Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (11 page)

What Did Alan Greenspan Learn from the 1970s?

In 1980, the
New York Times
spoke to him: “Alan Greenspan, the economist, has asserted that the translation of homeownership equity into cash available for consumer spending is perhaps the most significant reason why the economy in 1975–1978 was consistently stronger than expected.” In other words, the house-trading public prevented recession by cashing out its equity and spending it in the consumer economy.

Greenspan would have observed Arthur Burns’s clashes with Congress. Monetary policy was ostensibly the Federal Reserve’s mandate, but it was tethered by a short leash. Wright Patman, chairman of the House Banking and Currency Committee, was threatening to nationalize the Fed if it raised interest rates.
²²
This was old hat to Patman, who had threatened to abolish the Fed when William McChesney Martin sat in the hot seat.
²³

Henry Reuss succeeded Patman as chairman of the House Banking Committee. He blamed any party other than Congress for the nation’s troubles. Reuss lectured a Fed board member in 1978: “[W]e cannot stand for ruining the domestic economy just because somebody thinks it will make a few foreign bankers happy.”
²⁴
This was theater. Some bankers are always getting rich (that’s the nature of leverage), but the
Fed was not running a $59 billion deficit. Congress is constitutionally responsible for the budget.

²²
Martin Mayer,
The Fate of the Dollar
, (New York Times Books, 1980), p. 206.
²³
Robert P. Bremner,
Chairman of the Fed: William McChesney Martin Jr. and the Creation of the Modern American Financial System
(New Haven, Comm.: Yale University Press, 2004), pp. 189–191.
²⁴
Mayer,
The Fate of the Dollar
, p. 280.

In August 1979, Paul Volcker was appointed Federal Reserve chairman.
²⁵
An economist with experience inside and outside of the government, including four years as president of the Federal Reserve Bank of New York, Volcker was well versed in how markets operate. (The president of the New York Federal Reserve Bank is closer to the financial markets than the Fed chairman.) However, the markets were underwhelmed. An ounce of gold cost $282 on August 6, the day Volcker took over, the final bid of the year was $512, and gold would peak at $850 (for about two seconds) on January 21, 1980. In fact, Volcker had already turned monetary policy upside down during gold’s grand ascent. On October 6, 1979, the new chairman announced that the Federal Reserve would no longer set a specific interest-rate target. He would let the market decide the correct rate for borrowing and lending. Volcker would control the supply of money. His intention was to kill inflation by reducing the money supplied by the Fed to the banking system. This, in turn, would choke the flow of credit from banks to the economy. This was what the world’s economy needed, but it was not the best news for a president who was about to run for reelection. Receiving advance notice of Volcker’s imminent decision, CEA Chairman Schultze telephoned Volcker from the White House. He hoped to put this genie back in the bottle, but Volcker would not budge.

Greenspan’s 1980 Renomination Campaign

The Carter years found Greenspan playing both sides of the court. Leaving no stone unturned, Greenspan did his best to polish his Republican credentials while burrowing himself into the good graces of the Carter administration. Hobart Rowan reported Greenspan’s phlegmatic economic critique shortly after his departure from Washington: “Four months ago, conservative Alan Greenspan was President Ford’s No. 1 economic adviser and confidante. Now, at the Metropolitan Club, just a block from his old office, private citizen Greenspan is taking a long, hard look at the Carter Administration. He likes what he sees.… He believes that Carter is basically less liberal on economic issues than many of his own advisers.”
²⁶
Greenspan was “tolerably pleased with President Carter’s economic policies,” according to the
New York Times
.
²⁷

²⁵
Arthur Burns had resigned on March 31, 1978. President Carter chose G. William Miller to succeed Burns. The choice was unenlightened. Arthur Burns had his faults, but in a time of chaos, at least he smoked the familiar pipe. Upon announcement of the Miller Fed, the economist John Kenneth Galbraith expressed a common reaction: “I don’t know the new guy, a surprise choice, but it’s not a terribly important job.” Alan Greenspan seconded Galbraith: “Critics of the Fed impute a degree of efficacy to the institution which really isn’t there.” Henry Scott-Stokes, “Reactions Vary for Economists on Fed Change,”
New York Times
, December 30, 1977.

