Notes

INTRODUCTION

1. The following dialogue is reconstructed from contemporaneous notes taken by Martin Anderson, a White House adviser. I am grateful to Martin and Annelise Anderson for making these notes available to me.

2. William L. Silber, Volcker: The Triumph of Persistence (New York: Bloomsbury Press, 2012), 149.

3. In 1975 Greenspan was asked for an interview by Penthouse. He declined. See Justin Martin, Greenspan: The Man Behind Money (Cambridge, Mass.: Perseus Publishing, 2001), 127.

4. Alan Greenspan, Economics of a Free Society (lecture series presented at the Nathaniel Branden Institute, Roosevelt Hotel, New York, December 1963–February 1964, sec. VIII–17). Greenspan delivered a set of ten weekly lectures between December 1963 and February 1964. A detailed script of each presentation was drawn up. The author wishes to thank Lowell Wiltbank for providing a complete copy of these scripts, which runs to a little more than three hundred pages. Section numbers reflect the order of the lecture in the series followed by the page number for that lecture.

5. Toward the end of his life, Greenspan often rediscovered his youthful convictions. Thus, in an interview in 2010, Greenspan vigorously denied the usefulness of central-bank activism. “There’s an implication out there that if you have a lethargic economy the way to get it going is to kick it. Now if you have a manic depressive and you kick him, he will go into a deeper manic depression. This assumption that is taken as a given, that you have to ‘spark’ the economy, is an incredible hypothesis. It’s just false! There is no evidence that ‘sparking’ an economy actually turns it on. . . . We’ve had centuries of business cycles which go up and which go down. There hasn’t been a single business cycle which has not recovered on its own.” Alan Greenspan, interview by the author, October 29, 2010.

6. While Friedman expected the Fed to succumb to political pressure, others thought the central bank was powerless because rational individuals would adjust their behavior in an offsetting direction. For the rational expectations view, see Finn E. Kydland and Edward C. Prescott, “Rules Rather Than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy 85, no. 3 (June 1977): 473–91; Robert J. Barro and David B. Gordon, “A Positive Theory of Monetary Policy in a Natural Rate Model,” Journal of Political Economy 91, no. 4 (August 1983): 589–610.

7. Quoted in Silber, Volcker: The Triumph, 149.

8. William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1989), 714.

9. Friedman’s article compared inflation under Greenspan with the postwar rate, using the GDP deflator, a measure that is broader than the more familiar consumer price index. The comparison given here sharpens Friedman’s point: Greenspan’s record was superior even to Volcker’s second term—that is, it was superior to Volcker’s after his celebrated victory over inflation.

10. Milton Friedman, “‘He Has Set a Standard,’” Wall Street Journal, January 31, 2006.

11. Greenspan tried to reconcile his two selves by saying that he had run America’s fiat currency “as though we were on the gold standard.” House Committee on Financial Services, Monetary Policy and the State of the Economy: Hearing Before the Committee on Financial Services, 109th Cong., 1st sess., 2005, http://www.gpo.gov/fdsys/pkgCHRG-109hhrg23738/pdf/CHRG-109hhrg23738.pdf. Greenspan offered versions of this remark at other hearings of the House committee, always at the prompting of Congressman Ron Paul. See also his House Financial Services Committee testimonies of July 18, 2001; February 12, 2003; and July 21, 2004. Greenspan made the same point during interviews with the author on October 29, 2010; November 8, 2010; December 10, 2010; and May 4, 2012. The claim is justified in the sense that the Greenspan Fed contained inflation, but not in the sense that it abstained from manipulating the money supply, especially when the financial system was strained following crises.

12. Writing about the lead-up to the crash of 1929, the young Greenspan had observed that the Fed’s narrow focus on consumer price stability was folly—the Fed should have raised rates to head off an asset bubble. “Those who claimed that the famous policy of monetary ease by the Fed in 1927 was the spark to the 1929 speculative boom were, almost certainly, making a proper evaluation. . . . The sharp upward gyrations in stock prices—and other capital values—made the subsequent stock market reversal inevitable.” Alan Greenspan, “Papers on Economic Theory and Policy” (PhD dissertation, New York University, 1977), 102.

13. In congressional testimony in 1994, Greenspan observed that derivatives linked financial institutions in ways that could exacerbate crises: “The very efficiency that is involved here means that if a crisis were to occur, that crisis is transmitted at a far faster pace and with some greater virulence.” At times, although not consistently, Greenspan also foresaw the too-big-to-fail problem. To cite one example, in a speech in 1999, he stated that “the megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks.” See Alan Greenspan, “The Evolution of Bank Supervision” (speech, American Bankers Association, Phoenix, October 11, 1999). Greenspan also warned of the systemic risk posed by Fannie and Freddie. See chapter twenty-eight.

14. Between 1970 and 1990, the hardware costs needed to support securitization fell from about 4 percent of the value of a $2 billion basket of mortgages to about one tenth of a basis point. Over the same period, the share of mortgages securitized rose from 1.7 percent to 43.2 percent. I am indebted to Lewis Alexander for this comparison.

CHAPTER ONE

1. Stewart H. Holbrook, The Story of American Railroads (New York: Crown Publishers, 1947), 1. Greenspan’s mentor Ayn Rand cites Holbrook in her “Notes on the History of American Free Enterprise” from Capitalism: The Unknown Ideal (New York: Signet, 1967), 108–16. Greenspan himself remembers reading Holbrook, who captured the excitement that Greenspan shared about the railways.

2. Alan Greenspan, interview by the author, October 12, 2010.

3. Greenspan’s childhood is briefly described in his autobiography, The Age of Turbulence, and at somewhat greater length in Greenspan: The Man Behind Money, by Justin Martin. Martin’s rich account is based on interviews with Greenspan’s childhood friends and cousins. I have relied on both sources, as well as on extensive Greenspan interviews. See Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008); and Justin Martin, Greenspan: The Man Behind Money (Cambridge, Mass.: Perseus Publishing, 2001).

4. Greenspan recalls, “It’s not that we ever starved or anything like that but I mean to this day I turn lights off, lord knows that’s the last thing I should be spending my time on but it’s still built into my personality. I still eat everything on my plate, that’s the way I was brought up.” Greenspan, interview by the author, May 4, 2012.

5. Steven M. Lowenstein, Frankfurt on the Hudson: The German-Jewish Community of Washington Heights, 1933 to 1983, Its Structure and Culture (Detroit: Wayne State University, 1989).

6. Ernest Stock, “Washington Heights’ ‘Fourth Reich’: The German Émigrés’ New Home,” Commentary, June 1951.

7. Census records in the National Archives show that in 1940 Rose Goldsmith was working forty hours a week and earning a bit over $1,000 a year. Sixteenth Census of the United States: 1940 (U.S. Census Bureau, April 2, 2012), National Archives, http://1940census.archives.gov/search/?search.result_type=image&search.state=NY&search.county=New+York+County&search.city=&search.street=163rd+W#filename=m-t0627-02677-00216.tif&name=31-2139&type=image&state=NY.

8. Greenspan, Age of Turbulence, 21.

9. Greenspan, interview by the author, February 6, 2013.

10. Bonnie Angelo, First Mothers: The Women Who Shaped the Presidents (New York: William Morrow, 2000).

11. Quoted in Ernest Jones, The Life and Work of Sigmund Freud (New York: Basic Books, 1953), 1:5.

12. “She was a very buoyant lady . . . very optimistic . . . nothing bothered her.” Greenspan, interview by the author, July 10, 2012.

13. “I was more inclined to sit in the corner.” Greenspan, Age of Turbulence, 21.

14. The manifest recording the arrival of Haim Grunspann and his family is on record at the Ellis Island Passenger List Database of the Statute of Liberty–Ellis Island Foundation, Inc.

15. “He promised me things and never delivered.” Greenspan, interview by the author, July 10, 2012.

16. Martin, Greenspan: The Man Behind Money, 2.

17. Greenspan links his early interest in mathematics to his lack of familial ties: “There is something about growing up in a household where there’s a mother and a father and siblings all of whom love each other. . . . I never had that. I was never consciously aware that I missed it but I go back now in retrospect with an adult’s understanding of how the human species works and realize that it did have an effect on me. . . . Why I was originally drawn to math I think is the certainty of it. There is an incredible degree of security, intellectual security, in the feeling that I don’t need to go and ask other people, ‘Is this right?’” Greenspan, interview by the author, October 29, 2010.

18. Justin Martin writes that Greenspan refused to be bar mitzvahed. But Greenspan’s recollection is that he went through with the ceremony, although studying for it had been “my least favorite time.” Explaining why he went through with it, he says, “I’d have been rebelling against my mother, which I wasn’t going to do.” Greenspan, interview by the author, July 10, 2012.

19. Martin gives the uncle’s name as Jacob, but the true name was Irwin. See New York Public Library 1940 census records and 1940 telephone directory. (Sixteenth Census of the United States: 1940 [U.S. Census Bureau, April 2, 2012], National Archives, http://1940census.archives.gov/search/?search.census_year=1940&search.enumeration_district=31-577&search.page=1&search.result_type=image&search.state=NY#filename=m-t0627-02636-00987.tif&name=31-577&type=image&state=NY&index=19&pages=47&bm_all_text=Bookmark).

20. Martin, Greenspan: The Man Behind Money, 3.

21. “I’ve never been a moody kid if I may put it that way. Even in my own world I enjoyed it. I had a good time being by myself.” Greenspan, interview by the author, July 10, 2012.

22. Irwin Kantor’s memories were relayed by his son, Larry Kantor. Lawrence Kantor, interview by the author, May 15, 2012.

23. Greenspan reflects, “I’m sure coming from a family where my mother basically brought me up and she was working, and I spent an awful lot of time by myself, listening to the radio, playing games with myself . . . if I reach back in time it made me sort of an introverted person. There are people I know very well who get anxiety attacks if they’re by themselves. I can’t even remotely understand that, but it’s a common phenomenon. I was just the opposite.” Greenspan, interview by the author, February 6, 2013.

24. Andrea Mitchell, interview by the author, May 14, 2012.

25. “I was acutely aware of the fact that there was something special about what I could do at a young age. It goes back to several years earlier when my mother used to parade me out in front of my relatives and say add 236 and 447 and I could do it. I can’t do it now without a calculator.” Greenspan, interview by the author, February 6, 2013.

26. H.R. Regan & Co., display ad 40: “1935 Marches On!” Advertisement, New York Times, January 6, 1935, N11.

27. It seems possible that Greenspan’s father was a more compelling person than he acknowledges. He did, after all, remarry, unlike his mother. He was intelligent and focused enough to write a book. Perhaps Alan could not relate to him and resented his absence, and therefore judged him too harshly.

28. Greenspan, interview by the author, March 1, 2013.

29. “When I was at a ball game in Yankee Stadium at one point when I was young, I said, this is the most marvelous place in the world to be. It was the center of the universe.” Greenspan, interview by the author, July 10, 2012.

30. Greenspan became a Brooklyn Dodgers fan around 1939 because he was taken with Red Barber, the Dodgers commentator, who combined a folksy southern style with an impressive grasp of statistics. Greenspan, interview by the author, March 1, 2013.

31. Walter Isaacson, Kissinger: A Biography (New York: Simon & Schuster, 2005), 35.

32. Andrea Mitchell reflects, “We react to music in similar ways, viscerally, emotionally . . . we grew up with music around us. Having a mother who plays the piano, I know in my case, the house was always filled with her playing the piano. And we would go to sleep at night with her playing Chopin and Rachmaninoff, so there’s music that I always associate with my mother. And I think with him, it’s sort of the same way.” Mitchell, interview by the author, May 14, 2012.

33. Greenspan, Age of Turbulence.

34. Greenspan, interview by the author, June 18, 2014.

35. Martin, Greenspan: The Man Behind Money, 10.

36. The bandleader Leonard Garment later told the New Yorker’s John Cassidy, “He had exactly the same face, a slightly ironic, self-measuring smile, very interior-oriented.” John Cassidy, “The Fountainhead: Alan Greenspan Faces the Biggest Challenge of His Career,” New Yorker, April 24, 2000.

37. “I was on a train from Birmingham to Atlanta, and I happened to find myself seated next to a young southern woman with whom I conversed for the next couple of hours. I can truthfully say that I didn’t understand half of what she was saying, and I am sure she had the same difficulty with my New York accent. I knew she was speaking English, but it sounded as if she was speaking in a foreign tongue.” Alan Greenspan, The Map and the Territory: Risk, Human Nature, and the Future of Forecasting (New York: Penguin Press, 2013), 234; Greenspan, interview by the author, July 10, 2012.

38. Ira Gitler, Swing to Bop: An Oral History of the Transition in Jazz in the 1940s (New York: Oxford University Press, 1985), 202.

39. Ted Gioia, The History of Jazz (Oxford: Oxford University Press, 2011); Geoffrey C. Ward, Jazz: A History of America’s Music (New York: Knopf, 2000).

40. Gitler, Swing to Bop, 202.

41. A 1947 Childs’ restaurant menu from the Paramount location was uploaded on the Internet in 2011, when it was auctioned.

42. Charles G. Shaw, Nightlife: Vanity Fair’s Intimate Guide to New York After Dark (New York: John Day Company, 1931), 66. George Chauncey, Gay New York: Gender, Urban Culture, and the Making of the Gay Male World, 1890–1940 (New York: Basic Books, 1994), 166. Chauncey quotes a Manhattan resident recalling the Childs’ being regularly “taken over” by “hundreds” of gay men after midnight in the late 1920s.

43. Quotation heard on Henry Jerome Orchestra, The Henry Jerome Orchestra, 1944–45 (Love Records, 1997).

44. Greenspan reflected, “I essentially concluded that having seen what some of the really good people could do, and fundamentally recognizing that it’s not an issue of studying and you’ll learn, there are certain inherent qualities that you’re born with, and if you don’t have them, you’ll never achieve certain levels. Mozart had it when he was 4. I never had it, period. I was a fairly good amateur musician, and I was an average professional.” Someone who measured himself against Mozart would not be content to be “average.” Devin Leonard and Peter Coy, “Alan Greenspan on His Fed Legacy and the Economy,” BusinessWeek, August 9, 2012.

45. Kelly-Ann Franklin, “Norwich Native, Grammy-winning Musician Lived Generously and Humbly, Friends Say,” Bulletin, April 6, 2011.

46. Reflecting on why he had felt able to stand outside the culture of the band, Greenspan says, “I was getting support from my mother all the time.” Greenspan, interview by the author, July 10, 2012.

47. Looking back, Greenspan acknowledges the influence of his father in his choice of reading as he was getting ready to leave the music business. “Why I pulled this stock market book off the shelf in the public library I don’t know. I do think the reason for doing that was largely my father’s Wall Street experiences. I wanted to learn more about it. I was not conscious of it at the time but it is conceivable that it was he who directed me, more by example than by anything else.” Greenspan, interview by the author, October 12, 2010.

CHAPTER TWO

1. Alexander Feinberg, “All City Lets Go: Hundreds of Thousands Roar Joy After Victory Flash Is Received,” New York Times, August 15, 1945.

2. James T. Patterson, Grand Expectations: The United States, 1945-1974 (New York: Oxford University Press, 1996), 3.

3. Ibid, 4.

4. “The American soldier is depression conscious,” Fortune magazine opined, “worried sick about post-war joblessness.” William H. Chafe, The Unfinished Journey: America Since World War II (New York: Oxford University Press, 1986), 29; Patterson, Grand Expectations.

5. Patterson, Grand Expectations, 5.

6. Thanks to the war, the federal budget alone became larger than the entire gross national product had been a decade earlier. Chafe, Unfinished Journey, 7.

7. Patterson, Grand Expectations, 55.

8. George H. Nash, The Conservative Intellectual Movement in America Since 1945 (New York: Basic Books, 1976), xiii.

9. A fellow student remembers shirts and ties as normal for serious students at the School of Commerce in the 1940s. Robert Kavesh, interview by the author, March 5, 2013.

10. Lawrence B. Glickman, “Ryan Revives Old National Fixation on ‘Free Enterprise,’” Bloomberg View, August 17, 2012.

11. Mark Skousen, The Making of Modern Economics: The Lives and Ideas of the Great Thinkers (Armonk, NY: M. E. Sharpe Publishers, 2009).

12. Paul A. Samuelson, Economics: An Introductory Analysis, 1st ed. (New York: McGraw-Hill, 1948), 152–53.

13. William F. Buckley, God and Man at Yale: The Superstitions of “Academic Freedom” (South Bend, Ind.: Gateway Editions, 1977), 42. Samuelson appeared to enjoy riling conservatives, writing in his textbook that “the capitalistic way of life is on trial.”

14. Walter E. Spahr, “The March into the Death Valley of Socialism” (speech, Economic Club of Detroit, March 7, 1949).

15. Robert Kavesh, interview by the author, February 27, 2013. See also John Cassidy, “The Fountainhead: Alan Greenspan Faces the Biggest Challenge of His Career,” New Yorker, April 24, 2000. Cassidy identifies the book as Dudley Dillard, The Economics of John Maynard Keynes: The Theory of a Monetary Economy (New York: Prentice-Hall, 1948).

16. Recalling his time at NYU, Greenspan says, “What I realized is that if the only thing you learn is what you get from sitting in the classroom or even reading the assignments, you are not getting, I was not getting as much as I wanted.” Alan Greenspan, interview by the author, October 29, 2010. In another interview Greenspan reflected, “I’m sort of an odd, eclectic sort of person. I did not go through the standard curriculum that everyone else did. I did a vast amount of my learning on my own through reading; not sitting in classrooms.” Greenspan, interview by the author, November 22, 2010.

17. Kavesh, interview by the author, February 27, 2013. Martin, Greenspan: The Man Behind Money, 26.

18. Greenspan later expanded on Hill’s significance in lectures given at the behest of Ayn Rand. See Alan Greenspan, Economics of a Free Society (lecture series presented at the Nathaniel Branden Institute, Roosevelt Hotel, New York, December 1963–February 1964, sec. IX).

19. Stewart H. Holbrook, The Story of American Railroads (New York: Crown Publishers, 1947), 3. Greenspan’s enthusiasm for late-nineteenth-century industrialists extended beyond the railways. “I had an idealized version of the nineteenth century, from the 1880s forward through Teddy Roosevelt. It was a very deep-seated sense of awe.” Greenspan, interview by the author, October 12, 2010.

20. “I was unaware of the Depression when I was growing up in it. I just thought the 1930s were normal.” Greenspan, interview by the author, March 1, 2013.

21. George W. Terborgh, The Bogey of Economic Maturity (Chicago: Machinery and Allied Products Institute, 1945), 2.

22. Patterson, Grand Expectations.

23. “7,773 Get Degrees from N.Y.U. Today,” New York Times, June 9, 1948.

24. Economics barely existed as a separate field in the United States before World War II. When Milton Friedman enrolled at the University of Chicago in 1932, he joined what was then the Department of Political Economy.

25. Greenspan, Age of Turbulence, 31.

26. As noted in the previous chapter, endnote 16, Greenspan acknowledges this connection between his personality and his intellectual preferences. “There is an incredible degree of security, intellectual security, in the feeling that I don’t need to go and ask other people, ‘Is this right?’” Greenspan, interview by the author, October 29, 2010. On another occasion, Greenspan said, “A solved equation is an absolute. There’s no judgment involved and that fits very well with my basic introverted view of the world.” Greenspan, interview by the author, July 22, 2010.

27. Greenspan recalls, “The biggest surprise of my life was that I ended up with four years of college with two Bs and the rest As. I was never that good a student and it really surprised me. One B was for physical training. The other must have been conduct, or something.” Greenspan, interview by the author, October 12, 2010.

28. Greenspan says of his father, “He had great aspirations but he never converted them. . . . And I never fully trusted him. He’d tell me things which he was going to accomplish, like fictional heroes aspiring to great things who never achieve them. . . . There must have been deep disappointment on his part for what he had achieved.” Greenspan, interview by the author, October 12, 2010. In another conversation, Greenspan said, “[E]verything he ever did sort of quasi-failed. He was never an inspiration to me.” Greenspan, interview by the author, October 29, 2010.

29. Greenspan’s future friend Daniel Patrick Moynihan wrote of his relationship with his own estranged father, “I find thru the years this enormous emotional attachment to Father substitutes—of whom the least rejection was cause for untold agonies—the only answer is that I have repressed my feelings toward dad.” See Steven R. Weisman, Daniel Patrick Moynihan: A Portrait in Letters of an American Visionary (New York: PublicAffairs, 2012), 15.

30. Martin, Greenspan: The Man Behind Money, 29.

31. Lanny Ebenstein, Milton Friedman: A Biography (New York: St. Martin’s Griffin, 2007), 16.

32. Greenspan, interview by the author, December 22, 2010.

33. Greenspan, interview by the author, September 6, 2011.

CHAPTER THREE

1. James T. Patterson, Grand Expectations: The United States, 1945–1974 (New York: Oxford University Press, 1996), 22.

2. The account of the clash between Truman and the Fed is drawn from Robert L. Hetzel and Ralph F. Leach, “The Treasury-Fed Accord: A New Narrative History,” Economic Quarterly 87, no. 1 (Winter 2001): 41.

3. Most economists believed it would take a huge shift in interest rates to make any difference to inflationary bottlenecks. See for example Paul Samuelson, Economics: An Introductory Analysis, 1st ed. (New York: McGraw-Hill, 1948), 353: “Investment is likely to be inelastic with respect to the interest rate. The same is even more true about people’s decisions on how much of their incomes to spend on consumption.” [Emphasis in original.] The mistaken belief in the impotence of monetary policy was shared even at the central bank; in 1939 an article in the Federal Reserve Bulletin declared, “Experience has shown that prices do not depend primarily on the volume or the cost of money.” See Robert L. Hetzel, The Monetary Policy of the Federal Reserve (New York: Cambridge University Press, 2008), 35. For more on the assumption that monetary policy was impotent, see Daniel L. Thornton, “The Evolution of Inflation Targeting: How Did We Get Here and Where Do We Need to Go?” (Sixth Norges Bank Monetary Policy Conference, Oslo, 2009). Economists’ underestimation of monetary policy was based partly on the perception that low interest rates had failed to stimulate the economy in the 1930s, although this interpretation overlooked the fact that while nominal interest rates had been low, deflation had rendered real interest rates higher. On this point, see also Ben S. Bernanke, “Money, Gold, and the Great Depression” (remarks, H. Parker Willis Lecture, Lexington, Virginia, March 2, 2004), http://www.federalreserve.gov/boardDocs/speeches/2004/200403022/default.htm.

