I didn't know when the credit crunch would end.
I
I
would see President Bush every six or seven weeks, usually in the context
of a meeting with others but sometimes one-on-one. We had known
each other since the Ford years. He'd even had me over to Langley for
lunch when he was director of Central Intelligence in 1976. During the
early months of the 1980 campaign, he often called me on economic policy
issues. While Bush was vice president, I would join him every so often at
the White House. He was intelligent and in person we always got along
well. I was particularly taken with his wife, Barbara, a spunky and formidable
presence. But during his presidency, he was far less focused on the
economy than on foreign affairs.
Though his father had worked on Wall Street and he'd majored in economics
at Yale, he had never experienced the markets firsthand. He didn't
think of interest rates as being set mainly by market forces; he seemed to
believe that they were matters of preference. It was not a thoughtful view.
He preferred to delegate economic policy to his top aides. This meant that
I dealt mainly with Nick Brady, Dick Darman, and Mike Boskin.
Darman, the budget director, was in many ways similar to David Stockman—
a major-league policy intellectual and a believer in sound fiscal management.
Unlike Stockman, though, Dick was often less than direct with
people and was more driven by political expediency. Over time I learned to
keep my distance.
Darman wrote years later that behind closed doors at the White House,
he'd strenuously opposed keeping the no-new-taxes pledge. Instead he
tried to persuade the president to attack the deficit early on, when they
118
BLACK MON DAY
might have put the issue quickly behind them. But the president wasn't
convinced. As 1989 progressed, the White House found itself at loggerheads
with the Democratic Congress. So much debt continued to hang
over the budget that when the recession came, the administration didn't
have the fiscal flexibility to address it.
Before long, the administration began blaming its troubles on the Fed.
Supposedly we were choking the economy by keeping the money supply
too tight. I got my first taste of this in August 1989, while Andrea and I
were visiting Senator John Heinz and his wife, Teresa, at their Nantucket
summerhouse. We put on the Sunday morning talk shows and there was
Dick Darman on Meet the Press, I was only half paying attention when I
heard him say, "It's important to not merely Chairman Greenspan but the
other members of the Board and the FOMC ... that they be more attentive
to the need to avoid tipping this economy into recession. I'm not sure
they're quite there yet." I nearly spilled my coffee. "What!" I said. Listening
to his argument, I thought it made no economic sense. But then I realized
it didn't have to: it was political rhetoric.
Treasury Secretary Brady didn't like the Fed either. He and the president
were friends and had a lot in common—both were wealthy, Yale-educated
patricians and members of Skull and Bones. Nick had spent more than
three decades on Wall Street, rising to become chairman of a major investment
house. He brought with him to Washington a depth of real-world
trading experience and the habit of command.
Throughout the Bush administration, Nick and I cooperated on many
major issues—we traveled to Moscow in 1991 and worked closely and effectively
on complex matters of bank regulation and foreign exchange. Not only
did he and I work together, but he even invited me down to Augusta National
to play golf, and Andrea and I socialized with him and his wife, Kitty.
But he reinforced President Bush's instrumental view of monetary policy.
To Nick, slashing short-term interest rates seemed a no-risk proposition: if
the Fed flooded the economy with money, the economy would grow faster.
We would have to stay on the lookout for a flare-up of inflation, of course,
but if that happened, the Fed could rein it back in. If I had done what they
wanted, I'd have pushed for faster, steeper cuts, and no doubt have had my
head handed to me by the market—deservedly.
119
THE AGE OF TURBULENCE
The treasury secretary, however, was not receptive to debate. Like many
traders, he'd had great success going by his gut; in matters like exchange rate
policy, I found his sense of the markets quite acute. But he was not a conceptualize^
and was not inclined to take the long-term view. Nick and I
would meet for a working breakfast once a week, and whenever the subject
of monetary policy came up, we would simply go round and round.
This impasse made coping with the deficit and the recession doubly
difficult, because it meant the administration was always looking for a quid
pro quo from the Fed. When the 1990 budget bill was on the table—and
President Bush finally faced the necessity of breaking his no-new-taxes
pledge—Nick asked me for a commitment that if the budget went through,
the Fed would lower interest rates.
