On March 29, 1999, the Dow Jones Industrial Average closed above 10,000 for the first time in its history. Thanks to the spillovers from the technology revolution, even a stock index dominated by old-economy blue chips had doubled in four years, while the tech-heavy Nasdaq index had tripled. Companies such as eBay and Amazon were reinventing the economy from the ground up. Whereas during the cold war, technology had seemed to threaten a nuclear apocalypse, now it promised a utopia. “Computing is not about computers anymore. It is about living,” declared one prominent seer. “We will socialize in digital neighborhoods in which physical space will be irrelevant.”1 “We are seeing a revitalization of society,” another guru chimed in; “a new more democratic world is becoming possible.”2 Bestriding the globe as the sole superpower, the United States was creating the electronic building blocks of a thrilling new order—naturally, with itself at the center. “You’ve got to be a bull,” crowed Richard Grasso, the shiny-headed New York Stock Exchange chairman, as he tossed caps emblazoned with “Dow 10,000” to cheering traders on the floor. “Our country has never been stronger.”3
The day after the Dow passed its milestone, an obscure start-up named Priceline.com made its stock market debut. Priceline had begun operations just one year before, and for anyone who paused to contemplate its headlong rise, it stood as a warning. The company consisted of virtually no assets, an untested brand name, and fewer than two hundred employees; in its first eight months in business, its signature achievement had been to sell $35 million worth of discounted air tickets—for which it had paid $36.5 million. On top of this $1.5 million operating loss, Priceline had burned upwards of $100 million on Web development, marketing, and free stock options for suppliers; by one reckoning, the company had incinerated $114 million of investors’ money.4 But Priceline’s ebullient founders were unencumbered by self-doubt. They experimented boldly, selling car rentals, hotel rooms, and mortgages on their Web site; they rented a ballroom in a grand Manhattan club and pitched a vision of a cyberretailing empire to captivated investors. Amid the euphoria on Wall Street, every go-go fund manager wanted a piece of the action. By the end of its first day of trading, on March 30, 1999, Priceline’s value had quadrupled to $10 billion—more than United Airlines, Continental Airlines, and Northwest Airlines put together.
While Priceline’s stock price was exploding, Greenspan was seated in the Fed’s conference room, chairing an FOMC meeting. As usual, a vocal minority on his committee was worried by Wall Street’s advances.
“The stock market remains exuberant, to say the least,” Boston Fed president Cathy Minehan observed. “The cost of capital is too low.” The fact that inflation was quiescent provided only false comfort. “The exuberance of the economy may well come back to haunt us, even if inflation does not take off in the near term,” she cautioned. If Greenspan had cut rates back in the autumn for fear that markets might crater, a symmetrical policy surely required him to undo those cuts now.
“Now that the markets are mostly back to normal, I believe it is time to unwind those cuts,” agreed William Poole, the St. Louis Fed president.
Greenspan refused to budge, ruling out higher interest rates. His determination to stay loose posed something of a mystery. He had explicitly justified his post-LTCM rate cuts on the ground that the economy needed insurance; as Minehan and Poole said, this rationale was no longer credible. He had once upbraided his vice chairman for what amounted to a “Manley Johnson put”; yet now traders were celebrating a “Greenspan put” that took the risk out of investing. Greenspan was no doubt conscious that 45 percent of American households held equities, three times the proportion of twenty years before; if he raised interest rates with the clear purpose of bringing stocks down, he would no longer be a national hero. But Greenspan had proved himself capable of toughness, especially when resisting pressure from President George H. W. Bush. Why was he so steely in 1990, and yet so soft in 1999? Was it age, marriage, a desire to protect a reputation that had soared to such extraordinary heights? Or was there some other reason for his reluctance to tighten?
The best reason—at least, the one most persuasive to the economics profession—was that inflation was quiescent. The underlying “core” rate of consumer price inflation was running at 2.1 percent, right around the informal 2 percent target.5 To be sure, this rationale for loose money was still somewhat surprising given that Greenspan had been careful not to commit himself publicly to inflation targeting. Three years earlier, during the Fed’s debate on the merits of a target, he had insisted that the 2 percent goal should be kept secret: he had been determined to retain policy discretion. Yet now he was refusing to exercise that discretion—so why had he demanded it? Three years earlier, moreover, Greenspan had raised the possibility of an inflation target of zero. If that was his view, why not raise interest rates and push inflation below 2 percent, meanwhile addressing the evident froth in the equity market? At a minimum, higher interest rates might have let a little air out of the bubble, preventing it from expanding further—not a transformative achievement, perhaps, but certainly one worth having. Or depending on the unpredictable reaction of investors, higher interest rates might have had a more powerful effect, jolting the stock market back to its senses much as the Fed’s rate hike in February 1994 had jolted the bond market.