4. Samuelson, Economics: An Introductory Analysis, 353.

5. Hetzel, The Monetary Policy, 35.

6. Hetzel and Leach, “The Treasury-Fed Accord,” 52.

7. Ibid.

8. Greenspan, Age of Turbulence, 42.

9. Ibid., 44.

10. Bob Kavesh, Greenspan’s friend at NYU, has no memory of discussing discrimination against Jews with Greenspan. Robert Kavesh, interview by the author, February 27, 2013. However, Greenspan was conscious that discrimination existed. Referring to the barriers faced by his cousin, Greenspan recalls, “That type of extraordinary discrimination was very evident to me when I was young.” Greenspan, interview by the author, January 10, 2013. Given the prevalence of discrimination, Greenspan could hardly fail to be aware of it. In 1935, for example, the dean of the Yale medical school instructed: “Never admit more than five Jews, take only two Italian Catholics, and take no blacks at all.” See David M. Oshinsky, Polio: An American Story (New York: Oxford University Press, 2005), 98. Discrimination against Jews continued at the school until well into the 1950s. See Jerome Karabel, The Chosen: The Hidden History of Admission and Exclusion at Harvard, Yale, and Princeton (New York: Houghton Mifflin Harcourt, 2005), 329. Meanwhile, Chafe notes that the U.S. government showed scandalously little appetite for helping Jews escape from Europe. In one characteristic instance in 1943, Romania offered to allow the evacuation of seventy thousand Jews in return for a bribe of $170,000. Six months later, the offer had not been taken up. William H. Chafe, The Unfinished Journey: America Since World War II (New York: Oxford University Press, 1986), 25.

11. Chafe reports that Fortune complained of klannishness, not clannishness. Chafe, Unfinished Journey, 25.

12. “I would often be at large meetings in which I would be the only Jew in the room.” Greenspan, interview by the author, January 10, 2013.

13. “I learned everything about how roller mills were tuned and how cold-rolled sheet was derived from hot-rolled sheet and what the temperatures are and I just loved it! It was the engineering.” Greenspan, interview by the author, July 22, 2010.

14. Greenspan, interview by the author, November 15, 2010.

15. Greenspan, interview by the author, June 10, 2011.

16. Greenspan recalls that, thanks to the influence of Townsend and Skinner, “there was a lot of monetarism in my thinking. I was learning monetary economics, at least the monetary data, and all the stuff that Friedman would be using later.” Greenspan, interview by the author, December 16, 2010.

17. Chafe, Unfinished Journey, 144. In 1946, Americans had taken out short-term loans worth $8 billion. By 1958, that number had more than quintupled, to $46 billion. See ibid., 112.

18. When President Truman made a snide reference to “money changers” on Wall Street, Merrill seized the opportunity to rally the burgeoning ranks of property owners to his banner. “Mr. Truman knows as well as anybody that there isn’t any Wall Street,” a Merrill advertisement thundered. “That’s just legend. Wall Street is Montgomery Street in San Francisco. Seventeenth Street in Denver. Marietta Street in Atlanta. Federal Street in Boston. . . . And it’s any spot in Independence, Missouri, where thrifty people go to invest their money, to buy and sell securities.” See John Steele Gordon, An Empire of Wealth: The Epic History of American Economic Power (New York: HarperCollins, 2004), 369.

19. Testifying before Congress in May 1942, Friedman talked extensively about inflation without mentioning “money” or “monetary policy.” See Lanny Ebenstein, Milton Friedman: A Biography (New York: Palgrave Macmillan, 2007), 86–87. Later, in a 1951 essay titled Comments on Monetary Policy, he assigned fiscal policy and monetary policy a roughly equal responsibility for prices. “Monetary and fiscal measures are the only appropriate means of controlling inflation. . . . Monetary and fiscal measures are substitutes within a wide range.” See Milton Friedman, Essays in Positive Economics (Chicago: University of Chicago Press, 1953), 264.

20. See John G. Gurley and E. S. Shaw, “Financial Aspects of Economic Development,” The American Economic Review 45, no. 4 (September 1, 1955), 515–38. Greenspan comments, “Gurley Shaw showed me that all financial intermediaries can be thought of as doing the same thing. They improve the economy by reducing risk through diversification. . . . Gurley Shaw allows you to cut through all the complexity and get to the essence of finance.” Greenspan, interview by the author, February 10, 2012.

21. The paper is Alan Greenspan, “Stock Prices and Capital Evaluation,” Proceedings of the Business and Economic Statistics Section of the American Statistical Association 6, no. 1 (1959): 2–26. In his memoir, Greenspan relates that its arguments were in his mind during FOMC discussions of the stock market in December 1995. Greenspan, Age of Turbulence, 166.

22. Greenspan, “Stock Prices and Capital Evaluation,” 21. In an interview, Greenspan elaborates, “If the market value of GM were greater than the cost of building it new, leaving out the tricky problem of reputation and goodwill and all that, I will build GM. If the cost is above the market price, I won’t. Since 1959 I have been using that relationship in models that I have used to forecast capital gains and it works very well.” Greenspan, interview by the author, December 16, 2010.

23. In 1958, Greenspan had also pointed to the relationship between shifts in market psychology and the real economy. He sounded a warning concerning “periods of rapidly changing business and consumer psychology. In periods of high confidence there is a tendency for existing capital assets to be monetized as consumers and businessmen both attempt to pyramid on thin equities.” Alan Greenspan, Paul B. Simpson, and Addison T. Cutler, “Monetary Analysis and the Flow of Funds—Discussion,” The American Economic Review, Papers and Proceedings of the Seventieth Annual Meeting of the American Economic Association, 48, no. 2 (May 1, 1958): 171–77.

24. Greenspan, interview by the author, November 8, 2010.

25. Lawrence H. Summers to Alan Greenspan, letter (October 28, 1997). Copy on file with the author.

26. The wealth effect is known in the economics literature as “wealth elasticity of demand.” A search for that term in JSTOR locates the earliest mention in the early 1960s. However, the connection between wealth and spending is acknowledged in some contemporaneous writings; see for example Friedman, Essays in Positive Economics, 270.

27. In fairness to the 1920s Fed, it should be acknowledged that hawks within its ranks argued for tighter money precisely to choke off speculation. Between May 1928 and August 1929, the New York Fed duly raised the discount rate from 3.5 percent to 6 percent, precipitating the crash of October.

28. Later scholarship on the Depression did not vindicate Greenspan. Rather, the stock market crash of 1929 was found to create uncertainty among consumers, inhibiting consumption of durables. See Christina Romer, “The Great Crash and the Onset of the Great Depression,” Quarterly Journal of Economics 105, no. 3 (1990): 597–624.

29. Liaquat Ahamed memorably profiles believers in the gold standard in Lords of Finance. The gold standard has been the creed of industrious, thrifty, orderly people, people with a taste for rules and discipline and unbending efficiency. It is a heavy, unmoving, inflexible anchor, and it is beloved by people who like anchors and solidity, who doubt that such things can come from fickle governments, these being social constructs, and any collective enterprise being fragile and suspect. H. G. Wells praised the gold standard for its “magnificent stupid honesty.” As Ahamed writes, it “served to reinforce all those Victorian virtues of economy and prudence in public policy . . . [it was] a gift of providence, a code of behavior transcending time and place.” Liaquat Ahamed, Lords of Finance: The Bankers Who Broke the World (London: Penguin, 2009), 20.

30. As later chapters will show, for practical purposes Greenspan came to see gold as a distraction. But he continued to describe it as the ideal monetary anchor for a laissez-faire economy.

31. Alfred Winslow Jones, creator of the first “hedged fund,” launched his groundbreaking venture in 1949 after writing an essay in Fortune about predictive financial charts.

32. “When I was very young, you could make money by looking at commodity prices and saying, all commodity prices are volatile and none can go below zero. To the extent that they are crop-induced, you look for those for which the prices are severely depressed and you get five or ten of them, and you load up positions and you don’t know when or how or by what means but you know that some external event is going to cause prices to pop. It might be a crop shortage or some dynamic force from the outside but something. If you had maybe five positions, you didn’t need to know which one. Four could fail and you could lose maybe 2 percent of your investment and you could do very well because the fifth would take off. You could do that because markets were incomplete. It was so obvious. You’d think everyone would pick that up. You can’t do that anymore.” Greenspan, interview by the author, October 12, 2010.

33. “I was very puzzled at how was it possible that somebody trading across the ring from me, who can barely spell the word copper, or more interestingly, doesn’t know whether he’s trading copper or zinc, does better than I do.” Greenspan interview by the author, January 10, 2013.

34. “Markets have got very little to do with the particular commodity that’s being traded. It’s human psychology.” Greenspan, interview by the author, October 29, 2010.

35. “We’re dealing essentially with human fears, human aspirations, human euphoria and it is independent of the particular speculative instrument. . . . [A] goodly part of my view of financial markets was originally crafted in those periods when I was doing individual commodities.” Ibid.

36. A search of JSTOR confirms that Greenspan’s usage was unusual.

37. Greenspan returned to this theme in The Map and the Territory, published in 2013. “Fear induces a far greater response than euphoria. Accordingly, asset prices and other fear-sensitive financial variables move far more rapidly when falling than they do when rising.” Greenspan, The Map and the Territory: Risk, Human Nature, and the Future of Forecasting, 280.

38. Alan Greenspan, “Papers on Economic Theory and Policy” (PhD dissertation, New York University, 1977), 95.

CHAPTER FOUR

1. In 1949, coal accounted for two thirds of the world’s energy consumption; by 1971, oil accounted for two thirds. See David Halberstam, The Fifties (New York: Villard Books, 1993), 117–18.

2. Benjamin Fairless, “The Most Dramatic Years in the Story of Steel,” Life, October 22, 1956, 164.

3. James T. Patterson, Grand Expectations: The United States, 1945–1974 (New York: Oxford University Press, 1996), 74. Kindle edition.

4. Greenspan’s address is shown on his marriage license: 67-14 Juno Street. The building was built in 1947.

5. Joan Mitchell described her first encounter with Greenspan to three writers. See Michael Lewis, “Beyond Economics, Beyond Politics, Beyond Accountability,” Worth, May 1995, 61. See also John Cassidy, “The Fountainhead: Alan Greenspan Faces the Biggest Challenge of His Career,” New Yorker, April 24, 2000. See also Martin, Greenspan: The Man Behind Money, 31.

6. The marriage license, available on request from the Marriage Bureau of the Office of the City Clerk in New York, states that the union took place on Sunday, October 12, 1952, at 6:30 p.m.

7. Martin, Greenspan: The Man Behind Money, 31.

8. Alan Greenspan, Age of Turbulence, 40.

9. Andrea Mitchell remarks, “He’s not a visually observant person.” Andrea Mitchell, interview by the author, May 14, 2012.

10. Lewis, “Beyond Economics, Beyond Politics, Beyond Accountability,” 65.

11. Quoted in William H. Chafe, The Unfinished Journey: America Since World War II (New York: Oxford University Press, 1986), 111–12.

12. Quoted in Chafe, Unfinished Journey, 141.

13. William H. Chafe, The Unfinished Journey: America Since World War II (New York: Oxford University Press, 2003), 136.

14. The most popular item among followers of the Foundation for Economic Education was Bastiat’s The Law, the text that Ronald Reagan invoked a third of a century later during his inflation conversation with Milton Friedman and Greenspan. See George H. Nash, The Conservative Intellectual Movement in America Since 1945 (New York: Basic Books, 1976), 615–17. Kindle edition.

15. Sources date Greenspan’s first encounters with Rand slightly differently. Greenspan says in his memoir that he was twenty-six, meaning that his first meeting with Rand took place before March 1953; but in a subsequent interview Greenspan said that it might have happened later. Greenspan, interview by the author, April 30, 2013. Meanwhile, Justin Martin reports that Greenspan’s conversion to objectivism came in 1954. See Martin, Greenspan: The Man Behind Money, 40.

16. Anne Conover Heller, Ayn Rand and the World She Made, 1st printing edition (New York: Nan A. Talese, 2009), 238–39. Heller’s excellent biography of Rand is a key source in the pages that follow.

17. Greenspan, Age of Turbulence, 4; and Heller, Ayn Rand and the World, 177.

18. Heller, Ayn Rand and the World, 176.

19. Ibid., 257.

20. Oswald Hanfling, Logical Positivism (New York: Columbia University Press, 1981), 193.

21. Greenspan, Age of Turbulence, 41.

22. “What she did was she demonstrated that the position I was at was syllogistically inaccurate and wrong. Once I removed that premise, a whole area of examination opened up. Not for rational discussion but for the discovery of systematic relationships. . . . It was an epistemological change, not a philosophical change.” Greenspan, interview by the author, October 29, 2010.

23. Martin, Greenspan: The Man Behind Money, 40–41.

24. This quotation comes from Robert Anderson and John Little, Ayn Rand: In Her Own Words, Documentary, 2011.

25. Ayn Rand, The Romantic Manifesto: A Philosophy of Literature (New York: Signet Books, 1971), 168.

26. Heller, Ayn Rand and the World, 139.

27. Ibid., 275. A photo of the gold bar is reproduced in Jeff Britting, Ayn Rand (Woodstock, N.Y.: Overlook Press, 2004), 89.

28. Britting, Ayn Rand, 85.

29. Heller, Ayn Rand and the World, 275.

30. Ibid., 282–83.

31. Whittaker Chambers, “Big Sister Is Watching You,” National Review, December 28, 1957.

32. The journalist was Claudia Pierpont. See Heller, Ayn Rand and the World, 287.

33. Ibid. Two decades later, the Republican vice presidential candidate was Paul Ryan, who had once cited Atlas Shrugged as an influence on his monetary thinking.

34. Greenspan recalls that before he met Rand, he had been intrigued by the use of gold as a marker of status and store of value in all ancient cultures. Greenspan, interview by the author, April 30, 2013. Rand, for her part, had been confirmed in her affection for gold by Ludwig von Mises. See Heller, Ayn Rand and the World, 248.

35. Robert Kavesh, interview by the author, February 27, 2013.

36. From 1936 through 1940, Roosevelt’s appointees to the Justice Department, culminating with Thurman Arnold’s selection to head the Antitrust Division, mounted ambitious attacks on horizontal collusion and single-firm dominance. See William E. Kovacic, “The Modern Evolution of U.S. Competition Policy Enforcement Norms,” Antitrust Law Journal 71, no. 2 (January 1, 2003), 378.

37. Both Rand’s Notes and Greenspan’s antitrust essay are reprinted in the volume Ayn Rand et al., Capitalism: The Unknown Ideal (New York: Signet, 1967).

38. “Where monopoly rests on man-made obstacles to entry into a market, there is every case for removing them.” Friedrich A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960), 266.

39. Friedman argued that monopolies were often preferable to ham-fisted attempts to rein them in, but antitrust legislation was nonetheless a welcome restraint on blatant price fixing and collusion. “The Sherman antitrust laws, with all their problems of detailed administration, have by their very existence fostered competition.” Milton Friedman, Capitalism and Freedom, 40th Anniversary Edition (Chicago: University of Chicago Press, 2002), 199. See also pp. 28 and 132.

40. Greenspan, interview by the author, May 4, 2012, and April 30, 2013.

41. Alan Greenspan, “‘Bad History, Worse Economics Spawned Anti-Trust, Says Critic,’” Barron’s, February 5, 1962.

42. Even as early as 1932, a classic volume by Adolf A. Berle Jr. and Gardner C. Means (The Modern Corporation and Private Property) had documented the dominant position of the large corporation in the modern economy, the growing dispersion of corporate stock, and the separation of ownership from control. Adolf A. Berle Jr. and Gardiner C. Means, The Modern Corporation and Private Property (New York: The MacMillan Company, 1932). Lamenting that talented mavericks were giving way to bean counters, Russell Leffington, a partner at J.P. Morgan, warned the Senate Committee on Finance in 1935 that “we are becoming a nation of hired men, hired by great aggregates of capital.” Halberstam, The Fifties, 122.

43. Indeed, GM would have been even more dominant if a team of its executives had not rescued its primary competitor, the Ford Motor Company, after the war—a rescue that Alfred Sloan himself had blessed, fearing that if Ford went bust, GM would be revealed as a monopoly.

44. Greenspan recalls, “If you were to try to understand how the world works, you’d have to start with a structure. If you try to cram all of the qualifications in before you’ve got a conceptual structure, you will fail. And the ideal way to learn is to get a simplistic system and then start to take the exceptions. That’s the reason why younger students or people in their teens are very idealistic. The world is a very simple place. It’s black and white. And in my case, it remained black and white longer than for the average person.” Greenspan, interview by the author, June 27, 2010.

45. Greenspan, interview by the author, December 10, 2010.

CHAPTER FIVE

1. Ronald Steel, Walter Lippmann and the American Century (New Brunswick, NJ: Transaction Publishers, 1980), 525.

2. Under the surface, there lurked awkward questions as to how precisely the monetary policy worked: “I haven’t the faintest idea of how you control the money supply,” the Fed chairman, William McChesney Martin, once confessed. “Yet everyone thinks I have it at my fingertips.” But for the new breed of confident economists, such details were beside the point. William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1989), 329.

3. Paul Samuelson, Economics: An Introductory Analysis (McGraw-Hill, 1961), 318.

4. Samuelson, Economics, 375. Samuelson’s message reached a large audience: in 1964, his textbook sold 440,000 copies.

5. Arthur F. Burns, “Progress Toward Economic Stability” (Presidential Address, Seventy-second Annual Meeting of the American Economic Association, Washington, D.C., December 28, 1959). Reprinted in Arthur F. Burns, “Progress Toward Economic Stability,” in The Business Cycle in a Changing World (New York: National Bureau of Economic Research, 1969), 128.

6. See Robert J. Gordon, “The History of the Phillips Curve: Consensus and Bifurcation,” July 15, 2009, https://ideas.repec.org/a/bla/econom/v78y2011i309p10-50.html.AU.

7. Quoted in William H. Chafe, The Unfinished Journey: America Since World War II (New York: Oxford University Press, 1986), 195.

8. Greenspan, interview by the author, December 10, 2010.

9. Greenspan, interview by the author, October 29, 2010.

10. Nathaniel Branden, My Years with Ayn Rand (San Francisco: Jossey-Bass, 1999), 212.

11. “Deposits, Earnings Mount at Trans-World Financial,” Barron’s, July 30, 1962.

12. Greenspan recalls that in 1962, TWF—Trans-World’s ticker symbol—was trading at fifty times earnings. Greenspan, interview by the author, January 21, 2011. Stocks for the California S&Ls were trading at twenty-five times earnings in late 1961. See Mitchell Gordon, “Thrift-Land Revisited: Apparently Nothing Can Halt the Growth of California’s Savings and Loans,” Barron’s, March 11, 1963.

13. Hubert Kay, “California’s S. & L.’s: The Boom the Bankers Knock,” Fortune, August 1964, 120.

14. Ibid., 122.

15. “Finance: Black Bart’s Red Ink,” Time, April 19, 1968.

16. “Civilization seemed far more advanced in California rather than back East . . . a more exotic nature to the vegetation . . . it was a different world, and it was all new.” Greenspan, interview by the author, January 21, 2011.

17. “Hillcrest Country Club,” Los Angeles Times, August 6, 1972.

18. A summary of Greenspan’s argument is contained in the 1962 version of his antitrust essay, reprinted in Barron’s, February 5, 1962.

19. “And I’m not sure whether I said anything intelligent for the next several years. I was just so awed at the idea of A, he knew Ayn Rand; but B, he would introduce me; and C, I would have coffee with her.” Kathryn Eickhoff, interview by the author, November 29, 2011. Eickhoff granted the author approximately ten hours of interviews.

20. Scott McConnell, 100 Voices: An Oral History of Ayn Rand (New York: New American Library, 2010), 268.

21. “He loved to dance with women who could dance with him. . . . And you know, Alan always came and would dance not only with whoever he was there with, if he came with somebody, but any of the women who were particularly good dancers.” Eickhoff, interview by the author, November 29, 2011.

22. “He’s the only person I know of who reads a statistical abstract into the footnotes. Many people use a statistical abstract to go look up the number on something. Alan doesn’t; he reads it.” Ibid.

23. Ibid.

24. “Things he did not like to do, he never found time to do them.” Ibid.

25. “Every time I hired somebody and I really got to like them, become good friends with them, Alan would start dating them, and then they would break up, they would quit, and I would no longer have a friend.” Ibid.

26. “Alan has always been serially monogamous. . . . I have never known him not to have a woman that he was dating at any point in time.” Ibid.

27. James T. Patterson, Grand Expectations: The United States, 1945–1974 (New York: Oxford University Press, 1996), 33. Kindle edition.

28. Martin, Greenspan: The Man Behind Money, 62.

29. On average, a woman made just over fifty cents for every dollar a man did. See Patterson, Grand Expectations. Greenspan’s openness to promoting women may have been connected to the fact that he did not share the postwar enthusiasm for the nuclear family, which lay behind much of the prejudice against working women. “The independent woman is a contradiction in terms,” a popular book declared in 1947, advising women to strive for “receptivity and passiveness, a willingness to accept dependence without fear or resentment, with a deep inwardness and readiness for the final goal of sexual life—impregnation.” See Ferdinand Lundberg and Marynia F. Farnham, Modern Woman: The Lost Sex (New York: Harper & Brothers, 1947). See Patterson, Grand Expectations, 36. Even Ayn Rand, though she said women could be as intellectually capable as men, considered “hero worship—the desire to look up to man” the essence of femininity. See Ayn Rand, “About a Woman President,” in The Voice of Reason: Essays in Objectivist Thought, ed. Leonard Peikoff (New York: New American Library, 1988), 268. The essay was originally published in the December 1968 edition of the Objectivist Newsletter.

