occasion—a cut-velvet burgundy and black Badgley Mischka—and looked
ravishing, even though she'd been working at her usual intense pace and
had the flu.
The Millennium Dinner filled both the East Room and the State Dining
Room, which, as a reporter gushed the next day, "were transformed into
a fantasy of white and silver, with white orchids and roses set atop silver
velvet tablecloths." I don't have much of an eye for such things. But as we
nibbled beluga caviar and sipped champagne, what did strike me was that
both host and hostess seemed genuinely pleased—he rounding out his second
term as president, she preparing to launch her political career with a
run for the U.S. Senate. The president toasted the guests: "I cannot help but
think how different America is, how different history is, and how much
better, because those of you in this room and those you represent were able
to imagine, to invent, to aspire." After seven years in the White House—after
the trials of Bosnia, the sleaze of Monicagate, and a historic economic
and financial boom—this was the Clintons' Camelot moment.
The dinner broke up a little after nine, and the crowd moved to the
buses that were to take us to the Lincoln Memorial. But Andrea and I
peeled off We had another millennium gathering to attend—at the Fed,
where a sizable team was poised to work through the night to monitor the
transition of the nation's financial systems.
The Fed had devoted years of effort to ensure that the turn of the millennium
would not be a disaster. The threat was from obsolete software—
the Y2K bug, it was called—embedded in computers all over the world. In
order to save precious computer storage capacity, programmers in decades
past had routinely used only two digits instead of four to represent the year,
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so for example "1974" would show up simply as "74." As I wrote programs
using punchcards in the 1970s (I'd used this technique myself, writing programs
on punchcards at Townsend-Greenspan. It had never entered my
mind that such programs, extensively patched, might still be in use at the
end of the century and I never bothered to document the work.) There was
understandably widespread concern that the shift from 1999 to 2000 might
cause such software to go haywire. This potential glitch was often devilishly
hard to detect and costly to fix. But in Y2K doomsday scenarios, the consequences
of failing to do so were dire: vital civilian and military networks
would crash, causing electricity to go out, phones to fail, credit cards to
stop working, airplanes to collide, and worse. To prevent chaos from breaking
out in the financial system, Fed governor Mike Kelley had spearheaded
a massive two-and-a-half-year drive to modernize the computers of America's
banks and of the Fed itself. The Fed had worked hard to mobilize other
central banks around the world to do the same.
Tonight we were to learn whether all those precautions had paid off.
Mike and his team had sacrificed their holiday to man a command post on
the terrace level of the Fed's William McChesney Martin Building, where
they'd fitted out a big room near the cafeteria with phones and screens and
televisions and workspaces for about a hundred people. The kitchen was
open; there was no champagne but plenty of nonalcoholic sparkling cider.
When Andrea and I stopped in, the team had already been there all day,
watching celebration after celebration on TV as the millennium made its way
around the globe. First the New Year had come to Australia, then Japan, then
the rest of Asia, then Europe. In each of those places, the TV coverage would
show the fireworks, of course, but what Mike and his team were really watching
was the city lights in the background to see if they were still on.
I felt out of place walking into this scene in black tie; most everybody
else had on a red T-shirt bearing a patch emblazoned with an eagle on a red,
white, and blue shield and the words "Federal Reserve Board" and "Y2K."
Mike, who had been keeping me up-to-date, said things were still going remarkably
well. Britain had just entered the twenty-first century apparently
without problems. We were now in the hiatus as midnight crossed the Atlantic.
The United States would be the last major economy to go, which
added to the suspense, because after all our poking and prodding of other
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nations, it would have been an embarrassment to have our systems fail. But
we were extremely well prepared: the U.S. financial industry had spent
many billions of dollars replacing and updating old systems and programs;
crisis-management teams stood ready in every Federal Reserve district and
in every major bank. The FOMC had released billions of dollars of liquidity
into the financial system, using options and other innovative techniques.
And in the event America's credit card system or ATM networks broke
down, the Fed had even positioned stockpiles of extra cash at ninety locations
around the United States. Having had a hand in creating the problem,
there was no way I could have shown up at the office on January 3 without
having visited the troops in the trenches on the eve of potential
catastrophe.*
From there, Andrea and I headed home. It was only 10:30, but we felt
strangely as though we'd already seen the new millennium come and go. By
the time midnight finally reached Washington—and began to cross the
United States without incident—we were tucked snugly in bed.
*We didn't know it then, but the huge investments directed at clarifying and rationalizing all
the undocumented pre-Y2K programs greatly enhanced the flexibility and resilience of America's
business and government infrastructure. There were no more undocumented "black boxes"
to try to puzzle out when something went wrong. I suspect a good part of the surge in productivity
in the years immediately following was owed to those precautionary Y2K investments.
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TEN
DOWNTURN
M
M
y first meeting with President-elect Bush took place on December
18, 2000, less than a week after the Supreme Court decision
that enabled him to claim his election victory. We met
at the Madison, the hotel about five blocks from the White House, where
he and his team had set up shop. This was his first trip to Washington as
president-elect; we'd met a few times over the years but had spoken at
length only once before, on the dais at a banquet that spring.
The breakfast at the Madison included Vice President-elect Cheney;
Bush's chief of staff, Andy Card; and a couple of aides. The situation had a
familiar feel: I'd briefed five previous incoming presidents on the state of
the economy, including, of course, the president-elect's father.
In this instance, I was obliged to report that the short-term outlook was
not good. For the first time in years, we seemed to be faced with the real
possibility of recession.
