On a rainy morning in December 2000, Greenspan set off for breakfast with America’s next president. It had been a strange few weeks in politics: after a disputed election count in Florida, dueling demands for recounts, and arcane arguments about card-punch voting contraptions, the Supreme Court had put an end to the uncertainty, handing the presidency to George W. Bush. Now Dubya, as people called him, had moved his court to Washington. His first appointment on his first day in the capital was with the Fed chairman.
The president-elect’s father, the first President Bush, blamed Greenspan for his electoral defeat at the hands of Bill Clinton. But the younger Bush was not in a position to indulge the family grudge. The Fed chairman was now the undisputed architect of American prosperity; and even though growth had slowed since the stock market’s dive in the spring, the Goldilocks glow still radiated powerfully. Greenspan presided over an economy that had expanded in fifty-one out of fifty-three quarters during his tenure; unemployment in December 2000 stood at an astonishingly low 3.9 percent. A bestselling biography of Greenspan, published on the eve of the election, had formally anointed him the maestro. Whoever succeeded Bill Clinton would hold office in the Greenspan era, the biography asserted.1 To most of the book’s readers, that seemed about right.
Greenspan’s driver deposited him at the Madison Hotel, a stuffy Washington establishment across the road from the Washington Post. There, seated with the president-elect, the Fed chairman acknowledged the likelihood of short-term economic trouble. The tech-heavy Nasdaq had by now lost half its value since its peak in March, and even blue-chip stocks were sliding. But Greenspan reserved his emphasis for a sunnier message: America’s future was bright.
Bush seemed to like the sound of that; but in any case, he had no choice. “I want you to know,” he said toward the end of the breakfast, “that I have full confidence in the Federal Reserve and we will not be second-guessing your decisions.”2 The lesson of the past decade had not been lost on him. No president had anything to gain from bashing a Fed chairman, especially not one who seemed to reign over the economy as if by divine right.
The elect and the elected finished their breakfast and walked out of the hotel. Camera crews and reporters had staked out the exit, and Bush wrapped an arm around Greenspan as they approached the throng. In contrast with his father, he was unencumbered by New England diffidence. He was as tactile and Texan as the elder Bush had been patrician and proper.
“I talked with a good man right here,” the Texan told the press, with Greenspan still close by him. “We had a very strong discussion about my confidence in his abilities.”3
It was not just the incoming president who was telegraphing positive signals. The new vice president was Dick Cheney, a Greenspan friend since the Ford administration. As defense secretary in the elder Bush’s presidency, Cheney had shared intelligence about the Gulf War; as a corporate chieftain he had attended Alan and Andrea’s Fourth of July parties at the Fed headquarters; the previous summer, he had met Greenspan to discuss the search criteria for Candidate Bush’s running mate. Admittedly, Cheney could be inscrutable: during that running-mate conversation, for example, Greenspan could not tell whether his old friend’s selection criteria amounted to a perfect self-description by design or by coincidence—Cheney appeared to be organizing a nationwide search for none other than himself. But Greenspan did not hold that against him. If Cheney was scheming to make himself vice president, Greenspan was happy to support the plot.4
On December 18, the same day he breakfasted with Greenspan, Bush offered the job of Treasury secretary to Paul O’Neill, another Greenspan friend from the Ford administration. As in the case of Cheney, the bond had grown deeper with time. As a director of the aluminum giant Alcoa in the 1980s, Greenspan had helped to install O’Neill as chairman and chief executive; later, as O’Neill had gone from strength to strength at Alcoa, he and Greenspan had remained close, bonding over a shared fascination with economic data as well as the shared experience of exalted professional status. It helped, perhaps, that the Fed chairman had spent his formative years as a consultant to industrialists. Greenspan’s connection to O’Neill had a particular significance because it doubled as a connection to his youthful self.
When O’Neill got Bush’s call offering him the Treasury job, he responded by hedging evasively. He was a somewhat obsessive figure, upright and uptight. He was not sure he was ready to return to government. He would accept a cabinet position only if he could make a difference.
“He’s got two pages of pros and cons,” Cheney reported to Greenspan after O’Neill had failed to jump at the president’s offer. “Can you talk to him?”
O’Neill had by now left Washington for Manhattan, where he checked into the Hyatt hotel next to Grand Central station. He had just hung up his suit jacket and turned on the TV news when the telephone rang.5
O’Neill recognized a familiar voice. “Alan?” he said.
“So, I hear you had an interesting day.”
“News travels fast.”
“Paul, I’ll be blunt,” Greenspan told him, winding up for the pitch that Arthur Burns had used to lure him to the Council of Economic Advisers. “We really need you down here.
“There is a real chance to make some lasting changes,” Greenspan continued. “We could be a team at the key moment, to do the things we’ve always talked about.” Greenspan mentioned Social Security reform as an example, knowing that O’Neill favored replacing government pensions with private retirement accounts. Of course, Greenspan owed his own job partly to the fact that he had avoided consideration of privatization when presiding over Reagan’s Social Security commission. But the thought of a political suicide mission would appeal to O’Neill. He was principled to the point of self-righteousness.
