work, which I'll mention because I've used variations of them ever since.
The first was to limit the problem. In this case, it meant not taking up
the issue of the future funding of Medicare—while technically part of Social
Security, Medicare was a far more complex problem, and trying to
solve both could mean we would do neither.
The second was to get everyone to agree on the problem's numerical
dimensions. As Pat Moynihan later put it, "You're entitled to your own
opinion, but you're not entitled to your own facts." When it was clear that
a long-term shortfall was real, commission members lost their ability to
demagogue. They had to support cuts in benefits and/or support a rise in
revenues. Reverting to the cop-out of financing Social Security from the
federal government's "general revenues" was adamantly ruled out early by
Pepper, who worried it would cause Social Security to become a welfare
program.
The third smart tactic came from Baker. If we wanted a compromise to
succeed, he argued, we had to bring everybody along. So we made a point
95
.1 of 738 - 8:20 PM St Louis Fed Econo.
THE AGE OF TURBULENCE
of keeping both Reagan and O'Neill in the loop as we worked. It became
Bob Ball's job to inform O'Neill, and my job and Baker's to inform the
president.
Our fourth move was to agree among the commissioners that once a
compromise was reached, we would stand firm against any amendments
being imposed by either party. I later told reporters, "If you take pieces out
of the package, you will lose the consensus, and the whole agreement starts
to unravel." We published our report in January 1983; when it was finally time
to present the reform proposals to Congress, Ball and I resolved to testify
side by side. Whenever a Republican asked a question, I would answer it.
And whenever a Democrat asked a question, he would answer it. Which is
just what we tried to do, though the senators didn't entirely cooperate.
Diverse as our commission was, we found ways to agree. What brought
together men like Claude Pepper and the head of the manufacturers was
the care we took to spread the burden. The Social Security Amendments,
which Reagan ultimately signed into law in 1983, involved pain for everyone.
Employers had to absorb further increases in the payroll tax; employees
faced higher taxes too and in some cases saw the date when they could
anticipate receiving benefits pushed further into the future; retirees had
to accept postponement of cost-of-living increases, and wealthier retirees
began having their benefits taxed. But by doing all this, we succeeded in
funding Social Security over the seventy-five-year planning period that is
conventional for social insurance programs. Moynihan, with his usual eloquence,
declared: "I have the strongest feeling that we all have won. What
we have won is a resolution of the terrible fear in this country, that the Social
Security system was, like a chain letter, something of a fraud."
A
A
s all this was still unfolding in 1983,1 was in my office one day in New
York poring over demographic projections when the telephone rang.
It was Andrea Mitchell, a reporter for NBC. "I've got some questions about
the president's budget proposals/' she said. She explained that she'd been
trying to figure out whether the Reagan administration's latest fiscal-policy
assumptions were credible, and that David Gergen, the assistant to the
White House communications chief, had suggested my name. She told me
96
PRIVATE CITIZEN
Gergen had said, "If you really want to know about the economy, why don't
you call Alan Greenspan? He knows more than anybody."
"I'll bet you say that to all the economists/' I replied, "but sure, let's
talk." I'd noticed Andrea on NBC newscasts. She was a White House correspondent.
I thought she was very articulate and that her voice had the nicest
authoritative resonance. Also, I'd noted, she was a very good-looking
woman.
We talked that day and a few more times, and soon I became a regular
source. Over the next two years, Andrea would phone whenever she had a
big economics story in the works. I liked the way she handled the material
on TV; even when the issues were too complex to present in their full technical
detail, she would find the crux of the story. And she was accurate with
the facts.
In 1984 Andrea asked if I'd come with her to the White House Correspondents'
Dinner, where reporters invite their sources. I had to tell her
that I'd already agreed to go with Barbara Walters. But I added, "Do you
ever get to New York? Maybe we could have dinner."
It took another eight months before we could connect—it was an election
year, and Andrea was extremely busy through November, when Reagan
defeated Mondale in a landslide. Finally when the holidays arrived, we
scheduled a date, and I made a reservation at Le Perigord, my favorite restaurant
in New York, for December 28. It was a snowy night and Andrea
rushed in late, looking very beautiful if a bit disheveled after a day of reporting
the news and trying to hail cabs in the snow.
That night I discovered she was a former musician like me; she'd played
violin in the Westchester Symphony. We loved the same music—her record
collection was similar to mine. She liked baseball. But mainly we shared an
intense interest in current affairs—strategic, political, military, diplomatic.
There was no shortage of things to talk about.
It might not be everybody's idea of first-date conversation, but at the
restaurant we ended up discussing monopolies. I told her I'd written an essay
on the subject and invited her back to my apartment to read it. She
teases me about that now, saying, "What, you didn't have any etchings?"
But we did go to my apartment and I showed her this essay I'd written on
antitrust for Ayn Rand. She read it and we discussed it. To this day, Andrea
97
THE AGE OF TURBULENCE
claims I was giving her a test. But it wasn't that; I was doing everything I
could think of to keep her around.
For much of Reagan's second term, Andrea was my main reason to go
to Washington. I stayed in touch with people in the government, but my
focus was almost entirely in the business and economics world of New
York. As business economics matured as a profession, I'd gotten deeply
involved in its organizations. I'd served as president of the National Association
of Business Economists and as chairman of the Conference of Business
Economists, and was slated to become chairman of the Economic Club
of New York, the financial and business world's equivalent of the Council
on Foreign Relations.