In refusing to tighten rates in early 1999, Greenspan was revealing himself to be far more committed to inflation targeting than he had previously admitted. His undeclared policy was now perfectly simple: he would allow the economy to grow as fast as it could, consistent with the preservation of Paul Volcker’s legacy. But the new Greenspan doctrine was based on flimsy foundations. The Fed and the economics profession had yet to prove that an unchanging rate of inflation should trump other central-bank objectives. The attempts to show a link between low inflation and high productivity growth had failed. Where was the evidence that price stability mattered more than financial stability?
• • •
At the end of August 1999, Greenspan flew to Jackson Hole for the Fed’s summer gathering. The action on Wall Street had grown crazier; both the Dow and the Nasdaq had gained another tenth since Priceline’s flotation. Greenspan had done the minimum to respond. He had held interest rates down through April and May, then raised them by a cautious 25 basis points at the end of June, following up with another 25 points on the eve of the Jackson Hole meeting. Interest rates were still 25 basis points below their pre-LTCM level.
Addressing the central-banking priesthood in Jackson Hole, Greenspan refused to defend his passivity in the face of the stock market’s exuberance. To the contrary, his opening speech at the symposium emphasized the economy’s vulnerability to market crashes. As more companies sought public listings, and as the value of those companies increased, stock market wealth was growing relative to national income, Greenspan observed. If this enormous stock of paper wealth were to evaporate, the consequences would be awful. Prudent central bankers should therefore prepare for the worst. “History tells us that sharp reversals in confidence happen abruptly, most often with little advance notice,” Greenspan reminded his colleagues. He understood the frailty in finance, even if he was not doing much about it.
If Greenspan would not defend his policies, others were more forthcoming. After the chairman left the podium, the distinguished company at Jackson Hole heard from two academic economists: Ben Bernanke, the Princeton professor who had written shrewdly on the 1987 debacle and the early 1990s credit crunch; and Mark Gertler, a coauthor of Bernanke’s from New York University. In hindsight, the professors’ presentation came to be seen as a pivotal moment: it marked Bernanke’s emergence into the public spotlight, leading ultimately to his selection as Greenspan’s successor; it marked the most impressive effort yet to establish the case for targeting inflation rather than responding to asset bubbles. Yet although the presentation set Bernanke on the path to future prominence, and although it had a profound impact on the Fed’s hardening commitment to inflation targeting, its conclusions were strangely unpersuasive.
Echoing the Fed chairman’s speech earlier that day, Bernanke and Gertler began by acknowledging the challenge posed by asset prices. The advanced economies had experienced an increase in financial instability, they conceded; such instability menaced jobs and incomes. But the professors nonetheless argued that central bankers should take account of the stock market only insofar as it affected inflation. In and of itself, the bursting of a bubble need not be too painful if monetary policy came to the rescue, the authors said—this was what the Fed had done after 1987. It was hard to distinguish a dangerous bubble from a healthy rise in the market, the professors continued; and besides, central banks need not target bubbles because there was a more practical option. “By focusing on the inflationary or deflationary pressures generated by asset price movements, a central bank effectively responds to the toxic side effects of asset booms,” they asserted.6 Resorting to italics to drive their point home, the professors insisted, “A key advantage of the inflation-targeting framework is that it induces policy-makers to automatically adjust interest rates in a stabilizing direction in the face of asset-price instability.”
