Woodward's book takes look at how Greenspan dealt with powerful

Journal Record, The (Oklahoma City), Jan 4, 2001 by Max Nichols

George W. Bush will become president of the United States on Jan. 20, but Alan Greenspan, who has been called the "president" of the U.S. economy, is expected to continue as chairman of the Federal Reserve Board until 2004.

Bush may find that both bitter and sweet. Greenspan was blamed by some for causing Bush's father, former President George Bush, to lose the 1992 election by not lowering interest rates fast enough. On the sweet side, George W. will have Greenspan's experience in avoiding inflation and overwhelming recessions since the Reagan administration.

With the recent softening of consumer buying, we could be facing economic turmoil in the early months of George W. Bush's reign. He can rely on the steady hand of Greenspan at the Federal Reserve tiller, but there are reports that Greenspan advises against Bush's proposed $1.3 trillion tax cut. Given Greenspan's experience in raising and lowering interest rates to meet new conditions, his views will be critical.

An inside view of how Greenspan has met powerful pressures over the last 13 years is well told in Bob Woodward's book, Maestro: Greenspan's Fed and the American Boom, published by Simon and Schuster. Greenspan has dealt with opposing presidents, economists and bankers as well as the tremendous high-technology changes in America's economy.

Before this book, little was known about how the Federal Reserve Board of Governors and the chairman operated, though the Fed is America's central bank. It was known that the Federal Open Market Committee meets eight times a year to assess the economy and consider action on the short-term federal funds rate, which banks charge each other on overnight loans.

The committee includes the seven governors and the presidents of the 12 Federal Reserve Banks, but only 12 vote. These include the seven governors, the presidents of the New York Fed and four other reserve banks. In some cases, the committee authorizes the chairman to raise or lower rates between meetings to meet changing conditions.

It's the influence of Greenspan on these 12 voting members, and all the pressures that are brought to bear on them -- and by them, that is the heart of Woodward's effort. It's an important book for anyone who borrows money to run a business or who invests extensively in stocks and bonds, because it reveals how little we know about those pressures.

If anything, Woodward gives us too much information. He provides a play-by-play of every significant lowering or raising of short-term interest rates under Greenspan's leadership. You have to sift through all that detail to arrive at the most exciting moments.

The events that tell the most about Greenspan and the Fed include a short 1987 stock market crisis, pressures from the 1988-92 George Bush administration, Greenspan's role in President Bill Clinton's decision to reduce the federal budget deficit, and the struggle to understand the effect of high technology on productivity and therefore the whole economic structure.

It is Greenspan's thinking and persuasiveness, however, that dominates his decisions and the votes of the committee. With a gift for mathematics, this New York City native studied economics at New York University and earned his doctorate at Columbia University. He developed models for forecasting based on detailed measurements of economic activity and joined William Townsend in forming Townsend- Greenspan, a consulting firm. He chaired President Gerald Ford's Council of Economic Advisors from 1974-76.

With that background, Greenspan replaced Paul Volcker as chairman of the Fed on Aug. 18, 1987. Just 72 days later, the stock market fell 22.6 percent -- nearly double the Black Tuesday crash of 11.7 percent on Oct. 29, 1929. With banks and companies needing assurance that credit would be available, Greenspan issued a one-sentence press release:

"The Federal Reserve, consistent with its responsibilities as the nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system." The market rallied and wound up the day with a gain. Greenspan learned that day how powerful people functioned under stress.

During the 1988 election campaign, James Baker lobbied hard on behalf of George Bush against an interest rate raise. Greenspan, a Republican, worried about inflation and refused to buckle. The governors voted an increase. The rate worries later subsided and Bush was elected.

During the 1992 election campaign, after the 1990-91 recession, Budget Director Richard Darmon and Treasury Secretary Nicholas Brady lobbied for lower interest rates. Greenspan stood firm until July 2, when rates were reduced as the recovery was under way. In October, he refused to cut them again, and Bill Clinton was elected president in November.

Later, Greenspan advised President Clinton that reducing the budget deficit would have the best long-term effect on economic growth. Clinton led that effort, and the economy grew rapidly during the 1990s.

Woodward's most interesting tale, however, involved the difficulty that Greenspan had in understanding the productivity increase that was resulting from the rapid spread of high technology in the economy.