Are the criticisms valid? Bob Woodward, author of 10 books on Washington including “All the President’s Men” and more recently, “Maestro: Greenspan’s Fed and the American Boom,” agreed to discuss the Fed’s recent actions, the criticism enveloping Greenspan — and the economy’s ultimate future.
That just doesn’t make sense. If you’ve read through the book or read about the period of ’94-’95 when they raised rates, then started lowering them, you’ll see that [the recent interest rate cut] fits that model. Greenspan’s trying to execute the second soft landing. A while ago, it was clear to me — and I said this publicly a number of times — that the Fed was soon going to start lowering rates. The timing and degree — the half-point drop — have to do with the numbers they have. I think it’s basically an economic decision, not a political one. Greenspan is certainly aware of politics and apparently wanted to avoid [cutting rates] early in the Bush administration. But you can interpret it either way: It could help Bush advocate his tax cut plan, or it could hurt him.
The interest-rate cut also raised eyebrows because it came between meetings of the Federal Open Markets Committee, the seven-member board that Greenspan oversees. What’s the significance of this, of Greenspan’s power to move policy between meetings, without committee votes?
Well, they normally give him the right to move rates at each regular meeting. It’s ambiguous, that power. In this case, I understand, he held a telephone conference. Actually, there’s one report that he held a vote over the phone of the committee members. There are cases, I report in the book, where he did that to make sure everyone was on board, then made the cut himself. But he dominates the institution in a way that everyone agrees on. It’s not with a heavy hand. He listens, he incorporates people’s views. It’s consensus leadership. But some consensus counts more than others. He decides.
There’s an interesting subtext, though, with Bush. Greenspan and Bush’s circle of advisors — particularly Dick Cheney and Donald Rumsfeld — are old friends, as you point out in your book. Yet George Sr. blamed Greenspan for his loss to Bill Clinton in ’92. How do you think this conflict will play out?
Well, it’s the classic question of does the enemy of your father — allegedly Greenspan — become your enemy or does he become your friend? Enemy is too strong a word, but father Bush has been public and direct in blaming Greenspan for his ’92 defeat — which I don’t think is correct. During that period, Greenspan and the Fed had to worry about inflation and if you lower the rates too fast, too much, you can still get inflation. That’s the problem right now; the Fed is still basically an inflation-fighting institution. If they didn’t have to worry about inflation, they just would lower rates more quickly and dramatically.
So, it’s my sense that with the way Bush embraced Greenspan — talking about the high regard he held for Greenspan’s skills — he clearly was reaching for the Clinton model of “let’s work together.” And Greenspan realizes that it’s to everyone’s advantage to have a good working relationship [with the White House], to the point which, as I say in the book, he felt that he and [Robert E.] Rubin — Clinton’s Treasury secretary — felt like they were working for the same firm.
You mentioned that Greenspan has been trying to engineer a “soft landing.” Here in Silicon Valley, the land of layoffs, few see the dot-com downturn as anything but hard and bumpy. Are dot-commers correct to blame Greenspan for their woes?
They may turn out to be correct. But if you go back to ’95, which is the equivalent period in terms of the rate increases, there was immense talk of recession but the economy pulled out. So you don’t know. It may be that they raised rates too much and kept them high for too long. The model, the conviction that Greenspan has, is that you’ve got to turn the screw an extra time and really make sure that you slow down the economy. It is a tricky calculation and the economy may have shifted very quickly. People keep saying, “In December [the Fed] said they didn’t have to raise rates, then they did in January.” But that’s the way it always is. There is a moment when they shift. I don’t find that unusual. And it may work, it may not. The conditions now are different than in ’95.
In what way?
The stock market is going down dramatically, or at least in the technology sector. And the big question is, Will the productivity growth continue? It’s been very high in recent years, and that’s the X factor in keeping the economy strong. So maybe the paperback version of my book will have to be entitled “Maestro Emeritus” or “Former Maestro.”
You’re painting a pretty uncertain picture. Your book follows the same pattern. In fact, you seem to be at least as interested in Greenspan as you are in the fragility of the markets that he’s working with.
Exactly, and not just the markets but also the whole economy, the whole system. I couldn’t agree with you more. When you look at the decision to raise or lower rates, you can do it at the wrong time, or there can be a Mexican crisis, or a Russian crisis or that Long Term Capital Management crisis in ’98. In each season, there is a series of events or economic conditions where you can make the wrong decisions. By and large, Greenspan has made the right decisions.