This, of course, was oddly optimistic. It was true that cleaning up after the crash of 1987 had proved relatively easy, although the Fed’s loose policy had allowed the New England property bubble to inflate—and that bubble had proved toxic. Likewise, it was true that diagnosing bubbles could be hard—but sometimes hard challenges might be too important to duck, and Greenspan had diagnosed plenty of bubbles during FOMC meetings. As to the claim that inflation targeting would dampen bubbles automatically, Bernanke and Gertler were glossing over the distinction between a demand shock and a supply shock—a distinction that had been recognized by several members of the FOMC, and that Bernanke himself would ponder in a speech five years later.7 In the face of a productivity revolution that created an increase in supply, the Fed might confront downward pressure on inflation combined with upward pressure on assets—the choice between price stability and financial stability could not be avoided. Indeed, the late-1990s bubble resulted precisely from the fact that Greenspan had followed the inflation-targeters’ advice. The core measure of inflation had averaged 2.2 percent in the past twenty-four months—from an inflation-targeting perspective, Greenspan’s policy had been immaculate. But because he had targeted inflation, Greenspan had been content to keep interest rates, and thus borrowing costs, low, which encouraged investors to bid up financial assets. It was just as Larry Lindsey, Cathy Minehan, and the other FOMC skeptics had feared. It was the opposite of what Bernanke and Gertler asserted.8
The professors made another claim that helped to solidify the inflation-targeting consensus. “Macroeconomic stability, particularly the absence of inflation or deflation, is itself calming to financial markets,” they suggested. Financial assets would be easier to value in a stable setting, the idea went: spared the need to worry about swings in inflation or interest rates, fund managers could focus on assessing the business prospects of firms, and their decisions would steer asset prices toward their efficient, nonbubbly level. But this proposition was excessively optimistic, too. It neglected the point for which the economist Hyman Minsky later became famous: if you remove inflation and interest-rate risk, investors are liable to compensate with extra risk of other kinds, leaving markets no more stable. Since the time when he had dubbed himself the Zipswitch chairman, Greenspan had understood this point. “When things get too good, human beings behave awfully,” he had stated then. “To the extent that we are successful in keeping product price inflation down, history tells us that price-earnings ratios [and hence stock prices] under those conditions go through the roof,” he had observed, a year later. A stable macroeconomic environment was no guarantee of stable capital markets. Again, Bernanke and Gertler were mistaken.
The doubts about the professors’ inflation-targeting prescription would be aired in scholarly papers over the next decade. One school argued that central banks should pay more attention to leverage and bubbles.9 Another pointed out that inflation responded to changes in the real economy only with a lag, so that central banks would do better to respond to nominal GDP—a combination of inflation and the growth rate. Either way, pure inflation targeting attracted thoughtful attacks, and at Jackson Hole in 1999, several flaws in the Bernanke-Gertler stance were pointed out immediately. Alan Blinder, who had left the Fed vice chairmanship to return to Princeton, echoed Greenspan’s past objections to the contention that low inflation would stabilize finance. “Stock market investors get irrationally exuberant when inflation gets low,” Blinder pointed out. “You have a central bank that is doing exactly what it should do, that delivers low inflation and smooth output performance. The central bank may therefore, unwittingly—and not because it is doing the wrong thing—contribute to a financial bubble. Indeed, that is the way a lot of people characterize the United States today,” he declared pointedly.
Blinder was by no means the only critic. Rudiger Dornbusch, a prominent MIT economist who was serving as the official respondent to Bernanke and Gertler, accused the authors of basing their findings on “channels and effects that are not altogether apparent.” Moreover, Dornbusch continued, both the Bernanke-Gertler prescription and the Fed’s historical practice involved a troubling bias: when asset markets rose, the central bank was supposed to ignore them; but when they fell, the clean-up-afterward doctrine required it to react forcefully. Mike Mussa, the formidable chief economist of the International Monetary Fund, weighed in on this point, too. If the Fed was going to respond to asset busts, Mussa argued, then it should respond to asset bubbles as well.10 Otherwise, traders would expect to ride bull markets without resistance from the Fed, and then expect a safety net when the market reversed direction. Confronted with such lopsided incentives, rational investors would take as much risk as possible. It was a formula for ever greater leverage and instability.
After the discussion was over, Greenspan walked past Bernanke and Gertler, who were now seated a safe distance from the microphones. As quietly as he could, he said, “You know, I agree with you.”11
Despite the chairman’s long preoccupation with bubbles, and despite the flaws in the Bernanke-Gertler view, Greenspan was giving the inflation targeters the benefit of the doubt. If he was not going to jack up interest rates to fight a speculative mania, he needed a theory that would justify his actions.