The deflation of the tech-stock bubble had been the great financial
drama of the preceding months. The NASDAQ lost a stunning 50 percent
of its value between March and year-end. The broader markets declined far
DOWNTU RN
less—the S&P 500 was down by 14 percent, and the Dow by 3 percent. But
while the total losses were small in comparison with the paper wealth that
the bull market had created, these were significant declines, and the Wall
Street outlook remained gloomy, putting a damper on public confidence.
Of greater concern was the overall state of the economy. For much of
the year, we'd appeared to be entering a mild cyclical slowdown; this was
to be expected as businesses and consumers adjusted to the effects of so
many boom years, so much technological change, and the deflation of the
bubble in stocks. Indeed, to foster this adjustment process, the Fed had
tightened interest rates in a series of steps from July 1999 to June 2000. We
were hoping we might achieve another soft landing.
But in the past couple of weeks, I said, the numbers had slipped badly.
There had been production slowdowns among automakers and other manufacturers,
lowered estimates of corporate profits, swelling inventories in
many industries, a marked rise in initial unemployment claims, and a weakening
of consumer confidence. Energy was putting a drag on the economy
too: oil had spiked up to more than $30 a barrel earlier in the year, and natural
gas prices were up. Then there was the anecdotal evidence. Wal-Mart
had told the Fed that it was cutting back its expectations for holiday sales,
and FedEx reported to us that shipments were below predictions. You can't
judge the health of the economy by the length of the lines to visit Santa at
Macy's, but it was mid-December and anyone who had gone Christmas
shopping knew that the stores were eerily quiet.
Despite all this, I told the president-elect, the economy's long-term
potential remained strong. Inflation was low and stable, long-term interest
rates were trending down, and productivity was still on the rise. And of
course the federal government was running a surplus for the fourth straight
year. The latest forecast for the 2001 fiscal year, which had just begun in
October, had the surplus at nearly $270 billion.
As breakfast ended, Bush asked me aside for a private word. "I want you
to know," he said, "that I have full confidence in the Federal Reserve and we
will not be second-guessing your decisions." I thanked him. We chatted a bit
more. Then it was time for him to leave for meetings on Capitol Hill.
There were cameras and reporters waiting as we walked out of the hotel.
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I assumed that the president-elect would just go up to the microphones,
but instead he put his arm around my shoulders and brought me along. An
Associated Press photo from that morning shows me smiling broadly, as if
I'd just gotten good news. Indeed I had. He'd zeroed in on the issue of most
pressing importance to the Fed: our autonomy. I wasn't yet sure what to
think about George W. Bush; but I felt inclined to believe him when he said
we weren't going to have fights about monetary policy.
I
I
felt relieved that the election crisis had been resolved. In unprecedented
circumstances, after thirty-six days of hanging chads, recounts, lawsuits,
and bitter allegations of vote tampering and fraud that in other countries
would have caused rioting in the streets, we'd at least achieved a civil conclusion.
Though I'm a lifelong libertarian Republican, I have close friends
on both sides of the political aisle, and I thought I understood the Democrats'
dismay at seeing George W. Bush take the White House. But it is
worth focusing on how rare it is in world politics for a bitter political brawl
to end up with the opposing candidates wishing each other well. Al Gore's
concession speech ending the presidential race was the most gracious I'd
ever heard. "Almost a century and a half ago," he said, "Senator Stephen
Douglas told Abraham Lincoln, who had just defeated him for the Presidency:
'Partisan feeling must yield to patriotism. I'm with you, Mr. President,
and God bless you.' Well, in that same spirit, I say to President-elect
Bush that what remains of partisan rancor must now be put aside, and may
God bless his stewardship of this country."
While I did not know where George W. Bush would lead us, I had confidence
in the team that was taking shape. People wisecracked that America
was witnessing the second coming of the Ford administration, but what was
just a witticism to them meant a great deal to me. I'd started my public service
in the Ford White House, and looked back to those years as something
special. Gerald Ford was a very decent man, thrust into a presidency that
he had never sought and that he probably would never have been able to
win on his own. As he showed in his race against Jimmy Carter in 1976, he
was not very good at the bare-knuckle politicking of a presidential campaign;
his dream had been to serve as Speaker of the House of Representa
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tives. Yet in the turmoil of a president resigning in disgrace, he'd proclaimed,
"Our long national nightmare is over," and gathered around him as talented
a group of people to run government as I have ever witnessed.
And now, in December 2000, George W. Bush was staffing the core of
his government with Ford administration stalwarts, a lot older and far more
experienced. The new secretary of defense, Donald Rumsfeld, had been
Ford's first White House chief of staff. Under Ford, Rumsfeld had proved
exceptionally effective. Called back by the president from his assignment
as ambassador to NATO, he had quickly organized the Ford White House
and ruled over it with great skill until Ford appointed him to his first turn
as secretary of defense in 1975. After he returned to the private sector,
Rumsfeld took the reins of a faltering G. D. Searle, a worldwide pharmaceutical
company. I was brought on as the company's outside economic
consultant and was fascinated to see this former U.S. Navy flight instructor,
congressman, and government official fit so easily into the business world.
Another stalwart from the Ford administration was the new secretary
of the treasury, my friend Paul O'Neill. Paul had impressed everybody as
Gerald Ford's deputy director of the Office of Management and Budget.
His had been a midlevel job, yet we'd pulled Paul in for all the important
meetings because he was one of the few with full command of the details
of the budget. Leaving the government to join the business world, he'd
risen to become CEO of Alcoa—I was on the board of directors that hired
him. In twelve years in that job, he'd been a great success. But he was ready