“We have an extraordinary opportunity,” Greenspan reiterated. “Paul, your presence will be an enormous asset in the creation of sensible policy.”6
O’Neill hung up the phone and thought over what Greenspan had said. Since their joint service in the Ford administration, he had made more money than Greenspan, but he nonetheless admired the chairman for living a life “guided by inquiry,” as he put it. Besides, O’Neill had already decided to step down from the helm of Alcoa, and he needed a new challenge. It was not in his character to relax: as Ford’s deputy budget director, he had worked every day except Christmas, as he had once informed an interviewer, stipulating that his definition of a workday involved a twelve-hour minimum.7 He had no more interest in wandering around Venice than Greenspan did.
O’Neill phoned his wife to tell her he would accept Bush’s offer. He met with no resistance, but he knew she was crying.
Greenspan, for his part, was delighted. The new Bush administration would not be like the old Bush administration: instead of the hostile Nick Brady, Greenspan would have a friend at Treasury.
• • •
On the morning of January 5, 2001, Paul O’Neill went over to the Federal Reserve building for breakfast with Greenspan. He showed up punctually at 8:30 a.m. The Fed chairman was nowhere to be seen.8
An apologetic sagelike figure appeared after some moments.
“Jesus, Alan, I read all the papers already and, you know, there’s really not a whole lot to do around here. . . .”
Greenspan took the tease in stride and muttered something about traffic.
A waiter appeared, and both men ordered healthy meals involving slices of grapefruit. O’Neill’s silver hair was always cropped and parted perfectly. Greenspan could look pleasantly disheveled.
How was the economy? O’Neill asked.
What was going on with metal prices? Greenspan wondered.
The two friends discussed the data like “mariners discussing tides and winds,” as the writer Ron Suskind put it. Then they got down to the policy issue that was consuming Washington.
The issue was tax, and a sizable cut appeared inevitable. Candidate Bush had promised a reduction worth $1.6 trillion over a decade; now, as president, he was determined to deliver. And whereas his father had been forced to renege on his “no new taxes” pledge, the younger Bush was in a stronger position. Thanks to the deficit-reduction packages enacted under Bush senior and Clinton—and thanks, just as powerfully, to a tax windfall from the Greenspan boom—the federal government was running budget surpluses for the first time since Neil Armstrong walked on the moon. The Congressional Budget Office had recently projected that the federal government would take in nearly $4.6 trillion more than it would spend over the next decade.9 Bush’s proposed tax cut seemed eminently affordable.
The budget office’s projection, however, was just that: a projection. Anybody who recalled the disastrous budget forecasts of the early Reagan years would treat it with caution. Indeed, just in the fortnight since Greenspan had met Bush at the Madison, the economy had slowed appreciably, driving the Fed to announce a hefty rate cut of 50 basis points on January 3. A weaker economy meant weaker tax revenues. Just as the windfall from the Greenspan boom had fueled the unexpected budget surplus, so a prolonged slowdown might cause the surplus to evaporate.
“It’s certainly not money in the bank,” Greenspan remarked of the projected surplus. After years of resisting deficits, he did not want the federal government to go back into the red.
O’Neill nodded.
What if the surplus turned out to be smaller than expected? Greenspan wondered. Already Congress was intending to use half the projected savings to shore up the federal pension and health programs for retirees. What if the other half of the surplus failed to materialize?
“Triggers,” O’Neill answered. The tax cut should be made conditional upon the surplus really being there. If the budget went back into the red, triggers would automatically suspend the tax cut so as to contain the deficit.
It was an elegant idea—too elegant, perhaps, to survive the rough-and-tumble of the legislative process. For starters, the president would have to be convinced.
“Think you could find a way to mention triggers in one of your upcoming pronouncements?” O’Neill asked slyly.
“Why me?” Greenspan protested.
“Because I thought of it,” O’Neill answered. “That means you have to sell it.”
• • •
A week or so later, on Sunday, January 14, 2001, O’Neill and Greenspan visited the future vice president at his gated-community town house in McLean, Virginia, just outside Washington. With six days to go until Bush’s inauguration, it was time to fix priorities so that they could hit the ground running.
Cheney was set to play a larger role in the new administration than most vice presidents. Having served as Ford’s chief of staff, he knew precisely how to wield power that formally resided elsewhere, and no detail escaped him. When managing the Ford White House, Cheney had laid down the law on which salt shakers to use on which occasions; discovering that nine people in the West Wing had consumed $101 worth of coffee in a single summer month, he had launched a weeks-long inquisition followed by a stern clampdown.10 For the incoming vice president, command and control were ends in themselves, not just the means to policies he believed in.