• • •
Greenspan flew from Jackson Hole to his annual tennis retreat on the West Coast—he was a creature of habit. Landing with Andrea at San Jose airport, he boarded a car for Carmel Valley, and the couple wound their way through a secluded countryside of gentle mountains, gnarled oak forests, and crystal streams. As the resort grew nearer, the road relaxed into quiet curves, passing cowboy bars and boutiques, saddlery shops and spas, and acres of vineyards planted with pinot. It was the perfect counterpoint to the East Coast. A five-car backup on Carmel Valley Road amounted to a traffic jam, a local magazine boasted.12
Alan was almost six months past his seventy-third birthday. His tennis was still solid: most Saturdays and Sundays, he would be on court at the Chevy Chase Club by nine a.m.—there would be one coach for Andrea and another one for him, and when they were done with their respective drills, they would sometimes get together for a game of doubles. But the question of aging was nonetheless a real one. Andrea worried about the toll the Fed was taking. After a dozen years in office, perhaps Alan deserved a break—a chance to sleep past 5:30 a.m.; to travel, maybe even to the beach; to enjoy an entire opera without having to leave early to prepare for congressional testimony.13 His third term as chairman would be up the following summer; and although he could theoretically serve a fourth term and even part of a fifth term—he would be forced into retirement only when his simultaneous appointment as a Fed governor expired in January 2006—Andrea sometimes wondered whether three terms might be enough. Already Alan had served for almost twice as long as Bob Rubin, his ally at the Treasury. Rubin had recently called it quits, stepping down from public office to return to Manhattan.
Alan regretted Rubin’s leaving. To help mark the moment, he had made an appearance in a spoof movie directed by the White House economics staff; the film told the story of the Treasury secretary’s kidnapping by the nefarious Japanese, and Alan accepted a walk-on role in which he starred as none other than the Fed chairman. “Alan Greenspan and Woody Allen have one thing in common,” a Clinton adviser said with a chuckle, “they both know how to play only one character.”14 But the Woody Allen comparison was not just a joke; it was precisely the issue confronting Andrea in Carmel. In the gaps between the tennis games and snoozes, she and Alan contemplated the question: After so many years of playing Washington, could Alan reinvent himself?
Alan felt he was still equal to the responsibilities of office. As far as he could tell, his mind remained as sharp as ever; he would know when he was fading when he had trouble with calculus, and there was no sign of that. As to the prospect of retirement, Alan and Andrea had tried, at least a little bit, to take time off and travel; there had been that honeymoon in Venice—at least Alan hadn’t hated it.15 But the truth was that by the end of their stay in Italy, the economist inside him had elbowed aside the romantic, clamoring to estimate the city’s value-added. There was no point in fantasizing that he was going to change. He was deeply contented with the established patterns of his life. He had no desire to shuffle them.
If the president offered Alan a fourth term at the Fed, he would not hesitate to accept it.
• • •
A bit more than a month later, on October 11, Greenspan appeared in Phoenix at the Arizona Biltmore, an iconic castle made from patterned blocks under Frank Lloyd Wright’s direction. Almost half a century earlier, Ronald and Nancy Reagan had celebrated their honeymoon at this resort, but Greenspan had come on a less joyous mission. Standing in the Biltmore’s capacious ballroom, looking out on seven hundred or so members of the American Bankers Association, Greenspan laid out the Fed’s approach to financial supervision. What followed was the regulatory counterpart to the Bernanke-Gertler paper on the Fed’s monetary stance. Greenspan honestly acknowledged the risks in too-big-to-fail banks. Then he proceeded to explain why the Fed should not address them.
“The megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks,” Greenspan began.
Megabanks; complex entities; large systemic risks. The chairman seemed to have embraced the language of the bankers’ critics.
“No central bank can fulfill its ultimate responsibilities without endeavoring to ensure that the oversight of such entities is consistent with those potential risks,” Greenspan continued.
At this point, opponents of the Travelers-Citi merger might have rubbed their hands expectantly.
“At the same time, policymakers must be sensitive to the tradeoffs,” Greenspan pivoted. “Heavier supervision and regulation designed to reduce systemic risk would likely lead to the virtual abdication of risk evaluation by creditors,” he cautioned. “The resultant reduction in market discipline would, in turn, increase the risks in the banking system, quite the opposite of what is intended.” Faced with a choice between extra regulatory discipline on the one hand and continued market discipline on the other, Greenspan had no difficulty in taking sides. “Supervisors have little choice but to try to rely more—not less—on market discipline,” he announced to the audience.