30. Eickhoff, interview by the author, November 29, 2011.

31. “Alan is a very withdrawn person. . . . He did not form close relationships with people easily . . . so he was fond of his mother and recognized her positive attributes. . . . He would have thought of her as a good person, rather conventional, and had absolutely nothing to say to her.” Ibid.

32. Ibid. In a follow-up interview, Eickhoff reiterated her point. Eickhoff, interview by the author by phone, March 13, 2012.

33. Eickhoff, interview by the author, November 29, 2011.

34. Ibid. Greenspan recalls in his memoir, “Ayn Rand became a stabilizing force in my life.” See Greenspan, Age of Turbulence, 51.

35. These letters, sent under the name of Greenspan’s financial firm, Townsend-Greenspan, went out on January 4 and March 29, 1963. My thanks to Kathryn Eickhoff for providing me with copies.

36. In his skepticism of forecasts, Greenspan was not alone. William McChesney Martin, the chairman of the Federal Reserve Board, forbade the staff from making forecasts until 1966. Between 1936 and 1965, moreover, there were no academic economists serving as Fed governors. See Robert J. Samuelson, The Great Inflation and Its Aftermath: The Transformation of America’s Economy, Politics, and Society (New York: Random House, 2008), 80. Martin once told a visitor, “We have fifty econometricians working for us at the Fed. They are all located in the basement of the building, and there is a reason why they are there. . . . The danger with these econometricians is that they don’t know their own limitations, and they have a far greater sense of confidence in their analyzes than I have found to be warranted.” Richard T. McCormack, A Conversation with Ambassador Richard T. McCormack (Bloomington, IN: Xlibris, 2013). Kindle edition.

37. Month-on-month headline inflation in November and December 1962 had been zero. If Greenspan’s readers preferred to consult year-on-year numbers, they would have noted that both core and headline consumer price inflation stood at an unremarkable 1.3 percent in December 1962.

38. Greenspan notes that Gurley and Shaw led him to appreciate the difficulty in choosing monetary targets. The choice of a particular measure of the money supply—currency and checking accounts (M1), or currency plus a broader range of deposit accounts (M2), or any other variable—seemed arbitrary once Gurley and Shaw had pointed out that there was “a whole continuum of Ms.” that could potentially be followed. The gold standard had the advantage of avoiding the choice of monetary aggregate. Greenspan, interview by the author, February 18, 2011.

39. Greenspan’s letter did not elaborate on the advent of negotiable time deposits, presumably because he assumed that contemporary readers would know of them. For a readable account of this innovation, see Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Knopf, 2011), 18.

40. Greenspan recalls Friedman’s influence, but does not specifically recall particular writings from this period. Greenspan, e-mail to the author, May 5, 2013.

41. Milton Friedman, A Program for Monetary Stability (New York: Fordham University Press, 1960), 91. Originally delivered as the Millar Lectures at Fordham University, 1959.

42. Alan Greenspan, “Liquidity as a Determinant of Industrial Prices and Interest Rates,” Journal of Finance 19, no. 2 (May 1964): 159. Originally delivered at the annual meeting of the American Finance Association, Boston, December 27–29, 1963.

43. The following account comes mainly from Eickhoff, interview by the author, November 29, 2011.

44. Quotation comes from the full transcript of Greenspan’s ten lectures that was provided to the author by a former employee of Townsend-Greenspan, Lowell B. Wiltbank.

45. In an apparent contradiction of Greenspan’s account, some of the money panics of the late nineteenth century brought about recessions that were more than transitory. The panic of 1873, for example, led to what was known at the time as the Great Depression. Greenspan’s lectures deal with this objection by presenting this episode as a result of the dilution of the gold standard during the Civil War, when the government had printed so-called greenbacks. The depression of the 1870s was caused, in Greenspan’s account, by a deflation that took place as investors anticipated the retirement of greenbacks in 1879 and the contraction of credit that came with it.

46. The gold constraint was dismantled in stages between the Fed’s opening in 1914 and Nixon’s abandonment of the dollar-gold link in 1971. But Greenspan was right that after 1914 the government had the power to create bank reserves at will because it could decree relaxations to the remaining constraints whenever they became inconvenient.

47. Barry Goldwater, The Conscience of a Conservative (Bottom of the Hill Publishing, 2010), 11.

48. John Chamberlain, “Campus Radicals,” Wall Street Journal, November 3, 1960, 16.

49. Jennifer Burns, Goddess of the Market: Ayn Rand and the American Right (Oxford, England; New York: Oxford University Press, 2009), 190.

50. Rand had refused to vote in 1952 and 1956, disgusted by both Eisenhower and Stevenson. See Heller, Ayn Rand and the World She Made, 247.

51. Ayn Rand, Atlas Shrugged (New York: Signet Books, 1992), 965.

52. In an interview that appeared that same month in Playboy, Rand insisted that “faith . . . is extremely detrimental to human life: it is the negation of reason.” Ayn Rand, “Ayn Rand: A Candid Conversation with the Founder of ‘Objectivism,’” interview by Alvin Toffler, Playboy, March 1964.

53. Rand argued that objectivists need approve only of Goldwater’s political philosophy, not his total philosophy; a candidate should be expected to represent merely “an approximation” of one’s values, a “lesser of two evils.” Ayn Rand, “How to Judge a Political Candidate,” Objectivist Newsletter 3, no. 3 (March 1964), 10.

54. Rick Perlstein, Before the Storm: Barry Goldwater and the Unmaking of the American Consensus (New York: Nation Books, 2009), Kindle location 5614.

55. McConnell, 100 Voices, 271.

56. The following description of the 1964 Republican National Convention comes from C-SPAN video footage and Perlstein, Before the Storm, Kindle locations 8618–42. “Goldwater 1964 Acceptance Speech,” C-SPAN Video Library, accessed July 22, 2015, http://www.c-span.org/video/?4018-1/goldwater-1964-acceptance-speech.

57. Greenspan, interview by the author, April 14, 2011.

58. Ayn Rand, “‘Extremism’ or the Art of Smearing,” Objectivist Newsletter 3, no. 9 (1964).

59. “The War Hawks,” Washington Post, July 14, 1964.

60. Perlstein, Before the Storm, Kindle location 8665.

61. Nixon claimed to have felt “almost physically sick” listening to the nominee’s speech at the convention. Gary A. Donaldson, Liberalism’s Last Hurrah: The Presidential Campaign of 1964 (Armonk, NY: M.E. Sharpe, 2003), 180–81.

62. Ayn Rand, “It Is Earlier Than You Think,” Objectivist Newsletter 3, no. 12 (December 1964).

63. Heller, Ayn Rand and the World, 323.

CHAPTER SIX

1. This description is taken from the marvelous reporting by Brad Parks of the Newark Star-Ledger. See Brad Parks, “Crossroads Pt. 2: 5 Days That Changed a City,” Star-Ledger, July 9, 2007.

2. Patrick J. Buchanan to Richard Nixon, memorandum, July 17, 1967, personal files of Patrick J. Buchanan. I am grateful to Pat Buchanan and to the archivists of the Richard Nixon Presidential Library and Museum for providing me with an extensive collection of memos by or relating to Alan Greenspan from the Nixon campaign of 1967–68.

3. Martin Anderson and Annelise Anderson, interview by the author, April 7, 2011.

4. Martin, Greenspan: The Man Behind Money, 64.

5. Anderson’s memo was delivered on July 10, 1967.

6. This comment of Greenspan’s was recorded by Ray Price, a Nixon adviser, in a memo to Pat Buchanan written on August 17, 1967. The author is grateful to Pat Buchanan for sharing the memo. Raymond K. Price Jr. to Patrick J. Buchanan, memorandum, August 17, 1967, personal files of Patrick J. Buchanan.

7. Patrick J. Buchanan, interview by the author, March 20, 2013; Patrick J. Buchanan, e-mail to the author, June 2, 2013. In his memoir, Greenspan recalls a lunch rather than a dinner (Greenspan, Age of Turbulence, 57). However, Buchanan’s memory of a dinner includes details of the conversation and ambience; being more specific, it is also more credible. A careful analysis of Nixon’s campaign memos also shows that Greenspan’s account of events leading to his involvement with Nixon is mistaken in some minor details.

8. Greenspan, interview by the author, May 4, 2012. Leonard Garment has claimed that he brought Greenspan into the campaign, but Greenspan convincingly recalls that Anderson was the key connection.

9. The acquaintance was Fred Ikard of the American Petroleum Institute. Quoted in Joseph Kraft, “Right, for Ford,” New York Times, April 25, 1976. Although the quote was published later, it referred to the 1960s.

10. Richard T. McCormack, A Conversation with Ambassador Richard T. McCormack (Xlibris, 2013), 13. Perhaps the key inflection point came in 1966, when the Fed began to lower interest rates despite troubling inflation, with Martin justifying his stance with the dubious claim that it would make Congress more likely to cut the budget deficit. As well as the bullying from Johnson, Martin was under pressure from the economics profession. He had taken tough action against inflation in the late 1950s, with the result that inflation was headed off but the economy went into recession. Paul Samuelson responded by attacking the “disastrously biased tight-money capers of 1956–1960.” See Julio J. Rotemberg, “Penitence After Accusations of Error: 100 Years of Monetary Policy at the U.S. Federal Reserve,” in The First Hundred Years of the Federal Reserve (National Bureau of Economic Research Conference, Cambridge, Mass., 2013).

11. Robert J. Samuelson, The Great Inflation and Its Aftermath: The Transformation of America’s Economy, Politics, and Society (New York: Random House, 2008), 95–96.

12. William H. Chafe, The Unfinished Journey: America Since World War II (New York: Oxford University Press, 1986), 317.

13. James T. Patterson, Grand Expectations: The United States, 1945–1974 (New York: Oxford University Press, 1996), Kindle location 11915.

14. See “Chronology of the War in Vietnam and Its Historical Antecedents from 1940,” New York Times, January 28, 1973. See also “U.S. Vietnam Casualties Exceed Record Again: Weekly U.S. Casualties Exceed Record Again,” Washington Post, June 2, 1967.

15. George C. Wilson, “1967 Draft-Call Level May Increase in 1968,” Washington Post, October 13, 1967.

16. “Man of the Year: The Inheritor,” Time, January 6, 1967.

17. Martin, Greenspan: The Man Behind Money, 61.

18. Greenspan, Age of Turbulence, 56.

19. Homer Bigart, “City’s Welfare Rolls Soar Despite National Prosperity and Decline in Unemployment,” New York Times, June 30, 1967.

20. “Changes in Center’s Plans Are Sought by Architects,” New York Times, June 11, 1967.

21. Ada Louise Huxtable, “Project, Planned 10 Years, Has Been Called Unsound: Work Starts on Total Renewal Project,” New York Times, October 21, 1966.

22. Alan Greenspan to Patrick J. Buchanan, memorandum, July 27, 1967, personal files of Patrick J. Buchanan.

23. Price Jr. to Buchanan, August 17, 1967, ibid.

24. See James Reston, “Nixon on What Makes Him Run Again,” New York Times, October 25, 1967. See also Carey Goldberg, “The Mudge Rose Firm Enters the Tar Pit of Legal History,” New York Times, October 1, 1995. See also Richard Nixon, RN: The Memoirs of Richard Nixon (New York: Simon & Schuster, 1990), 247–50.

25. Terence Smith, “Nixon on Nixon and Other Issues,” New York Times, September 4, 1966.

26. “I had the sense that here was a once-important figure who had been pushed off into a little room with a lot of memories,” Greenspan recalled. Greenspan, Age of Turbulence, 57.

27. Martin, Greenspan: The Man Behind Money, 68.

28. “And my impression of him is a stiff and a very proper candidate, in other words, very stiff, used exquisitely accurate syntax in his sentences and paragraphs.” Greenspan, interview by the author, July 16, 2010.

29. Gladwin Hill, “Clark Notes Drop in Summer Riots,” New York Times, October 4, 1968.

30. Ibid.

31. See George Gallup, “Domestic Issues Lead List for 1968,” Washington Post, December 20, 1967, and “Poll Finds Crime Top Fear at Home,” New York Times, February 28, 1968.

32. Alan Greenspan to Richard Nixon, “The Urban Riots of the 1960s,” memorandum, September 26, 1967, personal files of Patrick J. Buchanan.

33. “They [Kennedy-LBJ] argued that the Negro has undergone severe and unjust discrimination (which is true) and exploitation by the white community (which is false),” ibid. Objectivists routinely insisted that Marx’s theory of worker exploitation was unfounded. Whether white liberals had this meaning in mind when they referred to American blacks is not a question Greenspan’s memo reckoned with.

34. Richard Nixon, “What Has Happened to America,” Reader’s Digest, October 1967.

35. Ibid.

36. Alan Greenspan to Richard Nixon, “Possible Article on ‘What’s Wrong with the Great Society,’” memorandum, November 3, 1967, personal files of Patrick J. Buchanan.

37. Buchanan, interview by the author, March 20, 2013. Greenspan remembers the story differently: he believes that Buchanan reported to him that the “Nebraska bears” were after him. However, Buchanan’s memory is supported by a line in a memo from Buchanan to Nixon dated March 20, 1968, in which Buchanan reports the Dakota senator’s irritation with Greenspan. A copy of this memo was provided to the author by Pat Buchanan. Patrick J. Buchanan to Richard Nixon, memorandum, March 20, 1968, personal files of Patrick J. Buchanan.

38. Buchanan, interview by the author, March 20, 2013.

39. Richard J. Whalen, Catch the Falling Flag: A Republican’s Challenge to His Party (Boston: Houghton Mifflin Harcourt Publishing Company, 1972), 83.

40. Luce had recently lost her husband, Henry, Time’s legendary publisher, to a heart attack; but then she had once quipped that “widowhood is a fringe benefit of marriage.”

41. Buchanan, interview by the author, March 20, 2013.

42. Eickhoff, interview by the author, November 29, 2011. See also Theodore H. White, The Making of the President 1968 (New York: Harper Perennial, 2010), 384.

43. Martin Anderson describes Nixon’s communications technology and its rapid response briefings in an oral history interview. See Miller Center, “Interview with Martin Anderson,” http://millercenter.org/president/reagan/oralhistory/martin-anderson. Greenspan recalls, “Part of my job was to coordinate responses on any issue that came up: we’d scramble to assemble the necessary research and fax it to Nixon and the campaign team overnight.” Greenspan, Age of Turbulence, 58.

44. For example, Richard Allen, the campaign’s foreign policy director, was paid $3,000 monthly. “Spreadsheet,” June 27, 1968, folder 17, box 31, Nixon Presidential Returned Materials Collection, White House Special Files, Richard Nixon Presidential Library and Museum, Yorba Linda, California.

45. The hourly employee was Lowell Wiltbank. “Kathryn lodged a real complaint for a couple of weeks, because I was a part-timer and she was on salary, so I was being paid by the hour and she’s just being paid for the job, and I logged ninety-six hours one week.” Lowell Wiltbank, interview by the author, March 20, 2012.

46. Robert M. Eisinger, The Evolution of Presidential Polling (Cambridge, UK: Cambridge University Press, 2003), 89. The analysis ultimately had little impact because the Kennedy campaign and DNC didn’t believe its results were reliable.

47. This description is taken from Evan Thomas, Robert Kennedy: His Life (New York: Touchstone, 2002), 366.

48. R. W. Apple Jr., “Kennedy Sees Capital Damage After Going to Church in Slum,” New York Times, April 8, 1968.

49. Thomas, Robert Kennedy, 368.

50. Alan Greenspan to DC, memorandum, April 8, 1968, personal files of Patrick J. Buchanan.

51. “Kennedy Deplores Tolerance of Rise in Level of Violence,” New York Times, April 6, 1968.

52. “We’re Not Afraid . . . We’re Gonna Die for Our People,” Washington Post, April 26, 1968.

53. Ward Just, “Nixon Urges Program to Aid ‘Black Capitalism,’” Washington Post, April 26, 1968.

54. Kennedy had borrowed this line from George Bernard Shaw.

55. William Safire, Before the Fall: An Inside View of the Pre-Watergate White House (New Brunswick, NJ: Transaction Publishers, 2005), 48.

56. Ray Jenkins, “George Wallace Figures to Win Even If He Loses,” New York Times, April 7, 1968. See also Patterson, Grand Expectations, 698.

57. Alan Greenspan to Patrick J. Buchanan, memorandum, July 4, 1968, personal files of Patrick J. Buchanan. The issue in this memo was how Nixon should respond to Wallace’s populist denunciations of the federal census.

58. Alan Greenspan to Patrick J. Buchanan, “Getting the Wallace Vote,” memorandum, July 7, 1968, personal files of Patrick J. Buchanan.

59. The following description is taken from Whalen, Catch the Falling Flag, 181.

60. Buchanan, interview by the author, March 20, 2013. It is also notable that Richard Whalen, who describes this retreat brilliantly and in some detail in his memoir, says nothing about Nixon’s outburst even though he played up other bruising moments in the campaign.

61. Greenspan, interview by the author, November 15, 2010.

62. Ibid.

63. Greenspan, Age of Turbulence, 59. Greenspan had explained his decision not to work in the Nixon administration in similar terms in a 1974 interview. See Erwin C. Hargrove and Samuel A. Morley, eds., The President and the Council of Economic Advisers: Interviews with CEA Chairmen (Boulder, CO: Westview Press, 1984), 414–15.

64. Goldfinger (1964), filming locations, IMDb, accessed February 28, 2014, http://www.imdb.com/title/tt0058150/locations?ref_=tt_dt_dt.

65. “The Unlikely No. 2,” Time, August 16, 1968.

66. Patterson, Grand Expectations, Kindle location 11958.

67. Hobart Rowen, “Greenspan Views: Right of McKinley,” Washington Post, August 18, 1968.

68. Steven F. Hayward, The Age of Reagan: The Fall of the Old Liberal Order: 1964–1980 (New York: Random House, 2009), 215–21; David S. Broder, “Hangover in Chicago,” Washington Post, August 30, 1968.

69. James Mann, Rise of the Vulcans: The History of Bush’s War Cabinet (New York: Penguin Books, 2004), 9.

70. Whalen, Catch the Falling Flag, 216.

71. “Townsend-Greenspan Polling Analysis,” October 4, 1968, personal files of Patrick J. Buchanan.

72. Alan Greenspan to DC, “Short-Term Campaign Strategy,” memorandum, August 30, 1968, personal files of Patrick J. Buchanan.

73. Ibid.

74. Alan Greenspan to Martin Anderson, Patrick J. Buchanan, and James Keogh, memorandum, n.d., Economics [1968–70], box 25, White House Central Files, Staff Member and Office Files: Martin Anderson, Subject Files, Richard Nixon Presidential Library and Museum.

75. Hobart Rowen, “Nixon Firmly Committed to Full-Employment Policy,” Washington Post, October 18, 1968.

76. Ibid.

77. White, The Making of the President 1968, 395.

78. Deirdre Carmody, “Pierre Prepares for New Tenant,” New York Times, November 29, 1968.

79. Deirdre Carmody, “Politics or Not, the Pierre Is Always the Pierre,” New York Times, November 29, 1968.

80. James Keogh to H. R. Haldeman, memorandum, November 13, 1968, folder 5, box 41, Nixon Presidential Returned Materials Collection, White House Special Files, Richard Nixon Presidential Library and Museum. H. R. Haldeman’s notes from the transition confirm that Greenspan was being considered for a White House staff position. See in particular H. R. Haldeman, “Handwritten Notes,” November 16, 1968, folder 9, box 41, Nixon Presidential Returned Materials Collection, White House Special Files, Richard Nixon Presidential Library and Museum.

CHAPTER SEVEN

1. The decision to tighten was taken in December 1968. The discount rate went up from 5.25 percent in November 1968 to 5.5 percent in January 1969. See “U.S. Discount Rates, Federal Reserve Bank of New York 11/19140-07/1969,” National Bureau of Economic Research, http://www.nber.org/databases/macrohistory/data/13/m13009.db.

2. The data on debt are from the Federal Reserve’s Z.1 Financial Accounts of the United States (commonly known as the Flow of Funds report). “Federal Reserve Statistical Release: Z.1 Financial Accounts of the United States, Historical Data,” Board of Governors of the Federal Reserve System, June 11, 2015, http://www.federalreserve.gov/releases/z1/Current/data.htm. The data on GDP come from U.S. Bureau of Economic Analysis, “National Income and Product Accounts, Table 1.1.5 Gross Domestic Product,” July 30, 2015. It should be noted that government debt as a share of GDP came down over the period. In denouncing Johnson’s budget policies, Greenspan had been attacking the wrong target.

3. Adopted in 1933, Regulation Q interest-rate caps prohibited the payment of interest on demand deposits at banks, and capped rates that could be paid on savings or time deposits. Meanwhile, Congress legislated interest-rate caps for S&Ls in 1966, but administrative caps had been applied before that.

4. Economic Report of the President (Washington, D.C.: U.S. Government Printing Office, February 1970), 104. Greenspan’s firm, Trans-World, was more prudently managed than most. But at the start of 1970, it, too, experienced a sudden outflow of deposits, proving that even a relatively cautious mortgage firm could not escape the consequences of dysfunctional controls on interest rates. Steven S. Anreder, “Building for the Futures? The Worst May Be Over for California’s Savings and Loans,” Barron’s, April 27, 1970, 19.

5. Even without regulated deposit rates, savings and loans were vulnerable to a rise in short-term interest rates: their funding costs would go up straightaway while their revenues from long-term fixed-rate mortgages would adjust slowly. However, deposit rate caps turned the problem of a rising cost of funds into a problem of a loss of funds, exacerbating the vulnerability. The economist James Tobin calculated that as of 1970, the S&Ls had sufficient reserves to tide them through a period of high funding costs, but an outright loss of funds posed a graver threat. See James Tobin, “Deposit Interest Ceilings as a Monetary Control,” Journal of Money, Credit and Banking 2, no. 1 (February 1970): 4–14.

6. “Worldly Philosopher: Alan Greenspan Analyzes Prospects for Interest Rates, Steel and Gold,” Barron’s, April 22, 1968.