Cheney was clear that the president’s tax cut had to be the first priority. Bush had campaigned on the issue; it was a political imperative. Besides, the softening economy created a new urgency. Early in his campaign, Bush had advocated the tax cut mostly on the ground that the nation was booming—if the proceeds of the surplus were not returned to the people, Congress would lavish the money on big-government programs.11 Now Cheney thought the tax cut could be sold on the opposite theory. The economy was slowing. A tax cut would revive it.12
Cheney’s new stance was bad news for the Greenspan-O’Neill triggers plan. According to the vice president’s logic, if the economy slowed even more sharply and the budget deficit returned with a vengeance, that would be all the more reason to press ahead with tax cuts.
O’Neill tried to suggest that tax cuts were not the only way to fight a slowdown. “The best, first stimulus, truth be told, may be monetary policy,” he objected.
Greenspan agreed, hinting as strongly as he could that the Fed stood ready to cut interest rates.
Cheney listened, not giving anything away. He was low-key, nonconfrontational, and noncommittal. He was more Greenspan than Greenspan.
Presently, the discussion moved on. Neither the Fed chairman nor the Treasury secretary had summoned up the nerve to mention triggers.
• • •
Ten days later, on January 24, 2001, Greenspan visited Kent Conrad, the senior Democrat on the Senate budget committee. At the start of the Clinton presidency, Conrad had successfully baited Greenspan into endorsing a specific target for deficit reduction. Now he had an advance copy of Greenspan’s testimony, due to be delivered before the budget committee the next day. The Fed chairman was about to endorse Bush’s proposed tax cuts.13
Conrad was not happy. “If you endorse these tax cuts, Alan, you’re going to unleash the deficit dogs,” he protested. The Fed chairman had championed budget responsibility in the Clinton years. Now what had happened?
“There are a lot of caveats attached to my statement,” Greenspan answered. His testimony would constitute a conditional endorsement of the tax cuts, not a blank check for the White House. True to his breakfast promise to O’Neill, Greenspan was advocating triggers.
Conrad persisted. Nobody would notice the triggers proposal. The newspapers would be looking for a clear headline: “Fed Chairman Supports Tax Cuts.” What’s more, Conrad continued, those cuts would deprive the government of revenues it needed in the long run. If you extended the budget projection out beyond ten years, the deficit was destined to grow bigger than ever, fueled by soaring health costs for retirees.
Greenspan tried to mollify the senator. To be sure, an excessive tax reduction might be risky. But a cautious one could be risky in its own way, too—what if the huge budget surpluses did actually materialize? If the Congressional Budget Office projection was right, the government would soon pay off the entire national debt; it would then have no choice but to invest its accumulating cash pile in the financial markets. All of a sudden, the Feds would be buying up chunks of the equity market, effectively nationalizing the commanding heights of the economy.
Greenspan was resorting to a curious argument. To a libertarian, naturally, the prospect of government accumulation of stakes in private companies was anathema. But to a pragmatist—a label the mature Greenspan generally wore comfortably—this was a fuss about nothing. The government could create an investment fund to hold financial assets passively, without meddling in the companies whose shares it owned.14 Besides, the problem of zero national debt was not exactly imminent.
“You have a lot of debt to pay down before you get there,” Conrad observed.
It might happen as soon as 2008, Greenspan parried.
“Let’s worry about that, Mr. Chairman, when we get close to that point. We have plenty of time, if that develops.”
After Greenspan left, Conrad put a call in to Bob Rubin. As the architect of the 1990s deficit reduction, the former Treasury secretary would surely be alarmed at the prospect of Greenspan’s testimony. Perhaps he could persuade his old friend to recalibrate his message?
Rubin agreed to try. He had recently lunched with Greenspan at the Fed, and he remained on good terms with him.
When Rubin reached Greenspan by phone, he urged him to anticipate perceptions. If the Fed chairman delivered his draft testimony unchanged, the headlines would proclaim that he was endorsing the tax cut. The nuance about triggers would be lost on the public.
“I can’t be in charge of people’s perceptions,” Greenspan replied. “I don’t function that way. I can’t function that way.”
Again, it was a curious argument. Contrary to Greenspan’s assertion, he absolutely did function by manipulating perceptions. Perceptions lay at the heart of everything the Fed did—that was how it influenced market interest rates. More to the point, perceptions lay at the heart of what Greenspan himself did. The media watched everything from his body language to the bulge in his briefcase, and he understood this perfectly.
On the morning of Greenspan’s testimony, January 25, 2001, USA Today published a triumphant scoop. “Greenspan to Back Tax Cuts,” the newspaper’s front page proclaimed, even before Greenspan had said anything. By the time the Fed chairman appeared in Congress, the reporters were intent mainly on confirming the established story line, and several slipped out of the hearing room once they had heard what they needed. Kent Conrad watched them as they left. So much for those triggers, he thought bitterly.