After President Carter delivered an uninspiring State of the Union address in 1979, the Republican response was one of derision. Greenspan, not noted for breaking with the pack, took this occasion to wax ecstatic over Carter’s performance. Carter’s proposals were “an extraordinary set of documents, as Republican as I can imagine; they could just as easily have been delivered by a Republican.”
²⁸

Later in the year, Greenspan straddled the political fence. (The CarterReagan presidential race in 1980 was tight until the final weeks. In late 1979, the possibility of Carter’s constructing a bipartisan cabinet had an allure—if not to Carter, certainly to Greenspan.) He “affirm[ed] what some Carter aides suspect” in the
New York Times
: “that if Mr. Ford had been reelected in 1976 his economic policy would probably have been much like Mr. Carter’s.… [T]here would have been little difference and ‘the rhetoric is the same.’”
²⁹

All candidates were potential employers. A year before the election, Greenspan had met every Republican candidate with the exception of John Connolly, as well as Democratic candidates Jerry Brown and Ted Kennedy. Greenspan organized a breakfast for candidate Kennedy with “key Wall Street figures.”
³⁰
Soon after, he told the
New York Times
, “if only a few words were changed [in a speech by Kennedy], it could have been delivered by Gerald Ford four years ago.”
³¹

²⁶
Hobart Rowen, “Carter Backed by Greenspan,”
Washington Post
, May 29, 1977.
²⁷
Silk, “Greenspan, White House Days Behind.”
²⁸
Warren Weaver Jr., “Carter’s Address Draws a Barrage of Criticism from G.O.P. Leaders,”
New York Times
, January 25, 1979.
²⁹
Edward Cowan, “Carter’s Policy: Storm Clouds Grow,”
New York Times
, June 7, 1979.
³⁰
Steven Rattner, “The Candidates’ Economists,”
New York Times
, November 18, 1979, F1.

Supply-Side Economics

Economic issues were central to the 1980 presidential election. With different schools of thought vying for attention, Greenspan probably choose the wisest course. He remained aloof.

Volcker’s decision to control the money supply drew attention to Milton Friedman’s monetarism. Putting monetarism into practice, according to Friedman’s own recipe, would entail a constitutional amendment that would increase money growth at a specified, annual rate.

There was also a new school of thought: supply-side economics. Some argued that it was very old, but it did break ranks with postwar American economics by competing with, rather than rising through, the establishment.

More important, though, was that supply-side economics swept the next president off his feet. Martin Anderson, the Randian who had befriended Greenspan since the Nixon campaign, now an economist at the Hoover Institution, was Reagan’s issues advisor for both his 1976 and 1980 presidential campaigns. Anderson’s role included meeting and screening outside economists on behalf of the candidate.
³²
Theory aside, a presidential candidate intent on halting the dismal results of the past three presidencies would be on the lookout for a new voice.

Supply-side economics emphasized the need to cut personal income taxes to stimulate the economy. Ronald Reagan was opposed to state interference in people’s lives. Whether it all added up (literally—would the rising tax revenues cut the mountainous Carter budget deficits?) was never his prime concern.

Alan Greenspan was an outsider to supply-side economics. An expert juggler, Greenspan became an economic advisor to Reagan after Reagan was nominated as the Republican candidate. Martin Anderson tapped him for the role. Greenspan was not a sycophant. Traveling with the candidate, Greenspan told reporters that it would be a “risky proposition” to defend Reagan’s proposed tax cuts on the assumption that the “supply-side” would make up for lost revenues.
³³

³¹
Edwin McDowell, “He Even Counsels Kennedy,”
New York Times
, December, 9, 1979.
³²
Rattner, “The Candidates’ Economists.”

Greenspan Runs for Treasury Secretary

Greenspan may not have cared about economic theory. To fulfill his ambitions, he pursued a more direct strategic course: he nearly checkmated Reagan into naming him secretary of the treasury.

At 11:13 p.m. on July 16, 1980, Ronald Reagan received the Montana delegation’s unanimous vote at the Republican National Convention. This ensured his nomination. He would, within the hour, stand on the stage of Joe Louis Arena and announce to the conventioneers his choice of vice-presidential running mate. The selection was still in limbo.