7. Kathryn Eickhoff, interview by the author, July 14, 2013.

8. Eickhoff, interview by the author, November 29, 2011.

9. The minutes of the commission’s meetings are notable for the minimal contributions from commissioners with no economics background. See “AVAF—Minutes of Meeting of Pres. Com. on All-Volunteer Armed Force [1969–70] [1 of 4],” n.d., box 38, Richard Nixon Presidential Library and Museum, through “AVAF—Minutes of Meeting of Pres. Com. on All-Volunteer Armed Force [1969–70] [4 of 4],” n.d., box 39, Richard Nixon Presidential Library and Museum, Yorba Linda, California.

10. Milton Friedman and Rose D. Friedman, Two Lucky People: Memoirs (Chicago: University of Chicago Press, 1998), 380.

11. When the abolitionists on the staff tried to insert a feisty appeal to natural rights into the commission’s final report, Greenspan joined with the generals in swatting it down, despite the fact that the campaign brief he had worked on with Anderson had included a similar argument.

12. “AVAF—Minutes of Meeting of Pres. Com. on All-Volunteer Armed Force [1969-1970] [2 of 4],” n.d., box 38, White House Central Files, Staff Member and Office Files: Martin Anderson, Richard Nixon Presidential Library and Museum.

13. Alan Greenspan, interview by the author, November 15, 2010.

14. Descriptions of scene taken from photograph of Cabinet Room, reproduced in Bernard Rostker, I Want You! The Evolution of the All-Volunteer Force (Santa Monica, CA: RAND Corporation, 2006), 88.

15. Presidential Daily Diary Entry, September 28, 1971, Richard Nixon Presidential Library and Museum.

16. The three-page memo resulting from this meeting is in the Richard Nixon Presidential Library and Museum. Paul W. McCracken, “Handwritten Notes,” August 30, 1969, Friedman, Tonsor, Greenspan 8-30-1969, box 17, White House Central Files, Staff Member and Office Files: Paul W. McCracken Meeting Files, Richard Nixon Presidential Library and Museum.

17. This interchange took place on October 23, 1969. See John Ehrlichman, Witness to Power: The Nixon Years (New York: Simon & Schuster, 1982), 248–49.

18. Stephen Slivinski, “Last Stop Lending,” Federal Reserve Regional Focus, Winter 2009, 6–9.

19. Martin Arnold, “City Inquiry Is Set in Skyscraper Fire,” New York Times, August 7, 1970.

20. Richard Stone, “Fatal Blazes in Modern Office Skyscrapers Stir Charges of Unsafe Building Practices,” Wall Street Journal, December 8, 1970.

21. Lawrence van Gelder, “Fire on 33rd Floor of New Building Kills Two,” New York Times, August 6, 1970. See also Robert E. Tomasson, “New Fire Code Points to Change in Office Design,” New York Times, February 25, 1973.

22. The anchor was Howard K. Smith of ABC News. See A. James Reichley, Conservatives in an Age of Change: The Nixon and Ford Administrations (Washington, D.C.: Brookings Institution Press, 1981), 220.

23. Nixon’s commitment to the Keynesian consensus had been evident even before the inauguration. At the start of December 1968, he had announced the choice of Paul McCracken to head the White House Council of Economic Advisers. His new chief economist understood that “it was not necessary to accept increased unemployment to end inflation,” Nixon assured the press, insisting that McCracken was “a centrist, a man who is pragmatic in his economics”; someone who would “not approach the grave economic problems that face us in a doctrinaire manner.” The repudiation of laissez-faire advisers such as Greenspan was obvious, and Nixon’s references to economics in his inaugural address merely reiterated his status quo approach to the economy. See “McCracken Named Economic Adviser,” Washington Post, December 5, 1968. See also Sewell Chan, “Paul W. McCracken, Adviser to Presidents, Dies at 96,” New York Times, August 3, 2012.

24. William Safire, Before the Fall: An Inside View of the Pre-Watergate White House (New Brunswick, NJ: Transaction Publishers, 2005), 491.

25. Robert D. Hershey Jr., “Raymond J. Saulnier, Economic Adviser to Eisenhower, Dies at 100,” New York Times, May 8, 2009.

26. The dialogue is taken from Cabinet Room, Conversation 56-1, May 6, 1971, White House tapes, Richard Nixon Presidential Library and Museum.

27. A version of this testimony appeared as a New York Times op-ed, along with a picture of Greenspan smoking a pipe. See Alan Greenspan, “Opening Pandora’s Box,” New York Times, July 25, 1971.

28. Safire, Before the Fall, 496. The date of the meeting comes from Charles W. Colson, Notes, July 23, 1971, Presidential Meetings & Conversations [7/1/71-7/30/71] [3 of 3], box 16, Charles W. Colson Collection, Richard Nixon Presidential Library and Museum. Safire writes that Colson told him Weinberger and Kissinger were present, but when Safire asked Weinberger and Kissinger for confirmation, they said they could not recall any such meeting. The Presidential Daily Diary for July 23, 1971, lists Nixon’s shipmates that night as Haldeman, Colson, Ehrlichman and Weinberger—no Kissinger, unless his presence was kept secret. Presidential Daily Diary Entry, July 23, 1971, Richard Nixon Presidential Library and Museum.

29. James T. Patterson, Grand Expectations: The United States, 1945–1974 (New York: Oxford University Press, 1996), Kindle location 12532.

30. Safire, Before the Fall, 496, and Colson, “Notes.”

31. Safire, Before the Fall, 492.

32. Charles W. Colson, Paper, July 26, 1971, Federal Reserve—Arthur Burns, box 61, White House Special Files, Staff Member and Office Files: Charles W. Colson, Subject Files, Richard Nixon Presidential Library and Museum.

33. In interviews with the author, Greenspan recalled brushing off Colson’s request. However, Colson’s notes from the conversation and tape recordings from the White House indicate that Greenspan cooperated. Colson’s notes, spread over one and a half pages of a yellow legal pad, indicate that he first called Greenspan asking him to intervene and then later got a call back from Greenspan to report on Burns’s reaction, which consisted of an expression of dismay, a request to see Nixon, and a statement that he might be willing to be more supportive of the administration’s economic policy. Confronted with these notes, Greenspan suggested to the author that Colson may have concocted them to support a false claim that he had secured Greenspan’s cooperation—the notion being that Colson needed to make that claim in order to impress his boss, White House chief of staff Haldeman. But Colson presumably took these phone notes for his personal office files, not for presentation to superiors, so Greenspan’s defense seems unpersuasive—in all likelihood, the notes would not have impressed Colson’s superiors because they would not have been presented to them. Greenspan’s complicity in Nixon’s dirty trick seems overwhelmingly likely. Greenspan, interview by the author, November 15, 2010, October 30, 2015, and December 14, 2015. See also Charles W. Colson, Call Notes, n.d., Federal Reserve—Arthur Burns, box 61, Charles W. Colson Collection, Richard Nixon Presidential Library and Museum.

34. Quotes taken from Colson, Call Notes, op.cit.

35. Haldeman dialogue taken from Oval Office, Conversation 550-1, July 28, 1971, White House tapes, Richard Nixon Presidential Library and Museum.

36. White House Telephone Conversation 7-18, July 28, 1971, White House tapes, Richard Nixon Presidential Library and Museum.

37. Safire, Before the Fall, 495.

38. Monetary historians have debated the extent to which political pressure may have caused the Fed to loosen policy ahead of the 1972 election. See Julio J. Rotemberg, “Federal Reserve Goals and Tactics for Monetary Policy: A Role for Penitence?,” Journal of Economic Perspectives 27, no. 4 (Fall 2013): 73–74. The incident described here encourages the verdict that political pressure was decisive. It seems overwhelmingly likely that the Fed would have pursued a tighter monetary policy had it not been for Nixon’s smearing of Burns. The Fed had raised the discount rate by 25 basis points eleven days before the smear; rather than follow up with a further hike, it reversed course and began cutting. Moreover, at the time of the smear, the M2 measure of monetary growth was rising at a monthly rate of 0.9 percent, much higher than the 0.5 percent average in the three years before Burns took over the chairmanship. Absent Nixon’s bullying, Burns would have wanted to steer monetary growth back down to the earlier average. Instead, he allowed the pace to accelerate: between the smear and the 1972 election, M2 grew at an average monthly rate of 1.0 percent. Burns’s incentive to restrain monetary growth was all the stronger given that Nixon was simultaneously running an expansionary budget deficit. The inflation penalty for the postsmear monetary looseness was delayed by the wage-price freeze of August 1971, but it set the stage for the sharp inflationary acceleration of 1973.

39. The details of the Camp David meeting are taken mostly from Don Oberdorfer, “Planning Took Several Weeks,” New York Times, August 17, 1971.

40. H. R. Haldeman, The Haldeman Diaries: Inside the Nixon White House (New York: G.P. Putnam’s Sons, 1994), 341.

41. Since 1933, the U.S. pledge to convert dollars into gold had applied to foreign governments only, and in the postwar period the big ones undertook not to test the U.S. government’s ability to deliver on its promise. But as foreign governments feared that the U.S. might devalue, their commitment not to demand gold broke down. By the start of 1968, the U.S. gold stock was down to $12 billion. Meanwhile, foreign central banks held more than $15 billion in dollar reserves, and European commercial banks held $25 billion in dollar deposits—accumulations that reflected U.S. spending abroad on war and foreign direct investment (the U.S. current account was not the driver of foreign holdings of dollars because it was in surplus). It was obvious that the United States might not make good on its pledge to convert dollars into gold, and the fears were self-fulfilling.

42. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 61–62. Greenspan recalls in an interview: “It’s funny because whenever people ask me, ‘When is it when you had your back problems?’ and I say I know exactly when it was, it was in a weekend in mid-July 1971!” Greenspan, interview by the author, November 8, 2010.

43. Greenspan’s affection for the gold standard was reserved for the more restrictive nineteenth-century version. By 1971, the dollar-gold link had long since ceased to restrain credit creation. In Senate testimony in 1968, Milton Friedman had rightly argued that whatever one might think in principle about the virtue of monetary restraint, the gold cover did not provide it. See Senate Committee on Banking and Currency, Hearings on the Gold Cover: Hearing Before the Committee on Banking and Currency, United States Senate, 1968, 152–66.

44. “When he injured his back and was laid up for so long, his mother was there every day for him and whatever he needed, she got it for him. She did it willingly. And after that Alan had a different view of her and started calling her every morning. And that went on for the rest of her life. He had been changed. He was not calling just out of a sense of duty. His mother had become important to him. It meant a great deal to him.” Eickhoff, interview by the author, by phone, March 13, 2012. “He began to appreciate his mother and what she did for him. And why what she did for him showed her values. And that she did hold values strongly. . . . For once in his life he needed things, somebody had to do things, and she did.” Eickhoff, interview by the author, November 29, 2011.

45. Herbert Stein, Presidential Economics: The Making of Economic Policy from Roosevelt to Clinton (Washington, D. C.: American Enterprise Institute for Public Policy Research, 1994), 178.

46. Ibid., 179.

47. This list is taken directly from Dick Cheney’s memoir. See Dick Cheney, In My Time: A Personal and Political Memoir (New York: Threshold Editions, 2011), 60.

48. Ibid., 61.

49. “Alan was a political and judicious person. He did not want to get out on a limb. In a larger group, he was fairly quiet. He was not a big leader and he should have been.” Donald Jacobs, interview by the author, June 27, 2013. Jacobs was the staff director of the commission.

50. The ordinary saver was unable to circumvent regulation, Tobin wrote, because he was hampered “by the significant minimum denominations and lot sizes of market instruments, by brokerage fees, by his own unfamiliarity and ignorance.” James Tobin, “Deposit Interest Ceilings as a Monetary Control,” 9.

51. The first money-market fund appeared in 1970. By 1980 Americans had invested nearly $100 billion in them.

52. Cabinet Room, Conversation 86-5, December 22, 1971, White House tapes, Richard Nixon Presidential Library and Museum.

53. The regulator was Preston Martin, chairman of the Federal Home Loan Bank Board, which oversaw S&Ls. Richard Erb to Peter Flanigan, “Hunt Commission Report,” memorandum, December 21, 1971, President’s Commission on Financial Structures and Regulation 1/1/71, box 1, White House Central Files, Subject Files: FG 267, Richard Nixon Presidential Library and Museum.

54. Oval Office, Conversation 640-6, December 22, 1971, White House tapes, Richard Nixon Presidential Library and Museum.

55. Alan Greenspan, presentation, American Finance Association, New Orleans, December 28, 1971.

56. Alan Greenspan to Milton Friedman, letter, October 2, 1972.

57. Milton Friedman to Alan Greenspan, letter, October 10, 1972.

58. Alan Greenspan, “The Mirage of Wage-Price Controls,” Wall Street Journal, April 30, 1973. This op-ed column was a précis of an address to the American Statistical Association.

59. Alan Greenspan, “Do-Nothingism,” New York Times, July 31, 1973.

60. “Business Outlook: Inflation: The Longer View” (New York: Townsend-Greenspan & Company, January 23, 1974), personal files of Kathryn Eickhoff; and “Business Outlook” (New York: Townsend-Greenspan & Company, January 28, 1974), personal files of Kathryn Eickhoff.

61. Patterson notes: “The very high hopes of the previous decades—a key to the drive, the optimism, the idealism, and the rights-consciousness of the era—were becoming harder to achieve.” Patterson, Grand Expectations, 783.

CHAPTER EIGHT

1. “Economists: Super-Capitalists at the CEA,” Time, August 5, 1974.

2. See Senate Committee on Banking, Housing, and Urban Affairs, Nominations of Philip A. Loomis Jr. and Alan Greenspan: Hearing Before the Committee on Banking, Housing, and Urban Affairs, United States Senate, 1974.

3. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 63.

4. Ibid.

5. “Economists: Super-Capitalists at the CEA.”

6. Soma Golden, “Why Greenspan Said ‘Yes,’” New York Times, July 28, 1974. In addition, the New Republic described Greenspan as a “fundamentalist mystic.” See Richard L. Strout, “Economic Fundamentalist: Chairman Greenspan,” New Republic, September 14, 1974.

7. The fact that Nixon by now seemed likely to resign made it easier to condemn his record—Nixon resigned in a speech the evening of Greenspan’s hearing. However, at the time when news of Greenspan’s nomination first surfaced, in early July 1974, Nixon’s departure was by no means certain, so the expectation that he would serve a different president probably did not drive Greenspan’s decision to accept the nomination.

8. The financial sacrifice did not bother Greenspan. “I’ve never had a problem making money so I’m not worried about [that]—I make more than I could possibly use. That wasn’t a factor.” Alan Greenspan, interview by the author, December 10, 2010.

9. After the hearing, Proxmire told his staff researcher that Greenspan’s extreme views might cost the nation dearly in the future. See “An Oral History Interview with Morton Schwartz,” Wisconsin Historical Society, accessed March 25, 2014, http://content.wisconsinhistory.org/cdm/ref/collection/proxmire/id/2260. Like Proxmire, Biden voted against Greenspan’s confirmation. Greenspan recalls, “I got two negative votes in the committee. One I’ve always considered to be a compliment. It was a freshman senator by the name of Joe Biden. He said: ‘I’m going to vote “no” for your confirmation, frankly because I think you hold political views far different from mine and you are much too smart not to have some impact. Therefore, I will vote “no.”’ To which I said, ‘Thank you, Senator.’” Greenspan, interview by the author, November 8, 2010.

10. Carroll Kirkpatrick, “Nixon Resigns,” Washington Post, August 9, 1974.

11. James T. Patterson, Restless Giant: The United States from Watergate to Bush v. Gore (New York: Oxford University Press, 2005), 1.

12. “Policy: Seeking Relief from a Massive Migraine,” Time, September 9, 1974.

13. Gerald R. Ford, “The President’s News Conference,” White House, August 28, 1974, http://www.presidency.ucsb.edu/ws/?pid=4671.

14. Kathryn Eickhoff says of Rand’s relationship with Greenspan at the time when he took office, “She had that sort of mother’s pride in what Alan had done and what his success was. Certainly when he asked her what she thought about his going down to Washington, he took [her answer] very seriously. She was . . . very concerned that he might sacrifice some of his own values by doing so.” Kathryn Eickhoff, interview by the author, November 29, 2011.

15. “So I said I will accept with your understanding that I will be taking a thirty-day lease and I will have my suitcase parked at the door.” Greenspan, interview by the author, December 10, 2010. In his memoir, Greenspan recalls telling White House chief of staff Alexander Haig, “If I come in as chairman and the administration starts implementing policies I can’t agree with, I’d have to resign. You don’t need that.” Greenspan, Age of Turbulence, 63. Kathryn Eickhoff corroborates Greenspan: “Alan went down to Washington believing he would be back in New York in less than six months because he did not think he could last longer than that without running into someone asking him to do something which would violate his values.” Eickhoff, interview by the author, November 29, 2011.

16. The description is taken from Julia Duscha, “Economists at the White House—Telling It Like It Is,” New York Times, September 8, 1974.

17. The historian Douglas Brinkley notes that Ford embraced the civic-movement approach with touching simplicity. “Once you had 213 million Americans recognizing that inflation was a problem and joining in the effort to do something about it, positive results would have to follow,” Ford wrote. “If both the government and the people tightened their belts voluntarily and spent less than they would have before, that would reduce demand, and the inflation rate would start going down.” Douglas Brinkley, Gerald R. Ford, The American Presidents Series (New York: Times Books, 2007), 77.

18. Greenspan recalls, “I remember vividly. I said to myself, ‘Now, do you dare to say this? It’s accurate. The question was “Whose incomes fell the most?” Any other answer is wrong!’ I’m now in government for the first time and in a matter of weeks . . . I don’t think I would have done that again any time thereafter. It was an early lesson in truth-telling.” Greenspan, interview by the author, December 22, 2010.

19. Justin Martin, Greenspan: The Man Behind Money (Cambridge, Mass.: Perseus Publishing, 2001), 103.

20. Ibid.

21. Michael Lewis, “Beyond Economics, Beyond Politics, Beyond Accountability,” Worth, May 1995.

22. Martin, Greenspan: The Man Behind Money, 103.

23. Greenspan, interview by the author, December 22, 2010.

24. The economist was IBM vice president David Grove. His study assumed moderate monetary growth. See “Inflation: Summing Up the Summit,” Time, October 7, 1974. Okun, for his part, conceded in 1975 that Greenspan’s policies would cure inflation in the same way that “decapitation can be one answer to a headache.” Henry Mitchell, “Atlas Shrugged, Greenspan Accepted,” Washington Post, January 12, 1975.

25. Alan Greenspan, “Reflections on the Economists Meeting September 5, 1974,” draft memorandum, September 5, 1974, Summit Conference on Inflation—September 1974, box 52, Alan Greenspan Files: Subject File, 1974-1976, Gerald R. Ford Library.

26. In a diary entry dated November 18, 1974, John Casserly, a Ford speechwriter, noted, “The Whip Inflation Now campaign was evaluated as a complete bust but the most interesting thing about it from the inside was that Ford men and women called it a bust. This would never have happened under Nixon.” John J. Casserly, The Ford White House: The Diary of a Speechwriter (Boulder: University Press of Colorado, 1977), 12. “Every time the ‘WIN’ issue came up we at the Economic Policy Board would hide our heads in embarrassment,” said Simon. “I still have a box of old ‘WIN’ buttons at home which I look at any time I develop partisan delusions.” William E. Simon, A Time for Truth (New York: Reader’s Digest Press, 1978), 105. In his memoir, Greenspan describes Whip Inflation Now as “a low point of economic policymaking.” Greenspan, Age of Turbulence, 66.

27. James P. Sterba, “New ‘Advice’ to Curb Inflation: Buy Now, Buy More—Spend!” New York Times, November 16, 1974.

28. Ibid.

29. Alan Greenspan to Jerry Jones, “Effort to Ensure Continuation of Citizens’ Action Committee (WIN),” February 27, 1975, Alan Greenspan Files: White House Correspondence, box 4, Jerry Jones, Gerald R. Ford Library.

30. A month into his tenure, he had urged that Ford delay the launch of the WIN campaign, but when the president declined to do so, he had lodged no further protest. Dick Cheney, In My Time: A Personal and Political Memoir (New York: Threshold Editions, 2011), 76. Equally, on October 15, the day that Ford pressed forward with his WIN initiative by urging his fellow Americans to “clean up your plate before you get up from the table,” Greenspan was asked to comment on a draft of the president’s speech. Rather than rubbishing the whole thing, Greenspan suggested only marginal edits to the text, most of which were ignored anyway. Alan Greenspan to Paul Theis, memorandum, October 15, 1974, personal files of Alan Greenspan. This memo is among the files of Ford-era material provided to me by Alan Greenspan. I am grateful to Katie Broom for her assistance.

31. “Rumsfeld wanted me to be chief economic spokesman for the administration. I said I’ll never do that. The reason I didn’t was you can see what it means, you get up there and whatever the policy is you have to stand up with a straight face and say it’s the right thing to do. . . . My view was that the CEA was supposed to be an economic consulting firm with one client, and you just tell ’em what the facts are and what’s going on and what the alternatives are. But the political decisions are made elsewhere, and I was very uncomfortable getting involved in that stuff.” Greenspan, interview by the author, June 27, 2012.

32. Greenspan, interview by the author, July 16, 2010.

33. Steven F. Hayward, The Age of Reagan: The Fall of the Old Liberal Order: 1964–1980 (New York: Random House, 2009), 448.

34. Earlier in December, Greenspan had lobbied to have the draft of a presidential speech altered so as to focus more on inflation and less on the potential need for a stimulus. Casserly, Ford White House, 17.

35. “If we could keep our hand off the panic button, the economy would correct itself.” Greenspan, Age of Turbulence, 67.

