by Bob Woodward
Once, Greenspan had read one of Einstein’s original 1905 papers on relativity. Greenspan considered himself a somewhat accomplished mathematician, capable of working advanced calculus problems—integral and differential equations—which he sometimes tackled for fun and relaxation. He got some 10 to 15 pages into the paper before realizing it would take much more study, perhaps reading as many as four books, to understand the next step.
He continued to find fascination in Einstein’s work as a model for discovery—careful, scrupulous observation and picking apart the measurements in the economic data to determine what was changing.
The chairman had another problem. He had been telling himself that he should not expect reappointment to another four-year term. After all, he had been appointed to the job twice by Republican presidents—by Reagan in 1987 and by Bush in 1991. A Democratic president would want to choose his own chairman. If Greenspan were president, he would want to choose his own person. It wasn’t plausible that he was going to get another chance.
By November 1995, no one at the White House or in the administration had brought up his reappointment in their frequent conversations with him. And, of course, Greenspan had not brought it up. His term was over in five months. He was wearing fashionable double-breasted suits at times and eating only vegetables for lunch, generally looking fit and ready. He was also waiting.
In the meantime, as he had from the start, the chairman worked the Washington network—parties, private lunches and dinners, tennis matches, a steady stream of private, off-the-record gossip, chat and court intrigue. To some it was an ugly and to others an appealing feature of the nation’s capital. Greenspan found elements of both. Nonetheless it was a useful channel for political intelligence. When the subject of his future came up, he would adopt a stance of studied nonchalance. He would have had eight good years. If Clinton reappointed him, he would accept. If not, that too would be okay. He worked at showing neither anxiety nor pain. He wanted that to be clear. He shrugged. He smiled. He was a man comfortable and at the top of his game. But the message was clear that he was available. He spoke admiringly of presidents who did the politically unexpected.
Greenspan recalled to several people a story about the importance of independence, making it clear he valued his. About 25 years earlier, when his consulting business, Townsend-Greenspan, was going strong, a CEO of one of the large brokerage houses tried to buy the firm. He was reluctant to sell. The CEO wrote a price on a piece of paper, placed it in an envelope, handed it to Greenspan and said, Take it home, open it and think about it over the weekend. At home, Greenspan opened the envelope. It was a wonderful price, very high and tempting. Later that day Greenspan got a pain in his stomach, and it would not go away. The next day he had the same pain. It would not leave him. He concluded that it was a signal—the body knowing something before the head. He realized that with the sale of his business, he would be selling his independence. He declined the offer.
• • •
The FOMC met December 19, 1995, for the last time of the year. Greenspan proposed another 1/4 percent cut, taking the fed funds rate down to 51/2 percent. Blinder and Yellen were strongly in favor. Though some of the bank presidents were very reluctant, the 1/4 percent cut passed unanimously. Many market analysts called the cut a surprise. Others called it another Fed Christmas present.
What a year for Greenspan. In most respects, he had the economy right where he wanted it. Inflation was low, at less than 3 percent for the year. Unemployment was also low, steady in the 51/2 percent range, with the addition of 1.8 million jobs for the year. After 31/2 percent growth the previous year, the annual growth was down in the range of 11/2 percent. There had been no recession. Greenspan had delivered. The economic analysis he had given Clinton in December 1992 was working. The payoffs he had anticipated were evident. By keeping inflation low and cutting the federal deficit, the intermediate- and long-term interest rates—the key rates for businesses, home buyers and consumers—were 2 to 21/2 percent below their levels at the beginning of 1995. Bond prices, which move in the opposite direction as interest rates, were up substantially, and the stock market was up about 35 percent with the Dow at 5117—its best year in two decades.
He was available.
11
* * *
ALAN BLINDER and his wife, Madeline, flew to Acapulco, Mexico, after Christmas to vacation on the beach, so he could stare at the water and decide whether he should seek reappointment as vice chairman when his term expired in early 1996. It was a hard decision. After less than two years at the Fed, he was profoundly frustrated.
Blinder believed he had figured out what was so disconcerting. Greenspan didn’t allow any risk. If there was a 2 percent or a 4 percent probability that something might happen—such as Blinder succeeding him or Blinder’s star rising—Greenspan worked to bring the probability down to zero. Most people would tolerate low chances. Greenspan wanted to stomp out the slightest probability. That’s why Greenspan had stuck the knife in him, Blinder believed, in so many ways and so skillfully. And there were no fingerprints.
Blinder decided he should leave. He wanted to be a lame duck for as short a time as possible, so he cut it tight and told the White House only two weeks before the expiration of his term. As a little piece of revenge, he decided not to tell Greenspan. Blinder figured the chairman could read about his departure in the newspapers. After all, Greenspan had never really told him anything, never really let him in the way Blinder had hoped. He realized it was childish on his part. The news of his departure hit the papers on January 17.
Greenspan said nothing to Blinder, but he presided at a little going-away party for him.
You know, Greenspan said graciously at the ceremony, it seems like you just got here, it’s been wonderful to have you.
Ha, ha, Blinder thought as he stood nearby in deep discomfort.