When Reagan and his advisors gathered in his sixty-ninth-floor suite at the Detroit Plaza Hotel on the morning of July 15, the unspoken assumption was that George H. W. Bush, Reagan’s closest challenger during the campaign, would be his choice. Then Reagan queried his entourage, “What about Ford?”
³⁴

Several versions of the negotiations with Ford have been published. In the end, Bush was Reagan’s choice. By most accounts, Reagan was predisposed to Ford as a running mate. William Casey, on Reagan’s staff, asked Henry Kissinger to negotiate with Ford. Later that night, Ford and Kissinger met privately in a room in Ford’s seventieth-floor suite. By luck, Alan Greenspan had been among two dozen friends who accompanied Ford on a yacht that evening and then returned to the hotel suite.
³⁵
In less than 24 hours, Reagan would announce his choice for vice president.
³⁶
During those 24 hours, Greenspan would play his hand for all it was worth.

³³
Elizabeth Drew, A Reporter At Large, “1980: Reagan,”
New Yorker
, September 29, 1980, p. 123.
³⁴
Ed Magnuson, “Inside the Jerry Ford Drama,”
Time
, July 28, 1980.
³⁵
Ibid.
³⁶
Richard V. Allen, “George Herbert Walker Bush: The Accidental Vice President,”
New York Times Magazine
, July 30, 2000.

Reagan gave his advisors free rein to negotiate with Ford. When and how Kissinger expanded the negotiating team to include Ford’s CEA chairman is not recorded, but we do know that Greenspan insinuated himself into the role of kingpin. According to
Time
magazine, “Greenspan did most of the talking for the Ford group.”
³⁷
Richard V. Allen, who was “the only person to remain in Reagan’s presence throughout the adventure,” remembers Reagan’s summation of the first round of personal negotiations with Ford. Ford’s demands included Kissinger as secretary of state and Alan Greenspan as secretary of the treasury. Reagan was unpersuaded: “I thought
that
was more than a little sacrifice.”
³⁸
(Italics in original.)

At 8:55 p.m., Reagan called the undecided Ford. In Allen’s recollection, Reagan reported that “Ford had told him Kissinger ‘now takes himself out’ of the running for secretary of state. It was not clear that Ford and Greenspan had taken themselves out of anything.”
³⁹
At 11:30 p.m., Ford told the candidate he would not join the party ticket.
⁴⁰
Shortly after, Bush agreed to be Reagan’s running mate.

Greenspans’ pursuit of the top spot with such determination was logical, aside from whether the ticket was in the Republican Party’s best interest. The presidency could pass to the Democrats in 1984. So, Greenspan abandoned his reticent demeanor and promoted himself ruthlessly. In the pinch, Greenspan pursued his personal interest more aggressively than Henry Kissinger.

Greenspan had no reason to despair, if despair he did. Most presidential cabinets shuffle jobs every couple of years. Reagan might win a second term, during which time the treasury secretary post or the chairmanship of the Fed might be available (presumedly, the positions Greenspan sought). Greenspan’s job was to retain a high profile in the media, maintain his reputation as a much-respected consulting economist, and wedge his persona into the new administration.

³⁷
Magnuson, “Inside the Jerry Ford Drama.”
³⁸
Allen, “George Herbert Walker Bush,” pp. 36, 38.
³⁹
Ibid., p. 39.
⁴⁰
Magnuson, “Inside the Jerry Ford Drama.”

1980–1987

With some urgency, Mr. Greenspan says the recent trend toward short-lived investment means that a higher percentage of the nation’s plant and equipment wears out each year. “What happens if you have inadequate capital investment, is you wind up with lower standards of living than you otherwise would.”
¹

—
New York Times,
1984

Many seeds of the 2007 financial collapse either were planted or bloomed in the 1980s. The 1970s had been a period of financial experimentation. The leveraged buyout and the junk bond were tested. The Carter administration initiated deregulation in several industries.

Standards fell in the eighties. Investment banks converted from partnerships to publicly traded companies; the chase for higher profits was on.
²

¹
Steven Greenhouse, “Pitfalls in the Capital Spending Boom,”
New York Times
, June 3, 1984.
²
Donaldson, Lufkin & Jenrette was the first to go public in 1970.