(of which I am a faithful viewer, because of Andrea) but also on CNBC and
other upstart cable channels that catered to businesspeople and investors.
On Super Bowl Sunday of 2000, half the thirty-second ad slots were bought
by seventeen Internet start-ups for $2.2 million each—the Pets.com sock
puppet appeared alongside Budweiser's Clydesdales and Dorothy from The
Wizard of Oz (in a FedEx spot).
In pop culture, I was right up there with the sock puppets. CNBC invented
a gimmick called the "briefcase indicator" in which cameras would
follow me on the mornings of FOMC meetings as I arrived at the Fed. If my
197
THE AGE OF TURBULENCE
briefcase was thin; the theory went, then my mind was untroubled and the
economy was well. But if it was stuffed full, it meant I'd been burning the
midnight oil and a rate hike loomed. (For the record, the briefcase indicator
was not accurate. The fatness of my briefcase was solely a function of
whether I had packed my lunch.)
People would stop me on the street and thank me for their 401 (k); I'd
be cordial in response, though I admit I occasionally felt tempted to say,
"Madam, I had nothing to do with your 401 (k)." It's a very uncomfortable
feeling to be complimented for something you didn't do. Andrea, who was
by turns exasperated and amused, kept a box filled with "Greenspan-alia"—
cartoons and postcards and clippings that were especially strange, not to
mention Alan Greenspan T-shirts and even a doll.
Undoubtedly I could have avoided some of this—it would have been
easy to duck the cameras, for example, by driving into the Fed's garage. But
I was in the habit of walking those last several blocks to the office, and once
they started doing the briefcase indicator, I didn't want to give the impression
I was hiding. Besides, it wasn't mean-spirited—why be a killjoy?
The briefcase indicator was not a good way to convey monetary policy,
however. Often, the ideas we needed to present were subtle and had to be
thought through, making them poor fodder for sound bites as well. If sound
bites had been our only contact with the media, I'd have been extremely
concerned. But the Fed got a great deal of expert coverage. While it was my
practice to avoid on-the-record interviews, my door was open to serious reporters.
When someone called with questions for an important story, I'd often
take the time to meet on background and talk through the ideas. (This
practice helped print journalists more than it did TV people, Andrea was
quick to point out, but I couldn't do anything about that.)
In the midst of all this craziness there was still real work to do. In the
fall, Larry Summers and I had to settle a major turf war between the Treasury
and the Fed. What had set it off was a push by Congress to overhaul
the laws governing America's financial industries—banks, insurance companies,
investment houses, real estate companies, and the like. Years in the
making, the Financial Services Modernization Act finally did away with the
Glass-Steagall Act, the Depression-era law that limited the ability of banks,
investment firms, and insurance companies to enter one another's markets.
198
M I LLE N N I UM FEVER
Banks and other companies were eager to diversify—they wanted to be able,
for instance, to offer customers one-stop shopping for financial services. They
argued that they were losing ground to foreign competitors, especially European
and Japanese "universal banks," that operated under no such restrictions.
I agreed that liberalization in these markets was long overdue. The
Treasury through the Office of the Comptroller of the Currency was responsible
for the supervision of all nationally chartered banks. The Fed
oversaw bank holding companies and state-chartered institutions that chose
to be regulated by the Fed. The version of the reform bill that had been
passed by the Senate assigned responsibility mostly to the Fed; the House
version favored the Treasury. After endless efforts to reconcile the two versions,
Congress threw up its hands and gave our institutions until October 14
to settle it ourselves. So the Fed and Treasury staffs began to negotiate.
This wasn't quite the OK Corral, but there was plenty of friction. The
Treasury and the comptroller's staff felt that all the regulatory authority
should belong to them, and the Fed staff felt the same. Working day and
night they were able to solve a number of issues, but by October 14 they'd
fought to a standstill on others—they had a whole list of irreconcilable
differences. I suspected tempers were running high.
