Maestro

by Bob Woodward

  Like all the vice chairmen during Greenspan’s tenure, Rivlin decided to resign. Her husband had prostate cancer. She had been at the Fed three years, and she enjoyed the work immensely, but it was certainly Greenspan’s show. For the last year, she had also served as head of the financial control board that was attempting to restore financial health to the ailing District of Columbia government—virtually a full-time job in itself. And that was her show.

  When she told Greenspan that she was leaving, he was unhappy to lose an important ally.

  • • •

  At the June 30 FOMC meeting, the economic forecast continued to suggest vigorous economic growth but subdued inflation. Greenspan felt that the three rate cuts of the previous year had put them in an unnatural stance. With the improvement of conditions abroad, it was time to take back one of those cuts and raise rates 1/4 percent.

  In addition, it looked as though the general price declines in oil, imports and health care that had helped tame inflation could be over or were even reversing themselves and going up.

  Several members noted that since 1996, many businesspeople had said they couldn’t raise prices without being crushed by their competitors. Now some were saying they were going to try to raise prices. That was a significant change, foreshadowing future inflation.

  The main objection to a rate increase came from Robert D. McTeer Jr., president of the Dallas bank. He didn’t believe they were in an inflationary environment and said he wanted to continue to test the growth limits of the new economy.

  The others seemed to agree on a 1/4 percent increase, but a substantial debate developed over whether to maintain the asymmetric directive with a tilt toward another increase.

  The compromise was to raise rates 1/4 percent but return to a symmetric directive, meaning no bias toward either an increase or a decrease. All but McTeer voted in favor.

  The press release announcing the increase presented the move as a slight, cautious preemptive action and suggested no additional increases. The markets were startled and delighted, with the Dow hitting nearly 11,000. The hike was widely seen as market friendly and much less hawkish than anticipated. “The Fed smiled,” said the lead to The Wall Street Journal story on the markets.

  Greenspan had passed word to Rubin that the rate increase was coming—not that anyone reading the newspapers the previous month couldn’t have anticipated it. Rubin had no real problem.

  The president was not as confident.

  Did this have to happen? Clinton asked his economic team. I don’t see any signs of inflation, he added, asking the same questions he had posed in 1994 when Greenspan was raising rates. Was this another preemptive stranglehold on the economy? he asked, echoing some liberal Democratic senators who had been his most vocal defenders during his impeachment trial, in which he had been acquitted.

  Rubin, Summers and Sperling defended Greenspan’s decision.

  Mr. President, Sperling said, he is just putting his foot on the brake a little. This is good. It will keep the expansion going longer. The risk of inflation with unemployment at 4.2 percent was too great.

  Frankly, the president’s advisers explained, Greenspan was on the softer side of the FOMC, a little to the left even of the people that the president had relied on his advisers to pick as his nominees, like Meyer. Clinton’s objections were muted, not as intense or as deep as they had been in 1994.

  A kind of greening of Alan Greenspan had taken place over the recent years. In a commencement speech at Harvard that month, Greenspan had not by any means called for income redistribution, but he had sounded more like Bill Clinton. “Expansion of incomes and wealth has been truly impressive,” Greenspan said, “though regrettably the gains have not been as widely spread across households as I would like.” Militant laissez-faire capitalists were not usually concerned about the distribution of wealth.

  • • •

  Janet Yellen, who had moved from the Fed to the White House as chairman of the Council of Economic Advisers, agreed that her former Fed colleagues had done the right thing. The economy had such a head of steam that the unemployment rate of about 4.2 percent was going to go even lower. That would certainly increase the risks of future inflation.

  Yellen went to the president several times to underscore her main fear for the economy. The stock market was likely going to take a tumble, she said. A 10 to 20 percent drop would leave the economy just fine, if it didn’t trigger a larger crisis in the financial markets. In fact, she told Clinton, they needed a stock market decline to get the economy to calm down so that growth and the unemployment rate could stabilize.

  Rubin and Summers agreed.

  • • •

  The real world of the stock market continued to intrude on Greenspan’s thinking. The stock market had been a central feature of his business life in New York, and he had meant it when he’d said that more people were following it than baseball. Well over 70 million Americans had investments directly or indirectly in stocks listed just on the New York Stock Exchange.

  For several years, Greenspan had had the Fed economists attempt to construct mathematical, computerized models that might offer some insights into the stock market. It had become clear that two propositions were true. First, there was no rational way to determine that you were in a bubble when you were in it. The bubble was perceivable only after it had burst—which, for Greenspan, meant a drop of roughly 40 percent over a short period of time.

  To forecast such a drop, someone would have to pit his analysis against the broad wisdom of the millions who thought they understood the economy and the businesses they had invested in. To do so involved a certain hubris.

  Second, there was no doubt that the Fed could withdraw liquidity and raise rates so high that the whole thing would cave. But the crucial issue, which Greenspan felt was unspoken, was how to defuse the bubble—how to let the air out slowly, tightening enough to put pressure on the bubble, but not so much that it would break the economy. It could be a kind of soft landing for the stock market.