• • •
As the Bush administration settled into the White House, Greenspan was a frequent visitor—more frequent, by far, than during the Clinton administration. But his conversations with the president’s economic team were not always easy. The head of Bush’s National Economic Council was none other than Lawrence Lindsey, the former Fed governor who had repeatedly warned Greenspan about asset bubbles. Now installed in the White House, Lindsey demanded payback. Having allowed the bubble to inflate, the Fed chairman could hardly oppose a tax cut that protected the economy from the fallout.
Lindsey could be difficult to argue with. He was smart, stubborn, and possessed of an annoyingly good memory. Visiting Greenspan as the tech bubble inflated in 1998 and 1999, he had pressed the Fed chairman to say how policy makers would cope when the bubble eventually imploded.
“There’s no guarantee that even if you get a 1929, you’ll end up with a 1932,” Greenspan had replied. In other words, a crash would not harm the economy if the government responded with a determined stimulus.15
Now that the crash had duly arrived, Lindsey reminded Greenspan of that comment. How could the Fed chairman oppose a stimulus that he had privately endorsed earlier? Besides, Lindsey continued, Greenspan needed to respect democracy. Bush had won a mandate to deliver the tax cuts; Greenspan had no business obstructing him. The administration was committed to respecting the monetary independence of the Fed. Greenspan should reciprocate by respecting the president’s primacy on the budget.
As well as hearing from Lindsey, Greenspan kept up his visits to Dick Cheney. The Fed chairman regarded the vice president as his back channel to Bush: if the president was set on a tax cut, perhaps Greenspan, working through Cheney, could aspire to rein him in a bit. But the vice president’s objective was precisely the reverse: not to augment the maestro’s influence but to contain it. If Greenspan felt as though he had a private channel to the top, he was less likely to denounce the tax plan in public; so Cheney invited the chairman over to his office, nodded along, and said enough to humor him. Despite the real bond between the two men, Cheney was resorting to the same pretend-to-listen tactic that Greenspan had deployed on Dick Darman during the administration of Bush senior—but now Greenspan was on the receiving end.16
In February 2001, Greenspan testified in the Senate once again, this time before the banking committee.17 Its chairman was the wily Republican Phil Gramm, who had teased Greenspan for appearing next to the first lady at Bill Clinton’s deficit-cutting State of the Union address. Now, with the opposite party in the White House and the opposite momentum on taxes, Gramm could see what Greenspan was up to: a U-turn, pure and simple.
“I got the idea in listening to some of my colleagues that at least they perceive that you had been misquoted in your testimony,” the senator began, referring to the fact that Democrats were still claiming Greenspan as their ally in opposing the tax cuts. The Fed chairman’s mention of deficit triggers showed that he did not really support Bush’s cuts, or so the Democrats suggested.
“But I have noted in the past, when you thought people got it wrong, you issued a clarification,” Gramm continued. “I saw no clarification as a result of that testimony.
“In your opinion, were your views misconstrued?” Gramm demanded.
The question left Greenspan nowhere to hide. Contrary to what he had pleaded to Rubin, he could be in charge of people’s perceptions—Gramm was asking him to say how Congress should construe his tax testimony. If Greenspan wanted to force politicians to reckon with his triggers proposal, this was his moment. If not, he would have to come clean. The game of cozying up simultaneously to both sides was not going to be sustainable.
Greenspan refused Gramm’s invitation to reiterate his support for deficit triggers. “Mr. Chairman, I do think that because of the complexity of the issue which I addressed in the Senate Budget Committee—complex of necessity, because things are changing in ways that we had not been required to evaluate previously—that a number of the reports that I saw were quite selective of the general position that I took,” he waffled masterfully. “But I don’t find that unusual. I find that sort of more general rather than otherwise. I don’t know what to do about it.”
With that, Greenspan passed up the opportunity to press his triggers proposal, effectively endorsing the administration’s position. The triggers idea had been just the latest instance of his tendency to speak the truth, but quietly. As an adviser in the Ford White House, he had waffled on the 1975 tax cut, allowing the president to construe his lack of an objection as an endorsement. As Fed chairman during the tech bubble, he had muffled his musings about irrational exuberance in a cloak of history and philosophy. Given his stature, Greenspan might at least have tried to sway the tax debate. But he was not about to clash with the president’s national economic adviser. He was not going to fight his good friend the vice president.18 He was not going to risk the Fed’s monetary independence by challenging the White House on fiscal policy.
“We did what we could on conditionality,” O’Neill reflected to his friend in May, after a last-ditch trigger amendment had been defeated in the Senate.
“Without the triggers, that tax cut is irresponsible fiscal policy,” Greenspan observed.19
Arguably, in not insisting on the same point publicly, Greenspan himself had acted irresponsibly.