As it happened, October 14 was the day slated for Larry and me to have
our weekly breakfast. We looked at each other and said, "We have to settle
this thing." That afternoon I went over to his office and we shut the door.
He and I are a lot alike: we both like to argue from basic principles and
from evidence. I'm sorry we didn't have a tape recorder running, because
this was a textbook case of policymaking by rational compromise. We sat
and argued point by point. Periodically I'd say, "Your argument sounds more
credible than mine," and the Treasury Department would carry that point.
On other issues, Larry would accept the Fed's argument. After an hour or
two, we'd divided the pie. Treasury and the Fed came together on a single
bill, and up it went that day to Capitol Hill, where it passed. Historians
view the Financial Services Modernization Act as a milestone of business
legislation, and I'll always remember it as an unsung moment of policymaking
for which there ought to be a little song.
The boom rose to a crescendo late in the year, with the NASDAQ
stock-market index at the end of December having nearly doubled in
199
THE AGE OF TURBULENCE
twelve months (the Dow rose 20 percent). Most people who'd invested in
stocks were feeling flush, and with good reason.
This presented the Fed with a fascinating puzzle:
How do you draw the line between a healthy exciting economic boom
and a wanton, speculative stock-market bubble driven by the less savory
aspects of human nature? As I pointed out drily to the House Banking
Committee, the question is all the more complicated because the two can
coexist: "The interpretation that we are currently enjoying productivity
acceleration does not ensure that equity prices are not overextended." An
example that intrigued me was the epic, multibillion-dollar competition
involving Qwest, Global Crossing, MCI, Level 3, and other telecom companies.
Like the railroad entrepreneurs of the nineteenth century, they were
racing to expand the Internet by laying thousands of miles of fiber-optic
cable. (The link to the railroads is not merely metaphorical—Qwest, for
one, actually built fiber-optic networks using old railroad rights-of-way.)
There was nothing wrong with this—demand for bandwidth was increasing
exponentially—except that each competitor was laying enough cable
to accommodate 100 percent of the projected overall demand. So while
something of great value was being built, it seemed clear that most of the
competitors would lose, the value of their stock would plunge, and billions
of dollars of their shareholders' capital would evaporate.
I'd given a lot of thought to whether we were experiencing a stockmarket
bubble, and if we were, what to do about it. If the market were to
fall 30 percent or 40 percent in a short time, I reasoned, I'd be willing to
stipulate that, yes, there had been a bubble. But this implied that if I wanted
to identify a bubble, I had to confidently predict that the market was going
to drop by 30 percent or 40 percent in a short time. That was a tough position
to take.
Even if the Fed were to decide there was a stock bubble and we wanted
to let the air out of it, would we be able to? I wondered. We had tried and
failed. In early 1994, the FOMC began a 3-percentage-point tightening
that lasted a year. We did it to address a concern that inflationary pressures
were building. But I could not fail to notice that as we tightened, the nascent
stock-market advance that had carried through most of 1993 went
flat. Then, when our tightening episode came to an end in February 1995,
200
M I LLE N N I UM FEVER
stock prices resumed their rise. We tightened again in 1997 only to see
stock prices again resume their rise after the rate move. We seemed in effect
to be ratcheting up the long-term price trend. If Fed tightening could
not knock stock prices down by weakening the economy and profits, owning
stocks became a seemingly ever less risky activity. Our modest forays
therefore had only set the stage for further increases in stock prices.
A giant rate hike would be a different story. I had no doubt that by
abruptly raising interest rates by, say, 10 percentage points, we could explode
any bubble overnight. But we would do so by devastating the economy,
wiping out the very growth we sought to protect. We'd be killing the
patient to cure the disease. I was reasonably certain that seeking to defuse
a mounting bubble with incremental tightening, as many had recommended,
would be counterproductive. Unless the tightening broke the
back of the economic boom and with it profits, an incremental tightening
would, in my experience, reinforce the perceived power of the boom. Modest
tightening was more likely to raise stock prices than to lower them.
