IN GREENSPAN WE TRUST THE POWERFUL FED CHAIRMAN IS HEADED FOR FOUR MORE YEARS, TO THE RELIEF OF CORPORATE AMERICA. WHAT DOES IT MEAN? SIMPLY THIS: NO RECESSION. NO INFLATION. NO VOODOO.
(FORTUNE Magazine) – IT'S AN ELECTION YEAR, and the weirdness is beginning early. As the presidential candidates barnstorm from one state to the next, they're preying on the nation's deep-rooted feelings of economic uncertainty, preaching their unlikely plans for economic nirvana--from the pure flat tax to the gold standard to 19th-century-style trade protectionism--each one warning all the while that his opponents' policies will ruin the country. Back in Washington, Congress and the Clinton Administration are clueless--six months late with a budget for this year, let alone the next seven. Meanwhile, the markets have been jumping around like hungry puppies.
Thank God for Alan Greenspan. Arguably as important as who wins in November--maybe even more important--is the fact that Greenspan will still be running the Federal Reserve--the closest thing the U.S. economy has to an economic pacemaker. How good is this news? Well, the markets roared their approval over Greenspan's renomination. And in a poll we just commissioned of FORTUNE 1,000 chief executives, 96% backed the chairman's reappointment (how's that for an approval rating, Bill?). More than half give Greenspan an A for his performance at the Fed; almost all the others give him a B. And they're also voting with their forecasts: Barely 1% expect a recession this year.
Greenspan's peers think just as highly of him. "He's the best chairman the Fed has ever had," says Allan Meltzer, a professor at Carnegie Mellon University and longtime critic of Fed policy. Meltzer isn't just shooting the breeze--he's in the midst of writing a history of the Federal Reserve System. Says Lawrence Lindsey, one of Greenspan's fellow Fed governors: "If the curve you're grading on is 'What's attainable by mortals,' he certainly deserves an A."
Greenspan's highest marks are for the so-called soft landing that the economy is in the process of accomplishing right now, slowing from the hot and potentially inflationary growth of 1994. "What he did was very unusual," says Meltzer. "He acted against inflation before it got started--the first time the Fed has done that in at least 30 years." Here's an inside observation, from Rick Mishkin, chief economist at the New York Federal Reserve Bank: "In hindsight, it was as good as we could have hoped. We just nailed it." Says Alan Blinder, who recently departed as vice chairman of the Fed: "This is perhaps the most successful episode of monetary policy in the history of the Fed." Because of that policy success, there are no worries about triggering inflation; the Fed now has room to take out some "monetary policy insurance"--as Greenspan told Congress in February--by cutting interest rates as we face a period of slowing economic growth.
Not everyone loves Greenspan, of course, and he doesn't walk on water. He presided over one of America's worst recessions as chairman of Gerald Ford's Council of Economic Advisers. Lots of people--including business people--remember that well and think he was and is too worried about inflation and not enough about growth. There are even some who positively hate him, and concoct dark conspiracy theories about how he's subverting the will of the people to benefit Wall Street.
So who is this guy? And why should we bet that he can continue to keep the economy on track? If you think you know, wait a second. Sure, you know his public persona: the professorial bureaucrat who speaks before Congress about boring subjects in intentionally ambiguous cadences. But the real man is more interesting. His is a story of intellect and street smarts--of how he learned to examine the clockwork of the U.S. economy and how he built a hugely successful business by explaining its workings to executives. How he turned himself into the ultimate Washington operator and how he became chairman--as if by destiny--of the Federal Reserve just when it most needed him. There's even a lighter side somewhere behind his opaque mask: He's a wry observer of the political folkways of Washington, and though he has a monastic streak--sometimes spending entire weekends lost in the data, preparing for congressional testimony--he's also a bit of a bon vivant, making the Washington party scene and playing tennis at mountain resorts with his longtime companion, NBC news correspondent Andrea Mitchell.
Not that Greenspan seeks the limelight. He's happiest when his profile is low. Fed chairmen are in the news in only two situations: when inflation is rising or when recessions happen. The economy under Greenspan has pretty much stayed out of trouble and has performed fairly well recently. GDP growth has averaged 2.6% since the 1990 recession, compared with 2.9% in the 1980s, and inflation was below 3% in 1995 for the fifth year in a row--the first long stretch of low inflation since the Kennedy Administration. Greenspan himself seems far more relaxed these days than he did a few years ago. He even told a visitor to his hushed office not too long ago (the loudest noise is the hum of the well-used PC) that he was managing to catch up on his leisure reading--of early econometric theory.
