part 2:
Unlikely Alliance Helped Build Economic Boom
Sunday , November 12, 2000
Continued from Page 1
Making it work had a lot to do with timing, which in turn had to do with economic forecasting, an imprecise science that did not approach the mathematical certainty Greenspan loved. There was no alternative to forecasting. It wasn't guessing or fortune-telling, but the forecasters, including himself, were going to be wrong some of the time.
On February 4, 1994, the Fed's key interest-rate-setting committee voted to raise rates by a quarter percent. It was the first rate increase in five years, and for the first time in history the Fed publicly announced the increase. That day, the Dow Jones industrial average dropped nearly 100 points, to 3871, the largest single-day loss in two years. Over the next four months, the Fed raised rates another full 1 percent.
At the White House, the president was increasingly restless. Was this necessary? Was Greenspan going too far? Did he know what he was doing?
Rubin and Bentsen insisted everything was okay.
Clinton grew angrier and angrier. When he blew up about rising interest rates, as he frequently did, the members of his economic team let him blow off steam and then urged him to continue to confine his distress to the privacy of the Oval Office. Any reasonable Fed was going to have to pull the foot off the accelerator, they told him. The low short-term interest rate, the so-called fed funds rate, had been pumping up the economy, so interest rates were going to have to go up to cool things off. All the economic models built on years of history showed there was a limit to how high growth could go without triggering inflation. To complicate matters, the economists believed — and recent American economic history showed — that there was a level of so-called full employment. If unemployment dipped much below 6 percent, the pressure for wage increases would trigger inflation.
The president was skeptical and even outraged. So the problems were too much economic growth and too many people working! It was ridiculous, he seethed.
Once, when Greenspan had an appointment to see the president, Clinton and his economic team were assembled in the Oval Office. As they waited for Greenspan to arrive, the president had launched into a comedic imitation of the chairman. Speaking in a gloomy, deep voice, he mimicked Greenspan drumming on inflation. Inflation! Inflation was all-important. Inflation was the center of the universe. Inflation! Inflation! It was a pretty good caricature, and his advisers were in stitches. One checked nervously to make sure the soundproof Oval Office doors were shut tight so the chairman wouldn't hear.
Now there were no jokes coming out of the Oval Office about Greenspan.
Worse, the bond market had gone to hell. The long-term rates were shooting up, nullifying the gains from the 1993 deficit-reduction plan. Where was the payoff? the president wanted to know.
The Fed continued to raise rates into February 1995, taking the Fed's key interest rate from 3 percent up to 6 percent in less than a year. By the summer of 1995, the economy showed clear signs of slowing. Growth was hovering at an anemic 2 percent.
On Sunday, June 11, White House Chief of Staff Leon Panetta was on "Meet the Press" and was asked if the Fed should reduce interest rates. "Well," Panetta said, "it would be nice to get whatever kind of cooperation we can get to get this economy going."
Asked if he was jawboning the Fed to get rates lower, Panetta replied with his overeager grin, "Is that what it's called?"
Bob Rubin, who had moved from the White House to become treasury secretary in early 1995, was furious. The administration had been so disciplined, avoiding any public or even private effort to pressure Greenspan. The soft landing would occur because the administration and Greenspan didn't let the economy get out of control. It wasn't science, Rubin knew, but he believed Greenspan was making a series of highly informed judgments — the best they had. White House pressure to cut rates could actually prevent a rate cut.
Rubin immediately went public with a rebuke for Panetta and an assurance, almost an apology, to Greenspan. Of Panetta, Rubin said in a public statement, "I can assure you that his comments were not intended to signal any shift. Our policy with regard to the Federal Reserve has been consistent from the beginning of the Administration — and that is not to comment."
President Clinton seemed to agree with Rubin. It appeared that Panetta was briefly put in the doghouse — an unusual place for the White House chief of staff, who was supposed to be managing the executive branch on behalf of the president. Rubin and others knew that a side of Clinton agreed with Panetta, but in terms of politics and public perception, Clinton's relationship with Greenspan and the Fed were more important than his relationship with his chief of staff.
Greenspan took Panetta's comments as a cheap and ineffective hit. Rubin had it right, not because of their growing friendship but because Rubin saw it was in the president's self-interest to avoid political meddling with the Fed. What was interesting, Greenspan realized, was that his relations with the administration were so good that the White House was more concerned about the perception of Panetta's comments than Greenspan was himself.
Now Greenspan had a chance to practice some of his fine-tuning. Having doubled short-term interest rates from 3 to 6 percent during 1994 and early 1995, he realized that he might have slightly overshot. To bring the economy in for the soft landing now required a slight easing. On Thursday, July 6, 1995, Greenspan proposed a rate cut of a quarter percent. It was the first decrease in nearly three years and the first rate cut during the Clinton administration.
