Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (12 page)

71

Financial discipline decayed, and the excesses snowballed into the present. Instability grew as a result of government, corporate, and consumer borrowing. Bailouts of the largest commercial banks, the unfortunate abuse of junkbond financing (a welcome development turned into a destructive weapon), and stock-option cashout plans for those at the top are legacies of the decade.

The setting is important. Nothing mattered more than the decline of interest rates. The falling inflation rate was crucial, but there may be no more important reason for recovery than the pricing of the United States: it was selling at liquidation prices. Longterm government bond yields peaked at 15.78 percent in May 1981, the highest rate paid on bonds by the United States in the nation’s history. By 1986, longterm Treasuries yielded 7.37 percent.
³
Prime corporate bond yields fell from 15.49 percent in September 1981 to 10.18 percent in November 1982.
⁴
At 10 percent, companies initiated long-delayed financing needs.

In August 1982, the Dow Jones Industrial Average was at the same level as in 1964. In “real” terms—accounting for price inflation—the Dow had fallen 75 percent from its 1966 peak. On August 12, 1982, the Dow Jones Industrial Average closed at 776—a loss of 275 points, or 26 percent (before inflation), since Alan Greenspan had made his “unqualifiedly bullish” buy recommendation in January 1973. From that 1982 low, the Dow rose to 2,722 on August 25, 1987. Since buying America was a good deal, the dollar shot up against foreign currencies.

Alan Greenspan kept his face in the public’s mind with television appearances on
Wall Street Week with Louis Rukeyser
and
Tod ay
immediately after Reagan’s 1980 election. In addition to Greenspan’s speaking engagements, there were his contributions to Time’s Board of Economists, consulting relationships, and corporate board memberships. He had a bird’s-eye view of the radical changes in American finance from the board of J. P. Morgan.

³
Sidney Homer and Richard Sylla,
A History of Interest Rates
, 4th ed. (Hoboken, N.J.: Wiley 2005), pp. 386 (May 1981), 384 (1986).
⁴
Ibid.

Greenspan in the Eighties: From Expert Forecaster to “Notes on Fashion”

Greenspan was a regular in Washington, both appearing before congressional committees and serving Reagan’s White House. He was interviewed by the
New York Times
on March 24, 1981. This would have been read by those who wield influence: “Alan Greenspan, the New York–based economist, has emerged as a major influence on the [Reagan] Administration’s new economic policies. . . . [H]is expertise as a forecaster and consultant through his firm, TownsendGreenspan & Company, [has] enhanced his influence in Washington and his stature in the business and financial community.”
⁵
Whether the
Times
reporter interviewed TownsendGreenspan’s clients is not clear.

A 1983
Times
profile was accompanied by a three-quarter-page picture of Alan Greenspan leaning forward from the edge of his seat aside his office desk. He bears the determined look of a man with little time for picture taking. The story noted: “For high fees, his clients can buy into a wide array of computerized services, data banks and consultations with the senior economists—or even with Mr. Greenspan himself. His time is the firm’s scarcest resource and, as a consequence, a highpriced commodity. Client lunches with him can run $2,000, a speech for nonclients, $10,000.”
⁶

The profile followed with his curriculum vitae—board memberships, 200 clients—and the two characteristics common to past interviews: his wizardry with numbers and the enduring image of an ascetic monk huddled like a prophet in a cave: “Mr. Greenspan says he is most comfortable not on television or at fashionable dinner parties, but at work in his New York office. . . . where he is in easy reach of the TownsendGreenspan library and all its blue binders full of statistical data—‘Livestock’ to ‘Loan Activity’ . . . . to ‘Mobile Home Sales.’ Work is so central to Mr. Greenspan’s life, in fact, that little else, except perhaps baroque music, really seems to engage him.”

⁵
“Talking Business with Alan Greenspan,”
New York Times
, March 24, 1981.
⁶
Tamar Lewin, “The Quiet Allure of Alan Greenspan,”
New York Times
, June 5, 1983.