Happily, there is good reason to believe--as Greenspan and many of the Fed's other senior policymakers do--that we will see even lower inflation over the next two years and that the economy will continue to grow, recession-free, through the near future (see "No Recession in '96"). But you'll never hear Greenspan promising more than he can deliver. He's a cautious person, and pragmatism, for him, is a way of life. All he would tell Congress recently is that the chances of the economy avoiding a recession are "better than fifty-fifty." Those familiar with Greenspan's views think he's somewhat more confident than that. The chances of a typical postwar recession right now are low, in his judgment, although it wouldn't surprise him if the economy suffered something like a single quarter of negative economic growth.
Greenspan was born and raised in New York City, went to public school, and attended New York University--eventually winding up with a Ph.D. in economics. Always interested in public policy, he hung out with libertarian novelist Ayn Rand's band of free-market intellectuals in the early Fifties, about the time he got started in economic forecasting. That was also a golden age in econometric research, and chances are that he spent as much time with Measuring Business Cycles, by Arthur Burns and Wesley Mitchell, as he did with The Fountainhead. David Mullins, vice chairman of the Fed from 1991 to 1994, credits Greenspan with inventing a business back in the 1950s: economic analysis for senior business executives. "He was the first to adapt forecasting specifically for CEOs," says Mullins, now a partner at Long Term Capital Management, the quant trading firm. Greenspan was soon in demand as a forecaster and adviser, and eventually wound up on the boards of companies like Alcoa, Capital Cities/ABC, J.P. Morgan & Co., and Mobil.
Greenspan began visiting Washington in the late Sixties, first as an adviser to then presidential candidate Richard Nixon. He served in the Ford Administration during the tumultuous middle 1970s. Along the way, he developed the perfect Washington personality: rock solid in his own beliefs and impervious to the ritual abuse that comes with the territory. He became a master at suffering fools--patiently if not gladly--and he learned when not to take things too seriously.
A story about Greenspan in the Ford years goes like this: Once he was waiting to testify before a Senate committee chaired by the late Hubert Humphrey. Greenspan had back trouble at the time, and Humphrey knew it. As another administration official's testimony dragged on, Humphrey sent Greenspan a note saying, "Alan, I can see you're having trouble with your back. Why don't you leave, and we'll say you were called by the President." Greenspan replied by note that he was okay. Later, as the questioning of the other official droned on, Humphrey motioned Greenspan to the dais and whispered, "Go. We've got enough testimony. I don't want you to be in pain." Again, Greenspan declined.
Finally it was time for Greenspan's testimony, and the red light came on, signifying Humphrey's turn to ask questions. "Dr. Greenspan," he intoned balefully, "are you ashamed, as you should be, about how destructive your policies have been to this country?" Greenspan gritted his teeth and answered without smiling.
Such training was invaluable for a future Fed chairman. Think of the ranks of nitwit Congresspeople who take shots at the Fed chairman today during his appearances on Capitol Hill, sometimes as often as once a week and for several hours at a time.
TODAY Greenspan's power as the undisputed leader of the Federal Reserve system is downright awesome--but he had to earn it. The Fed is a strange governmental creature. It's made up of the 12 regional Federal Reserve banks, each with a president, board of directors, officers, and research staff, plus the Washington-based board of governors, with the largest phalanxes of research economists. The Fed is secretive by nature, suspicious of outsiders, and possessed of an esprit de corps that borders on fanaticism. When Greenspan was appointed chairman in 1987 by Ronald Reagan, he was greeted with some suspicion. "You get a new chairman who hasn't had a career at the Fed, and there's a period of intense observation," says one Fed official. "Greenspan was different; he was a political guy, a bit of a celebrity." And remember, he succeeded Fed insider Paul Volcker, the towering, glowering legend who had slain the demon dragon of the 1970s: double-digit inflation.
Two things helped right away. First was his manner. Greenspan is libertarian in person as well as in theory--a believer in individual liberty and rights. He treats everyone from hotel waiters to heads of state with respect, and there's not a hint about him of the snobbery that's typical of academic economists. The other things that helped were his mastery of the theory and details of the economy, and his obvious love of data. That impresses people at the Fed, and it can't be faked.
Greenspan's first big test was the stock market crash of 1987. It came just two months after he showed up at the Fed. His cool and decisive reaction to the crash--guaranteeing enough liquidity to preclude the cycle of asset deflation and monetary contraction that drove the economy down after the 1929 crash--has been widely praised. Inside the Fed, though, his ability to see that the stock market problem was transitory and his willingness to reverse policy and raise interest rates in mid-1988 were equally important. It sent the signal that the Fed was determined to keep its foot on the throat of inflation and was willing to take risks to do it. A case can be made that this attitude helped produce the 1990 recession--or at least prevented Greenspan from fighting it more aggressively once it began.
