The Free Market 19, no. 5 (May 2001)
A combination of factors has elevated the Federal Reserve and its chairman to mythical status amongst the corporate and media elite. The publishing of summaries of meetings of the Federal Open Market Committee, which started in 1994, gave reporters and bond traders more information than ever before to fuel speculation on the direction of interest rates and the money supply. Chairman Alan Greenspan’ s frequent and televised congressional testimony, combined with a penchant for gradual, newsworthy rate changes, also piqued media interest in Fed activities.
The publication of Maestro: Greenspan’ s Fed and the American Boom, by Washington Post super-sleuth and Watergate protagonist Bob Woodward, has further bolstered the rising fascination and outright worship of the Fed and all its power. The author is notorious for reporting insights gleaned from unnamed “inside” sources who can be scrutinized by no one. This time, he again shrouds his subject in a dense fog of hearsay offered by more than one hundred unidentified “Deep Throats” of the political and financial worlds.
It is upon this shaky foundation of mysterious evidence that we are to accept Woodward’ s thesis: The Federal Reserve is responsible for everything good in the economy, and the entire nation would have submerged into a sea of financial chaos if not for the masterful intervention of Greenspan and his learned staff of government experts.
Though Woodward does his best to glorify the machinations of Greenspan’ s Fed, many details revealed in his book undermine the notion of an independent central bank that is insulated from extraneous political considerations. When Greenspan disappointed President Bush in 1992 by not cutting interest rates dramatically enough, he nearly jeopardized his reappointment to a second term as chairman. Greenspan, who admits to loving the job so much that he would accept a lower position on the board, would not make the same mistake with President Clinton.
Early on in Clinton’s tenure, Greenspan met with the president and his top advisers to cut a deal. He agreed to loosen monetary policy in exchange for higher taxes and budget deficit reduction. In Maestro, we learn that at almost every turn, Greenspan, the one-time devotee of Ayn Rand, abandons free-market thinking in favor of some form of interventionism to help the president’s political fortunes.
The first important favor done for Clinton was to help devise a $40 billion bailout scheme for Mexico, Clinton s deteriorating NAFTA partner. The book reveals many illuminating details about this tawdry episode. It was Bear Stearns chief economist Wayne Angell, a former Fed governor and adviser to then-Senate Majority Leader Bob Dole, who first invented the idea of using the Exchange Stabilization Fund to prop up the collapsing peso. Existing credit lines created to support the peso did not have enough cash to clean up the giant mess south of the border, but this obscure slush fund inside the US Treasury could easily be tapped, according to Angell. Woodward fails to mention that Angell s investment bank had underwritten scores of collapsing securities in Mexico, hoping to capitalize on NAFTA.
Senator Robert Bennett, a freshman Republican from Utah, took Angell’s proposal to Greenspan and to Treasury Secretary Robert Rubin. Both rejected the idea, shocked at the blatant circumvention of constitutional procedures that this strategy represented. They could not imagine trying to implement an illegal strategy that invited certain reprisal from Congress. But Bennett persisted. “What happens if you do it, and Congress is silent?” he asked Greenspan. The chairman advised him that yes, “that would work if you could guarantee Congress’s silence.”
Suddenly the unthinkable became thinkable. Bennett went to Dole and convinced him that the whole scam would work if the majority leader would simply block all efforts to bring this use of taxpayers’ money to a vote. It would all happen by executive fiat. Rubin was still reluctant until he consulted with Greenspan, who allayed his fears.
The next step was to persuade Dole and his counterpart in the House, Speaker Newt Gingrich. They consulted several state governors, notably Texas Governor George W. Bush, who enthusiastically endorsed the idea of a bailout to subsidize the border region in his state. With George W.’ s support, Dole and Gingrich quickly signed off on the plan.
Greenspan, who historically opposed bailouts of the private sector for fear of incurring moral hazard, was clearly in a position to stop this one. Instead, he used his considerable power and influence to help the process along when key players had balked.
The peso bailout would lead to a series of similar situations in which private investors got themselves into trouble, vindicating the moral-hazard principle that predicts such people will take undue risks in the presence of bailout guarantees. As Thailand, South Korea, and Russia stumbled into crisis, culminating in the collapse of hedge fund giant Long-Term Capital Management, Greenspan moved to increase liquidity to support the ailing bond markets. At the helm of LTCM was yet another former member of the Federal Reserve board, ex-vice chairman David Mullins. Mullins was there to plead for help from his former colleagues.
When William McDonough, president of the New York Federal Reserve Bank, helped to coordinate a bailout of LTCM at his offices, Greenspan purportedly disapproved, according to Woodward. Yet when McDonough was called before a congressional oversight committee to explain his actions, Greenspan was there to defend this intervention in a private business mistake.
Reflecting on all the corporate welfare being doled out to prop up bad private-sector investments, Clinton appointee Alice Rivlin observed that “the Fed was in a sense acting as the central banker of the world.” Of course, she made this observation approvingly. And Woodward even makes the deed sound noble, quoting one beneficiary of Fed largesse who called Greenspan’s intervention “the greatest thing that had ever happened in modern times to help the markets.” Who else would stand up and take responsibility for rescuing international bond traders? Only a forceful government institution with the power to print money.
The level of cooperation Greenspan offered to the Clinton administration is really quite astounding. In early 1996, some Clintonistas became concerned about reappointing Greenspan, since he was nominally Republican and they wanted someone they could control running the Fed. Secretary Rubin and others on the Clinton team considered other options but concluded that Greenspan was really one of them. “It was easy to make Greenspan theirs, because in all important respects he already was,” explains Woodward. “They didn’ t think of him as a Republican. He wasn’ t running the Fed as a Republican.” During Clinton’s first term, he had handed the president a “pro-incumbent-type economy.”
Whenever Clinton himself became uneasy about Greenspan, his top economic advisers reassured him. They explained to him that Greenspan was “on the softer side of the FOMC, a little to the left” even of the president’s own nominees to the board. He was proving to be even more dovish on interest rates than Clinton appointee Janet Yellen, who thought the economic data actually called for a rate hike when Greenspan wanted to ease.
In public speeches, Greenspan was sounding more and more like Clinton himself, at one point even bemoaning the unfair distribution of wealth that capitalism had created. Eerily, Woodward’s description of the relationship between Greenspan and Clinton starts to resemble a love affair: “Clinton and Greenspan were almost glowing at each other, odd partners sitting there around the polished wood table, linked surprisingly to each other’s greatest successes, wrapping themselves in each other’s legacies.”
Maestro sets out to paint a picture of Greenspan as a kind genius, orchestrating the national economy like a graceful music conductor. Yet most of the details we are given about the actual decision-making process at the Fed- revealed by veiled “insiders” with no names- expose a harsher reality. The powers exercised by Greenspan are exceedingly centralized in the hands of one man. They are wielded, not for the benefit of the average citizen, but for the very privileged insiders who no doubt provided the background material for Woodward’s account. For all the opponents of sound money, Maestro is music to the ears.
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James Sheehan is an MBA student.