The chairman had been telling himself that he should not expect reappointment to another four-year term. After all, he had been appointed to the job twice by Republican presidents — Reagan in 1987 and Bush in 1991. A Democratic president would want to choose his own chairman. If Greenspan were president, he would want to choose his own person. It wasn't plausible that Greenspan was going to get another chance.
By November 1995, no one at the White House had brought up his reappointment in their frequent conversations with him. And, of course, Greenspan had not brought it up. His term was due to expire in five months.
In the meantime, as he had from the start, the chairman worked the Washington network — parties, private lunches and dinners, tennis matches, a steady stream of private, off-the-record gossip, chat and court intrigue. When the subject of his future came up, Greenspan would adopt a stance of studied nonchalance. He would have had eight good years. If Clinton reappointed him, he would accept. If not, that, too, would be okay. He worked at showing neither anxiety nor pain. He wanted that to be clear. He shrugged. He smiled. But the message was clear: He was available.
By the end of 1995, Greenspan had the economy right where he wanted it. Inflation was low, at less than 3 percent for the year.
Unemployment was also low, steady in the 5 1/2-percent range, with the addition of 1.8 million jobs for the year. After 3 1/2-percent growth the previous year, the annual growth was down in the range of 1 1/2 percent. There had been no recession. Greenspan had delivered. The economic analysis he had given Clinton in December 1992 was turning out to be correct. The payoffs he had anticipated were evident. By keeping inflation low and cutting the federal deficit, the intermediate- and long-term interest rates — the key rates for businesses, home buyers and consumers — were 2 to 21/2 percent below their levels at the beginning of 1995. Bond prices, which move the opposite direction as interest rates, were up substantially, and the stock market was up about 35 percent with the Dow at 5117 — its best year in two decades.
He was available.
Rubin never considered it a real question. Reappointing Greenspan was a no-brainer. Rubin and Greenspan both attended a weekend meeting of the Group of Seven major economic powers in Paris in January 1996, and the two had a chance to speak privately. Taking advantage of a quiet moment, they walked together toward a series of large plate glass windows at one end of the room, with a view of Paris before them. The two men had established a feeling of trust. For Greenspan, such friendship, closeness and agreement gave him a sense that they were working for the same firm. Greenspan had once remarked privately, and only half-jokingly, that he considered Rubin the best Republican treasury secretary ever, though he was a Democrat.
"When you get back," Rubin said, "the president's going to want to talk to you."
Greenspan could tell by the body language that it was all favorable.
"The president's quite pleased with what you've been doing," Rubin said.
The implausible had become plausible. Greenspan realized it was the soft landing that made his reappointment possible. He knew he had helped hand Clinton what the chairman called "a pro-incumbent type economy." Most important, there had been no recession.
Clinton understood the power of the economy in a presidential election. The 1990-91 recession — and the economic doldrums and pessimism of 1992 — had been the foundation of his first presidential campaign. The campaign's memorable slogan, "It's the Economy, Stupid," devised by political strategist James Carville, contained a pledge that Clinton would be engaged and in touch with the forces that affected people's daily lives. The last three presidents to lose-Ford, Carter and Bush-had failed in part because they had been perceived to have mismanaged the economy.
On February 22, 1996, Clinton announced that he was reappointing Greenspan to a third term. "He brings his years of experience as a prominent economist," Clinton said, "and, I might add, a leading Republican."
Clinton went on to win reelection, partly due to the sound economy. For the next two years, Greenspan resisted sustained pressure from within and outside the Fed to raise rates, increasing them only once, in March 1997, and only by a quarter percent.
On Tuesday, May 5, 1998, Greenspan went to the Oval Office to see the president. It was the fourth month of Whitewater independent counsel Kenneth Starr's investigation of Clinton's relationship with former White House intern Monica Lewinsky. There was a sense that investigators were closing in.
Greenspan had not visited the president formally for 16 months, and Clinton's economic team wanted Clinton to bask a little in the positive domestic economic news. In any case, an hour with Greenspan was always educational and worthwhile, and on this occasion it would be a momentary diversion from the president's mounting personal and legal troubles.
"This is the best economy I've ever seen in 50 years of studying it every day," Greenspan told Clinton. There had been a boom in productive capital. Money that businesses were spending was yielding an extraordinary return because of increased worker productivity. The computer and high technology investments were paying off. And those payoffs had to be real, because the higher profits and economic growth had continued for several years now.
Greenspan said that the stock market was very high by historical standards, but it could stay high. Despite his statements about "irrational exuberance" 18 months earlier, the chairman said, it was basically an illusion to think that the Fed could tinker with the stock market.
In June 1999 Greenspan passed word to Rubin that a rate increase would soon be necessary because the economy was overheating. Rubin had no real problem.