Greenspan bonded, early on, with the Fed's research staff. Fed economists at the time were studying a way of predicting inflation called P* (don't ask). Greenspan supported the project and got involved personally. When the research paper was published, buried in a list of acknowledgments, in alphabetical order, was the name Alan Greenspan. It was a classy, egalitarian touch, and Fed economists beam even today when they tell the story.
Leading by example and winning over the staff is especially important at the Fed because of its idiosyncratic management structure. The chairman's power derives almost exclusively from his position as presiding officer over two committees. One is the Board of Governors--made up of himself and the six other presidential appointees who serve in Washington (it is mostly concerned with regulatory and administrative matters). The other, which holds the real statutory power over monetary policy, is the Federal Open Market Committee (FOMC), made up of the seven governors and the presidents of five of the 12 regional Federal Reserve banks (they take turns voting).
Outside the committees, the chairman has little pure executive power. There's a story about the short, unhappy reign of G. William Miller--a former CEO of Textron who was appointed Fed chairman by Jimmy Carter in 1978--that makes the point. A nonsmoker, Miller, was bothered by the fumes emanating from his left--the seat of then New York Fed President Paul Volcker (his tastes ran to cigars that were short, but not too big around)--and from the right, where governor Henry C. Wallich, a distinguished monetary economist, smoked a large and malodorous pipe. Miller had little THANK YOU FOR NOT SMOKING signs placed at each committee member's seat. They were ignored, and barely visible through the haze. "I can remember looking over and not being able to see Miller for the smoke," recalls Al Broaddus, now president of the Richmond Fed, then a staffer--with a laugh. The signs eventually disappeared, as did Miller. Volcker succeeded him as chairman and was still smoking when he left the Fed in 1987.
Running the Fed, then, depends crucially on the chairman's ability to run a meeting. Greenspan, by all accounts, is very good at it. Newly released transcripts of FOMC meetings (they are published with a five-year lag) show him at work, letting all members have their say, softening the edges of disputes, and suggesting areas of compromise when there is disagreement. "He shows a lot of respect for other people," says former vice chairman Mullins, "and he has the confidence to defer to their expertise." Greenspan, they say, has only been on the losing side of one vote during his entire time at the Fed, and that was a bank regulatory matter so arcane that no one seems to remember what it was about. "By the time I arrived on the scene, in the middle of 1994, this was Alan Greenspan's Fed from top to the bottom," recalls Alan Blinder. "It was like the Fed was an orchestra being played by an expert conductor."
Blinder, who left the Fed in February to return to teaching, never did figure the place out. He's a brilliant man, widely respected in academia and the pride of Princeton University's economics department. And he has a rare ability to communicate complex ideas, both in print (he co-authored a best-selling introductory economics textbook) and in person. Blinder even had some previous Washington experience, having spent the first part of the Clinton administration as a member of the Council of Economic Advisers.
But he evidently alienated the Fed staff in a hurry. Fed governors don't have independent power bases. The staff reports to the board of governors, and a governor typically has a single personal secretary--a career Fed employee, no less. Blinder insisted on having a personal assistant, over the objections of senior staff members (only one other governor, Lawrence Lindsey, has such an assistant). Blinder announced that he did not wish to serve another term at the Fed in a letter to President Clinton. He has expressed dissatisfaction about his treatment by the staff and said that he felt isolated and excluded during his 19 months at the Fed.
Blinder also has a substantive complaint about the way the Fed is run. He considers the institution's penchant for secrecy excessive, and he tried to get the Fed to be more open and communicative. He mostly failed. "I can't go into details," he says, "because everything at the FOMC is confidential. I have to respect that, even though I don't agree with it." By lobbying for glasnost, Blinder was setting himself up in opposition to a sacred tradition at the Fed--its insistence on discretion and silence. Fed staffers rarely talk to the press on the record. Interviews with governors are subject to elaborate ground rules, such as how close to the FOMC meetings they can take place. One can speculate that Blinder's agitation for openness was one of the reasons for his isolation. After all, if you feel the place ought to keep its secrets, would you share them with someone who feels it should not?
But Blinder never disagreed fundamentally with Greenspan about monetary policy. While the two differed about such details as the timing of interest-rates changes, he voted with Greenspan through the long series of rate increases in 1994. That lack of dissension is highly significant, since it undercuts the most serious charge against monetary policy in the Greenspan era: That the Fed is needlessly holding back the growth rate of the economy because of unfounded fears of inflation.
Critics have said this for years, and they're a varied bunch, ranging from Naderite consumer activists to supply-side Republicans to trade associations such as the Chamber of Commerce and the National Association of Manufacturers. The business lobby has disagreed vociferously with Greenspan in recent years, especially when the Fed began tightening monetary policy in 1994. "We scream loudly whenever we think he's doing a wrong thing," says one trade association economist, adding wistfully, "If only he'd let the economy grow half a percent more."