36. Not wanting to be held responsible for failing to anticipate bad outcomes, Greenspan had told White House colleagues in November, “We think this is going to be a rather deep but short recession, but we could fall off the cliff.” Ron Nessen, interview by the author, December 21, 2010. Greenspan’s insistent pessimism alienated colleagues; one White House aide called Greenspan “a goddam gloom-and-doom artist.” Larry Martz et al., “The Economy: Can They Fix It?,” Newsweek, February 24, 1975. Even so, Ford felt in December that he had not been warned of the bad economic news. “An economist, someone once remarked to me, is a person who tells you that there is definitely not going to be a hurricane,” Ford wrote in his memoir. “Then, shortly thereafter, he volunteers to repair and rebuild your roof.” See Gerald R. Ford, A Time to Heal: The Autobiography of Gerald R. Ford (New York: Harper & Row, 1979), 202.

37. Stanley J. Sigel, “Round Table of GNP Users,” in The U.S. National Income and Product Accounts, ed. Murray F. Foss (Chicago: University of Chicago Press, 1983), 318. At Townsend-Greenspan, Greenspan had produced a monthly GNP measure.

38. David Hume Kennerly, White House Photograph, December 27, 1974, White House Photographic Office Photographs, 1974–77: Series A&B, Volume 26, Roll A2598, Frames 9-36, Color, Gerald R. Ford Library.

39. Casserly, The Ford White House, 26. Burton Malkiel, interview by the author, June 25, 2012.

40. The colleague was Bill Seidman. See John Cassidy, “Moneyman,” in The Talk of the Town, New Yorker, February 6, 2006.

41. Again, the colleague was Seidman. See Lewis, “Beyond Economics, Beyond Politics, Beyond Accountability.”

42. In his memoir, Ford describes Greenspan as dovish on the tax cut, even though Greenspan had testified against such a cut in the August Senate hearing. See Ford, A Time to Heal, 84.

43. Casserly, Ford White House, 26.

44. Greenspan, Age of Turbulence, 68. A quarter of a century later, at the start of the administration of George W. Bush, Greenspan would offer another qualified approval of a tax cut, and the Bush team would seize on his endorsement while ignoring the nuances in Greenspan’s statement. Greenspan claimed to be startled, all over again.

45. The speechwriter was Robert Hartmann. He had conceived the WIN campaign, and since then Rumsfeld, Greenspan, and Cheney had been at pains to prevent him from writing speeches that committed the president to policies of which they did not approve. Numerous memoirs of the Ford White House record the bitterness of this faction fighting. See for example Donald Rumsfeld, Known and Unknown: A Memoir (New York: Penguin, 2011), 182.

46. Nessen, interview by the author, December 21, 2010. See also Ron Nessen, Making the News, Taking the News: From NBC to the Ford White House (Middletown, CT: Wesleyan University Press, 2011), 150.

47. The colleague was Jim Lynn, Ford’s budget director. Greenspan, interview by the author, December 22, 2010.

48. Nessen, interview by the author, December 21, 2010. See also Nessen, Making the News, Taking the News: From NBC to the Ford White House, 151–52.

49. Alan Greenspan to William E. Simon, memorandum, January 15, 1975, personal files of Alan Greenspan.

50. Alan Greenspan to Economic Policy Board, memorandum, January 12, 1975, personal files of Alan Greenspan.

51. Murray Seeger, “Has No Faith in Ford or Congress: AFL-CIO to Plan Own Recession War,” Los Angeles Times, January 22, 1975. The quotation is also excerpted in a collection of quotes from Meany in Alan Greenspan’s personal files.

52. The critic was Walter Fackler of the University of Chicago. See Martz et al., “The Economy: Can They Fix It?,” 58.

53. U.S. Congress, Congressional Record, 94th Cong., 2nd sess., January 23, 1975.

54. “He did not waste time. He was fourty-eight years old. He knew his way around the ladies.” Kaye Pullen, interview by the author, October 15, 2012.

55. Ibid.; and Kaye Pullen interview by the author, April 23, 2012.

56. Mitchell, “Atlas Shrugged, Greenspan Accepted.”

57. Allen J. Mayer, Jane Whitmore, and Pamela Lynn Abraham, “Greenspan—Atlas Jogs,” Newsweek, February 24, 1975.

58. Martz et al., “The Economy: Can They Fix It?”

59. “The Economy: How Far Is Down?,” Newsweek, February 24, 1975.

60. Between January and March 1975, Gallup put Ford’s approval rating in the 37–39 percent range, a far cry from the 71 percent at the start of his presidency and lower than any reading taken later. “Presidential Approval,” Roper Center, 2015, http://www.ropercenter.uconn.edu/polls/presidential-approval/.

61. Greenspan’s weekly GNP gauge was correct. The economy returned to growth in the second quarter of 1975.

62. Greenspan quotes taken from Erwin C. Hargrove and Samuel A. Morley, eds., The President and the Council of Economic Advisers: Interviews with CEA Chairmen (Boulder, CO: Westview Press, 1984), 445; and from Sigel, “Round Table of GNP Users,” 318.

63. Arthur F. Burns to Gerald R. Ford, memorandum, March 28, 1975; 1975 March 2–1977 Nov. 16, box 1, Arthur Burns papers, 1911–2005, Duke University Libraries.

64. On March 28, 1975, the same day he advised Ford to accept the Democrats’ tax cut, Greenspan wrote to Senator Edmund Muskie objecting to the idea of commitment to reduce unemployment to 7 percent by the end of the following year. “Your question assumes there is an amount of stimulus which, if applied, could reduce unemployment by the dimensions that you specify,” Greenspan wrote. He had not lost the capacity to denounce the more ambitious versions of fine-tuning. See Alan Greenspan to Edmund S. Muskie, correspondence, March 28, 1975, Davis Subject, Congressional Correspondence (2), Box 151, CEA Staff Economists Files (1982 Accretion), 1974–77, Gerald R. Ford Library.

65. Alan Greenspan to Gerald R. Ford, memorandum, March 28, 1975, Alan Greenspan Files, White House Correspondence, James Cannon, box 3, Gerald R. Ford Library.

66. Describing Greenspan’s influence over Ford, Dick Cheney recalls, “Alan combined economic expertise with an appreciation of practical politics. No less important, he had a real knack for capturing large and complicated ideas in a few well-chosen words. The president liked him and put a lot of stock in his judgment.” Cheney, In My Time, 79.

67. Patterson, Restless Giant, 96.

68. To be sure, the big deficits of Ford’s tenure were primarily driven by the recession, but the tax cuts also contributed. In fiscal 1975, U.S. GDP was $1,560 billion, so the March 1975 tax cut of $22.8 billion represented about 1.5 percent of GDP. That was much less than the huge stimuli enacted in 1933 and 2009, both of which came to more than 5 percent of GDP, but it was still hard to reconcile with Greenspan’s professed commitment to budgetary restraint. For data cited here, see Office of Management and Budget, “The Budget for Fiscal Year 2012,” Historical Tables, Table 1.2, n.d., 24.

69. In July 1975, when the first tax rebate had yet to take full effect and the second one was still months off, Greenspan wrote to Ford that the latest economic news “virtually guarantees a significant recovery throughout the rest of this year.” He then noted that the only disappointing feature of the economy was that long-term interest rates remained too high, a fact he blamed on high inflation expectations. The remedy, Greenspan told the president, was “continued vigilance on the fiscal side.” But Ford acceded to congressional pressure for further tax relief five months later. Alan Greenspan to Gerald R. Ford, memorandum, July 25, 1975, personal files of Alan Greenspan.

70. Greenspan’s Wall Street Journal op-ed, titled “The Politics of Inflation,” had appeared just one year earlier, on March 14, 1974. “I see inflation as essentially a political, not an economic problem,” Greenspan wrote. “The ever-increasing political focus on short-term benefits at the expense of long-term costs has been particularly evident in the budgetary process as candidates for political office have vied with each other to capture votes by proposing new or bigger expenditure programs.” Alan Greenspan, “The Politics of Inflation,” Wall Street Journal, March 14, 1974. Given those words, it is hard to believe that Greenspan expected Congress to go along with spending cuts when he proposed them in 1975. Sure enough, federal outlays in the year to June 1976 came to 21.4 percent of GDP, a touch higher than the previous year and considerably above the 18.7 percent of GDP in fiscal years 1973 and 1974.

71. Asked about this episode, Greenspan said that he “was making a political economy judgment” and that “no matter how convinced you are that something is going to come out a certain way, you’ve got to hedge against being wrong.” He continued, “There is no doubt that the type of judgment I was making was that Ford would be much better off if he signed the bill. Suppose I was wrong and things were worse, he would be better off having signed it. If I were right, signing it would not cause much of a problem.” Greenspan, interview by the author, December 22, 2010.

CHAPTER NINE

1. Peter Kihss, “Tory Chief, Here, Deplores Statism,” New York Times, September 16, 1975.

2. “Margaret Thatcher: A Cut Above the Rest,” Economist, April 8, 2013, http://www.economist.com/blogs/blighty/2013/04/margaret-thatcher-0.

3. Deirdre Carmody, “First Woman to Head Major British Party Makes Some Political Points as She Winds Up Tour Here,” New York Times, September 18, 1975.

4. Charles Moore, Margaret Thatcher: The Authorized Biography, from Grantham to the Falklands (New York: Alfred A. Knopf, 2013), 317.

5. Ibid., 318.

6. Ibid.

7. Graham was speaking to Lady Hartwell, the wife of the owner of the London Daily Telegraph. Ibid., 319.

8. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 282. In his magisterial biography of Margaret Thatcher, Charles Moore says that Thatcher and Greenspan met at Katharine Graham’s house. But Greenspan, for whom the encounter remained vivid, recalls that the dinner took place at the British embassy. Press accounts make no mention of a Graham dinner but confirm that there was a dinner for Mrs. Thatcher at the embassy on September 19. See Jeannette Smyth, “Thatcher Midst the Colonials,” Washington Post, September 20, 1975.

9. The definition of monetary aggregates including M3 was changed by the Federal Reserve in 1980. See Table 2 in Thomas D. Simpson, “The Redefined Monetary Aggregates,” Federal Reserve Bulletin 66 (1980), 99.

10. In 1974, the Bundesbank had become the first central bank to publish monetary targets. The Fed followed in 1975, but the targets were not taken seriously until October 1979.

11. Kaye Pullen, interview by the author, October 15, 2012.

12. Later in her U.S. trip, Thatcher would tell an audience, sounding remarkably like Greenspan, “When money can no longer be counted on to act as a store of value, savings and investment are undermined, the basis of contracts is distorted and the professional and middle-class citizen, the backbone of all societies, is disaffected.” Moore, Margaret Thatcher, 329.

13. Pullen, interview by the author, October 15, 2012.

14. Greenspan had been watching the travails of the British economy for months before Thatcher’s visit. In April 1975, he sent the president a clipping from the Economist detailing the “crumbling financial and fiscal condition” of the United Kingdom. “Observe that the British economy appears to be at the point where they must accelerate the amount of governmental fiscal stimulus just to stand still,” Greenspan told Ford. “This is clearly a very dangerous situation. The frightening parallels, with a lag, between the financial policies of the U.S. and those of the U.K. should give us considerable pause.” Alan Greenspan to Gerald R. Ford, April 23, 1975, Memoranda for the President, August 1974–September 1975, box 1, Records of the U.S. Council of Economic Advisers (1969), 1974–1977, Gerald R. Ford Library.

15. James Q. Wilson, “The Riddle of the Middle Class,” Public Interest, no. 39 (Spring 1975): 128. A copy complete with a White House circulation list was found in Greenspan’s personal files.

16. Louis Harris, speech (National Press Club, Washington, D.C., June 26, 1975). The speech was circulated in the White House. A copy was found in Greenspan’s personal files.

17. The dean was Arnold Weber of the business school at Carnegie Mellon University. See James P. Gannon, “Future Fear: Is the Economy Sliding into Five or Ten Years of Stagnation, Unrest?,” Wall Street Journal, May 15, 1975.

18. Steven F. Hayward, The Age of Reagan: The Fall of the Old Liberal Order: 1964–1980 (New York: Random House, 2009), 517.

19. Hobart Rowen, “Humphrey-Javits Bill Urges Long-Term Economic Plans,” Washington Post, May 13, 1975.

20. Alan Greenspan to Gerald R. Ford, memorandum, June 3, 1975, personal files of Alan Greenspan.

21. Alan Greenspan to Gerald R. Ford, memorandum, June 24, 1975, personal files of Alan Greenspan.

22. The Harvard colleague was Stanley Hoffmann. Quoted in Niall Ferguson, Kissinger 1923–1968: The Idealist (New York: Penguin Press, 2015), Kindle location 625.

23. Walter Isaacson, Kissinger: A Biography (New York: Simon & Schuster, 2005), 319.

24. Edwin L. Dale Jr., “Kissinger’s Worldwide Economic Design,” New York Times, June 8, 1975, sec. 3.

25. In early 1974, at the height of the boom, basic foodstuffs were up by 100 percent in four years, fertilizer by 170 percent, and petroleum by more than 350 percent. These percentage changes refer to the rise in commodity prices relative to manufactured goods between a benchmark period, 1968–70, and the peak of the commodity boom in 1974. See Hollis B. Chenery, “Restructuring the World Economy,” Foreign Affairs 53, no. 2 (January 1975): 244.

26. Henry Kissinger, speech (Kansas City International Relations Council, May 13, 1975), http://www.ford.utexas.edu/library/document/dosb/hak1975.pdf.

27. Ibid.

28. “Henry and I have been working together for years but we’re not personally very close. I know his wife very well and I know him very well but there’s always a little distance that prevented me from making that kind of connection. . . . He’s got a different personality from mine. We actually worked together one time in the private sector. And as well as I know Kissinger, there are deep, deep secrets in that man that I’m not sure even he knows about.” Alan Greenspan, interview by the author, October 12, 2010.

29. Kissinger had made this appeal for a new Bretton Woods in a speech on April 17, 1975, at the National Press Club. In response, Greenspan argued that if Kissinger regretted its passing, he should press for a return to national budget discipline. See Alan Greenspan to Donald Rumsfeld, “The Financial Crises of New York City,” memorandum, September 12, 1975, Alan Greenspan Files: White House Correspondence, box 4, Rumsfeld, Donald, Greenspan, Gerald R. Ford Library.

30. G. Edward Schuh to Alan Greenspan, memorandum, April 22, 1975, personal files of Alan Greenspan.

31. G. Edward Schuh to Alan Greenspan, memorandum, May 23, 1975, personal files of Alan Greenspan.

32. G. Edward Schuh to Alan Greenspan, memorandum, June 4, 1975, personal files of Alan Greenspan.

33. Bernard Gwertzman, “Kissinger’s New Role: His Speeches on Economic Policy Irk Officials Who Prefer More Research,” New York Times, June 4, 1975.

34. The lieutenant was Thomas Enders, his assistant secretary for economic affairs.

35. Henry Kissinger and Thomas Enders, “Memorandum of Telephone Conversation,” June 4, 1975, Kissinger Telephone Conversations, http://gateway.proquest.com/openurl?url_ver=Z39.88-2004&res_dat=xri:dnsa&rft_dat=xri:dnsa:article:CKA13689.

36. Andrew Scott Cooper, The Oil Kings: How the U.S., Iran, and Saudi Arabia Changed the Balance of Power in the Middle East, Reprint edition (New York: Simon & Schuster, 2012), 262–63.

37. By the spring of 1975, Iran’s oil production was down by a sixth since the previous year, and it was building up an unsold stockpile.

38. Gerald R. Ford, Henry Kissinger, and Brent Scowcroft, “Memorandum of Conversation,” June 12, 1975, Gerald R. Ford Library, http://www.fordlibrarymuseum.gov/library/document/0314/1553120.pdf.

39. Henry Kissinger, Alan Greenspan, et al., “Memorandum of Conversation,” June 16, 1975. in Monica L. Belmonte, ed., Iran; Iraq, 1973–1976, vol. 27, Foreign Relations of the United States, 1969–1976 (Washington, D.C.: United States Government Printing Office, 2012), 403–6.

40. The problems with Kissinger’s oil plan had been pointed out earlier to him by the economists on his National Security Council staff. On June 6, 1975, Robert Hormats and Robert Oakley had written to him that “for 500,000 barrels of oil per day out of our total consumption of roughly 18,000,000 bpd you are, in short, running a major policy and personal risk by advancing this proposal. The profound changes called for in the way the US does business and conducts its financial relations holds virtually no hope that the plan could succeed and will expose you to the worst sort of criticism.” Memorandum from Robert Hormats and Robert Oakley of the National Security Staff to Secretary of State Henry Kissinger, June 6, 1975, in Monica L. Belmonte, Iran; Iraq, 1973–1976, 27:401–3.

41. Henry Kissinger and Charles Robinson, “Memorandum of Telephone Conversation,” June 16, 1975, Kissinger Telephone Conversations, http://nsarchive.chadwyck.com/cat/displayItemId.do?queryType=cat&ItemID=CKA13749.

42. Henry Kissinger and Alan Greenspan, “Memorandum of Telephone Conversation,” June 17, 1975, Kissinger Telephone Conversations, http://nsarchive.chadwyck.com/cat/displayItemId.do?queryType=cat&ItemID=CKA13753.

43. Table 11.1a, “World Crude Oil Production: OPEC Members” (U.S. Energy Information Administration, Monthly Energy Review, September 25, 2013).

44. Greenspan later observed that “the major job of the Council of Economic Advisers is to shoot down crazy schemes that people on the Hill have, or in the Administration. Productive things are not visible.” Greenspan, interview by the author, December 10, 2010.

45. Following conversation from Henry Kissinger, Frank Zarb, Alan Greenspan, and Charles Robinson, “Memorandum of Conversation,” n.d., Classical External Memcons, May–December 1975, folder 2, box 23, Record Group 59, Department of State Records, National Archives.

46. This meeting with Kissinger took place one day before Greenspan wrote the second of two June memos to Ford emphasizing the case for deregulation, as mentioned earlier in this chapter.

47. The frustrated CEA memos of the spring, cited above, were followed on July 1, 1975, by a memo from CEA economist Bob Stillman. “I always feel perplexed anytime I deal with people from State,” Stillman wrote. “Their language is so rhetorical that it is difficult to know whether to accept their statements at face-value and label the perpetrators ‘economic ignoramuses’ or whether to conclude that the rhetoric is a necessary façade in international politics.” Stillman inclined toward the first hypothesis, noting that Kissinger’s speeches were suffused with the “hand-in-hand down the primrose path” view of international economics. Robert Stillman to Paul W. MacAvoy, memorandum, July 1, 1975, personal files of Alan Greenspan.

48. Cooper, Oil Kings, suggests that the June 30 meeting with the shah and his foreign minister was unsuccessful. But a memo from Kissinger to Ford on August 15, declassified after publication of Oil Kings, indicates otherwise. See Document 140, Monica L. Belmonte, Iran; Iraq, 1973–1976.

49. Henry Kissinger, Frank Zarb, Alan Greenspan, Charles Robinson, et al., “Memorandum of Conversation,” July 14, 1975, Classified External Memcons May–December 1975, folder 3, box 23, Record Group 59, Records of Henry Kissinger, 1973–77, Department of State Records, National Archives.

50. Henry Kissinger and Charles Robinson, “Memorandum of Telephone Conversation,” August 7, 1975, Kissinger Telephone Conversations, http://nsarchive.chadwyck.com/cat/displayItemIdImages.do?queryType=cat&&ItemID=CKA13923.

51. Gerald R. Ford, Henry Kissinger, and Brent Scowcroft, “Memorandum of Conversation,” August 7, 1975, box 14, National Security Adviser, Memoranda of Conversations 1973–1977, Gerald R. Ford Library, http://www.fordlibrarymuseum.gov/library/document/0314/1553204.pdf.

52. Henry Kissinger, memorandum, August 15, 1975, National Security Adviser, Kissinger-Scowcroft West Wing Office Files, box 16, Iran (5), Secret, Nodis, Cherokee, Gerald R. Ford Library.

53. Charles Robinson to Henry Kissinger, memorandum, August 17, 1975, WikiLeaks, https://www.wikileaks.org/plusd/cables/1975STATE195265_b3.html.

54. Charles Robinson to Henry Kissinger, memorandum, August 30, 1975, WikiLeaks, https://www.wikileaks.org/plusd/cables/1975STATE207021_b.html.

55. Charles Robinson to Henry Kissinger, memorandum, September 8, 1975, in Monica L. Belmonte, Iran; Iraq, 1973–1976, 27:430–32.

56. Henry Kissinger, interview by the author, September 5, 2012.

57. Ibid.

58. Whether Greenspan had been right to block the deal was a slightly different question, however. In the long run, he was correct that untrammeled price signals would balance demand with supply more efficiently than government deal making. In the short run, however, the shah worked out his irritation with his U.S. partners by joining other hawkish producers in demanding a price increase, ultimately securing a price hike of 10 percent.

59. Roderick M. Hills, interview by the author, April 24, 2012. Hills was the administration colleague who was bundled into the same car as Greenspan.

60. Alan Greenspan to Donald Rumsfeld, Dick Cheney, and Robert Goldwin, memorandum, September 25, 1975, James Cannon (3), box 2, Records of the U.S. Council of Economic Advisers (1969), 1974–1977, Gerald R. Ford Library. Sara Jane Moore, the shooter in the second incident, did her best to vindicate Greenspan’s perspective; at her trial she described her attempt to kill Ford as “a correct expression of my anger.”

61. Martin Tolchin, “General Negative Feeling Toward City Shown in Congressional Refusal of Aid,” New York Times, May 25, 1975. For his part, Representative Thomas P. O’Neill Jr. of Massachusetts, the House majority leader, complained of New York’s municipal employees, “Their salaries are too high, their pensions are too high, and they have too much vacation.”

62. Greenspan advised on the draft of the May 14 letter from Ford rejecting New York’s request. See Alan Greenspan to James Cannon, note, May 1975, Seidman files, box 78, New York City, Gerald R. Ford Library. Carey quotation is from Frank Lynn, “Carey and Mayor Express Anger,” New York Times, May 15, 1975.

