioned or challenged him.

  He had done more than simply assert control. To those inside the Fed, he had proved it.

  • • •

  “Look, we’ve got to decide on Greenspan,” Michael J. Boskin, the chairman of President Bush’s Council of Economic Advisers—the position Greenspan had held under President Ford—said to his White House colleagues at the end of June. “Do we reappoint him? Do we put someone else in? There’s such a thing as impact on the markets about whether the Fed chairman is going to be reappointed.” The decision about whether to reappoint Greenspan had been languishing for months, and Greenspan’s term expired in about six weeks.

  Infighting and turf wars in the Bush administration had reached the point where Treasury Secretary Brady and John Sununu, Bush’s chief of staff, were not on speaking terms. Both very proud men, neither would go to the other’s office to have a meeting on the subject. Boskin finally assembled the key players in his office in the Old Executive Office Building, next to the White House. Brady, Darman, Sununu and Boskin had a long, intense meeting. None could come up with a viable alternative. A widely reported poll of New York money managers in April and a Wall Street Journal poll of financial decision makers in May both found that about 75 percent of the people on Wall Street favored Greenspan’s reappointment.

  Greenspan was pretty sure Brady was looking for an alternative, someone else to appoint to the chairmanship. Normally patient, Greenspan was increasingly disturbed and decided that if he didn’t get an answer soon, he was going around Brady to Jim Baker, now the secretary of state.

  Bush’s economic advisers agreed on a series of questions about the economy that Brady was to ask Greenspan. After months of inaction, the treasury secretary and the Fed chairman finally sat down to talk.

  Greenspan responded to Brady’s questions by providing his estimate of what the economy might look like over the next year or year and a half. He gave what he considered to be a pretty pessimistic view of the economy, although he did suggest that he thought growth would pick up. He did not figure that he was being interviewed for a job. He had his own relationships with Bush and Baker, and he knew that Baker’s influence was great, particularly on political matters. And nothing was more political than the condition of the economy. Greenspan didn’t think his future was in Brady’s hands, and he wasn’t going to negotiate with him. He could see that the treasury secretary was trying to extract a tangible promise on rates in exchange for reappointment.

  Brady took Greenspan’s remarks as a virtual guarantee that Greenspan would act to lower interest rates even faster i
f he were reappointed, and he reported the good news to the president and the economic team. Bush’s advisers were somewhat skeptical that Brady had accomplished everything that he said he had. “Brady is the wrong person to have in there to close a deal,” one of them said.

  In Greenspan’s eyes, all he had done was offer his economic forecast.

  On June 30, Greenspan went over to the White House and met with Bush and some of his economic advisers in the Oval Office. It was the chairman’s first visit with the president in six months.

  What’s going to happen next with the economy? someone asked.

  The economy was improving more than he had previously thought, Greenspan replied. “I’m not believing what my staff is telling me,” the chairman added, “but we could have growth of 4, 41/2 to 5 percent the next quarter. I can’t believe this.” Greenspan knew that the initial data weren’t reliable. There simply weren’t enough resources being put into the process of forecasting overall national economic growth, so he was suspicious of the numbers he’d seen. The situation was getting better, but not nearly as fast as some of the forecasts had predicted. In all, though, the recovery was under way. He urged the others not to tell anyone what he’d said, adding that there was really nothing they could do about it anyway.

  For the White House, this was positive news. The Gulf War had been won in March, Bush’s approval ratings were sky high, and now it looked as if there were a lock on high economic growth during the year before his reelection bid—if not Greenspan’s high numbers, at least something in the realm. The effective message to Bush: Don’t touch the steering wheel, don’t fix what isn’t broken.

  • • •

  Just before 6 p.m. on Wednesday, July 10, Bush called a press conference in the briefing room at the White House with Greenspan at his side.

  “Just to top the day with a very important announcement,” Bush began, “I want to say that it is my intention to send, as soon as possible, to the Senate my intention to reappoint Chairman Greenspan as chairman of the Federal Reserve.

  “It gives me great pleasure,” Bush continued, “to move forward at this time, quite a bit in advance of the expiration of the term.” “Quite a bit” was a slight exaggeration; Greenspan’s term was up in a month, and Bush had cut the decision very close.

  “It’s a job of great pressure,” Bush said. “He has done an outstanding job.”

  “I thank you very much, Mr. President,” Greenspan said when he stepped to the podium. “I look forward to another four years.

  “It has certainly been an honor to work with you,” he said to the president.

  Asked about the recession, Greenspan said, “I think the evidence is increasing week by week that the bottom is passed and the economy is beginning to move up. We still do not yet know how rapid the recovery is, or the underlying strength of it, but I think it’s a pretty safe bet at this stage to conclude that the decline is behind us and the outlook is continuing to improve.”

  “Mr. President, did Chairman Greenspan, in effect, save his job with these interest rate cuts early this year?” a reporter asked Bush.

  “No,” Bush replied. “His job wasn’t in jeopardy. The Fed is an independent—sometimes very independent—organization over there, and he’s got to lead that important enterprise the way he sees fit.”

  In response to another question, Bush said, “I’ve expressed my interest in lower rates from time to time, and I can’t say there have never been differences of how we look at a problem. My view is to keep the interest rates as low as possible without getting inflation out of control, and to see this country grow. And I’m satisfied that in a broad sense Chairman Greenspan shares those goals.”

  Do you see any signs of emerging inflation? another reporter asked.