  In Greenspan’s view, the big 1987 crash had probably raised the Dow several thousand points. Investors saw the sharp decline of 22 percent in a single day, and then nothing serious had happened. They concluded that the outlook for stocks and the economy was better than they had presumed, so stocks went up even higher. Since 1987, whenever the Fed had raised rates the stock market invariably faltered, stabilized, recovered and then took off again.

  There was the extreme case in which they could knock the stock market down completely with big rate increases, but as they moved away from the extreme case, their actions would merely try to diffuse, and not dangerously deflate, the bubble. The net result was that the tightening would get an upside response—stabilization and another takeoff—and not the downside.

  Was there a precise point of tightening that could achieve a modest degree of stock market decline, that would keep the market down? In theory there must be some point at which this would occur, a point economists call a “saddle.” But Greenspan concluded it was not predictable, and certainly it was not capable of being judged in any meaningful way. For practical purposes, there was no such point. The magic moment to suppress stock prices existed, perhaps in a fraction of a second out in the markets, but Greenspan determined that he could not find it.

  This abstract reasoning made it seem, even to Greenspan sometimes, that he was backing off “irrational exuberance.” But it was really just a wider analysis. He was still grappling.

  In a speech on August 27, 1999, at the annual Jackson Hole retreat, Greenspan attempted to lay out some of his conclusions. He was even more elliptical than usual, saying that to anticipate a bubble accurately would be to pit one’s own assessment against millions of investors, many of whom were highly knowledgeable.

  It was a sufficiently obscure dose of Greenspanspeak that his colleagues and aides felt the need to interpret it. Several passed word to the press that the chairman had officially declared the end of “irrational exuberanc
e.” He had not. The New York Stock Exchange stocks were worth about $16 trillion. The growth in value—and the potential volatility—of the market was just that much more important to the economy than it had been in the past, so he was watching more closely than ever.

  Greenspan had invited Sperling to attend the conference, and the top White House economics official was fascinated as Greenspan delivered his 20-minute speech and then answered questions. Wire service reporters hovered, watched, took notes, grabbed their cellular phones and at one point sprinted out of the room as the chairman seemed to be saying something new, especially about the stock market. It was as if Greenspan were the national tuning fork that might sound a clue, or even a final answer, about the disorderly music of the markets. Poor guy, Sperling thought, he can’t be a regular person for even a minute.

  • • •

  Greenspan and Andrea discussed what he should do if he was offered a fourth term. What would it be like if he retired? Wouldn’t it be nice to sleep past 5:30 a.m., travel, go to the beach, read novels, not have to leave the opera early to prepare for congressional testimony? Andrea worried about the stress of the job.

  In all their years together, they had really had only one extended holiday—their four-day delayed honeymoon in Venice. They had found musicians playing Vivaldi in the churches, and the city’s ancient power had enveloped them. At least he didn’t hate it, Andrea thought. They took only one vacation a year, five days at a tennis camp in California after the Jackson Hole conference. This was a man who refused to stand in line for a movie because he thought it was a waste of time. At night, at times, the curtain would come down and he would turn to his business statistics or his small hand calculator. His idea of relaxation was doing calculus problems.

  Years earlier, they had spent weekends looking for a country house before they realized that they loved Washington on the weekends. And Andrea was thinking about retirement and travel? She realized it was silly.

  He would accept the offer if it came.

  15

  * * *

  “I BET he’ll stay there until they carry him out,” President Clinton joked to his economic advisers as they discussed a fourth term. Summers, who had taken over as treasury secretary from Rubin the previous summer, recommended reappointing Greenspan. He and Sperling had already sounded Rubin out as a courtesy, to see if he wanted the Fed job. But Rubin had declined, saying, “Alan’s perfect for this.”

  White House Chief of Staff John Podesta got permission from Clinton to call Greenspan and offer the reappointment on behalf of the president. Podesta made the call one evening just before Christmas, reaching the chairman at his office.

  Greenspan was formal. He said thank you. He seemed to say yes.

  Podesta was on the way to the airport when he got Summers and Sperling on the phone for a conference call.

  You guys follow up with Greenspan, he suggested. Just to make sure he understood clearly that he got an offer. There had been something vague about their conversation.

  Summers and Sperling followed up. Yes, Greenspan said, it was a firm yes. He told Sperling to keep it quiet.

  Greenspan was in a state of sober rapture. At 73, he found that his mind still functioned well. He figured he would know he was losing it when he started to have difficulty with mathematical relationships, and he was aware of no diminution of that mental capacity. He was fully engaged. His only problem was that occasionally he couldn’t remember people’s names.

  The White House set Tuesday morning, January 4, 2000, for the announcement, wanting to make the timing of the announcement a surprise before Congress returned from recess. That way, Clinton could give his annual State of the Union address later in January and fully embrace the good economy and Greenspan, leaving no doubt about the chairman’s future role. In February, the American economy would officially have enjoyed the longest expansion in its history. The White House wanted the Clinton-Greenspan team to be part of the celebration.

  Only a handful of senior officials knew about the announcement. It had not leaked, and Sperling in particular was very proud that they had all kept their mouths shut.