63. Frank Lynn, “Carey and Mayor Express Anger.”

64. Greenspan contended that far more than money was at stake. “America is better off economically than it was fifteen years ago, but are we spiritually better off?” he demanded of his colleagues. “Resurrecting respect for leadership in government can only be done by moving away from short-term expediency.” See Alan Greenspan et al., “Memorandum of Conversation,” September 25, 1975, James Cannon (3), box 2, Records of the U.S. Council of Economic Advisers (1969), 1974–1977, Gerald R. Ford Library.

65. See also Federal Open Market Committee, “Memorandum of Discussion” (Board of Governors of the Federal Reserve System, November 18, 1975), 67.

66. Seymour P. Lachman and Robert Polner, The Man Who Saved New York: Hugh Carey and the Great Fiscal Crisis of 1975 (New York: SUNY Press, 2010), 152.

67. “President Sees No Justification for Help to City,” New York Times, October 8, 1975. See also Hobart Rowen, “Burns Says Haste Is Vital for NY,” Washington Post, October 9, 1975.

68. “Around City Hall,” New Yorker, October 27, 1975, 154.

69. These arguments were made in three memos, one of which was finalized six days after Ford’s October 29 speech even though its gist was probably deployed in oral form in the debates leading up to it. See Greenspan to Rumsfeld, “The Financial Crises of New York City”; Paul W. MacAvoy to Gerald R. Ford, memorandum, October 27, 1975, personal files of Alan Greenspan; and Burton G. Malkiel to William Seidman, memorandum, November 4, 1975, personal files of Alan Greenspan.

70. Adequacy of Federal Agency Studies into National Impact of a New York Default, vol. 1, 2 vols., Hearings Before a Subcommittee of the Committee on Government Operations, House of Representatives, 94th Cong., 1st sess., October 8 and November 7, 1975 (Washington, D.C.: United States Government Printing Office, 1975), http://hdl.handle.net/2027/pur1.32754076 878366. The study revealed that 546 banks held “significant” amounts of New York State and City securities, which the House subcommittee’s chairman, Benjamin Rosenthal, noted was “approximately 100 more banks than had been previously known to hold such securities.” Edwin L. Dale Jr., “Large Banks Hold Big Stakes Here,” New York Times, November 14, 1975.

71. John Scadding to Alan Greenspan, memorandum, November 10, 1975, personal files of Alan Greenspan. Scadding was forwarding a memo written by David Brazell three days earlier.

72. John J. Casserly, The Ford White House: The Diary of a Speechwriter (Boulder: University Press of Colorado, 1977), 206.

73. Robert Trowbridge Hartmann, Palace Politics: An Inside Account of the Ford Years (New York: McGraw-Hill, 1980), 358.

74. Gerald R. Ford, “Remarks on the Subject of Financial Assistance to New York City” (National Press Club, October 29, 1975).

75. Ford’s speechwriter, Bob Hartmann, later wrote that there were hidden hands behind the speech, “and the hands were the hands of Greenspan.” Hartmann, Palace Politics, 358.

76. Francis X. Clines, “Beame and Carey Decry Ford Plan,” New York Times, October 30, 1975.

77. Ibid. “I’d say the President spoke out to the hinterlands and tried to reach a certain audience, and he’s very mindful of an apparition called Ronald Reagan who somewhere beclouds his future,” Carey suggested.

78. A CBS–New York Times poll taken in the wake of the speech found that a small majority of all Americans—55 percent—supported some kind of federal aid for New York, an increase over a Gallup poll taken just days before the speech that pegged public support at 42 percent.

79. “Default Anticipation Notes Bow at Follies,” New York Times, November 15, 1975.

80. Ibid.

81. The witness was Felix Rohatyn. See Lachman and Polner, Man Who Saved New York, 163.

82. Gerald R. Ford, “Statement on Measures Taken to Improve the Financial Situation of New York City” (President’s News Conference, White House, November 26, 1975).

83. There is a lesson here for the future of finance: commentators repeatedly assert that the system can be rendered safer if the government conducts fewer bailouts, but the reality is that governments will always provide bailouts. Thus, in the wake of the chaos of 2007–9, free-market commentators asserted that the government could have reduced the damage by allowing the investment bank Bear Stearns to fail. Likewise, the efforts to put the financial system back together again featured strenuous attempts to reduce the odds of future government rescues. But history shows that bailouts will be forever with us; nobody wants to trust the market when the market threatens pandemonium. Conservatives of all people should accept this truth about human nature, not pretend that human nature can be otherwise.

84. Pullen, interview by the author, April 23, 2012.

85. “Television: Not for Women Only,” Time, February 21, 1972. See also “The Press: Bah-Bar-Ah’s Bow?,” Time, October 18, 1976.

86. Barbara Walters, Audition: A Memoir (New York: Vintage Books, 2009), 260.

87. Ibid.

88. Stephen F. Hayes, Cheney: The Untold Story of America’s Most Powerful and Controversial Vice President (New York: HarperCollins, 2007), 102.

89. Burton Malkiel, interview by the author, June 25, 2012.

90. John B. Shoven, interview by the author, April 7, 2011.

91. Walters, Audition, 262.

92. Ibid., 263–64.

93. Ibid., 261.

94. Jeannette Smyth, “Personalities,” Washington Post, May 11, 1976.

95. Walters, Audition, 263.

96. Alan’s call on ABC’s balance sheet turned out better than another financial tip he gave Barbara later. Flush with her big salary, she wanted to buy a $250,000 Fifth Avenue co-op. “The way New York City is going, it’s not a good investment,” Alan told her, sagely. Thirty-five years later, the apartment was worth more than $30 million. Ibid., 264.

97. Frank Zarb, interview by the author, May 22, 2012.

98. Greenspan, The Age of Turbulence, 81.

99. “I really hoped that that would go someplace, because I thought she was the first one he’d gone out with that could work. Because her job was more important than his job.” Kathryn Eickhoff, interview by the author, November 29, 2011. Kaye Pullen also expected that the two might get married. Pullen, interview by the author, April 23, 2012.

100. Greenspan recalls, “She knew all the musicians, Isaac Stern and everybody else. But she was not really emotionally drawn to music the way I was. Very few people are. And Andrea was. And that was a necessary, but not sufficient condition. That was a filter which separated how I looked at women.” Greenspan, interview by the author, January 10, 2013.

101. At the 1977 White House Correspondents’ Dinner, Greenspan was overheard saying that he and Barbara Walters are “very good friends. We see each other quite often. But no, there are no announcements.” Nancy Collins, “The Gossip Column,” Washington Post, May 2, 1977.

102. Marian Burros et al., “Inauguration: Establishment Crowd a Day of Citywide Celebrating,” Washington Post, January 20, 1977.

103. Pullen, interview by the author, October 15, 2012.

104. Alan Greenspan to Frank Zarb, memorandum, December 13, 1975, personal files of Alan Greenspan.

105. Alan Greenspan to Nathan Haywood, memorandum, December 24, 1975, personal files of Alan Greenspan.

106. Alan Greenspan to James M. Cannon, memorandum, April 6, 1976, personal files of Alan Greenspan.

107. Fearing systemic fallout from the untested municipal bankruptcy option, state governments rescued cities such as Chicago, Boston, Camden, Harrisburg, and Detroit; in effect, the new bankruptcy option became a threat used by cities to snag the bailouts it was designed to prevent. See Clayton P. Gillette, “Fiscal Federalism, Political Will, and Strategic Use of Municipal Bankruptcy,” University of Chicago Law Review 79, no. 1 (Winter 2012): 309.

108. James W. Singer, “The Humphrey-Hawkins Bill—Boondoggle or Economic Blessing?,” National Journal, June 12, 1976.

109. Margaret Weir, Politics and Jobs: The Boundaries of Employment Policy in the United States (Princeton, NJ: Princeton University Press, 1992), 135.

110. Joint Economic Committee, Thirtieth Anniversary of the Employment Act of 1946: Hearings Before the Joint Economic Committee, United States Congress (Washington, D.C., 1976).

111. The quotes in this paragraph come from Singer, “The Humphrey-Hawkins Bill,” 815.

112. Greenspan told Reichley that he remembered “real pressure” within the administration to ramp up spending at the beginning of ’76, but he and Ford resisted. “We could not be sure that increased spending would have a positive effect in the short run, and then we would have to deal with the effects of having unleashed inflationary pressures into the economy. . . . Actually, the extent to which economists can predict the effects of economic decisions is really quite limited.” A. James Reichley, Conservatives in an Age of Change: The Nixon and Ford Administrations (Washington, D.C.: Brookings Institution Press, 1981), 401. And the economy was improving, so it seemed additional stimulus would have been wasteful.

113. Alan Greenspan to Gerald R. Ford, “Reasons for Better Than Expected Economic Improvement,” memorandum, April 16, 1976, Alan Greenspan Files: White House Correspondence, box 2, Gerald R. Ford Library.

114. In 1976 the federal government changed the close of its fiscal year from the end of June to the end of September, leading Greenspan to expect that the slow growth in the second quarter would be offset during the third.

115. Malkiel, interview by the author, June 25, 2012.

116. Greenspan, interview by the author, June 27, 2012.

117. Greenspan, interview by the author, December 22, 2010.

CHAPTER TEN

1. Alan Greenspan, interview by the author, December 22, 2010.

2. Kathryn Eickhoff, interview by the author, November 29, 2011.

3. Wealth effects are partially recorded in the Federal Reserve’s Flow of Funds data set, but the transfer of wealth from housing stock to other parts of the consumer balance sheets is hard to track. Robert Parker, who worked on these issues at the Bureau of Economic Analysis in the 1970s, received multiple calls from Greenspan to debate the data. Robert Parker, interview by the author, June 13, 2011.

4. Greenspan’s method is described in the appendix to a Townsend-Greenspan client letter. See Alan Greenspan, “Business Outlook” (New York: Townsend-Greenspan & Company, August 26, 1977).

5. The finding that home-equity extraction boosted purchasing power by almost 5 percent is taken from Greenspan’s memo. However, repeating his calculation with today’s revised data indicates that the effect was closer to 4 percent. The finding that home-equity extraction boosted total spending by almost 3 percent is based on the author’s calculation, and assumes that all proceeds of the home-equity extraction were spent in the same quarter.

6. Greenspan, “Business Outlook.”

7. Donald Pitcher, interview by the author, December 19, 2011. Pitcher was a portfolio manager at MFS Boston.

8. Howard Hudson, interview by the author, September 12, 2011.

9. “We had to have post-Greenspan meetings to parse what in fact he had been saying. He would leave us with more than one conclusion, intentionally.” Ibid.

10. David Rowe, interview by the author, October 11, 2011.

11. Greenspan, interview by the author, January 31, 2013.

12. Burton Malkiel, the Princeton professor who worked with Greenspan on macroeconomic forecasting at the Council of Economic Advisers, emphasizes that Greenspan worked from Keynesian models, often seeking to add his own empirical insights from his days as an industrial economist. “He’s perfectly willing to use Keynesian forecasting models . . . he would want to tease the models and shock the models with this, that, and the other thing.” If Greenspan’s skepticism about policy activism made him look like a Friedmanite anti-Keynesian, his appetite for complex forecasting models made him look like a Keynesian anti-Friedmanite. Burton Malkiel, interview by the author, June 25, 2012.

13. Greenspan built home-equity extraction into his firm’s model. “It became a very important independent variable for personal consumption expenditures, especially on large, big-ticket items. And you could see the correlations were really extraordinary.” Greenspan, interview by the author, January 17, 2012.

14. Greenspan did believe (correctly) that markets were efficient to a first approximation. But he was more preoccupied with examples of market inefficiency than most economists in the late 1970s. Indeed, his writing about feedback loops and their propensity to inflate bubbles often resembles that of George Soros, the hedge-fund speculator who turned an obsession with far-from-equilibrium feedback loops into an astonishing fortune. (For a discussion of Soros’s belief in feedback loops, see Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite [New York: Penguin, 2010], especially chapter four.) Confusingly, Greenspan’s 2013 book recants a faith in market efficiency, leaving a false impression that he had believed in market efficiency for much of his career. Alan Greenspan, The Map and the Territory: Risk, Human Nature, and the Future of Forecasting (New York: Penguin Press, 2013). The same confusing impression is encouraged by Greenspan’s “confession” to Congressman Henry Waxman in October 2008 that he had discovered a “flaw” in his worldview. On this, see chapter twenty-nine.

15. Versions of this idea predated Keynes. Money was frequently described as a “veil” that hid the real working of the economy; or to use a different metaphor, it was the grease of trade, not the wheel. See Robert B. Ekelund Jr. and Robert F. Hébert, A History of Economic Theory and Method, third international edition (New York: McGraw-Hill, 1990), 517.

16. Justin Martin, Greenspan: The Man Behind Money (Cambridge, Mass.: Perseus Publishing, 2001), 139.

17. Leonard Silk, “Greenspan, White House Days Behind, Picks Up as Before Economic Scene: Greenspan Resumes Old Career,” New York Times, April 28, 1977.

18. Ibid.

19. Rowe, interview by the author, October 11, 2011.

20. Eickhoff, interview by the author, November 29, 2011.

21. “A Difference of Opinion,” Fortune, February 13, 1978. In this interview, Greenspan opposed a “general tax cut” and emphasized the inflationary consequences of deficits. He devoted much of the interview to arguing in favor of a business tax cut, which would boost growth more and expand the deficit less than other tax cuts. Neither Proposition 13 nor the Kemp-Roth tax cuts followed this logic, but he endorsed them anyway.

22. Romer and Romer examined the effect of tax cuts on future spending decisions. After analyzing tax cuts enacted in 1948, 1964, 1981, and 2001/2003, they found that tax cuts tended to be followed by increases in spending—the opposite of what the starve-the-beast theory predicted. Policy makers addressed increased deficits not by cutting spending but by raising taxes again. Christina Romer and David Romer, “Do Tax Cuts Starve the Beast? The Effect of Tax Changes on Government Spending,” Brookings Papers on Economic Activity, Spring 2009, 139–214.

23. “Nation: Economists Eye the Impact,” Time, June 26, 1978.

24. “A Difference of Opinion,” Fortune.

25. Congressional Budget Office, “Understanding Fiscal Policy,” April 1, 1978, 128.

26. Walter Heller, “The Kemp-Roth-Laffer Free Lunch,” Wall Street Journal, July 12, 1978.

27. Greenspan stipulated that “if we continue to have unrestrained expenditure growth on the one hand and sharp cuts in receipts on the other, we will have horrendous deficits.” Then, embracing the Prop 13 faith, he added: “That is clearly true but irrelevant.”

28. Alan Greenspan, “Economic Conditions and Outlook” (George S. Eccles Distinguished Lecture Series, Utah State University, October 23, 1978).

29. At the time of Greenspan’s speech, house prices were rising by more than 6 percent per year after adjusting for inflation.

30. It should be noted that the Fed’s policy was less tight than it seemed because inflation was high: the real short-term funds rate (the rate after subtracting core PCE inflation) was a bit above 2 percent at the time of Greenspan’s speech. However, the decoupling of short rates and mortgage rates is clear. Between the start of October 1975 and the start of October 1978, the Fed had pushed the short-term interest rate up from 6.2 percent to 8.9 percent, but the thirty-year conventional mortgage rate rose by only 0.6 percentage points, from 9.22 percent to 9.86 percent. Mortgage data are from the St. Louis Fed’s Federal Reserve Economic Data (FRED) database.

31. In the year to September 1978, inflation-adjusted growth had come in at 5.3 percent.

32. The existence of a “conundrum” with respect to mortgage interest rates is omitted in scholarly examinations of this period. See, for example, Julio J. Rotemberg, “Penitence After Accusations of Error: 100 Years of Monetary Policy at the U.S. Federal Reserve,” in The First Hundred Years of the Federal Reserve (National Bureau of Economic Research Conference, Cambridge, Mass., 2013), and Daniel L. Thornton, “The Evolution of Inflation Targeting: How Did We Get Here and Where Do We Need to Go?” (Sixth Norges Bank Monetary Policy Conference, Oslo, 2009). However, retrospective analysis shows Greenspan was right. Between 1954 and 1969, the correlation between the effective federal funds rate and the seasonally adjusted growth in home mortgages had been strong (showing an R2 of 0.4, according to calculations by Dinah Walker of the Council on Foreign Relations). Between 1970 and 1984, the correlation broke down (R2 of 0.06). By 1978, in other words, the previously tight relationship between interest rates and the growth in mortgage lending had indeed been broken.

33. After 2007, Greenspan implied that the “conundrum” had rendered the Fed powerless. But in 1978 he argued that it merely meant that in order to get its way, the Fed would have to act forcefully.

34. Greenspan, interview by the author, January 25, 2011.

35. “The Fed vs. Jimmy’s Aides: Seeing Slowdown Instead of Surge, Bill Miller Declines to Tighten Policy,” Time, April 30, 1979.

36. Edwin McDowell, “He Even Counsels Kennedy,” New York Times, December 9, 1979. It was a point he would raise again in 1983 on the PBS show Open Mind. “Regulating the Economy,” Open Mind (New York: PBS, August 12, 1983).

37. In January 1979, Carter enjoyed a 57–35 lead over Reagan. He also held a wide lead over Ford, 53 to 39 percent. But by early July 1979, Carter was losing in hypothetical head-to-head contests with Reagan, Ford, and Howard Baker.

38. Quoted in James T. Patterson, Restless Giant: The United States From Watergate to Bush v. Gore (New York: Oxford University Press, 2005), Kindle location 2023.

39. For Anderson’s discussion of how he persuaded advisers to help Reagan, see Martin Anderson, Revolution: The Reagan Legacy (Stanford, CA: Hoover Press, 1990), 168.

40. See Edwin Meese, “Campaign Planning Meeting Notes,” n.d., all April and May 1979 Notes, Meese, Ed—Campaign Planning—Meetings, April 1979/May 1979, Box 103, 1980 Campaign Papers, Ronald Reagan Governor’s Papers, Ronald Reagan Library.

41. Martin, Greenspan: The Man Behind Money, 141.

42. Edwin Meese, “Notes and Agendas from Meeting on Public Policy Issues,” September 8, 1979, Meese, Ed—Campaign Planning—Meetings, September 1979, box 103, 1980 Campaign Papers, Ronald Reagan Governor’s Papers, Ronald Reagan Library. The following account derives from these sources.

43. Greenspan, interview by the author, April 11, 2011.

CHAPTER ELEVEN

1. In January 1978, Burns had lamented, “We need an anti-inflation policy on the part of the Administration,” as though it were not the Fed’s responsibility to deliver one. The view that fiscal policy and not monetary policy caused inflation is reflected in staff briefings as well. For example, in a March 21, 1978, FOMC staff briefing, James Kichline suggested that “in the absence of an effective Administration anti-inflation program, the risks appear weighted toward higher rather than lower rates of inflation.” Daniel L. Thornton, “The Evolution of Inflation Targeting: How Did We Get Here and Where Do We Need to Go?” (Sixth Norges Bank Monetary Policy Conference, Oslo, 2009), 3.

2. Burns gave this testimony on July 24, 1975. It should be noted that during his Fed tenure Burns was occasionally capable of acknowledging his power. For example, in congressional testimony in July 1974, he said, “From a purely theoretical point of view, it would have been possible for monetary policy to offset the influence that lax fiscal policies and the special factors have exerted on the general level of prices. . . . But an effort to use harsh policies of monetary restraint to offset the exceptionally powerful inflationary forces of recent years would have caused serious financial disorder and dislocation.” However, statements emphasizing monetary policy impotence were more common. See Julio J. Rotemberg, “Penitence After Accusations of Error: 100 Years of Monetary Policy at the U.S. Federal Reserve,” in The First Hundred Years of the Federal Reserve (National Bureau of Economic Research Conference, Cambridge, Mass., 2013), 13.

3. In his February 2, 1970, Newsweek column, even Milton Friedman had expressed satisfaction that his “close friend and former teacher Arthur Burns” would become Fed chair, and urged the Fed to “shift promptly to a less restrictive policy.” See Rotemberg, “Penitence After Accusations of Error.”

4. The “Great Inflation” of the 1970s is sometimes invoked as proof that inflation can take off with little warning, and therefore that modern central banks should be wary of risking even temporary periods of inflation. But the Great Inflation of the 1970s owed much to the lack of an expert consensus in favor of fighting inflation. The conclusion is that modern central banks have more scope to risk temporary inflation surges than is sometimes recognized.

5. As Burns put it in his Belgrade speech, “We look in vain to technical reforms as a way of eliminating the inflationary bias of industrial countries.” Arthur F. Burns, “The Anguish of Central Banking” (1979 Per Jacobsson Lecture, Belgrade, September 30, 1979).

6. William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1989), 46.

7. Volcker’s reaction to Burns’s speech is described in William L. Silber, Volcker: The Triumph of Persistence (New York: Bloomsbury Press, 2012), 168.

8. Ibid., 15.

9. Ibid., 33.

10. González accused Volcker of usury during a House hearing on July 14, 1981; July was the month in which the federal funds rate topped 22 percent.

11. Charles Goodhart, “The Conduct of Monetary Policy,” Economic Journal 99, no. 396 (June 1, 1989): 301. After leaving office in 1987, Volcker delivered his own retrospective lecture, contrasting his legacy pointedly with that of Burns by titling it “The Triumph of Central Banking?” Paul Volcker, “The Triumph of Central Banking?” (1990 Per Jacobsson Lecture, Washington, D.C., September 23, 1990), http://www.perjacobsson.org/lectures/1990.pdf.

12. Quoted in Silber, Volcker: The Triumph, 149.

13. Neil Irwin, The Alchemists: Three Central Bankers and a World on Fire (New York: Penguin, 2013), 70.

14. Alan Greenspan, interview by the author, November 8, 2010. Greenspan added, “The most important action that the Federal Reserve ever did was what Volcker did in 1979–80. That was critical to this country to an extent that few people could imagine.”

15. The pollster was Daniel Yankelovich. See William Bowen, “The Decade Ahead: Not So Bad If We Do Things Right,” Fortune, October 8, 1979.

16. Robert L. Hetzel, The Monetary Policy of the Federal Reserve (New York: Cambridge University Press, 2008), xiv.

17. Silber, Volcker: The Triumph, 172.

18. William Bowen, “The Decade Ahead.” To the suggestion that forcing down inflation would cause a recession, Greenspan answered, “Is there an alternative? We don’t have either the option of doing nothing or the option of applying a painless cure.”