How much, Greenspan continued, he had enjoyed having Blinder as a colleague, how valuable he had been to the FOMC and the board, what a shame he was leaving so soon.
Ha, Blinder thought again. He concluded that Greenspan was not a straight person, not open and direct in the way that Blinder expected of colleagues.
He had just wanted to be part of the interest rate game, and Greenspan had not permitted it.
• • •
From the White House, Laura Tyson sounded out a number of people to see if they could help her draw up a list of possible successors to Blinder.
She spoke with Felix Rohatyn, Clinton’s favorite New York investment banker.
I might be interested in the job myself, Rohatyn said.
Tyson was surprised. She admired Rohatyn and had some sympathy with his higher-growth goals, but she knew that Blinder had felt squeezed at the Fed.
Felix, Tyson said, the vice chairman of the Fed doesn’t really do that much, especially with Greenspan—a long-term, very effective chairman—at the helm. The vice chairman goes to the boring meetings that the chairman doesn’t want to go to and gets the least interesting assignments.
No, Rohatyn said, the vice chairmanship would give him a platform for his views. He and Greenspan went back decades. “We’re friends,” Rohatyn said. “We’ve known each other for a long time. It would be different because we’re friends. I would be able to have more influence.” He knew New York and the financial markets cold, and the international scene as well. It would be a perfect fit with Greenspan’s Washington knowledge and vast technical understanding of the economy.
Tyson didn’t think that it was a good idea. Still, she reported what Rohatyn had said to the president.
“What a great . . . what an interesting idea!” the president said. One of the key issues for Clinton was how much the economy could grow without inflation. He didn’t like the conservative model of 21/2 percent annual growth. “We’ll have a really interesting debate, a national debate about this issue between the Fed chair and the vice chair,” he said. Clinton was loving the idea. He could reappoint Greenspan—an iss
ue still unsettled at that time—and also have someone pressuring the chairman from within the Fed to allow more economic growth.
Tyson had a sinking feeling. Just what the financial markets needed—open debate and perhaps even warfare within the Fed. She tried to discourage the president.
The more they talked about it, the more Clinton loved the prospect.
Tyson figured her job was to give advice, but if it was being rejected, then she had to try to accomplish what the president wanted. She informed Rohatyn of the president’s enthusiasm.
Rohatyn was even more interested but said that before the idea got too far or became public, he wanted to see Greenspan and Bob Rubin to make sure they were comfortable with it.
Rohatyn and Blinder spoke by phone. Blinder had decided that he owed Rohatyn a warning.
“Why are you doing it?” Blinder asked. “I’m leaving because I can’t stand it.” He explained that only one person counted at the Fed, and it was Greenspan. After Greenspan, probably the most important force at the Fed was the staff, which had the real power and squelched dissident thoughts or alternative thinking unless Greenspan agreed, Blinder said. He told Rohatyn that Greenspan and the staff would join forces against him.
“I think you’re wrong,” Rohatyn replied. “I’m going to try to change it.”
“But you’ll never do that,” Blinder said. Rohatyn had no idea what he was up against.
• • •
Rohatyn was not going to back off. He believed that the Fed mattered more to the economy than Treasury and almost as much as the president. The Fed—and its chairman or representative—would be America’s messenger to the dawning global economy. Speaking to that new world was critical, and he wanted to be a part of the message. Pressing on, Rohatyn set up meetings with Rubin and then Greenspan, to make sure they would support his candidacy. He went to see Rubin at Treasury.
Over the years, Rohatyn had come to understand that Rubin was cautious, not one to jump at a new suggestion. But he was also a Democrat who shared some of Rohatyn’s views.
Rubin said he would be happy to see Rohatyn over at the Fed, that it would be a plus.
Privately, Rubin thought it was a terrible idea. His own relationship with Greenspan worked well. If they had the slightest disagreement, instead of shouting opinions at each other, they calmly compared their analyses. There were always identifiable reasons for differing judgments. It rarely got emotional.
In contrast, Rohatyn was proselytizing about more growth. True believers could upset the balance within an institution. Rohatyn had sounded too much like a crusader.
• • •
Rohatyn, by the same token, believed that few people understood the closeness of his relationship with Greenspan. Decades earlier, he had hired Greenspan’s consulting firm, and he had remained one of Greenspan’s clients for years. In the 1970s, when Greenspan had been at the White House as Ford’s chairman of the Council of Economic Advisers, he and Rohatyn had been walking together on West Executive Drive, on the White House grounds.
“One of these days,” Rohatyn had said, “wouldn’t it be nice if I were secretary of the treasury and you were chairman of the Fed?”
In 1992 after Clinton’s election, when Rohatyn had been mentioned as a possible treasury secretary (the job Bentsen got), he had lunch with Greenspan. They were halfway toward the goal Rohatyn had suggested in the 1970s.
“This is a town that is full of evil people,” Greenspan had said. “If you can’t deal with every day having people trying to destroy you, you shouldn’t even think of coming down here.” Normal human beings could look you straight in the face and lie about things they had done, Greenspan warned. It had happened to him, and it was obviously designed to gain advantage. Greenspan maintained that it was morally evil to lie outright. Rohatyn had been struck by his friend’s observation and believed instinctively he was right.