The president was not as confident. Did this have to happen? Clinton asked his economic team. I don't see any signs of inflation, he added, asking the same questions he had posed in 1994 when Greenspan was raising rates. Was this another preemptive stranglehold on the economy? he asked, echoing some liberal Democratic senators who had been his most vocal defenders during his impeachment trial, in which he had been acquitted.
The president's advisers defended Greenspan's decision. Mr. President, said National Economic Council Director Gene Sperling, he is just putting his foot on the brake a little. This is good. It will keep the expansion going longer. The risk of inflation with unemployment at 4.2 percent was too great.
Frankly, the president's advisers explained, Greenspan was on the softer side of the Fed's key interest rate committee, a little to the left even of the people that the president had appointed. Clinton's private objections were muted, not as intense or as deep as they had been in 1994.
"I bet he'll stay there until they carry him out," President Clinton joked to his economic advisers at the end of 1999, as they discussed a fourth term for Greenspan. Larry Summers, who had taken over as treasury secretary from Rubin that summer, recommended reappointing the Fed chairman. He and Sperling had already sounded Rubin out as a courtesy, to see if he wanted the Fed job. But Rubin had declined, saying, "Alan's perfect for this."
White House Chief of Staff John Podesta got permission from Clinton to call Greenspan and offer the reappointment on behalf of the president. Greenspan accepted.
At 73, the chairman found that his mind still functioned well. He figured he would know he was losing it when he started to have difficulty with mathematical relationships, and he was aware of no diminution of that mental capacity. He was fully engaged. His only problem was that occasionally he couldn't remember people's names.
The White House set early January 2000 for the announcement, wanting to make the timing a surprise before Congress returned from recess. That way, Clinton could give his annual State of the Union address later in January and fully embrace the good economy and Greenspan, leaving no doubt about the chairman's future role. In February, the American economy would officially have enjoyed the longest economic expansion in its history. The White House wanted the Clinton-Greenspan team to be part of the celebration.
Greenspan arrived at the executive mansion on January 4. Clinton, Summers, Sperling and Council of Economic Advisers Chairman Martin N. Baily gathered around the dining room table next to the Oval Office with Greenspan. Podesta sat in a chair off to the side.
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 legacy.
"You know," the president said, addressing Greenspan to his immediate left, "I have to congratulate you. You've done a great job in a period when there was no rule book to look to."
"Mr. President," Greenspan replied, "I couldn't have done it without what you did on deficit reduction. If you had not turned the fiscal situation around, we couldn't have had the kind of monetary policy we've had."
"After doing so well," Clinton said, "no one would blame you for wanting to go out now on top."
"Oh, no," Greenspan said, "this is the greatest job in the world. It's like eating peanuts. You keep doing it, keep doing it, and you never get tired."
Clinton folded his arms, tightened his body over his crossed legs and glanced over as if to say, I know what you mean. He seemed wistful.
The irony was palpable. Greenspan, at 73, had already served 12 years and would get to be chairman for another four years. Clinton, 53, had served seven years as president, and had only another year. The Constitution barred him from seeking a third term. The younger man would have to leave office and re-create himself, while the man 20 years older would go on.
Who would have thought, seven years before at their first meeting in Little Rock, that such economic conditions were even possible — steady growth, low inflation, unemployment hovering at an unheard-of 4 percent and the Dow above 11,000. More than 20 million new jobs had been created since Clinton took office. Some economists would have put the odds of that at 1 in a million. Greenspan, ever a stickler about probability, couldn't even calculate it.
Of all the important people in Clinton's life, nearly all — including himself — had let him down, or not lived up to their full promise. Hillary had failed to deliver on health care, although she had stood by him during the Lewinsky scandal. Vice President Gore, though loyal, had not yet emerged as a vibrant successor. Dick Morris, the chief political strategist for the successful 1996 reelection campaign, had been forced out in a scandal and then turned on Clinton and written an informative-but-tattletale book. George Stephanopoulos, Clinton's young and trusted adviser, had also written a book full of inside stories of anguished decision-making and private fury. Democratic leaders in the Senate and House had come and gone. Staff had come and gone. Rubin, the shinning light of the Cabinet, was gone. Clinton's vaunted campaign fundraisers had brought scandal and doubt on the presidency. Clinton himself had not lived up to his own grand governing vision.
Greenspan alone had stood and improved his ground.
In the Oval Office, Clinton announced Greenspan's reappointment to a fourth term. He would serve as Fed chairman until 2004. The two men showered each other with praise. Clinton said Greenspan's willingness to stay in the job should be "a cause of celebration in this country and around the world."
Greenspan, in turn, gave Clinton the highest endorsement a Republican Fed chairman could offer a Democratic president. "And I must say you have been a good friend to America's central bank. Thank you, sir."
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