• • •
As he agitated from the sidelines of the tax debate, Greenspan confronted a challenge that fell directly within his own bailiwick. In March 2001 the economy entered a recession, the first since the previous Bush presidency.20 Not at all surprisingly, the Fed chairman reaped some of the blame. A survey of money managers in March found a sharp decline in his standing.21
The blame for the recession could be laid at Greenspan’s door in two senses. The previous spring, he had committed a rare tactical error, misjudging the outlook for growth and inflation. In February and March 2000, he had delivered a pair of quarter-point rate hikes, responding to evidence that inflation was rising; then, in May, he had followed up with a double dose of tightening, hiking by a further 50 basis points. The logic was straightforward: the most recent data on core inflation suggested that it was still heading up.22 But the last hike in Greenspan’s sequence turned out to be too much. The chairman had overestimated the underlying growth in productivity and underestimated the drag on the economy from the recent collapse of the Nasdaq. Ten months later, with the May 2000 tightening having taken its effect, the recession started.
In a larger sense, however, Greenspan’s error was not tactical but strategic. Because he had allowed the stock market to run wild in 1999, a period of exuberant growth would now be followed by a hangover. Just as Greenspan had argued in his 1959 paper, booming asset prices had driven companies to splurge on machinery and equipment; likewise, the collapse of the Nasdaq in 2000 portended a retrenchment. Sure enough, business investment collapsed by 25 percent in the first quarter of 2001, precisely as the young Greenspan would have predicted.23 The question this posed was whether the Fed should have been thinking on a longer horizon. At the end of the 1990s, it had aimed for the maximum amount of noninflationary growth possible over the next year or so. Now it turned out that maximizing growth over a period of a year might mean undershooting growth over a period of, say, three years. Perhaps the Fed should stabilize the economy over a longer horizon—which would mean paying more attention to asset prices?
Whether this critique was right would ultimately depend on the depth of the recession. The Fed had bet its reputation on the proposition that it could clean up after a bubble; if it succeeded in that task, perhaps the downturn would be mild enough for the earlier boom to have been worth it. Recognizing the stakes involved, Greenspan loosened policy aggressively from the start of 2001: he cut by 50 basis points in early January, then eased again in late January, March, April, and May, bringing the federal funds rate down by a cumulative 2.5 percentage points. It was a dramatic intervention, more forceful by far than anything Greenspan had undertaken in response to the recession during the first Bush administration.24 But the ferocity of the Fed’s action carried a warning. Perhaps, in the face of some future financial implosion, the Fed might run out of space to ease? Perhaps rate cuts this rapid and this deep might risk unpleasant side effects?
“Banks in our region are beginning to lend more aggressively on real estate,” Tom Hoenig, the president of the Kansas City Fed, observed at the FOMC meeting in March 2001. Low interest rates “might cause some—for lack of a better word—overbuilding,” he ventured.
• • •
While Greenspan struggled with tax politics and recession, he sensed another challenge from the White House. A vacancy had opened up on the Fed’s board, and Lawrence Lindsey was backing the appointment of an obscure community banker named Terry Jorde.
Jorde was more or less the antithesis of Greenspan. A petite blonde with a toothy smile, she ran a small community bank headquartered in the minuscule North Dakota frontier town of Cando—the name, pronounced CAN-do, had been chosen by Captain Prosper Parker in 1884, in a flourish of pioneer punning. Unfamiliar with Manhattan’s high-rises and high finance, Jorde could boast an intimate knowledge of farming; indeed, she was married to a durum wheat planter. As a community banker, she had met Larry Lindsey in the 1990s, when he had been leading the Fed’s outreach to community groups; the two had stayed in touch, and Lindsey had invited Jorde to participate in an economic forum with President-elect Bush shortly before he took office. If Lindsey succeeded in getting her appointed to the Fed’s board, she might feel more loyalty to her political patron than to the Fed chairman.25
Jorde also boasted a prominent ally in the Republican-led Congress. Richard Armey, the House majority leader, was a family friend and fellow Cando native. Reports that Jorde might be elevated to the Fed “are just tickling me plum,” Armey announced in early May 2001. “She’s a bright young woman who I’m sure studied finance and economics,” he ventured by way of an endorsement. “I’ve spoken to the President about her twice,” he added.26
A little while later, the bright young woman trooped into the Fed building as part of a delegation of community bankers. Despite their modest role in American finance, the community banks packed political punch: with networks all over the country and the power to sway votes at the grassroots, they were respected in Washington. Ken Guenther, the community bankers’ top lobbyist, occasionally played tennis or golf with the chairman. When Guenther and his posse visited the Fed, Greenspan knew he had better see them.
Guenther had planned his team’s agenda carefully. Toward the end of the meeting, the visitors would raise the matter of Terry Jorde’s impending nomination as a Fed governor. They wanted Greenspan to understand that Jorde had their full support. She was not just a nobody from a mom-and-pop outfit. She represented thousands of community banks from states across the country.
When the time came, Guenther and his entourage duly spoke up.