  The White House press office put out word that the president would have a “personnel” announcement, but it had come out garbled as a “personal” announcement. It was also the day Hillary Clinton was packing to move to the home the Clintons had bought in Chappaqua, New York, a Westchester County hamlet, in preparation for her run for the Senate seat. The suggestion that something “personal” was about to drop in the Clinton soap opera sent some reporters racing to the White House. Could it be a separation or a divorce? Many were disappointed to learn it was only Greenspan, who already seemed as if he had the Fed chairmanship for life.

  • • •

  Greenspan arrived at the executive mansion carrying the front section of the Financial Times, the world’s business newspaper, on its signature light orange paper.

  Sperling joked that the Financial Times would love to run an advertisement of Greenspan coming to see the president with no notes, no files, only their paper.

  Clinton, Summers, Sperling and Council of Economic Advisers Chairman Martin N. Baily gathered around the dining room table next to the Oval Office with Greenspan. White House Chief of Staff John Podesta sat in a chair off to the side.

  Clinton and Greenspan were almost glowing at each other, odd partners sitting there around the polished wood table, linked surprisingly to each other’s greatest successes, wrapping themselves in each other’s legacies.

  “You know,” the president said, addressing Greenspan to his immediate left, “I have to congratulate you. You’ve done a great job in a period when there was no rulebook to look to.”

  “Mr. President,” Greenspan replied, “I couldn’t have done it without what you did on deficit reduction. If you had not turned the fiscal situation around, we couldn’t have had the kind of monetary policy we’ve had.”

  “After doing so well,” Clinton said, “no one would blame you for wanting to go out now on top.”

  “Oh, no,” Greenspan said, “this is the greatest job in the world. It’s like eating peanuts. You keep doing it, keep doing it, and you never get tired.”

  Clinton folded his arms, tightened his body over his crossed legs and glanced over as if to say, I know what you mean. He seemed wistful.

  The irony was palpable. Greenspan, at 73, had already served 12 years and would get to be chairman for another 4 years. Clinton, 53, had served 7 years as president and had only another year. The Constitution barred him from seeking a third term. The man 20 years older could go on, while the younger man would have to leave office and re-create himself.

  • • •

  Since the rate increase of the previous June, Greenspan had raised rates twice more, each by 1/4 percent, and it didn’t look as if he were going to stop. But the subject of interest rates didn’t even come up directly. There was this intangible trust, almost a bond, between Clinton and Greenspan.

  Who would have thought, seven years before at 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. More than 20 million new jobs had been created since Clinton took office. Some economists would have put the odds at 1 in 1 million. Greenspan, ever a stickler about probability, couldn’t even calculate it.

  Of all the important people in Clinton’s life, nearly all—including himself—had let him down or not lived up to their full promise. Hillary had failed to deliver health care, although she had stood by him during the Lewinsky scandal. Vice President Gore, though loyal, had not yet emerged as a vibrant successor. Dick Morris, the chief political strategist for the successful 1996 reelection campaign, had been forced out in a scandal and then turned on Clinton and written an informative but tattletale book. George Stephanopoulos, Clinton’s young and trusted adviser, had also written a book full of inside stories of anguished decision making
and private fury. Democratic leaders in the Senate and House had come and gone. Staff had come and gone. Rubin, the shining light of the cabinet, was gone. Clinton’s vaunted campaign fund-raisers had brought scandal and doubt on the presidency. Clinton himself had not lived up to his own grand governing vision.

  Greenspan alone had stood and improved his ground.

  Clinton began questioning Greenspan about the economy and the impact of new technology. Greenspan found that, as usual, Clinton was asking the important and correct questions, formulated with a lawyerlike precision. It was such a good show that yet again Greenspan didn’t believe it was a show.

  Information technology, Greenspan said, defined the current period. Something profoundly different had occurred. Computers and the Internet were at the root of the extraordinary productivity improvement. Computers allowed vastly better inventory management in a way that had been unimaginable only years before. What was truly remarkable, however, was the vast dissemination throughout society of the new technology and the speed of the dissemination. All of this dissemination added productivity growth throughout the economy. There was little question that further major advances lay ahead. They were truly in a capital equipment investment boom.

  Greenspan complimented Clinton on his efforts to use the budget surpluses to reduce the federal debt.

  It’s a very powerful idea for the public, the president said, the idea of being debt free.

  If the federal government were debt free, Greenspan said, that would not take away its ability to do expansive things. Without debt, the government could eventually reborrow trillions of dollars if necessary in a crisis or an emergency. It would be available for the right moment. The surpluses and absence of deficits would also help keep long-term interest rates down, because the federal government would not be borrowing, making more money available for business borrowing.

  As they left the dining room, Clinton and Greenspan waited for the others to assemble in the Oval Office for the announcement before going in themselves. On the wall, the president had a set of old presidential campaign buttons going way back, a small history of the country as seen through the prism of these campaigns. He began talking about them with knowledge and passion. It was clearly the way Clinton viewed history. Clinton would miss the campaigns, Greenspan thought, miss the way he had best defined himself. There was something sad and lost about him. His big fights were perhaps over.