THESE "growth critics" argue that changes in economic conditions, especially increasing productivity, and also in such things as global competition, have transformed the economy so that it can grow much faster than it has recently. They have picked up some important support from President Clinton, who until recently had never second-guessed Greenspan on monetary policy. With the election looming and the economy slowing, he's been singing their tune.
The idea that there is a limit, at any given point, on how fast the economy can grow without causing inflation is not controversial among economists. Real GDP growth is a function of how much labor and capital are available and how productive those "inputs" are. If the economy consistently grows faster than its potential, industries and regions will run out of either workers or materials, or both--resulting in rising wage demands, rising prices, and other imbalances. No one knows exactly what that noninflationary growth rate is, but most estimates cluster around 2.5%.
Greenspan has said often that the Fed would welcome faster growth, so long as it's sustainable. But he and other analysts at the Fed are suspicious of the "growth school" arguments. If productivity improvements really are increasing the potential rate of noninflationary growth, for instance, the gains have yet to show up clearly in the national data. Of course, it may be that the data are bad, and Greenspan has delivered thoughtful, technical (and widely ignored) speeches on the issue in recent months. But there are also reasons to believe the growth school is all wrong. Roger Brinner, chief economist at DRI/McGraw-Hill, for example, notes that growth of the labor force has been much weaker in the 1990s than in other recent decades, which would drive the potential growth rate down.
Greenspan, above all, is a practical and cautious person. He's not about to fool with monetary policy and risk an outbreak of inflation based on nothing more than speculation. Besides, while the true potential growth rate is unknowable, Greenspan believes there are good indicators that show when the economy is running up against its limits, such as a stretching out of lead times in deliveries of goods and increases in overtime hours.
Most of the other criticisms of Greenspan are less consequential. Some "monetarist" economists quibble about the details of monetary policy. There are the gold bugs, who argue that either the nation should return to a gold standard or the Fed's monetary policy should be determined by gold prices (see "Good As Gold"). Then there are the conspiracy theorists. Most of their critiques revolve around simple anticapitalism or populism. Some of them move in even stranger orbits. A profile in Worth magazine last year spent 11 pages trying to prove that Greenspan was carrying out a secret agenda of free-market fanaticism--unbeknownst to anyone in the U.S. government--based on his youthful acquaintance with Ayn Rand. (That story also dwelt bizarrely on Greenspan's very ordinary physical appearance, making him sound like some sort of cross between Shecky Greene and the Elephant Man.) What these wide-eyed critics have in common is their ignorance of the vast literature on monetary economics and central banking. Granted, it's pretty dry stuff, full of math and pragmatism. But if you read it, you will be convinced that there's nothing all that mysterious, much less outre, about the Fed.
Greenspan has grown an amazingly thick skin and pays little attention to the more personal attacks on him. According to people who know him well, if he hears about some piece of journalism that's likely to be upsetting, he just doesn't read it. The only criticism that does bug him is what he sees as hypocrisy, when self-serving people pretend to be disinterested. Example? When Mort Zuckerman, the owner of U.S. News & World Report (and other media properties), lambastes the Fed in his personal column for raising interest rates, without reminding readers that his primary business--real estate development--is one of the industries that gains most from inflation.
Alan Greenspan likes to talk in sports metaphors when he's feeling relaxed, so let's hazard one about him: Going into his ninth year as quarterback of the Federal Reserve, Greenspan is at the height of his powers and the unquestioned leader of the team. He has a near perfect record (though he fumbles once in a while), and he usually does better than the oddsmakers expect him to. He has the look of a winner, and if he were on his way to the playoffs--and you can argue that that's exactly where the Fed is in its own economic season--you would bet on him.
What remains for him to do? One smart move would to be to institutionalize the changes he has wrought by adopting a formal inflation target for monetary policy. Several other nations have done this in recent years, including Canada and Britain, and the young turk monetary economists at the Fed like the idea. He could also lobby for a new law sponsored by Senator Connie Mack (R-Florida) that would do much the same thing.
But the real answer to the question, prosaic though it may be, is that Greenspan simply needs to keep doing what he has been doing. Monetary policy may be hard to do and hard to describe, but the basic idea is pretty simple. His first job is to keep the economy growing. A serious 20th-century recession would ruin Greenspan's reputation--though one milder than the last one might be forgiven. The other thing he needs to do is to keep inflation moving down toward 2%--or at the very least, keep it from rising.
Should he be able to do all that, it will be Greenspan's shadow that future historians see when they look back on the fin-de-siecle American economy. He will be remembered not only as the best Fed chairman ever, but perhaps as the preeminent central banker of the age.