With Jorde looking on, Greenspan replied, “The Board knows everything it will ever want to know about durum wheat.”27
That was “the execution of Terry Jorde in front of her peers,” Guenther would say later. Despite his best efforts to mount a lobbying blitz to get around Greenspan, there was nothing he could do to revive Jorde’s prospects. In July 2001, the White House abandoned her nomination.
Greenspan might cave in to the White House on issues like tax. But when it came to appointments to his board, he remained a force to be reckoned with.
• • •
On September 8, 2001, Greenspan left for a central bankers’ gathering in Basel. Three days later, he boarded an Airbus A330-200 for the long flight home to Washington.28 About halfway into the journey, he rose for a stroll. There were still several hours before the plane would land. A busy schedule awaited him, starting with a meeting with the prime minister of Australia.
“Mr. Chairman, the captain needs to see you up front,” a voice said.
It was Bob Agnew, chief of the security detail.
“Two planes have flown into the World Trade Center,” Agnew continued quietly. There was a beat. “I’m not joking.”
Once Greenspan entered the cockpit, the captain briefed him on the limited information he had received. Hijacked planes. Two into the World Trade Center. One into the Pentagon. One missing. The pilot had been ordered to return to Zurich, but he did not intend to panic passengers by sharing the news of the hijacks.
A dash for the seat phones nevertheless ensued when the captain announced the change of flight plan over the cabin intercom. Greenspan, by now back in his seat, also tried to place a call. It was no use. All the lines were busy.
Isolated in his flying tin can, Greenspan stared out of his cabin window. His thoughts were normally a place of refuge, but now they could not shelter him.
He wanted to call Andrea. Fortunately, she was not in New York, and she had not been planning to visit the Pentagon on that particular Tuesday. Even so, Alan worried. What if she had gone to the Pentagon on some last-minute visit?
Greenspan’s thoughts turned to the Fed. Was everybody safe? What about their families? This was the first attack on U.S. soil in more than fifty years. How far would the economy be damaged?29
It was clearly not good news that two of the four planes had hit the financial district of lower Manhattan. Paralysis among the banks and brokerages in and around the World Trade Center might in turn paralyze their Main Street clients, setting off a chain reaction of insolvencies. But the ultimate nightmare would involve Fedwire, the electronic network that financial institutions used to transfer funds. The Fed could fight a liquidity panic by pumping money into the system so long as Fedwire functioned; but if Fedwire was crippled, a crisis would be inevitable.30 In principle, the system was fortified with multiple redundancies, supposedly allowing it to maintain operations even after a nuclear attack. Now those defenses would be tested.
Unbeknownst to Greenspan, part of the Fedwire system had indeed been clobbered. The data centers that serviced one of the two main Fedwire clearinghouses were damaged, creating a logjam in the payments network. Moreover, even if most of the Fedwire infrastructure had survived, the staff experts who operated it faced a horrifying challenge. Debris from the World Trade Center towers rained down on the New York Fed’s headquarters at 33 Liberty Street; and One Liberty Plaza, a black steel skyscraper adjacent to the World Trade Center complex and just two blocks west of 33 Liberty Street, seemed to have sustained structural damage—if it toppled, chunks of it might land on neighboring buildings and the area would be choked in clouds of asbestos. Already the electricity in the Fed building had stopped working and the telephones were down. Several of the Fed’s trading partners at Wall Street’s big bond desks were battling equally chaotic circumstances.
Fearing that the Liberty Street tower was in danger of collapse, a Fed janitor commandeered the public address system and blurted out an evacuation announcement.31 Even if the order had been authorized, it would have been unprecedented. Someone was always inside the New York Fed to monitor the markets. The building never shut down—there was not even a key to lock it.32
Ignoring the janitor’s evacuation order, the New York staff hunkered down, coordinating lending operations by cell phone. They could hardly abandon their stations without also abandoning the country to chaos. In the face of a psychological shock of this size, people would hoard cash; and if people who had hoped to borrow were suddenly cut off, chains of IOUs would strain and crack, destroying confidence throughout the economy.
About a hundred Fed officials slept in their offices that night, and armed guards stationed themselves at the building’s entrances. More than $70 billion of gold bullion lay stored in the Fed’s underground vaults. In the dead dark of an electricity-free night, there would be a risk of looters.33
• • •
Greenspan’s plane landed safely back in Switzerland. He refused to watch video replays of the destruction at the World Trade Center and Pentagon. For a man who had spent much of his life in the shadow of the Twin Towers, the attacks were painful enough just to hear about. The wounded financial district had been the cradle of Townsend-Greenspan; it was where a square-shouldered, forty-one-year-old economist had first met Richard Nixon. Countless Greenspan acquaintances showed up to work there every day. The thought of how many might be injured or dead sickened him.
At just before 3:00 p.m. on the East Coast, Alan finally managed to get through to Andrea on her cell phone. He was relieved to hear her voice, but Andrea was just seconds away from going on television with a live special report.
“Just tell me quickly what’s happening there,” Alan asked her.