In fact, the budget package impressed me. It included a couple of Dar-
man innovations that I thought were very promising, such as a "pay-go" rule
that any new spending program had to have some offsetting source of funding,
either a new tax or a budget cut ("pay-go" was Washington shorthand
for "pay as you go"). The proposed budget did not cut the deficit as deeply
as it might have, but the consensus at the Fed, with which I agreed, was that
it was a big step in the right direction. In a congressional hearing in October
when the budget was finally up for approval, I pronounced the plan "credible"—
which might sound like faint praise, but it was enough to make the
stock market jump, as traders bet that the Fed would instantly cut interest
rates. Of course, we had no such intention: before easing credit, we needed
to see first whether the budget cuts actually became law, and most important,
whether they had any real economic effect.
So I was always very careful in what I privately told Nick. I said, "A sound
budget will bring long-term rates down because inflation expectations will
fall. Monetary policy, appropriately, should respond to that by lowering
short-term rates." This was standard Fed policy, but it frustrated Nick because
it was not the promise he was looking for.
When the recession hit that fall, the friction only got worse. "There has
been too much pessimism," President Bush declared in his 1991 State of
the Union address. "Sound banks should be making sound loans now, and
interest rates should be lower, now." The Fed, of course, had been lowering
rates for over a year, but the White House wanted more, faster cuts.
120
PHOTOGRAPHIC INSERT 1
Age five, Washington Heights, New York City, 1931.
The collection of Alan Greenspan
With three cousins on the
Greenspan side, circa 1934
(I'm on the left).
The collection of Alan Greenspan
Sixteen years old,
Lake Hiawatha, New Jersey.
The collection of Alan Greenspan
My father, who sold stocks on Wall Street, left
my mother when I was two. When I was nine,
he gave me a copy of his book, Recovery Ahead!,
which confidently predicted the end of the
Depression and included this affectionate, if
somewhat mystifying, inscription: "To my son
Alan: May this my initial effort with constant
thought of you branch out into an endless chain
of similar efforts so that at your maturity you
may look back and endeavor to interpret the
reasoning behind these logical forecasts and
begin a like work of your own."
Photograph by Darren Haggar
After a year at the Juilliard School, I toured the country as a sideman with the Henry
Jerome dance band, playing saxophone and clarinet (I'm sitting at far left). I also did tax
returns for the band members. Courtesy of Henry Jerome Music
With my mother, Rose Goldsmith,
a brave and lively woman who
gave me my love of music.
The collection of Alan Greenspan
By 1950,1 was earning enough as
an economist to think about leaving
New York City for the suburbs,
which I did just over a year later.
The collection of Alan Greenspan
Of all my teachers, Arthur Burns and Ayn Rand had the greatest impact on my
life. An economist who did groundbreaking work on business cycles, Burns was my
faculty adviser and mentor during my first year of graduate school at Columbia, and
years later persuaded me to finish my Ph.D. He served before me as head of the
Council of Economic Advisors and chairman of the Federal Reserve Board. Ayn Rand
expanded my intellectual horizons, challenging me to look beyond economics to
understand the behavior of individuals and societies.
LEFT: Bettmann/Corbis; RIGHT: The New York Times/Getty Images
Adam Smith's Enlightenment ideas of individual
initiative and the power of markets came back
from near eclipse in the 1930s to their current
dominance of the global economy. Smith (above
left) remains among my deepest intellectual
influences. I was also influenced by the thinking
of John Locke (above right), the great British
moral philosopher who articulated fundamental
notions of life, liberty, and property, and Joseph
Schumpeter, the twentieth-century economist
whose concept of creative destruction gets to
the heart of the role of technological change
in a modern capitalist society.
TOP LEFT: Hulton Archive/Getty Images; TOP RIGHT:
Bettman/Corbis; BOTTOM RIGHT: Getty Images
At my firm, Townsend-Greenspan, I focused on heavy industry—textiles, mining,
railroads, and especially steel. Studying steel put me in an excellent position to warn
of the recession of 1958—my first forecast of the U.S. economy as a whole.