Greenspan’s conclusion invited questions—to put it mildly. Surely market discipline had a history of failing, stretching back to Continental Illinois, and before that to Penn Central? Surely such failures were even likelier now, given the complexity of the megabanks? With his usual tragic honesty, Greenspan acknowledged these dangers, just as he acknowledged the risks in stock market crashes. For one thing, market discipline could function only if creditors had sound information about banks’ portfolios, but banks were not in the habit of transparency. “The best way to encourage more disclosures is not yet clear,” Greenspan admitted. For another thing, market discipline required banks to borrow from someone other than federally insured depositors, because only uninsured creditors facing the possibility of losses could be expected to monitor banks’ risks. Unfortunately, only the largest banks met this condition, and even they relied on insured deposits for much of their funding. Market discipline—imperfect at the best of times—would have limited power under these conditions.16
Undeterred by the admitted flaws in his argument, the chairman pressed onward to his conclusion. The Fed favored supervision that was “the least intrusive, most market based,” he declared to his audience at the Biltmore. With that, he exited through a doorway at the back of the stage, not pausing to take questions.17
One month later, after cantankerous negotiations between the Treasury, Congress, and the Fed, President Clinton signed a law that realized Greenspan’s regulatory philosophy. Thanks to Sandy Weill’s ferocious lobbying, Congress had finally coughed up a financial reform bill: by legalizing the silo-busting combination of insurance, lending, and the underwriting of securities, the measure completed the ratification of the Travelers-Citi merger. Cynics quipped that the Financial Services Modernization Act of 1999 would be better named the “Citicorp Authorization Act.”18 But what was more astonishing was the nature of the debate leading up to the reform. Rather than questioning whether the nation could afford too-big-to-fail banks, the Treasury had focused on a turf question: whether securities operations of banks should be structured as subsidiaries, implying that they would be overseen by the Treasury, or as affiliates, in which case the Fed would supervise them. Congress, for its part, had staged a battle royal over banks’ obligations to low-income communities—a worthy issue, perhaps, but not one that came close to the too-big-to-fail question. Greenspan’s dubious bet on market discipline was left unaddressed. The elephant in the room was too enormous to confront directly.
One year after the sidelining of Brooksley Born, the banking reform of 1999 represented another missed opportunity to grapple with the fragilities in finance. At a minimum, the consolidation of the banking sector should have been coupled with a corresponding consolidation of regulators, whose overlapping mandates allowed firms to shop around for the laxest overseer. But no such consolidation was attempted. Instead, the authorities stumbled on, trusting that rival banking regulators would collaborate successfully with the Securities and Exchange Commission, the Commodity Futures Trading Commission, and state-level insurance regulators. By retaining this army of Inspector Clouseaus, the government was setting itself up for a regulatory fall. “History is liberally dotted with crises caused by liberalizing finance without improving supervision,” the Economist observed presciently.19
When the dust eventually settled on the Citicorp Authorization Act, Sandy Weill mounted a four-foot-wide slab of wood on the wall of his office. “The Shatterer of Glass-Steagall,” it proclaimed proudly; and the caption ran alongside a portrait of the shatterer himself, in all his insolent glory.20 Meanwhile, Weill picked up another trophy, too: Citigroup announced a prize hiring—Bob Rubin. The erstwhile Treasury secretary had had no shortage of offers, and Weill’s winning bid cemented his status as the top dog on Wall Street.21 Yet Rubin’s arrival at Citigroup also hinted at a darker tale. In the months since the merger, the effort of integrating two sprawling empires with contrary cultures had poisoned Weill’s relationship with his cochief, John Reed; the only thing the two could still agree on was that they needed outside mediation.22 Even-tempered and judicious, Rubin would act as conciliator and coach—a “buffer that could allow them each to do their jobs without running afoul of each other,” as one chronicler put it.23
One year earlier, when approving Weill’s merger in the heat of the LTCM crisis, Greenspan and his fellow governors had expressed faith in the quality of Citi’s management. Now Citi’s top team felt it needed help from Rubin. The Fed evidently had a weak grasp of what it took to make a megabank function, which meant that its supervisors would be hard-pressed to distinguish sound lenders from shaky ones. The central bank was in over its head. The financial system was about to grow more vulnerable than anyone dreamed possible.
