The Economic Question
ANNOUNCER: Today on the Economic Question, Alan Harvey takes a look at a prominent personality in the making of economic policy, the nation's chief central banker, Alan Greenspan.
No single person exercises more control over the economy than the chairman of the Federal Reserve, with his control over monetary policy. He's not elected and he doesn't need a spotless private life, yet he's held office through four Administrations -- Democrat and Republican. When he talks, people listen. They often have to listen very closely. Back with a look at the surprising personality behind the power of the Fed right after this.
An incident related in Bob Woodward's book on Alan Greenspan titled MAESTRO describes the end of a meeting with Clinton advisors in 1993. The Fed chairman wrote a figure down on a piece of paper and passed it across the table.
That figure was 140 billion dollars in deficit reduction. The Clinton budget bill came in at exactly 140 billion dollars. Fed-controlled interest rates came down.
Who is this man, so powerful, yet unelected, unimposing, and often nearly incomprehensible. Woodward's book describes a data wonk, a man combing price indices looking for signs of inflation or hints of recovery.
Perhaps this is not surprisingly if you start from his owlish appearance, his coke bottle glasses and deeply furrowed brow. But Woodward's book also describes a master manipulator of the Fed's processes and bureaucracy and a consummate Washington insider. Few couples are more prominent on the A- list social scene than the Fed chairman and his wife NBC White House correspondent Andrea Mitchell.
His speeches make the eyes glaze over and it is this habitually obscure and convoluted manner of expression which most remember. It is said that he proposed marriage twice to Mitchell before she accepted. She had not understood or it had failed to register the first time.
Let's take a look at two samples. First from March of 2000:
"Economic conditions and considerations addressed by the committee are essentially the same as when the committee met in February. The committee remains concerned that increases in demand will continue to exceed the growth in potential supply, which could foster inflationary imbalances that would undermine the economy's record economic expansion."
That statement was accompanied by a quarter-point hike in the federal funds rate. Seems to make sense in a way, except there was never any inflation.
Second, from July of 2001:
"Our accelerated action reflected the pronounced downshift in economic activity, which was accentuated by the especially prompt and synchronous adjustment of production by businesses utilizing the faster flow of information coming from the adoption of new technologies."
This was accompanied by a lowering of the federal funds rate. Please note that between these two pronouncements Greenspan's stock tumbled as far as that of any dot-com start-up.
Once revered as the architect of permanent prosperity, Greenspan was then blamed for an unnecessary slump then almost forgotten in the fallout from the tragedy of September 11. We'll take a closer look at this remarkable moment in history next time on the Economic Question.
The Fall of Alan Greenspan
ANNOUNCER: Today on the Economic Question, Alan Harvey looks at the remarkable rise and fall and rise again of Federal Reserve Board chairman Alan Greenspan.
Two years ago, Alan Greenspan directed the economy the way a conductor directs the symphony Greenspan was applauded from all sides. A masterpiece of umpteen dozen straight quarters without negative growth. Then the economy began to fail. Until September 11 the recession was laid at Greenspan's door. What happened? That is today's economic question.
I'm not sure if Alan Greenspan is going to appear on the cover of any more national magazines soon. If he does, the caption will not read The man who led the American economy into the promised land of permanent prosperity without inflation.
It was Greenspan's eagle eye on fundamentals that many credited with the remarkable growth of the Clinton years. It was Greenspan's itchy finger on the interest rate that many blame for the first three quarters of the slump that began in two thousand one.
At the beginning of 1999 the American economy was booming, the stock market was booming, help wanted signs were everywhere. In the nineties we barely paused on our upward trajectory as Russia defaulted on its bonds and Asian currencies melted down. We thought we were invulnerable.
Then Alan Greenspan saw inflation in the tea leaves of his economic reports, and the Fed began to ratchet up interest rates. Wall Street scratched its collective head. What inflation?
The only inflation worry came from the rise in oil prices and a subsequent explosion in energy costs -- definite drags on an economy which certainly did not need the additional burden of higher interest rates.
Widely considered an inflation hawk, Greenspan's four terms as Fed chairman saw interest rates — in real terms — much higher than the post-war average. Fed controlled interest rates rose throughout 1999, and when they stopped late in the year, the prime rate stood at 9.5 percent, the highest in ten years. In real terms it was the highest since early in the Reagan years.
Then, led by the collapse of the dot.com bubble, the stock markets began to fall. GDP growth fell. And the reputation of Alan Greenspan fell as well. His about face on interest rates continued through the tragic events of September eleventh.
The prime rate is now well below any level since 1980. But as the Fed chairman and the rest of us in the economy are learning, it is easier to stop an economy with monetary policy than it is to restart one.
Barring extraordinary circumstances, it is extremely doubtful that Greenspan will be around for another four-year term. Initially hired by Ronald Reagan, Greenspan has survived four administrations.
But even though he is a Republican, has made no friends in the Bush family. George Bush Senior is on record as saying "I reappointed him and he disappointed me."
When he is out of office and another Fed chairman charts the course of monetary policy, it may be a while before people again remember the architect of permanent growth without inflation.
Next time on the economic question, we'll take a look at the historic ups and downs, ins and outs of the interest rate.