After thinking a great deal about this, I decided that the best the Fed
could do would be to stay with our central goal of stabilizing product and
services prices. By doing that job well, we would gain the power and flexibility
needed to limit economic damage if there was a crash. That became
the consensus within the FOMC. In the event of a major market decline,
we agreed, our policy would be to move aggressively, lowering rates and
flooding the system with liquidity to mitigate the economic fallout. But
the idea of addressing the stock-market boom directly and preemptively
seemed out of our reach.
A few eyebrows were raised when I presented this back-to-basics philosophy
to Congress in 1999. I said I was still worried that stock prices
might be too high, but that the Fed would not second-guess "hundreds of
thousands of informed investors." Instead, the Fed would position itself to
protect the economy in the event of a crash. "While bubbles that burst are
scarcely benign, the consequences need not be catastrophic for the economy,"
I told the legislators.
Reflecting on this, the New York Times editorialized: "That sounds
markedly different from the old Greenspan, who 30 months ago warned
investors against 'irrational exuberance/ Despite the article's tone—you
201
THE AGE OF TURBULENCE
could almost hear the harrumph—the editor's impression was correct. I'd
come to realize we'd never be able to identify irrational exuberance with
certainty, much less act on it, until after the fact. The politicians to whom
I explained this did not mind; on the contrary, they were relieved that the
Fed seemed disinclined to try to end the party.
Ironically very soon afterward, we ended up tightening interest rates
all the same. Between mid-1999 and mid-2000, we raised the fed funds
rate in steps from 4.75 percent to 6.5 percent. We did so first to take back
the liquidity we'd added to the system to safeguard it during the interna
tional financial crisis. Then we took back a little more to build "a bit of in
surance," as Bill McDonough put it, against the tightness of the U.S. labor
market and the possible overheating of the economy. In other words, we
were positioning ourselves to try for another soft landing when the busi
ness cycle ultimately turned. But stock prices were largely undeterred—
they didn't peak until March 2000, and even then the bulk of the market
moved sideways for several months more.
T
T
hose challenges lay in the future as the world paused to ring in the
New Year on December 31, 1999. The hottest ticket in Washington
was the dinner at 1600 Pennsylvania Avenue, and Andrea and I were
invited—along with Muhammad Ali, Sophia Loren, Robert De Niro, Itzhak
Perlman, Maya Lin, Jack Nicholson, Arthur Schlesinger Jr., Bono, Sid Cae
sar, Bill Russell, and scores more. To celebrate the new millennium, the
Clintons were planning a huge extravaganza: a dusk-to-dawn affair starting
with a black-tie dinner for 360 at the White House, then a nationally tele
vised entertainment spectacle at the Lincoln Memorial produced by my
friends George Stevens Jr. and Quincy Jones. "American Creators" was the
theme. Then, after midnight and fireworks, it would be back to the White
House for breakfast and dancing till dawn.
I already had an inkling about what the new millennium held in store
for me: I'd received word from John Podesta, the White House chief of
staff, that President Clinton wanted to reappoint me for a fourth term. I'd
said yes. To be involved in the analysis of the world's most vibrant economy,
then be able to apply that analysis to decisions and have feedback from the
202
M I LLE N N I UM FEVER
real world—I couldn't think of anything I'd rather do than serve as Fed
chairman. I was seventy-three, true, but I saw no diminution of my creativity,
or of my ability to handle mathematical relationships, or of my appetite
for work—changes that would have made me hang up my spurs. In his
book Maestro, about me, Bob Woodward wrote that being reappointed put
me in "a state of sober rapture"; I have to admit, I was having fun.
All this added a happy glow to the holiday season, though the announcement
of my reappointment hadn't yet been made, and Andrea and
I had to keep it to ourselves. She'd bought a dress for the White House
