Back from the Brink. - book reviews

Business Economics, Oct, 1997 by Evelina M. Tainer

Solve the puzzle of Alan Greenspan's Fedspeak and you are on your way to millions of dollars in trading profits in the financial markets. Steven Beckner, a financial reporter for Market News Service, Inc. who can send ripples through the markets with the so-called "Beckner effect," has done a worthy job of chronicling Greenspan's years as Fed Chairman through 1996. Understanding Greenspan's thought process will help economists and financial market participants to predict Fed policy better in the future. The main criticism of this book is its length: more than 400 pages of solid prose in small print. As a result, one is tempted to skim more than read - which is a shame because one could miss some of the gems buried within the details.

Don't let the fine print deter you from reading this comprehensive history of Greenspan's first ten years as Federal Reserve chairman. Those of us working during these years will get a more complete view of historic events such as the stock market crash of 1987, the credit crunch years of the late 1980s, the bank capital shortage years of the early 1990s, the 1990-91 recession and its subsequent recovery, and the peso crisis of 1994. Plowing through FOMC meeting transcripts released through the Freedom of Information Act, Beckner gives us a behind-the-scenes look at discussions that Greenspan had with his fellow Fed governors and district bank presidents during these years. The author also interviewed key people at the Fed, the Administration and Congress, as well as foreign policymakers for the retrospective aspects of this book.

The book begins with a description of Alan Greenspan's personality and character. Some of the information is generally universal knowledge: e.g., Mr. Greenspan's early years spent as a musician and the fact that he was admitted to Ayn Rand's inner circle in the 1950s. We also get a glimpse or two of Greenspan's quiet sense of humor. Most interesting is how his competitive nature and his central banker ambiguity get reflected on the tennis court and on the golf course. Current and former Fed governors and Administration officials offer candid views of the Fed Chairman.

In late 1996, Alan Greenspan commented on the "irrational exuberance" of the stock market, causing a brouhaha over the propriety of a Fed chairman commenting on movements in stock prices. Is it or isn't it in the purview of Federal Reserve policy to comment on the valuation of asset prices? In fact, this was not the first time that the chairman commented on equity market values. At his first FOMC meeting in August 1987, Greenspan observed, "We spent all morning, and no one even mentioned the stock market, which I find quite interesting in itself." At this meeting, Greenspan could not convince the rest of the FOMC that a rate hike was appropriate, but managed to persuade the committee to issue an asymmetric bias towards more restrictive policy, which was later followed by a rate hike in the first week of September. In spite of the fact that other Fed officials were less inclined to comment on the booming stock market, Greenspan had instigated internal contingency plans as soon as he arrived that August for the Fed to follow in case of a stock market crash. Later, these plans were cited as reasons that the Fed had been able to react quickly and decisively to the market crash in October.

Through the entire book, the author describes in minute detail the deliberation of the FOMC meetings that were conducted through the Greenspan years. He fills in details with personal interviews of the key players. Following the market crash, Fed officials were concerned that monetary policy would be too accommodative for too long a period and cause inflationary pressures. Indeed, there is no question that price stability is the main goal of the Fed. Governors and district bank presidents worried about loss of credibility in the financial markets and the potential renewal of inflationary psychology that was dampened significantly during the Volcker era.

In additional to learning what went on behind closed doors during the 1990s when we were facing recession, credit crunch, and economic recovery, this book shows how politically appointed governors act like central bankers, which has little to do with their Presidential appointment. For example, in the early 1990s, Martha Segar and John LaWare, both Reagan appointees, wanted to ease monetary policy more aggressively and were more concerned about the effects of the credit crunch that some governors and bank presidents who were sometimes considered more "dovish." At times, it seems that the Presidential appointment could hamper decisionmaking. Janet Yellen, a Clinton appointee noted that she would only dissent "...if I thought I had significant disagreement." She was well aware of the fact that she was viewed as having a dovish bias simply because she was appointed by a Democratic president.

The formality of the Federal Reserve System was noted by Alan Blinder who was surprised at addressing others as Governor or Mr. Chairman after having sat around the White House addressing the President as "Bill" and the Treasury Secretary as "Lloyd."