Now, Rohatyn told Greenspan about the prospect that they would be working together at the Fed, that he would be nominated to be the vice chairman.
Greenspan was uncomfortable, but he told Rohatyn that he could do the overseas travel, which Greenspan didn’t like. He would welcome someone who could do that.
It was a tepid endorsement to say the least, but Rohatyn took it as positive.
On January 19, 1996, The Wall Street Journal broke the story that Clinton was considering Rohatyn for the vice chairmanship. The story noted that Rohatyn had criticized the goal of achieving only 21/2 percent economic growth each year. Rohatyn was described as perhaps “Wall Street’s best-known investment banker” and Lazard’s “top dealmaker.” The story also noted, “Unlike some previous Fed vice chairmen, Mr. Rohatyn probably would be seen as Mr. Greenspan’s likely successor—if the Fed chairman were to leave office while a Democrat was president.”
• • •
Greenspan flew off to Paris that weekend for the January 20–21 meeting of the Group of Seven (G-7) major economic powers. Whatever might happen with Rohatyn, he was still unsure about his own status. His term expired in six weeks. It was unsettling. He was effectively a Republican lame duck chairman—a position of weakness, with a Democrat in the White House. The main positive sign was that he had seen or heard of very few trial balloons floated in the media suggesting alternatives. From his experience in Washington he knew that was an important signal, but it was not conclusive. Some news stories were treating his reappointment as inevitable, but he had no assurances.
Since nothing was certain, Greenspan had to consider what he might do if Clinton appointed someone else as chairman. Under the law, if no replacement was named and confirmed, he would remain chairman. One possible scenario was that Clinton would wait until after the presidential election and then, if reelected, pick his own chairman.
According to the arcane procedures of the Fed, Greenspan had an appointment to the Board of Governors that did not expire until the year 2006. His term as chairman expired on March 2, 1996. If he was not reappointed as chairman, he could remain on the board. It would be very unusual, but he decided that it was almost certainly what he wanted to do. If he had to move down the table out of the chairman’s seat, he felt that there was enough respect for his views that he could still have some influence.
The calculation also had to do with the lack of attractive alternatives. Greenspan was not interested in making more money; he had millions already. He would be 70. He didn’t want to go back to New York City, and he loved Washington. But most of all, he loved the Fed. He had access to the best economic data in the world, and there was an intellectual purity to the work that was done there. He had found his place. The title and seat at the table were less important.
Staying at the table in a less exalted position would somewhat resemble the career path of John Quincy Adams, the sixth president of the United States. After a term as president, Adams served 17 years in the U.S. House of Representatives, where his vast knowledge and gloomy high-mindedness made their mark until he died in office at the age of 81.
• • •
Rubin never considered it a real question. Reappointing Greenspan was a no-brainer. He had attended one meeting in the White House residence to discuss a possible successor to Greenspan. It would have been irresponsible not to have seriously considered alternatives. Fresh, new thinking was essential in all matters, Rubin believed, even the seemingly obvious. It was one of the reasons some of his colleagues at Treasury found him cold, too businesslike at times.
A few names were tossed around—the current and past New York Fed bank presidents McDonough and Corrigan, the previous board vice chairman David Mullins. Rubin didn’t think any was a serious alternative. Here Greenspan, an experienced, known chairman, and a Republican, was delivering the exact interest rate policy the economy—and administration—needed. In addition, if they nominated someone else, the administration would get a real fight, if not a bloody defeat, from the Republican-controlled Senate. It was important to have a Clinton nominee confirmed. It was easy to
make Greenspan theirs, because in all important respects he already was.
Rubin and Tyson essentially said to Clinton, Look, there’s no list, but if you ever were going to consider it, this is the kind of list you’d get.
Tyson’s main point was that they had all come to view Greenspan almost as a member of their team. They didn’t think of him as a Republican. He wasn’t running the Fed as a Republican.
For Tyson, there was an element of luck in the performance of the economy. She knew that it all could have turned out differently. If the economy and the markets had tanked, Greenspan would be the nation’s and the world’s great villain.
Everyone at the meeting, including Clinton and Gore, agreed the president should reappoint Greenspan.
Rubin was also at the G-7 meeting in Paris, where he and Greenspan had a chance to speak privately. Taking advantage of a quiet moment, they walked together toward a series of large plate-glass windows at one end of the room, with a view of Paris before them. The two men had established a feeling of trust, perhaps as much as two adult males in high government posts might find possible. For Greenspan, such friendship, closeness and agreement gave him a sense that they were working for the same firm. Greenspan had once remarked privately, and only half-jokingly, that he considered Rubin the best Republican secretary of the treasury ever, though he was a Democrat.
“When you get back,” Rubin said, “the president’s going to want to talk to you.”
Greenspan could tell by the body language that it was all favorable.
“The president’s quite pleased with what you’ve been doing,” Rubin said.