Walter Daran/Time Life Pictures/Getty Images
When I took my first
Washington job in 1974,1
left Townsend-Greenspan in
the hands of vice presidents
(from left) Kathy Eichoff,
Lucille Wu, and Bess Kaplan
(seated). Former vice president
Judith Mackey (right) came
back temporarily to help out.
The predominance of women
made Townsend-Greenspan
unusual in the economics
world.
The New York Times/Redux
My involvement in public life started with Richard Nixon's campaign for the presidency in 1967.
I was an unpaid member of the campaign staff. Though I was impressed by Nixon's intelligence, he
had a dark side that troubled me, and I decided against joining the administration. Seated to my left
at this July 1974 meeting is Hewlett-Packard cofounder David Packard, who served as deputy secretary
of defense from 1969 to 1971. Bettmann/Corbis
My mother congratulates me after I was sworn in as chairman of the Council of Economic Advisors,
while President Ford looks on. With the nation reeling from Watergate, high oil prices, and inflation,
it was a challenging moment to take a government job. Bettmann/Corbis
At this April 1975 meeting in the Oval Office to discuss economic policy, Secretary of State Henry
Kissinger had just interupted with news of the U.S. evacuation of Saigon. Left to right: President Ford,
Deputy Chief of Staff Dick Cheney, me, Chief of Staff Donald Rumsfeld, Vice President Nelson
Rockefeller, and Kissinger. David Hume Kennerly/The Gerald R. Ford Presidential Library/Getty Images
I he White House senior staff often gathered in the chief of staff's office to watch the evening news
and chew over the day's events. I would add my two cents from the carpet, where I'd stretch out to
ease my aching back. David Hume Kennerly/The Gerald R. Ford Presidential Library/Getty Images
Working at Camp David, left to right: Secretary of the Treasury Bill Simon, Press Secretary Ron
Nessen, President Ford, Dick Cheney, Donald Rumsfeld, and me. David Hume Kennerly/The Gerald R.
Ford Presidential Library/Getty Images
With President Ford in Palm Springs, 1980. Contrary to his reputation for being
physically clumsy, he was a formidable golfer and a former All-American football
player. Photograph by Neil Leifer
During the presidential campaign of 1980, my mission on this cross-country flight with Ronald
Reagan was to brief him on a long list of domestic issues. Adviser Martin Anderson, in the foreground,
put me up to it. "He'll listen to you," he said. But I couldn't get Reagan to stop telling
Stories. Michael Evans photograph, courtesy of the Ronald Reagan Presidential Foundation
At the Republican convention that
July, Henry Kissinger and I tried to
persuade former president Ford to
become Reagan's running mate. Polls
showed that Reagan and Ford would
be a "dream ticket," but after a
suspenseful twenty-four hours, the
negotiations fell apart and the vice
presidential nomination went to
George H.W. Bush.
David Hume Kennedy/'Getty Images
Social Security developed financial trouble in the late 1970s and early 1980s, and both Republicans
and Democrats knew that it had to be fixed. Reagan's reform commission, which I ran, achieved a
compromise. Joining Reagan in the Rose Garden in April 1983 as he signed it into law were leaders
from both parties, including Senator Bob Dole (to my left in the photo), Congressman Claude
Pepper (partially obscured), and House Speaker Tip O'Neill (joking with the president). The caricature
below appeared that year in the financial press.
ABOVE: AP Images/Barry Thumma; BELOW: David Leinne
On June 2, 1987, President
.n^m-i-n--
Eljc jNetu JJork Ehncs mm= Reagan announced that he would
. III i .1(11! WJ (T.JH ti_ .._ _.ml _ nilW kUML 1LVXM.K (. lUOflft . .C*.f*
nominate me to succeed Paul
STOCKS PLUNGE 508 POINTS, A DROP OF 22.6%;
604 MILLION VOLUME NEARLY DOUBLES RECORD Volcker as chairman of the Fed.