• • •
Even as he grappled with bubbles and banks, Greenspan faced another challenge. The computer chips that powered the new economy were flawed: because of a programming shortcut that had been popular in the days when silicon memory was scarce, the chips might confuse the year 2000 with the year 1900 when the millennium rolled over at midnight on January 1. Computers running on processors not protected from this “Y2K bug” could suffer debilitating glitches. And because trillions of dollars existed as 1s and 0s in banks’ hard drives, a software failure threatened to ignite panic throughout the economy.
By the summer of 1999, the ripples from the Y2K problem were already apparent. Market interest rates rose that summer as businesses scrambled to lock in funding ahead of possible disruptions to credit markets; the corporate bond market was “acting like all Four Horsemen of the Apocalypse are playing polo on Wall Street,” one commentator said, in a fit of galloping hyperbole.24 Spying a textbook case in which the lender of last resort ought to step in, Greenspan readied his response to the apocalypse.25
Greenspan rolled out his Y2K plan in late October. It was both imaginative and vigorous. The Fed would pre-position emergency stocks of shrink-wrapped currency at ninety locations across the nation; crisis-management teams would be prepared in every Federal Reserve district. Meanwhile, armed with a newly created Y2K fund, the Fed offered to sell banks a promise of liquidity: they could buy options on short-term loans around the century date change. Greenspan hoped that merely dangling these options would calm Y2K fears; perhaps no one would actually purchase them.26 But the banks snapped up the options the way ordinary citizens were expressing their millennial anxieties by stockpiling canned goods—at the first auction on October 20, banks submitted bids to buy five times more options than the central bank was offering. The Fed duly responded by auctioning more options over the next days. By the time of the next FOMC meeting, on November 16, it had sold more than $300 billion of them.27
The sale achieved its purpose: market interest rates subsided. But it also allowed equities to set off on a fresh tear: the Nasdaq jumped by fully one fifth during the first month of the auctions. Anticipating that consumers would now spend cash they previously had planned to hoard, analysts pushed up growth forecasts—and growth duly hit an annualized rate of 7.1 percent in the fourth quarter.28 Fund managers who had fretted about Y2K-panicked customers withdrawing their money now reported the opposite problem, with the result that yet more cash was searching for a home in Wall Street’s bubbly markets.29 Even though Greenspan raised interest rates by 25 basis points at the November FOMC meeting, lifting the federal funds rate to 5.5 percent and finally undoing his post-LTCM cuts, this was effectively a nonhike hike. Tightening money with one hand, Greenspan was permitting exuberance with the other.30
As Christmas approached, the nation reveled in astonishing prosperity. A jeweler in Chicago sold a $100,000 man’s pinkie ring adorned with a massive diamond that slid along the top on its very own rail system. A boutique reported hot demand for a $12,000 beaded cardigan.31 The average new home in Scottsdale, Arizona, was fully 50 percent larger than ten years before. In Tucson, an establishment called PetsHotel Plus provided upscale canine guests with telephones, allowing absent masters to call in and coo at their dogs on the speakerphone.32
Greenspan’s reputation continued to soar with the stock market. Vice President Al Gore, by now focusing on his bid for the White House, called himself Greenspan’s “biggest fan” and rated the chairman’s performance as “outstanding A-plus-plus.”33 Republican front-runner and Texas governor George W. Bush put aside his family’s lingering resentment toward Greenspan and credited him for his “great job of managing the monetary side of our economy.”34 Not to be outdone, Republican senator John McCain wished the chairman could stay at his post into the afterlife. “I would do like we did in the movie Weekend at Bernie’s,” McCain joked during a Republican presidential primary debate. “I’d prop him up and put a pair of dark glasses on him and keep him as long as we could.”35
By the time of the next FOMC meeting, on December 21, Wall Street was expecting another round of tightening. With tech stocks rocketing upward and the economy at boiling point, surely it was time for rates to rise above their pre-LTCM benchmark. Unemployment had fallen to an unsustainably low 4.1 percent, and the trade deficit was widening alarmingly. Unless demand was reined in, the economy would run out of workers to produce additional output, or run out of foreign loans to pay for its imports. But with the Y2K date changeover just days away, Greenspan lacked the will to move. “We want to communicate as effectively as we can that we have no intention of doing anything through the year-end and maybe for a short period thereafter,” he argued.