But there’s no guarantee he’ll continue to make those decisions. How will history view Greenspan if he goofs now, if we end up in a prolonged recession?
Well, the book ends — and it was finished in August or September — on the following note. It essentially says Greenspan’s role may lie in the future. “No one knows whether the economic expansion will continue for years or whether it is at its summit. But someday in some form it will end.” Someone with credibility, it goes on, will have to explain what happened, why, and who’s responsible. “Someone will have to propose a course of action and outline what has to be done.” So in other words, it ended on a note of “who knows?”
And yet, despite all this uncertainty about Greenspan’s legacy, he has become an icon of stability. We depend on him because, as you write, “He has become both a symbol and a means of explaining and understanding the economy.” Is this healthy, for the economy and the country? Does Greenspan have too much power?
A lot of Greenspan’s colleagues think so. In the book, I talk about Alice Rivlin (then vice chairwoman of the Fed) coming to him and saying, “There’s too much attention on you.” Then there’s Mike Prell, the head of research, giving that speech in January 1999, saying that everyone expects Greenspan to bail us out, bail the economy out.
How much of a danger is this knee-jerk reliance? Will we be in epic trouble, for example, if Greenspan dies?
Well, what Prell asked two years ago was if there was an exaggerated confidence in the Fed’s ability to cushion economic and financial markets against shock. I think that’s a good question. I think it’s one that haunts Greenspan and everyone who has a role here. Great baseball teams, great institutions, have their golden age. And this is one of the golden ages of the Federal Reserve. But there’s no guarantee that past performance dictates the future.
What about Paul Volcker, Greenspan’s predecessor? What makes Greenspan unique, different from those who came before?
Volcker had a tougher job, quite frankly, because he had to get inflation down. He had to raise interest rates and essentially cause two back-to-back recessions. No one liked that, including Volcker.
Volcker was also much more autocratic, less inclusive, less inclined to listen to people. Greenspan, if he’d not done this, could have been a great intelligence officer or a great journalist because he knows how to listen.
In his 20s, he listened quite a bit to Ayn Rand. How does Greenspan reconcile Rand’s insistence on pure, free-market capitalism with his own increasingly important role as a regulator?
I think he sees the irony in it, but that’s the job; he agreed to take it and he loves doing it. That doesn’t mean that it’s wrong or hypocritical. He sees the free markets, but he also sees that we don’t have a free-market system. So once you have government playing such a significant role in the marketplace, if this one institution did not exercise its power and do its job, then he should resign and give the job to somebody else.
So as long as there’s going to be regulation, Greenspan figures he might as well be the one to do it?
I think so. And there are times when he backs off. I think the most important story, perhaps, in the book occurs in ’96, when he wouldn’t let the Fed raise rates. Everyone wanted to raise rates and he wouldn’t let them because, he said, “We’ve got a new economy here. Productivity is higher than we’re measuring.”
It turned out he was right.
Is there anything you left out of the book? For instance, I wanted to know a bit more about Greenspan as a person.
I didn’t leave out anything significant. But if you’ve ever seen him or met him at social occasions, he looks so uncomfortable, like he wants to jump out of his skin. He is a true introvert. He would rather be alone, but I think he sees the necessity of getting out. He just uses it to his own purposes, to gather intelligence.
What’s the main lesson you learned in doing this book? What should readers take from “Maestro”?
That the system is just so fragile. The system is not just an economic system, it’s the political system too. It’s like the human body. It can function really well and then one little nerve or organ or valve in the heart goes and the whole system goes down. When it’s functioning it’s great, but let some 300-pound tackle run into a halfback and the knees crack.
The other thought relates to the governing metaphor. We called the book “Maestro” because it’s the metaphor for how he leads. He’s in charge but he doesn’t play any of the instruments himself. It’s a post-1990s leadership style. If the metaphor for leadership in the ’60s, ’70s and ’80s was “The Godfather” — tough, breaking kneecaps, hold your friends close but your enemies closer, the style of settling scores — then the post-’90s leadership style is Greenspan’s. It’s conducting, being in charge, being responsible but not being there making the airplane engines or running the business, and doing it in a style that’s subtle.
It has implications way beyond the Federal Reserve. He’s not the first to do it, but it is a leadership style that can be incredibly effective. If you want to be hopeful or optimistic, it may be the leadership style that the president-elect is adopting — intentionally or by nature. The idea is that you don’t get down there and turn the dials, and immerse yourself in the details like some presidents have, but stand above it on the podium and raise your arm a little bit. It’s an interesting idea, and in Greenspan’s case, it’s what gets the best results.