Andrea held the cell phone to one ear. A producer in New York was speaking urgently into her other ear, warning her to be ready.
“Listen up,” Andrea said. With that, she dropped the cell phone in her lap. The cameras blinked on, and she launched into her report: United Flight 93 had crashed in Pennsylvania.34
Assured that Andrea was safe, Alan’s next call was to Roger Ferguson Jr., the Fed vice chairman who was leading the emergency response in Washington. Ferguson was a calm presence, and he was doing everything right: he had lost no time in assuring the Fed’s member banks that the discount window would remain open, and so far he had delivered on his promise.35 Indeed, thanks to the heroic efforts of the Fed’s staff, the discount window was on its way to pumping more than $37 billion worth of reassurance into the country’s banks by the end of that first day: it was nearly two hundred times more than the Fed normally lent—Black Monday looked trifling by comparison.36 Meanwhile, faced with disruptions to the nation’s check-clearing system, the Fed announced that it would shoulder the “risk of ride”: banks receiving checks would get their money from the Fed immediately, even before the paying banks had made good on their obligations.37 The Fed also stemmed the panic among foreign financial institutions. It lent to the central banks of Britain, the Eurozone, and Canada, allowing them to support domestic lenders that found themselves abruptly short of dollars.38
Greenspan listened as Ferguson ticked off the steps he was taking. “You are in charge,” he told his deputy. “You go forward and make the decisions.”39
Thus far the Fed had averted disaster. But there were still many unknowns. The trading floors of several exchanges had suffered structural damage. In the bond market alone, data representing $170 billion worth of trades were missing.40
• • •
You’ll never believe this,” the pilot said, offering Greenspan a headset.
It was Wednesday, the morning after the attacks, and the Fed chairman was standing in the cockpit of an air force fueling tanker. With American airspace shut down to commercial flights, Greenspan had taken the only possible ride home.41 It was not exactly comfortable.
Taking the headset from the pilot, Greenspan listened in.
There was nothing. Just static.
“Normally the North Atlantic is full of radio chatter,” the pilot said. “This silence is eerie.”42
As the tanker entered U.S. airspace, it was met and escorted by two F-16 fighters. The captain got permission to fly over the site of what had been the Twin Towers, now a smoking ruin of mud and twisted metal.43
• • •
When Greenspan got back to the Fed, he found an atmosphere of embattled paranoia. The security staff refused to allow him to work out of his office. Fearing an attack by a sniper, they moved him to a room with no window over Constitution Avenue.
Roger Ferguson was running the crisis-response work partly out of his own office, and partly out of the boardroom and the nearby Special Library. Far from seeking to impose himself on Ferguson’s efforts, Greenspan continued to let him run the practical side of the emergency response. He retreated to his temporary office and plotted the Fed’s next monetary move, monitoring the markets to the extent that they were functioning.
Like the victim of a trauma who curls up into a fetal crouch, Greenspan was gravitating instinctively to his comfort zone. He had never taken much interest in financial plumbing; he was and remained an economic forecaster. Separated from the chairman’s formal quarters, studying the data on his own, he was the same introverted consultant he had always been. He took refuge in his office just as he had once hidden away in his walk-in closet at Townsend-Greenspan.
“We seek, virtually hour by hour, positions of comfort,” Greenspan reflected later. “There are people who I know very well who get anxiety attacks if they are by themselves. I was just the opposite.”44
On Thursday, September 13, Greenspan convened his FOMC colleagues by conference call. The stock exchanges were still not functioning, despite a personal appeal from President Bush that they should open as soon as possible. Telephone workers hoped to restore 90 percent of the exchanges’ phone lines over the weekend, but that might not be enough: no one expected trading on the first day back from the attacks to be anything but torrential. Meanwhile, falling debris had destroyed two electrical substations on which the exchanges depended. To get the power back up, utility workers planned to run giant extension cords through the streets of lower Manhattan. “It will look a bit like a Third World solution,” New York Fed president Bill McDonough said grimly.
McDonough was even more concerned about One Liberty Plaza. Engineers had pronounced the skyscraper structurally sound in three different surveys, but occupants of the nearby buildings were still terrified. Loud bangs and booms from the rubble-clearing effort at Ground Zero sent people racing out into the streets.
“Somebody is going to have to figure out once and for all whether the building is really likely to fall or not,” McDonough pleaded. “Nobody is quite sure whether people are just traumatized and overreacting or whether something is really wrong.
“So we’re living in a very surreal environment,” he concluded.
Greenspan listened to McDonough’s report in silence. The New York Fed chief was evidently distraught—understandably, because he was operating in the shadow of a possibly unstable tower, and with a phone system that was still only half working. Greenspan, for his part, seemed almost to be shutting down; he was not one for emotional entanglement, with situations or with people. When McDonough finished talking, the chairman responded numbly, from a place of pure reason.