“One always hates to see a marathon runner trip up at the end, and we certainly don’t want to be the person from the stands who runs out and trips that runner up,” another governor observed supportively.36
Performing her familiar function, Cathy Minehan of the Boston Fed attempted to push back. “It is hard to find any Y2K panic or even deep worries out there, and believe me we’ve tried to find it,” she objected. But as usual, she was ignored, and because she was among the regional Reserve Bank presidents who lacked a vote at this meeting, ignoring her was particularly easy. The committee voted unanimously to leave the fed funds rate unchanged. The Dow, the S&P 500, and the Nasdaq responded in unison, hitting record highs on the last trading day before Christmas.
As the markets rocketed skyward, Greenspan received his own gift from the White House. The chief of staff, John Podesta, called him on the president’s behalf to offer a fourth term in office. The Clinton team had briefly contemplated the possibility of an alternative chairman, but nobody could imagine how anyone could surpass the incumbent. Someone sounded out Bob Rubin to check whether he might be interested in the job. Rubin responded that Greenspan was perfect for it.
“I bet he’ll stay there until they carry him out,” Clinton remarked to his advisers.37
• • •
On the last day of 1999, the three major stock market indices raced each other up, setting a new set of records. That evening similar euphoria suffused the White House, where the first couple staged the American Creators’ Millennium Dinner, a tribute to the innovation and ideas that powered American supremacy. Not everybody present was technically an innovator, it had to be confessed; Elizabeth Taylor, Robert De Niro, and Sophia Loren were no doubt great in their own way, though the last of these was not actually American. “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,” President Clinton oozed to the assembled throng. The Hollywood composer John Williams gave the singer Jessye Norman a bear hug. Mary Wilson, a former Supreme, sang the old-time hits that baby boomers loved as the White House rang in the new century.38
Alan and Andrea caught the first part of the evening; it was, as Alan said later, Clinton’s “Camelot moment.”39 But well before midnight the first couple of finance slipped out of the White House, boarding a car that carried them through Washington’s dark streets to the Fed’s Y2K command center. There, in the William McChesney Martin Building, a hundred or so people sat in a large room, watching the celebrations on their TV screens as the millennium advanced westward from Asia and through Europe. Countless hours of preparation were about to be tested. If the Y2K bug so much as reared its head, the Fed was ready to swat it.
Greenspan looked around the room. He was dressed up in black tie, a grand, slightly dried-out figure with thin wisps of hair, peering through large spectacles. The staffers wore red T-shirts prepared especially for the occasion. They were young enough, or old enough, to be the chairman’s children.
Earlier in his Fed tenure, Greenspan might have stayed up to take charge, but he no longer felt a need to linger. He had inspected the troops, and now he headed home with Andrea. By the time midnight arrived in Washington, he was tucked snugly in bed; and when he awoke the next morning, he found that the millennium had rolled over without drama. Nothing much happened over the next few days. Some cash registers at a Godiva chocolate shop in New York malfunctioned temporarily.40
• • •
On Tuesday, January 4, President Clinton played host to another Camelot moment. The White House announced Greenspan’s fourth appointment to the Fed, and it was less of an announcement than a coronation. An eternal philosopher-king was to be enthroned, and his aura would rub off on those fortunate enough to be around him. Indeed, Greenspan’s term in office was not due to expire for a further six months, but the Clinton team was eager to get the news out now, at a time when it might give the president an extra bounce as he prepared for his final State of the Union address before a joint session of Congress. The man without effective term limits was thus being recruited to elevate the man running up against his cap, and the press commentary served only to underline the power of seniority. Greenspan had become, as the New York Times put it, “an institution in his own right.”41 Nobody would have said the same about Bill Clinton.
Soon after ten o’clock on an unseasonably warm January morning, Greenspan headed over to the White House.42 He had a brief private meeting with Clinton, who extended the official invitation to serve another term, which he accepted graciously. Then he prepared to follow the president into the Oval Office, which had been turned into an improvised press briefing room.