And, as always, his detachment from the corridors of power: “Those who know him say they think he would take the job at the Fed if asked, although several thought it would be hard for him to leave TownsendGreenspan.”
⁷

For one described as being so disengaged from the world, Greenspan had his fill of flirting with it. In the same newspaper that published the 1983 profile, Greenspan was a fixture on the society pages, in the fashion columns, and in television and radio listings. Some names will be known to readers, some have drifted into anonymity. That is the nature of social striving: the chosen are gods and goddesses, the discarded are broken on the wheel of fortune.

Greenspan joined “some 60 chums” of Malcolm Forbes on Forbes’s yacht to celebrate the publisher’s birthday. Others who sailed included Happy Rockefeller, Gloria Vanderbilt, Arthur Ochs Sulzberger (publisher of the
Times
), Dina Merrill, and New York City Mayor Ed Koch.
⁸
On another occasion, Greenspan joined Norman Mailer and United Nations delegates from the Netherlands, New Zealand, and Spain to ponder why Carl Bernstein was “wearing a white scarf with his black-tie ensemble at table?”
⁹
Greenspan attended Barbara and Allen Thomas’s annual dessert party: “Among the 65 guests [was]Alan Greenspan, the economist. A chocolate chip cookie freak, Mr. Greenspan was devouring the selection from David’s Cookie Kitchen.”
¹⁰

The simple introduction is a demonstration of his rise. Earlier in his career, the
Times
’s business page noted his firm, TownsendGreenspan, to anchor its source to an entity. Now the
Times
only mentioned “the economist.” In the chatty, worldly-wise style of “The Evening Hours” and “Notes on Fashion,”
Times
readers would have felt insulted by a full introduction to the regular partygoers.

Greenspan turned out at Happy Rockefeller’s gala in honor of Nancy and Henry Kissinger. “[T]he limousines were double-parked on Fifth Avenue, and they stretched around the corner to 62nd Street. . . . Theodore H.

⁷
Ibid.
⁸
Enid Nemy, “The Evening Hours
,
”
New York Times
, August 21, 1981.
⁹
John Duka, “Notes on Fashion,”
New York Times
, December 29, 1981.
¹⁰
Susan Heller Anderson, “The Evening Hours,”
New York Times
, December 31, 1981.

White, the author . . . summed up the event this way: ‘This is the top 10 percent of every A guest list in town—banking, industry, social and media.’” The A team included Brooke Astor, Felix Rohatyn, Laurence Rockefeller, Art Buchwald, Pierre Salinger, Jerry Zipkin, and Robert McNamara.
¹¹
When the 21 Club was reopened after renovations in 1987, the
Times
reporter thought the restaurant would “go on as it always has: being the frat house, the club, the first aid station of the city’s power brokers.” The
Times
predicted that Greenspan “will get the same warm greeting [he has] come to expect over the years.”
¹²

Only a handful of guests were mentioned in a typical “Evening Hours” column, and Greenspan’s name appeared regularly. For most attendees, a mention in the
Times
’s society pages was more important than an invitation to the party. Given the names present, mention of an economist seems an odd interest on the part of readers. That he often escorted Barbara Walters helped, but he received mention on his own merit. In a long
Times
magazine feature, “Living Well Is Still the Best Revenge,” “the economist Alan Greenspan” is discussed as being among “the very rich, very powerful and very gifted,” even though Barbara Walters was unable to attend this rendezvous at the home of Oscar and Françoise de la Renta. Others mentioned in this tribute to the anointed include Ahmet and Mica Ertegun, French director Louis Malle (escorting Candice Bergen), Norman Mailer, Diana Vreeland, Jerzy Kozinski (author of
Being There
), and Giovanni Agnelli (who asked Mailer on Greenspan’s arrival if that “was indeed Alan Greenspan ‘the famous economist’”).
¹³
He was even quoted in a cooking column, as a gourmet judge of chocolate desserts.
¹⁴

The inflation in prices during the 1980s was at least matched by the inflation of words, but it does appear that the economist Alan Greenspan was indeed “famous.” In a 1983
Times
article about the speaking circuit (“The Superstars”), the
Times
reader learned: “Mr. Greenspan has emerged as the most sought-after economist by lecture audiences worldwide.” Whether or not this evaluation is inflated is not as important as that it is stated: the Newspaper of Record established reputations. Despite 80 or so speeches a year, Greenspan told the
Times
, “Speech-making isn’t my business.” More than a few who sat through congressional testimony in future decades would agree, but the man seemed to spend quite a bit of time disavowing what he did the most.