Townsend-Greenspan itself had changed. Large economics firms with
names like DRI and Wharton Econometrics had grown up to supply much
of the basic data needed by business planners. Computer modeling had become
much more widespread, and many corporations had economists of
their own. I'd experimented with diversifying into investment and pension-
fund consulting, but while those ventures made money, they weren't as lucrative
as corporate consulting. Also, more projects meant more employees,
which meant more of my time had to be spent managing the business.
Ultimately I concluded that the best course was to focus exclusively on
what I did best: solve interesting analytical puzzles for sophisticated clients
who needed answers and could pay high-end fees. So in the second half of
the Reagan administration I planned to scale back Townsend-Greenspan.
But before I could implement those plans, in March 1987, I received a
phone call from Jim Baker. Baker was by this time treasury secretary—after
an intense four years as White House chief of staff, he'd made an unusual
job swap, trading posts in 1985 with Don Regan. Jim and I had been friends
since the Ford days, and I'd helped him prepare for his Senate confirmation
hearing the spring he took over at Treasury. He had his assistant call to ask
if I could come to Washington for a meeting at his house. This struck me as
odd—why not meet at his office? But I agreed.
The next morning a Washington driver delivered me to Baker's nice
old Georgian colonial on an elegant stretch of Foxhall Road. I was surprised
to find waiting for me not only Jim but also Howard Baker, President Rea
ps
PRIVATE CITIZEN
gan's current chief of staff. Howard got right to the point. "Paul Volcker
may be leaving this summer when his term runs out/' he began. "We're not
in a position to offer you the job, but we'd like to know—if it were to be
offered, would you accept?"
I was briefly at a loss for words. Until a few years before, I'd never
thought of myself as a potential Fed chairman. In 1983, as Volcker's first
term was ending, I'd been startled when one of the Wall Street firms conducted
a straw poll of who might replace Volcker if he were to leave and
my name turned up on top of the list.
As close as I was to Arthur Burns, the Fed had always been a black box
to me. Having watched him struggle, I did not feel equipped to do the job;
setting interest rates for an entire economy seemed to involve so much more
than I knew. The job seemed amorphous, the type of task in which it is very
easy to be wrong even if you have virtually full knowledge. Forecasting a
complex economy such as ours is not a ninety-ten proposition. You're very
fortunate if you can do sixty-forty. All the same, the challenge was too great
to turn down. I told the Bakers that if the job were offered, I would accept.
I had plenty of time to get cold feet. Over the next two months, Jim
Baker would phone to say things like "It's still under discussion" or "Volcker
is thinking about whether he wants to stay." I felt alternately fascinated by
the possibility and a little unsettled. It wasn't until just before Memorial
Day that Baker phoned and said, "Paul has decided to leave." He asked if I
was still interested and I said yes. He said, "You'll be getting a call from the
president in a few days."
Two days later I was at my orthopedist's office and the nurse came in
to say the White House was on the line. It had taken the call a few minutes
to get through because the receptionist had thought it was a prank. They
let me use the doctor's private office to take the call. I picked up the phone
and heard that familiar, easy voice. Ronald Reagan said, "Alan, I want you to
be my chairman of the Federal Reserve Board."
I told him I would be honored to do so. Then we chatted a bit. I thanked
him and hung up.
As I stepped back into the hall, the nurse seemed very concerned. "Are
you all right?" she asked. "You look like you've gotten bad news."
99
FIVE
BLACK MONDAY
I
I
'd scrutinized the economy every working day for decades and had visited
the Fed scores of times. Nevertheless, when I was appointed chairman,
I knew I'd have a lot to learn. That was reinforced the minute I
walked in the door. The first person to greet me was Dennis Buckley, a security
agent who would stay with me throughout my tenure. He addressed
me as "Mr. Chairman."
Without thinking, I said, "Don't be silly. Everybody calls me Alan."
He gently explained that calling the chairman by his first name was
just not the way things were done at the Fed.
So Alan became Mr. Chairman.
The staff, I next learned, had prepared a series of intensive tutorials
diplomatically labeled "one-person seminars," in which I was the student.
This meant that for the next ten days, senior people from the professional
staff gathered in the Board's fourth-floor conference room and taught me
my job. I learned about sections of the Federal Reserve Act I never knew
existed—and for which I was now responsible. The staff taught me arcana
about banking regulation that, having been a director of both JPMorgan
and Bowery Savings, I was amazed I'd never encountered. Of course, the
BLACK MON DAY
Fed had experts in every dimension of domestic and international economics
as well as the capability to call in data from everywhere—privileged access
that I was eager to explore.
Though I'd been a corporate director, the Board of Governors of the
Federal Reserve System, as it is formally known, was an order of magnitude
larger than anything I'd ever run—today the Federal Reserve Board staff
includes some two thousand employees and has an annual budget of nearly
$300 million. Fortunately, running it wasn't my job—the long-standing
practice is to designate one of the other Board members as the administrative
governor to oversee day-to-day operations. There is also a staff director
for management who acts as a chief of staff This way, only issues that are
out of the ordinary or that might spark public or congressional interest are
brought to the chairman, such as the massive challenge of upgrading the
international payments system for the turn of the millennium. Otherwise
he is free to concentrate on the economy—just what I was eager to do.
The Fed chairman has less unilateral power than the title might suggest.
By statute I controlled only the agenda for the Board of Governors
meetings—the Board decided all other matters by majority rule, and the
chairman was just one vote among seven. Also, I was not automatically the
chairman of the Federal Open Market Committee, the powerful group that
controls the federal funds rate, the primary lever of U.S. monetary policy*
The FOMC is made up of the seven Board governors and the presidents of
the twelve regional Federal Reserve banks (only five can vote at any one