A gaggle of reporters lay in wait. Cameramen stood ready to capture the event, which would naturally be broadcast live. Indeed, CNN had been teasing it all morning.
“He had a very tough act to follow in Paul Volcker,” CNN anchor Bill Tucker announced, striving valiantly to fill the airtime before the press conference began. “There were a lot of people who didn’t feel like Alan Greenspan would be able to live up to Volcker’s term at the Fed. But he has done so, and surpassed.”43
Presently, Clinton and Greenspan strode into the Oval Office, trailed by Larry Summers and a few White House advisers.44 As the reporters’ chatter died down and the live TV feed switched on, Clinton stood alone at a podium that had been set up in front of the Resolute desk. Greenspan lingered shyly in the background.45 His suit was black; his shoes were black; his expression seemed a little black as well. The only relief came from the faintly red-and-white variegations on his otherwise black necktie.46
“You’re supposed to stand over here today,” Clinton said, beckoning the sideman. He wanted Alan Greenspan close. That was the whole point of the occasion.
“This is the only time I’m interfering with the independence of the Fed!” he added.
Greenspan walked over to the president and stood at his left. The president began speaking.
“Chairman Greenspan’s leadership has always been crucial. . . . With his help, we were able . . . to enact historic financial reform legislation, repealing Glass-Steagall and modernizing our financial systems for the twenty-first century. He was also, I think it’s worth noting, one of the very first in his profession to recognize the power and impact of new technologies on the new economy, how they changed all the rules and all the possibilities.
“In fact, his devotion to new technologies has been so significant, I’ve been thinking of taking ‘Alan.com’ public. Then we could pay the debt off even before 2015.” At this, Clinton grinned triumphantly.
The president stopped, turned, and shook the nominee’s hand. The cameras captured the moment, and Clinton yielded the podium.
Greenspan stepped forward and a broad smile flashed across his face. The leader of the world’s sole superpower was beside him. A rapt press corps was before him. A global television audience was watching.
“Is the market irrational?” the veteran White House reporter Helen Thomas demanded as soon as it was time for questions.
There was scattered laughter in the room.
“Helen, I’ve—”
“Do you still stick by your previous statements on the stock market?”
“You surely don’t want me to answer that?”
“Yes I do.”
“You do? Well, I—I don’t think I will.” There was more laughter in the Oval Office. “Helen, you’ve been asking me questions now for decades—”
“Since you reformed the Social Security system.”
“—and I usually answer them, so my record’s not bad.”
Another reporter had a turn. Why had Greenspan decided to stay in the job? “After a decade there, one might expect that you might want to retire or move on,” the reporter observed. Perhaps Greenspan ought to quit while he was gloriously ahead, he seemed to be suggesting.
“There’s a certain really quite unimaginable intellectual interest,” Greenspan began, warming to the subject. “You have to put broad theoretical and fairly complex conceptual issues to a test in the marketplace.
“Unlike a straight academic career, you end up fully recognizing that hypotheses matter, that actions matter, and the ideas that you come up with matter.
“And that is a challenge which, I must say to you, is—as I said to the president before, it’s like eating peanuts. You keep doing it, keep doing it.
“You never get tired, because the future is always, ultimately, unknowable.”
Greenspan appeared at his Senate confirmation hearing on January 26, while the rest of the capital was digging out from a foot of snow dumped on the city by an unexpectedly powerful nor’easter.
Senator Phil Gramm, the savvy Republican chairman of the Senate Committee on Finance, captured the spirit of the occasion.
“If you were forced to narrow down the credit for the golden age that we find ourselves living in,” Gramm said in his slow Texas drawl, “I think your name would have to be at the top of the list.”
Speaking for the Democrats, Senator Charles Schumer of New York described Greenspan as a “national treasure.”
“Why have three successive administrations appointed Alan Greenspan to be chairman of the board of governors of the Federal Reserve System?” Gramm asked during the final debate.
“Because he is the best central banker we have ever had,” Gramm said, answering his own question.47
Then, just a little over a month later, the Nasdaq stock index peaked, and by the middle of May it had lost fully one third of its value. Priceline.com was among the big losers, and initial public offerings came to a standstill. As Americans dusted themselves off after that sickening slide, the question was whether Alan.com would collapse with the overvalued new economy.