19. “Right Move at the Eleventh Hour: Time Board of Economists Generally Backs Fed’s Decision,” Time, October 22, 1979, 24.

20. “Will the Last Remain First? A Cooler Ronald Reagan Enters the Race,” Time, November 26, 1979.

21. “‘President Reagan,’” New Republic, December 1, 1979. For further doubts about Reagan’s seriousness, see “Where Did He Get Those Figures? G.O.P. Front Runner Seems to Pluck Facts from Thin Air,” Time, April 14, 1980.

22. Notes from a meeting with Milton Friedman, January 21, 1980, folder “Meese, Ed—Campaign Planning—Meetings, January 1980,” Box 103, Ronald Reagan Campaign Papers, Ronald Reagan Governor’s Papers, 1965–1980, Ronald Reagan Presidential Library.

23. Arthur Laffer, “The Laffer Economic Report,” January 11, 1980, Research Policy (Hopkins/Bandow)—[Correspondence], box 453, Ronald Reagan 1980 Campaign Papers, Ronald Reagan Library. Emphasis original.

24. David A. Stockman, The Triumph of Politics (New York: Harper & Row, 1986), 50.

25. Ibid., 49–50.

26. Dennis Farney, “Reaching Out: Reagan Seeks to Shed His Doctrinaire Image but Keep His Loyalists,” Wall Street Journal, November 9, 1979.

27. Nancy Collins and Carla Hall, “Super Mania: Weekend of Parties and a World Premiere for the Special Olympics,” Washington Post, December 11, 1978.

28. William Bowen, “Better Prospects for Our Ailing Productivity,” Fortune, December 3, 1979.

29. Alan Greenspan, “The Great Malaise,” Challenge 23, no. 1 (April 1980): 37–40.

30. Steven F. Hayward, The Age of Reagan: The Fall of the Old Liberal Order: 1964–1980 (New York: Random House, 2009), 624.

31. Lou Cannon, “Ford Will Reassess His 1980 Prospects,” Washington Post, September 23, 1979.

32. Elisabeth Bumiller and Joseph McLellan, “Ford at a Grand Old Party,” Washington Post, March 13, 1980.

33. Martin Schram, “Ford Says He Won’t Be a Candidate,” Washington Post, March 16, 1980.

34. Thomas M. DeFrank, Write It When I’m Gone: Remarkable Off-the-Record Conversations with Gerald R. Ford (New York: Berkley Books, 2008), 82.

35. William J. Casey to Ronald Reagan, memorandum, June 4, 1980, Meese, Ed—Campaign Planning—Political Memos, June 1980, box 103, Ronald Reagan 1980 Campaign Papers, 1965–1980, Ronald Reagan Library.

36. In an interview with AP the day of his appointment, Greenspan sounded softer on government spending than he had done in his private conversation with Bill Casey one month earlier. “I’m not arguing for or recommending that specific programs be curtailed. I don’t think that’s necessary. It might be necessary in three or four years if we continue doing what we’re doing. I’m merely arguing we stand still and keep existing legislation where it is . . . the equivalent is if Congress went home all year long.” This was the ultimate in do-nothingism. Associated Press, “Reagan Budget Aide Has Spending-Cut Plan,” July 8, 1980.

37. Walters recounted this episode in an on-air discussion with ABC colleagues on Wednesday, July 16, 1980. See “1980 Republican National Convention,” ABC News (Nashville, Tenn.: WKRN, July 16, 1980), Vanderbilt Television News Archive. The author thanks Vanderbilt University’s Television News Archive and the Motion Picture and Television Reading Room of the Library of Congress for assistance in accessing this video and others cited in this chapter.

38. Justin Martin, Greenspan: The Man Behind Money (Cambridge, Mass.: Perseus Publishing, 2001), 142.

39. James M. Perry and Albert R. Hunt, “Canceled Ticket: The Reagan Ford Deal Was Built Bit by Bit—and Then Fell Apart,” Wall Street Journal, July 18, 1980.

40. Henry Kissinger, interview by the author, September 6, 2012.

41. Perry and Hunt, “Canceled Ticket.” Hunt later recalled that Greenspan was a wonderful source for this story, providing yet another example of Greenspan’s focus on cultivating the media. Albert Hunt, interview by the author, February 4, 2014.

42. Greenspan said later of this meeting and the idea of the “Dream Ticket,” “The more I thought about it, the more I thought it was a good idea.” Perry and Hunt, “Canceled Ticket.”

43. David M. Alpern et al., “How the Ford Deal Collapsed,” Newsweek, July 28, 1980. See also Martin, Greenspan: The Man Behind Money, 143.

44. The following account is drawn from multiple sources, but especially from Richard Allen’s vivid account. Although Allen published his memory of events twenty years after the fact, it was based on detailed contemporaneous notes. See Richard Allen, “George Herbert Walker Bush: The Accidental Vice President,” New York Times Magazine, July 30, 2000.

45. “Campaign ’80/Republican Convention,” World News Tonight, ABC News (Nashville, Tenn.: WKRN, July 16, 1980).

46. Perry and Hunt, “Canceled Ticket.”

47. Various elaborate claims have been advanced concerning Walters’s conduct in securing this interview. According to one account, Walters told Ford, “Mr. President, you’ve got to do this for old times’ sake, for Alan’s sake.” See “Barbara Walters and Senator Edward Brooke: The Secret Was Already Out,” New York Magazine Daily Intelligencer, May 2, 2008. See also Tom Shales, “Camera Madness: Network Showdown at Republican Convention,” Washington Post, July 18, 1980. See also “1980: It’s Reagan-Bush, Not Reagan-Ford,” National Journal, August 26, 2012.

48. Robert Shogan, “Bush Ends His Waiting Game, Attacks Reagan,” Los Angeles Times, April 14, 1980.

49. Allen, “George Herbert Walker Bush.”

50. Ronald Reagan, An American Life (New York: Simon & Schuster, 1990), 215.

51. Allen, “George Herbert Walker Bush.”

52. Looking back, Greenspan plays down the odds that the Dream Ticket might have worked, emphasizing that Ford was happy with his life in California. “It was the first time he was making any money. He was playing golf, which he loved to do.” Greenspan, interviews by the author, July 16, 2010, and January 25, 2011. On the other hand, Kissinger told the Washington Post that “if it had been possible for both the principals to go to bed, sleep on it, meet again in the morning, we could have wrapped up this thing in two hours in the morning,” adding, “that’s how close it was.” (Haynes Johnson et al., “The Republicans in Detroit: The Cement Just Wouldn’t Set on GOP’s Alliance,” Washington Post, July 17, 1980.) Kissinger also said that Greenspan believed at the time that the deal could work, and that Greenspan “probably was tempted by being secretary of Treasury.” Kissinger, interview by the author, September 6, 2012.

53. “Campaign ’80/Republican Convention,” World News Tonight, ABC News (Nashville, Tenn.: WKRN, July 17, 1980), Vanderbilt Television News Archive.

54. “1980 Republican National Convention,” ABC News (ABC, July 17, 1980), ABC News Archive. The author would like to thank ABC News for providing a copy of the Walters-Greenspan interview. Greenspan recalls of this Walters interview, “It was the only time she ever interviewed me. We had a Chinese wall, so to speak.” Greenspan, interview by the author, January 25, 2011. In another interview with Tom Brokaw about an hour later, Greenspan reprised his managerial defense of the Dream Ticket. “There was never any intention or any discussion of changing the constitutional prerogatives of the presidency. And the only alterations that were being involved in an enhanced vice presidency really represented shifting of various managerial functions which would allow the vice president to do the types of things which probably is inappropriately now being done by the chief of staff.” See “1980 Republican Convention” (Nashville, Tenn.: NBC, WSMV, July 17, 1980).

55. Greenspan’s assumption of a 17 percent recovery rate from tax cuts was broadly vindicated by later research. A 1986 National Bureau of Economic Research report estimated that between just under 17 percent and 25 percent of the cost of the Reagan tax cuts was recouped as a result of “changes in taxpayer behavior.” See Lawrence B. Lindsey, “Individual Taxpayer Response to Tax Cuts 1982–1984 with Implications for the Revenue Maximizing Tax Rate,” Working Paper (Cambridge, Mass.: National Bureau of Economic Research, December 1986). Similarly, Mankiw and Weinzierl find a 17 percent payback for a tax reduction on labor income. N. Gregory Mankiw and Matthew Weinzierl, “Dynamic Scoring: A Back-of-the-Envelope Guide,” Working Paper (Cambridge, Mass.: National Bureau of Economic Research, December 2004).

56. “A Warning to Reagan on Kemp-Roth,” BusinessWeek, August 11, 1980.

57. Martin Anderson, Revolution: The Reagan Legacy (Stanford, CA: Hoover Institution Press, 1990), 129.

58. Ibid., 132. Anderson writes, “Greenspan was one of the few economists in the country who enjoyed almost universal respect among the press.”

59. Anderson’s numbers assumed real growth in defense expenditures of 5 percent per year, lower than the 7 percent annual increase the campaign had talked about. He also assumed a business tax cut that would be less costly than the version Congress was most likely to enact. See Stockman, The Triumph of Politics, 70–71. See also Elizabeth Drew, “A Reporter at Large; 1980: Reagan,” New Yorker, September 29, 1980, 123. Sixteen months later, on January 17, 1982, Greenspan was called to account for the Chicago forecast on NBC’s Meet the Press. He confessed that, relative to that forecast, Reagan’s defense expenditures had turned out higher, other spending cuts had turned out lower, and economic growth had been much slower, even though the Chicago growth projection had been in line with the consensus in the fall of 1980. Meet the Press (Washington, D.C.: NBC, January 17, 1982).

60. This description is taken from Anderson’s vivid account. See Anderson, Revolution, 133.

61. Ibid., 134.

62. Drew, “A Reporter at Large; 1980: Reagan,” 123. The article also observes, “Greenspan is actually a very conservative man, but, compared with some of the people who had been advising Reagan, he is conventional.” Meanwhile, Time magazine was suitably impressed as well. In place of smoke and mirrors, Reagan now had an economic platform that was “debatable, but plausible,” in the judgment of Time’s editors. The fact that Greenspan had close ties to Time was surely not irrelevant. See George J. Church, Laurence I. Barrett, and William Baylock, “Conservative Conservatism,” Time, September 22, 1980. Likewise, the Washington Post quoted Greenspan’s reassuring verdict: “This is an exercise in reasonable budget making.” See Lou Cannon, “Reagan Scales Down Plan for Patching Up Economy,” Washington Post, September 10, 1980.

CHAPTER TWELVE

1. Lou Cannon, President Reagan: The Role of a Lifetime (New York: PublicAffairs, 2000), 95–114.

2. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 88.

3. Ronald Reagan to Alan Greenspan, letter, September 23, 1980, Political Ops—General—Debate (1/3) (Timmons), box 250, Ronald Reagan Campaign Papers, 1965–80, Ronald Reagan Governor’s Papers, Ronald Reagan Library.

4. Murray L. Weidenbaum, interview by the author, June 12, 2013.

5. Robert G. Kaiser, “High Visibility and Higher Stakes,” Washington Post, February 5, 1981. See also Walter Shapiro, “The Stockman Express,” Washington Post, February 8, 1981.

6. David A. Stockman, The Triumph of Politics (New York: Harper & Row, 1986), 74.

7. Ibid., 75.

8. Gail Fosler, interview by the author, October 3, 2011.

9. Weidenbaum, interview by the author, June 12, 2013.

10. Stockman, Triumph of Politics, 95.

11. Ibid., 103.

12. As a share of GDP, the fiscal 1982 and 1983 budgets produced deficits of 4.0 percent and 6.0 percent. This was a worse performance than the deficits of 3.4 percent and 4.2 percent over which Greenspan had presided in the Ford years, and also the worst performance in the post–WWII era. See Office of Management and Budget, “The Budget for Fiscal Year 2012,” Historical Tables, Table 2, n.d.

13. CPI inflation was 12.6 percent in November 1980.

14. Coordinating Committee on Economic Policy, “Economic Strategy for the Reagan Administration” (Los Angeles, November 16, 1980). The author thanks George Shultz for providing a copy of this document.

15. This scene is brilliantly described in William L. Silber, Volcker: The Triumph of Persistence (New York: Bloomsbury Press, 2012), 194–95.

16. Paul Volcker, interview by the author, December 8, 2010.

17. Silber, Volcker: The Triumph, 194–95. See also Stockman, Triumph of Politics, 71. Stockman’s presentation, “Avoiding a GOP Economic Dunkirk,” had emphasized the danger that monetary policy would stifle growth before tax cuts could stimulate it.

18. Volcker, interview by the author, December 8, 2010.

19. The meeting took place on Friday, January 23, 1981. Martin Anderson, Revolution: The Reagan Legacy (Stanford, CA: Hoover Institution Press, 1990), 250.

20. Associated Press, “Lass Gets Presidential Hug,” Sarasota (Florida) Herald-Tribune, January 24, 1981.

21. The following scene, including the passage on Volcker’s gratitude to Burns, is taken from Silber, Volcker: The Triumph, 200–201.

22. Weidenbaum, interview by the author, June 12, 2013. Weidenbaum would become Reagan’s first CEA chairman and was present at the meeting.

23. Steven Rattner, “Greenspan’s Widened Influence,” New York Times, March 9, 1981. In 1980, the pitcher Nolan Ryan earned $1 million, according to the Society for American Baseball Research.

24. “Talking Business with Alan Greenspan; Reagan Policy and Congress,” New York Times, March 24, 1981. A little while later, Greenspan added that corporations with short-term borrowing were also in trouble: their debt payments were rising through the roof, forcing them to lay off workers. “A sustained recovery may be difficult to achieve until order is restored to the balance sheets of financial institutions and nonfinancial companies,” Greenspan told the Wall Street Journal. Thanks to his understanding of the linkages between finance and the real economy, Greenspan’s forecast proved better than most, at least on this occasion. The Journal noted that “administration officials and most private economists believe that interest rates will turn down soon and spark a business recovery in the fourth quarter.” As it turned out, growth in the fourth quarter of 1981 was negative 4.5 percent, followed by negative 6.5 percent in the next quarter. Greenspan’s projection that the recovery would be delayed until the second quarter of 1982 was closer to the mark: growth in that quarter came in at positive 2.2 percent, although the economy did not start growing strongly until 1983. See Kenneth H. Bacon, “Budget Blight: Economic Slowdown Could Widen Deficit, Some Reaganites Fear,” Wall Street Journal, August 12, 1981.

25. “Watch on the Rhine,” Wall Street Journal, May 21, 1981.

26. In the last months of Carter’s tenure, supply-side forces in Congress had slipped a gold clause into the law, requiring that the secretary of the Treasury convene a high-level commission on the role of gold in monetary policy. However, it took further pressure the following year to get the administration to appoint the commission.

27. Kiron K. Skinner, Annelise Graebner Anderson, and Martin Anderson, eds., Reagan: A Life in Letters (New York: Free Press, 2003), 298–99. Quoted in Silber, Volcker: The Triumph, 195.

28. Ronald Reagan to Murray L. Weidenbaum, “Handwritten Note on Gordon Luce Correspondence,” 1981, box FG 143033198, Ronald Reagan Library. The author is grateful to Jerry L. Jordan for bringing this evidence to his attention.

29. Murray L. Weidenbaum to Ronald Reagan, memorandum, August 11, 1981, box FG 143033198, Ronald Reagan Library. The author is grateful to Jerry L. Jordan for providing a copy of this document.

30. Ronald Reagan to Gordon Luce, letter, August 14, 1981, Ronald Reagan Library. Copy obtained from Jerry L. Jordan.

31. Hobart Rowen, “Reagan Might Just Join the New Gold Rush,” Washington Post, August 20, 1981.

32. On Anderson’s unsuccessful effort to have Greenspan appointed to the commission, see Kevin Hopkins to Martin Anderson, memorandum, April 29, 1981, Gold Commission (1), box CFOA84, Martin Anderson Files, Ronald Reagan Library. The memo offers Anderson a list of possible commission members; Anderson scrawls at the bottom: “Rec[ommend] Alan Greenspan.”

33. Citing a conversation with Greenspan, Anderson wrote in an internal memo that Reagan should support Greenspan’s idea of gold-linked bonds, adding that this would mean extending the gold commission’s deadline. See Martin Anderson to Edwin Meese, memorandum, August 31, 1981, Gold Commission (1), box OA9540, Edwin Meese Files, Ronald Reagan Library. Coupled with evidence from other administration sources, who recall that the White House aimed to use the gold commission to defuse the pressure for a return to the gold standard, Anderson’s memo strongly suggests that Greenspan’s mission was to kill the gold campaign by delaying it. This is consistent with the delay tactics that Greenspan deployed against Kissinger in 1975, and is consistent with the role he played, at the Reagan administration’s behest, when he strung out the Social Security commission beyond the 1982 midterm elections.

34. It was “a remarkable turnabout from an ardent supporter of hard money,” Newsweek noted. Harry Anderson et al., “Reagan’s Ailing Economy,” Newsweek, September 7, 1981.

35. Committee on the Budget, United States Senate, Second Concurrent Resolution on the Budget—Fiscal Year 1982, 1981. See also Silber, Volcker: The Triumph, 207.

36. Empirical studies support Greenspan’s concern about the effect of deficits on interest rates. Eric Engen and R. Glenn Hubbard estimate that a 1-percent-of-GDP increase in the federal deficit raises interest rates by 18 basis points on five-year-ahead rates and 24 basis points on current rates. See Eric M. Engen and R. Glenn Hubbard, “Federal Government Debt and Interest Rates,” in NBER Macroeconomics Annual 2004, ed. Mark Gertler and Kenneth Rogoff, vol. 19 (Cambridge, Mass.: MIT Press, 2004), 83–138. William Gale, Peter Orszag, and colleagues find larger effects: an increase of 25 to 35 basis points on five-year-forward interest rates for each percent-of-GDP increase in the future unified deficit and 40 to 70 basis points for each percent-of-GDP increase in the future primary deficit. William G. Gale et al., “Budget Deficits, National Savings, and Interest Rates,” Brookings Papers on Economic Activity, no. 2 (2004): 101–210. The effect was almost certainly more powerful in the early 1980s than later, when more capital flowed across borders. See Richard J. Sebula and James V. Koch, “Federal Budget Deficits, Interest Rates, and International Capital Flows: A Note,” Quarterly Review of Economics and Finance 34, no. 1 (Spring 1994): 117–20.

37. Lewis Lehrman, a member of the gold commission, asserted that “the road to the balanced budget is paved with the gold standard.” See Lewis Lehrman, “The Case for the Gold Standard,” Wall Street Journal, July 30, 1981.

38. Jude Wanniski to Alan Greenspan, letter, September 25, 1981, Correspondence: Greenspan, Alan, 1991–1993, box 14, Jude Wanniski, Hoover Institution Archives.

39. “For the first time in fifty years, they seriously considered it,” Congressman Ron Paul told a reporter. See Robert Furlow, “Gold Backer Sees Victory in Rejection,” Associated Press, March 9, 1982.

40. Kenneth Duberstein, a White House aide at the time, recalls of the gold bandwagon, “Alan blew it up.” Kenneth Duberstein, interview by the author, February 20, 2014.

41. Robert M. Ball, The Greenspan Commission: What Really Happened (New York: Century Foundation, 2010), 21.

42. The Cato Institute proposed individual Social Security accounts in its newsletter in 1979. The next year it published a book advocating individual accounts titled Social Security: The Inherent Contradiction. Peter J. Ferrara, Social Security: The Inherent Contradiction, Studies in Public Policy (Cato Institute, 1980). Moreover, back in the summer of 1975, Donald Rumsfeld had written to Greenspan, asking whether the administration should tackle the subject, and Greenspan had responded by commissioning a memo on various options, including private savings accounts. Donald Rumsfeld to Alan Greenspan, memorandum, August 1, 1975, personal files of Alan Greenspan; and Barry R. Chiswick and June O’Neill to Alan Greenspan, memorandum, August 6, 1975, personal files of Alan Greenspan.

43. On Greenspan’s support for Stockman, see John S. DeMott, “The Outlook Brightens,” Time, June 1, 1981. Greenspan had also argued the point privately to the administration. According to Martin Anderson’s notes of an earlier President’s Economic Policy Advisory Board meeting, on June 11, 1981—generously provided to the author—Greenspan suggested that the introduction of Social Security reform legislation had caused long-term interest rates to moderate.

44. Martin Feldstein, interview by the author, January 30, 2013. Feldstein chaired the Council of Economic Advisers starting in 1982.

45. William A. Niskanen, who served on Reagan’s Council of Economic Advisers between 1981 and 1985, later called the May Social Security package “the major domestic policy mistake of the Reagan administration—an extraordinary political misjudgment.” See William A. Niskanen, Reaganomics: An Insider’s Account of the Policies and the People (New York: Oxford University Press, 1988), 38.

46. James Baker, the White House chief of staff, recalls, “Greenspan never mentioned private Social Security accounts to me. He knew that they would not work. Politically it was hopeless.” James Baker, interview by the author, June 12, 2013. Similarly, Greenspan recalls, “Trying to push private accounts was not my job.” Greenspan, interview by the author, February 18, 2011. Together with other evidence, these recollections contradict (and almost certainly correct) a suggestion in Robert M. Ball’s memoir, The Greenspan Commission: What Really Happened. Ball, who was one of the leading Democrats on the commission, recounts that Greenspan had to be talked out of a free-ranging philosophical discussion of federal retirement provision. See Ball, Greenspan Commission, 15. Given Greenspan’s experience in the Ford administration and his highly developed political skills, it seems implausible that he would have risked splitting the commission at the outset with a divisive debate about fundamental principles.

47. Alan Greenspan, “Briefing for Reporters,” December 16, 1981, National Commission on Social Security Reform, box CFOA89, Martin Anderson Files, Ronald Reagan Library.