“This event came at a most inopportune time if one really wants to look at it purely from an economic forecaster’s point of view,” he observed. The economy had already been weak before the terrorist attacks. Now the shock to confidence might send it into free fall.
• • •
On Friday, Alan and Andrea joined the country’s political elite in Washington’s National Cathedral. President Bush led his fellow Americans in a National Day of Prayer and Remembrance, and the service glowed on television screens in homes and offices around the nation. Ushers passed out red, white, and blue ribbons to be pinned on mourners’ lapels; Andrea put one on, then quickly took it off again before going on air after the ceremony was done—she was struggling with her dual roles as insider-spouse and outsider-reporter.45 In bagel shops in lower Manhattan, exhausted recovery workers stared at the proceedings on the TV screens, finished their coffees, and returned to the rain-soaked muck.46
Slowly but surely, the recovery work was paying off. Tests at the NYSE and Nasdaq over the weekend established that electricity and phone lines were working well enough to allow the exchanges to reopen on Monday. In preparation for that moment, President Bush declared on Sunday, “The markets open tomorrow, people go back to work, and we’ll show the world.” On NBC, Andrea’s network, Vice President Cheney asked the American people to “stick their thumb in the eye of the terrorists and say that they’ve got great confidence in the country, great confidence in our economy, and not let what’s happened here in any way throw off their normal level of economic activity.” The renowned investor Warren Buffett appeared on CBS’s 60 Minutes and announced that he would not be selling anything when the market opened: “There’s something I might buy,” he added. Buoyed by this tide of patriotism, a New York Fed official went to a store in Midtown and bought $1,500 worth of bunting and American flags. By Monday, 33 Liberty Street was decked out as though for Victory Day, and rousing music blasted from loudspeakers at the building’s parapet.47
At 7:30 a.m. on Monday, Greenspan convened another FOMC conference call. This was the moment for which he had been preparing in the solitude of his office: he had decided to cut interest rates by another 50 basis points. The idea was to do enough to reassure markets, but not so much as to telegraph panic. By timing the announcement just before the markets’ reopening, Greenspan was aiming for the maximum possible psychological impact. The committee quickly rallied behind him.48
When the markets reopened at 9:30 a.m., the sell-off was as mild as the Fed could possibly have wished for. Stocks closed the day around 7 percent lower; but the trading was orderly and the infrastructure functioned, accommodating the highest volume of orders on any day, ever. What could have been several days of Black Monday–style panic turned out to be a measured market correction—painful, certainly, but bereft of self-feeding terror.
The value of an active central bank had seldom been clearer.
• • •
The attacks of 2001 brought an end to the euphoric mood that had persisted through the 1990s. What the Nasdaq collapse had initiated, the destruction of the World Trade Center completed. It turned out that dot-com companies were not actually building a utopia with America at its apex; it turned out that the symbols of U.S. preeminence could become propaganda props for terrorists. Americans were left to reckon with the fact that their sense of post-cold-war invulnerability had been punctured. They would henceforth set aside more of their resources for airport security, border security, policemen, and air marshals. They would endure longer waits outside sporting events and concerts. They would lose some of their openness to immigrants, and hence a measure of their economic vitality.
For Greenspan, too, life became more complicated. His low-key security team was replaced by an officious Secret Service detail, with rules about who sat where in the back of the car and about not getting out until the door was opened for you. The post office stopped delivering mail to the Greenspan-Mitchell home—letters and packages had to be cleared first by security. Wandering off to a movie unaccompanied was now out of the question. Alan and Andrea’s secluded residence was rigged up with surveillance cameras. And rather than just dropping Alan off in the evening, his guards now camped there permanently.
For Andrea especially, these changes took some getting used to. Their relatively modest house was not designed to accommodate a permanent visit from a large team of well-built strangers. There was no basement or rec room for the Secret Servicemen to shed boots and watch TV, so they were forced to linger awkwardly in the small hall outside the kitchen. Later, when it became clear that this was not sustainable, the agents retreated to an RV trailer installed in the driveway—it was not a welcome addition to one of the prettiest residential streets in Washington. Andrea asked a landscape designer to come up with a system of flowered trellises to disguise the eyesore. But the security men were having none of that. The line of sight through the windows of the RV was not to be cluttered with hanging roses or begonias.
Andrea went to lunch with the CIA chief, George Tenet. He was a voluble source on all matters terrorism related.
“Do we have to live this way?” she asked him.
“Yes, you do,” came the reply. “And just don’t ask me.”
After that, Andrea made her peace with the security presence. If the terrorists were out to hit the symbols of America’s economic prowess, her husband was certainly among them. But she never said anything to Alan about the CIA chief’s ominous hint. There were some things he did not want to know. Threats were a waste of his energy.
A year later, on the anniversary of the attacks, Andrea watched a documentary about them. Alan refused to sit and watch with her.
“I worked by those Twin Towers,” he said. “I’m not going to ever look at this.”49