  “Not yet,” Greenspan said.

  “That’s not to say we should not be concerned about their being reignited at some point,” Greenspan went on characteristically, “but really examining the existing state of data gives one some confidence that inflation is well contained at this stage.”

  “What are you going to do differently in your next term?” someone asked, the last question of the conference.

  “I haven’t a clue,” Greenspan said.

  Two days later, in an editorial called “A Stiffer Spine for Mr. Greenspan,” The New York Times said that “the question arises why the renomination—coming barely a month before Mr. Greenspan’s current term ends—was so tardy and grudging. The obvious inference is that the White House hoped to strong-arm the chairman into lowering interest rates, delivering a temporary boost to the economy. . . .

  “Mr. Greenspan knows his business,” the editorial concluded, “yet doubts remain about his independence.”

  • • •

  Six days later, on July 16, Greenspan testified before Congress. “At this stage, we are well on the path of actually achieving the type of goals which we’ve set out to achieve: a solid recovery with the unemployment rate moving down to its lowest sustainable, long-term rate, with growth at or close to its maximum long-term sustainable pace, with inflation wholly under control.” He intimated that the Fed’s current policy position was “a posture of watchful waiting,” implying that he wouldn’t move rates anytime soon.

  In a sense, Greenspan was saying the Fed had done its job, the recession was over, and the economic forecasts were for solid growth of 3 percent or more for the rest of 1991 and into 1992.

  Toward the end of his testimony, Greenspan put in a good word for Bush. “He’s very knowledgeable about these issues,” Greenspan said. “A lot of times you think you’re giving him new information, and he’s heard it 10 times before, and he often knows a good deal more about certain issues than you do.”

  A story on the front page of the business section of The New York Times the next morning clearly understood what Greenspan was trying to accomplish: “Mr. Greenspan’s forecast and the tone of his comments could hardly have been sweeter music to a President gearing up for a run for re-election in 1992.”

  • • •

  Over the next five months, the economy took a nosedive. Business and consumer spending were depressed, and employment fell sharply. On October 28, Greenspan told a business conference audience in Rhode Island that “the economy is moving forward, but in the face of 50-mile-an-hour headwinds.” He indicated that he was frustrated that previous rate cuts hadn’t turned the economy around. He suggested that the credit crunch, with the banks still in trouble and reluctant to make new loans, had caused the recovery to falter. The Dow Jones rose that day as the markets began to expect the Fed to lower rates.

  • • •

  “I think it’s time to ring the bell,” Gerry Corrigan said to Greenspan during a coffee break at the December 2, 1991, FOMC meeting. Corrigan had been listening to the others on the FOMC all morning, thinking to himself that another kind of plain vanilla rate cut probably wasn’t going to achieve much. Greenspan seemed still to be thinking only of 1/4 percent incremental drops. As president of the New York Fed, Corrigan was not a member of the Board of Governors and technically he had no say in what went on with the discount rate, but he recommended that Greenspan persuade the Board of Governors to step up and cut rates significantly, perhaps a full 1 percent. The public announcement effect would send the needed message.

  David Mullins, who had replaced Johnson as board vice chairman four months earlier, approached Greenspan a few minutes later and urged a big discount rate drop as well. Mullins, 45, a former Harvard Business School professor, was particularly close to Nick Brady. He had served as a top adviser to the commission that had investigated the 1987 stock market crash and then had been an assistant treasury secretary to Brady. He had been Bush’s first Fed appointment.

  Attempting to act neither as Bush’s nor as Brady’s man at the Fed, Mullins had nonetheless been pushing for a big rate cut for a few months, arguing that there couldn’t be any real risk of reigniting inflation in the current sour economic environment. He observed
Greenspan’s leadership style carefully. The chairman tended to provide leadership by supporting, adopting or appearing to adopt the views of others on the board or FOMC. Because Greenspan was so deferential, allowing everyone their argument, he was able to pull a very large consensus along on the ultimate decisions. Let’s take a major step, Mullins said now. The short-term interest rates, both the fed funds rate and the discount rate, could be safely moved lower than the inflation rate. That would mean businesses and consumers would have real interest rates that would be less than zero, which should provide a giant stimulus to the economy. Greenspan had been resisting, but with Corrigan pushing, too, the chairman began to consider it more seriously. Both the FOMC vice chairman and the board vice chairman were saying essentially the same thing. They had a point, Greenspan concluded, and it was important to preserve consensus—even if it formed around the proposals of others.

  The Board of Governors could change the discount rate only if at least 1 of the Fed’s 12 regional reserve banks requested it. Soon after the December 2 meeting, Corrigan convened the New York Fed’s board of directors and talked to them about a big rate cut. He was careful to say that although he didn’t have the slightest idea how the board would respond to it, he wanted to put something on the table that was unconventional—a real statement. Some people voted for a plain vanilla incremental move first, but in a second vote he got a request from his board for a full 1 percent decrease.

  Corrigan informed Greenspan of the New York Fed’s request. Greenspan was in Chicago, where he and the president of the Chicago Fed were having a similar conversation. The Chicago bank soon requested a full point decrease as well.

  Greenspan knew that he had some convincing to do to get the other governors to go along. He knew that the markets were becoming increasingly weak, and that a dramatic rate decrease—unthinkable two months earlier—would most likely not risk an inflation outburst. But he wanted unanimity, or at the least a clear majority. He talked to all of the governors, seeking their support.