¹¹
Judy Klemesrud, “The Evening Hours,”
New York Times
, March 26, 1982.
¹²
Frank J. Prial, “ ‘21’ and El Morocco: 2 Legends Reopen,”
New York Times
, April 29, 1987.
¹³
Francesca Stanfill, “Living Well Is Still the Best Revenge,”
New York Times Magazine
, December 21, 1980.
¹⁴
Marian Burros, “Dessert Party: A Feast of Sumptuous Treats,”
New York Times
, November 2, 1983.

The opening paragraph of the 1983
Times
profile tipped off the attentive reader as to its timing: “Just last weekend, Alan Greenspan attended Henry Kissinger’s lavish 60th birthday party accompanied by Barbara Walters. When not attending such elegant affairs, he can be found on television or in Washington or in the most powerful of corporate boardrooms offering his views on economic affairs, politics and the social issues of the day. At age 57, Greenspan is one of the most popular guests on New York’s party circuit—and one of America’s leading and most sought after economists. Now, however, the bespectacled, softspoken Mr. Greenspan is being talked about for what would be his most lofty position. He is nearly everybody’s first choice for chairman of the Federal Reserve Board, should Paul Volcker . . . be asked to step aside.”
¹⁵

Volcker Loses Support

While the gourmet economist bettered his reputation, Paul Volcker lost popularity with the people. He was doing the job he was hired to do. He was unpopular in the White House for the same reason. Industrial production did not rise for three years—from mid-1979 to mid-1982. Blue-collar unemployment was over 16 percent.
¹⁶
The supply-siders and the neo-somethings who set administration policy knew the inflation menace had to be subdued, but choking it to death was proving costly. It was feared that the coming redistribution of congressional seats in the 1982 midterm elections would be directly correlated with the rising unemployment rate. (Higher unemployment would probably benefit the Democrats.) The rising unemployment rate was thought to be a consequence of tight money, so it was time to loosen up. As current voting members of the Fed board stepped aside, the Reagan White House appointed members who would be known as “doves.” They didn’t like inflation, but they were even less enthusiastic about doubledigit unemployment.

¹⁵
Lewin, “Quiet Allure of Alan Greenspan.”
¹⁶
Barrie A. Wigmore,
Securities Markets in the 1980s
, vol. 1 (New York: Oxford University Press, 1997), p. 39.

Jimmy Carter had opened the path to financial deregulation in the 1970s.
¹⁷
The Federal Reserve reduced the reserve requirements of banks (after congressional authorization).
¹⁸
This helped to expand credit. Total credit market debt—government, corporate, and consumer—grew by $533 billion in 1981 and by $1.1 trillion in 1985.
¹⁹
The eighties would later be known as the Decade of Greed.

The greedy federal government spent $128 billion more than it received from taxes in 1982; by 1983, the federal budget deficit swelled to $221 billion. Two decades earlier, Treasury Secretary Dillon considered the $2.5 billion deficit unpardonable.

Technological developments such as complicated derivative structures and colorful, action-packed computer-trading screens channeled America’s fast-buck energies (the tempo of moneymaking never slowed down after the seventies) into financial solutions rather than the slow, awkward development of production capacity. Internal corporate growth, sometimes called “organic growth,” places limits on how fast a company can get big. A solution that was growing more palatable was to borrow and buy growth. The value of the top 100 mergers by S&P industrial companies rose from 19 percent of gross capital expenditures in 1979 to 66 percent in 1984.
²⁰

¹⁷
For instance, caps on interest rates paid by financial institutions were eliminated. Changes that would follow include increasing savings and loan (S&L) deposit insurance from $40,000 per customer to $100,000 and authorization to invest in a broader range of assets.

¹⁸
Congress authorized the Fed to set requirements for all depository institutions in 1980. After passage of the Monetary Control Act of 1980, required reserve balances fell from over $30 billion in 1980 to $20 billion in 1984. Joshua N. Feinman,
Federal Reserve Bulletin
, June 1993, pp. 569–589.

¹⁹
Federal Reserve Flow of Funds Z.1 files, historical tables. Available at http://www.
federalreserve.gov/releases/z1/Current/data.htm.