48. Anne Conover Heller, Ayn Rand and the World She Made, 1st printing edition (New York: Nan A. Talese, 2009), 397.

49. Susan Chira, “Followers of Ayn Rand Provide Final Tribute,” New York Times, March 10, 1982.

50. Scott McConnell, 100 Voices: An Oral History of Ayn Rand (New York: New American Library, 2010), 326.

51. David Rowe recalls that Rand’s death seemed to affect Greenspan. “Around the office, the one time he seemed gloomy was when Ayn Rand died. Alan was hit hard by that. That was the one time when he seemed more subdued, a little testier. You did not see his dry wit for a while.” David Rowe, interview by the author, October 11, 2011.

52. Edwin Harper, “Notes: President’s Economic Policy Advisory Board,” March 18, 1982, Economic Policy Advisory Board, box OA9449, Edwin Meese Files, Ronald Reagan Library.

53. See Rowland Evans and Robert Novak, “The Economics of Pain,” Winchester Star, March 12, 1982. See also Hobart Rowen, “Does Reagan Seek an Economic Czar?,” Washington Post, July 18, 1982.

54. In 1983, Greenspan told the New York Times, “When I was asked to be the chairman, I wondered whether I had enough time to take the job on. But then I thought about it, and I thought the commission would produce a report that would sit on a shelf, and how much time could that possibly take?” Tamar Lewin, “The Quiet Allure of Alan Greenspan,” New York Times, June 5, 1983. David Rowe recalls, “The commission did not take more than 5 or 10 percent of Alan’s time. Alan is good at delegating things. It was not a big deal for him.” Rowe, interview by the author, October 11, 2011.

55. Greenspan “bent over backward to show procedural fairness,” Nancy Altman recalls of Greenspan. “He was serious about it and he understood that something had to be done. It was the pragmatic side that was being pulled out. He kept his personal views to himself.” Nancy Altman, interview by the author, February 18, 2011. Even Robert M. Ball, whose later account of the commission’s success played down Greenspan’s role, told the New York Times, “He was easy to deal with on procedural matters, and his conduct at meetings was low-key. He talks very quietly, and his manner does defuse people who might disagree.” Lewin, “The Quiet Allure of Alan Greenspan.”

56. Christopher Connell, “Saturday AM Cycle Bulletin,” Associated Press, February 27, 1982.

57. Nancy J. Altman, The Battle for Social Security: From FDR’s Vision to Bush’s Gamble (Hoboken, NJ: John Wiley & Sons, 2005), 240.

58. Ibid., 241.

59. Ball, Greenspan Commission, 18.

60. Ibid., 28.; Altman, Battle for Social Security, 244.

61. Altman, Battle for Social Security, 244–45.

62. Feldstein, interview by the author, January 17, 2013.

63. Ball, Greenspan Commission, 34.

64. Ibid., 35.

65. Ball writes, “This point seems to have been lost on everyone who sees the Greenspan Commission as an unqualified success and as a model for the future. The reality was that the commission as such had just about struck out by the end of its originally appointed term in 1982, having reached agreement on nothing more than the size of the problem and the desirability of extending Social Security coverage to newly hired employees.” Ibid., 42.

66. Altman, Battle for Social Security, 250.

67. Greenspan, interview by the author, February 18, 2011.

68. Ball, Greenspan Commission, 55.

CHAPTER THIRTEEN

1. William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1989), 483.

2. James M. Boughton, “The Mexican Crisis: No Mountain Too High?,” in Silent Revolution: The International Monetary Fund 1979–1989 (Washington, D.C.: International Monetary Fund, 2001), 281–318.

3. In 1979, regulators did begin to caution banks about Latin American exposure. However, an analysis of the program by the U.S. General Accounting Office in 1982 suggested that these cautions “had little impact in restraining the growth of specially commented exposures.” Banks continued to lend freely to Latin America right up to the outbreak of the crisis in August 1982. See Timothy Curry, “The LDC Debt Crisis,” in History of the Eighties—Lessons for the Future, vol. 1, 2 vols. (Washington, D.C.: FDIC, 1997), 191–210. Further, in December 1981 the Fed, in cooperation with the Office of the Comptroller of the Currency, issued new regulations requiring banks to hold more capital—a 5 percent capital-asset ratio for larger banks and 6 percent for smaller ones. The seventeen largest banks, however, were exempted from the regulation, largely because they were unable to comply with it. In 1981, the seventy largest banks averaged capital-asset ratios of 4.37 percent, with many of the largest well below that. See Greider, Secrets of the Temple, 423–33.

4. Adding together the top eight banks’ exposure to Latin America, federal officials found that it came to 232.6 percent of their capital. See Federal Deposit Insurance Corporation, Timothy Curry, “The LDC Debt Crisis,” History of the Eighties: Lessons for the Future. Vol. 1. Federal Deposit Insurance Corporation.

5. These loans were structured as currency swaps. Volcker informed the Reagan administration and key congressional chairmen of his actions, but he took advantage of the rules governing central-bank swaps, which allowed him to avoid public reporting for several months.

6. The Department of Energy would buy $1 billion of oil from Mexico and pay immediately instead of waiting for delivery. The Department of Agriculture would kick in another $1 billion, dressed up as a line of credit for the future purchase of U.S. farm produce. The Fed would provide—which meant, print—$925 million, and it would persuade foreign central banks to come up with a further $925 million between them.

7. Quoted in Robert D. Hershey Jr., “In Remembrance of Real Money,” New York Times, December 10, 1985.

8. Greenspan had repeatedly predicted a crisis in the savings-and-loan industry. He had picked the wrong example, at least for the moment. But his broader point was right.

9. Before Volcker’s arrival, blue-chip corporate borrowers had faced long-term interest rates of around 9.5 percent; by April 1981, rates were up at 14 percent. Bond yields cited here are from Moody’s AAA corporate bond index, which reflects yields on bonds with maturities of between twenty and thirty years.

10. Senate Committee on Banking, Housing, and Urban Affairs, International Debt: Hearings Before the Subcommittee on International Finance and Monetary Policy of the Committee on Banking, Housing, and Urban Affairs, 98th Cong., 2nd sess. February 17, 1983.

11. William L. Silber, Volcker: The Triumph of Persistence (New York: Bloomsbury Press, 2012), 222.

12. See, for example, Robert D. Hershey Jr., “The Fed and Its Credit Dilemma,” New York Times, October 11, 1982; and Clyde H. Farnsworth, “Monetarists Divided on Fed’s Stand,” New York Times, October 12, 1982.

13. Steven F. Hayward, The Age of Reagan: The Fall of the Old Liberal Order: 1964–1980 (New York: Random House, 2009), 197. Echoing Baker, Reagan’s campaign director, Ed Rollins, noted that “there’s only one man who can cost the President reelection all by himself, and that’s the chairman of the Federal Reserve. We need to control that guy.”

14. Harry Anderson and Rich Thomas, “Voting for Volcker to Stay,” Newsweek, June 20, 1983.

15. Jeremiah O’Leary, “Volcker Won’t Get 2nd Term,” Washington Times, April 18, 1983.

16. See, for example, Tamar Lewin, “The Quiet Allure of Alan Greenspan,” New York Times, June 5, 1983.

17. Walter Shapiro et al., “Will Reagan Reappoint Volcker?,” Newsweek, May 23, 1983.

18. Quotes from Eckstein come from Lewin, “The Quiet Allure of Alan Greenspan.”

19. Joseph Vitale, “Profile: Alan Greenspan,” NYU Business, n.d., 28–33. It is clear from the content that the profile ran in the first months of 1983.

20. Lewin, “The Quiet Allure of Alan Greenspan.” The quote from Walters comes from Linton Weeks and John M. Berry, “The Shy Wizard of Money,” Washington Post, March 24, 1997.

21. This passage is taken from William L. Silber’s masterful Volcker: The Triumph, 229.

22. Ibid., 232. William Greider says that Volcker and Reagan met in the Oval Office. But press reports shortly after Volcker’s renomination report that the meeting took place in the residence, suggesting that Silber’s version of events is accurate. See “Paul Volcker—Federal Reserve Board Chairman,” United Press International, June 18, 1983.

23. Anderson and Thomas, “Voting for Volcker to Stay.”

24. James T. Patterson, Restless Giant: The United States from Watergate to Bush v. Gore (New York: Oxford University Press, 2005), 159.

25. This exchange comes from Silber, Volcker: The Triumph, 232.

26. Ronald Reagan, The Reagan Diaries, ed. Douglas Brinkley (New York: HarperCollins, 2007), 157.

27. Tom Herman, “Volcker Has 76.9% Support to Remain Fed Chief, in Poll of Investment Leaders,” Wall Street Journal, June 8, 1983, 18.

28. Not only was inflation down, but growth had by now recovered powerfully. In the second quarter of 1983, output grew at an annualized rate of 9.4 percent.

29. George Will, “The Idea of Replacing Volcker,” Washington Post, May 12, 1983.

30. Reagan, Reagan Diaries, 157.

31. Silber, Volcker: The Triumph, 233.

32. Milton Friedman to Alan Greenspan, letter, July 13, 1983, folder 149–9. Correspondence: Greenspan, Alan, 1971–2002, box 149, Milton Friedman Papers, Hoover Institution Archives.

33. Greenspan was being interviewed on Open Mind by Richard Heffner, a professor of communications and public policy at Rutgers University. “Regulating the Economy,” Open Mind (New York: PBS, August 12, 1983). Press accounts of the contest for the Fed chairmanship frequently suggested that Greenspan might not want the job; but this only showed Greenspan’s skill in disguising his ambition. When the job was offered to him four years later, Greenspan had no hesitation in taking it.

34. Keith H. Hammonds, “What’s New on the Lecture Circuit; The Superstars,” New York Times, September 11, 1983. The article reported that Greenspan gave eighty speeches per year, at fees of between $10,000 and $13,000.

35. Alan Greenspan, interview by the author, January 31, 2013.

36. Ibid. Rory O’Neil, interview by the author, October 11, 2011. Dyan Machan, “One Plus One Plus One Equals Zero,” Forbes, April 20, 1987.

37. In 1982, Greenspan reflected, “I sit on the boards of a number of major corporations and often wonder how much I contribute, or in fact should contribute, to the forming of general policy for the enterprise. . . . The vast majority of meetings are dull and that probably is good news for shareholders. . . . The truth of the matter is that boards of directors do not have a significant function except when something is going disastrously wrong. It’s on those rare occasions when the directors earn their fees. . . . As you thumb through your annual reports of the companies in which you own shares, hope that your directors are being well paid, but that they are never called upon to really exert themselves.” “Commentary by Alan Greenspan,” Nightly Business Report (Miami: South Florida Public Television, WPBT, February 15, 1982).

38. J.P. Morgan was also known by the name of its bank subsidiary, Morgan Guaranty Trust.

39. “When I became a director of J.P. Morgan and I walked into 23 Wall Street and I sat down in the board-room and there was this picture hanging over me, it was a real thrill. I had an idealized vision of the nineteenth century.” Greenspan, interview by the author, October 12, 2010. In another interview, Greenspan recalled his sensation upon entering the boardroom: “What am I doing here? How the hell did I get here? It was like a kid dreaming of being a major-league baseball player, and he’s standing up at the plate, and the catcher behind him is a very famous ball- player or something like that.” Greenspan, interview by the author, March 11, 2011. See also Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 78–79. The impressive Morgan chandelier is noted in Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York: Grove Press, 2001), 719.

40. Michael Patterson, interview by the author, November 9, 2011.

41. John F. Ruffle, a senior J.P. Morgan executive who presented regularly to the board during Greenspan’s tenure, remembers Greenspan as among the three board members who challenged him with penetrating questions. (The others were George Shultz and Frank Cary, the boss of IBM.) John F. Ruffle, interview by the author, September 14, 2011. However, two other Morgan veterans with less specific memories said that Greenspan was as passive as the other directors.

42. One of the girls on the receiving end of this lecture was Gail Collins, who recalled the experience in a column for Newsday. (Gail Collins, “Anti-Porn Banker Kept Dirty Books,” Newsday, December 9, 1991.)

43. Quoted in Robert Scheer, “Of Saviors and Loans,” Playboy, September 1, 1990.

44. Ever since his service on Nixon’s financial commission, Greenspan had opposed regulatory silos, arguing that consumers would gain from freer competition among firms, and that the firms themselves would be safer if they could diversify their risks more widely. About a year before he met Keating, in July 1983, Greenspan had testified to a House committee that he saw “no danger in allowing a continued unwinding of the regulatory mechanism”—an unwinding that had already unleashed a “veritable explosion of new financial services in recent years.” (See Lisa J. McCue, “Greenspan Denounces Moratorium; Says Further Deregulation Will Benefit Consumers, Market,” American Banker, July 15, 1983.) The following September, Greenspan restated his message in the Wall Street Journal, insisting that competition would drive the financial sector to produce worthwhile services that lowered the cost of capital. To those critics who contended that much financial innovation was aimed merely at sidestepping regulation, Greenspan replied that this went only to show that regulation was “outmoded.” (Alan Greenspan, “Onward the Revolution in Financial Services,” Wall Street Journal, September 16, 1983.)

45. Greenspan’s November 1984 letter is reprinted in House Committee on Government Operations, Federal Regulation of Direct Investments by Savings and Loans and Banks; and Conditions of the Federal Deposit Insurance Funds: Hearings Before a Subcommittee of the Committee on Government Operations (Washington, D.C., 1985). Emphasis in original. A further description of Greenspan’s study is reported in David LaGesse, “Thrifts Face Crucial Fight on Investments,” American Banker, December 7, 1984.

46. LaGesse, “Thrifts Face Crucial Fight on Investments.”

47. Nathaniel C. Nash and Philip Shenon, “A Man of Influence,” New York Times, November 9, 1989. After the downfall of his business empire in April 1989, Keating told reporters: “One question, among many raised in recent weeks, had to do with whether my financial support in any way influenced several political figures to take up my cause. I want to say in the most forceful way I can: I certainly hope so.”

48. The letter, dated February 13, 1985, and addressed to Thomas Sharkey, principal supervisory agent for the San Francisco Federal Home Loan Bank Board, is reprinted as “Appendix C” in Martin Mayer, The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry (New York: C. Scribner’s Sons, 1990).

49. Greenspan made this comment on March 29, 1985, on Louis Rukeyser’s Wall Street Week. Wall Street Week with Louis Rukeyser (Owings Mills, Maryland: PBS, MPT, March 29, 1985).

50. Nathaniel C. Nash and Philip Shenon, “A Man of Influence.” See also Greg Evans, “The Desert Fox,” Cincinnati Magazine, August 1989.

51. Lincoln’s assets doubled in size over the course of 1984. In contrast, the assets of the savings-and-loan industry as a whole in California, Arizona, and Nevada grew 30 percent that year. The growth of Keating’s S&L is described in Nathaniel C. Nash, “Greenspan’s Lincoln Savings Regret,” New York Times, November 20, 1989. Industry statistics are reported in “Asset Growth at Western S&Ls Slowed Sharply,” Los Angeles Times, July 23, 1985.

52. Greenspan, Age of Turbulence, 115.

53. Richard L. Berke, “Savings and Loan Executives Accused of Tapping Phones,” New York Times, October 27, 1989.

54. Joseph W. Cotchett and Stephen Pizzo, The Ethics Gap: The Erosion of Ethics in Our Professions, Business, and Government: Greed and the Casino Society (Carlsbad, CA: Parker & Son Publications, 1991), 144. The source on the rerouting of Greenspan’s calls is Michael Bradfield, the Fed’s general counsel. Michael Bradfield, interview by the author, February 21, 2014.

55. For more on these projects see Evans, “Desert Fox.” The sale of these assets cost taxpayers dearly. In 1988, several months before it took over Lincoln Savings and Loan, the government estimated the thrift’s controlling stakes in this hotel, the Phoenician, and another, the Crescent, to be worth $179 million. In October 1991, the stakes in these hotels—now on the government’s balance sheet—were sold to the Kuwaiti Investment Office for $111.5 million, a loss of $67.5 million. See “U.S. Sells 2 Hotels in Lincoln S&L Case to Kuwaiti Investors,” Wall Street Journal, October 24, 1991. In 1993, when the Resolution Trust Corporation—the government entity created to clean up the thrift mess—moved Keating’s half-built housing community, Estrella, off its books, the highest bid came in at $28 million, compared to a book value of $295 million. See James S. Granelli, “Keating’s ‘Dream’ Is Devalued,” Los Angeles Times, June 2, 1993. It should be noted, though, that the RTC hoped to recoup some of its loss by maintaining an equity partnership with the property’s new developer. See Terry McDonnell, “RTC Rings Up Big Sale in Arizona,” Chicago Tribune, May 23, 1993; and Dean Foust, “Now They’re Really Down to the Dregs,” BusinessWeek, March 7, 1993.

56. Citing RTC sources, the Los Angeles Times put Lincoln’s estimated cost to taxpayers at $3.4 billion in October 1993. An RTC spokeswoman cited in the article described Lincoln as “by far . . . the costliest thrift failure ever.” See James S. Granelli, “Forecast Is Now $3.4 Billion to Liquidate Lincoln Savings,” Los Angeles Times, October 31, 1993.

57. Nash, “Greenspan’s Lincoln Savings Regret.”

58. Having hit a trough of 2.4 percent in July 1983, consumer price inflation was back up at 4.6 percent the following April.

59. Paul Blustein, “Feldstein to Quit Economic Job at White House,” Wall Street Journal, May 10, 1984.

60. Chernow, House of Morgan, 658. Chernow’s reconstruction of the Continental Illinois saga is a fine example of his wonderful writing. See also Jeff Bailey, John Helyar, and Tim Carrington, “Anatomy of a Failure: Continental Illinois: How Bad Judgments and Big Egos Did It In,” Wall Street Journal, July 30, 1984; and R. C. Longworth and Bill Barnhart, “How Panic Followed the Sun in Debacle at Chicago Bank: The Run on Continental,” Chicago Tribune, May 27, 1984.

61. Chernow, House of Morgan, 658.

62. Ibid., 659.

63. Robert A. Bennett, “$4.5 Billion Credit for Chicago Bank Set by 16 Others,” New York Times, May 15, 1984.

64. Chernow, House of Morgan, 659.

65. Between the run on the Knickerbocker Trust on October 22, 1907, and the calming of the crisis in mid-November, J. Pierpont Morgan and his associates worked to stem the panic. Morgan browbeat fellow bankers into providing $25 million in emergency credit to equity traders on October 24, 1907. He then assembled the bankers in his library and extracted a further $25 million in the early hours of November 3, 1907. In addition, the Treasury had put $25 million at Pierpont’s disposal. On October 27, Morgan had put together $30 million in emergency financing for New York City. To provide liquidity to the system, New York’s top bankers approved the creation of $100 million in clearinghouse certificates to shore up interbank lending. Counting all these actions together, and adding in a host of smaller interventions, the most expansive estimate for the total size of the 1907 rescue comes to $300 million—about $3.3 billion in 1984 dollars. Thus the total 1907 rescue was more than a billion dollars smaller than the Morgan syndicate loan for Continental Illinois, and was dwarfed by the total response to Continental Illinois, counting in loans from the Fed’s discount window and action by the FDIC. The estimate given here for the size of the 1907 bailout is pieced together from Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm (Hoboken, NJ: John Wiley & Sons, 2007).

66. The account of the Morgan meeting comes from the vivid reconstructions in Silber, Volcker: The Triumph, 245–46; Chernow, House of Morgan, 660; and Greider, Secrets of the Temple, 628.

67. “Commentary by Alan Greenspan,” Nightly Business Report (Miami: South Florida Public Television, WPBT, June 4, 1984); and “Commentary by Alan Greenspan,” Nightly Business Report (Miami: South Florida Public Television, WPBT, June 18, 1984). Greenspan calculated that if the FDIC guaranteed all creditors to all U.S. banks, “the U.S. Treasury would pick up a new contingent liability of $1.1 trillion.”

68. Greenspan emphasized this point in the Times discussion, and again when he addressed the conservative Heritage Foundation the following spring. Addressing the Heritage Foundation on March 23, 1985, Greenspan said, “At some point I would like to see a system with no federal deposit insurance at all. I do not expect to see that, but I am not the only one opposed to the whole issue of federal deposit insurance.” Warming to his theme, he denounced deposit insurance as “the use of the sovereign taxing and money-printing processes of the state,” because governments could deliver on their insurance promise only by extracting resources from the long-suffering public via taxes or inflation. In short, Greenspan’s Randian lucidity remained acute, even as he gave up expecting any of these principles to determine policy. “Fallout from Continental’s Collapse,” New York Times, August 5, 1984.

69. The Map and the Territory, Greenspan’s postcrisis apologia, acknowledged that he had paid too little attention to the individual irrationality documented by behavioral economists. But it gave short shrift to the other big weakness in the rational-agent view of the economy: distorted incentives within institutions that lead rational individuals to choices that cut against the interests of both the institution they work for and the broader common good. For more on this, see the closing section of chapter four. Alan Greenspan, The Map and the Territory: Risk, Human Nature, and the Future of Forecasting (New York: Penguin Press, 2013), chapter four.

70. Greenspan wrote later, “During my tenure as a director of JPMorgan (just prior to joining the Federal Reserve), I was impressed by the value the bank accorded to its AAA rating. They recognized that in the short run, they could achieve a higher return on equity through increased leverage. But they feared that that could lower the bank’s AAA rating, an important factor in their long-term ability to attract low-cost liabilities. Most important, the rating was required to sustain a reputation for prudence, an essential characteristic of their historic franchise that dated back to the time of John Pierpont Morgan himself. Similar considerations led to constrained leverage on the part of many nonfinancial corporations for which I have worked over the years.” Ibid., 87.

71. “Fallout from Continental’s Collapse.”

CHAPTER FOURTEEN

1. “On our very first date, music was a bonding experience for us. We react to music in similar ways, viscerally, emotionally.” Andrea Mitchell, interview by the author, May 14, 2012.

2. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 98.

3. In her autobiography, Mitchell comments that “except for a few women far more glamorous than I, the big anchor jobs have always been reserved for men.” Walters was the most prominent exception to the rule Mitchell was describing. Andrea Mitchell, Talking Back: . . . to Presidents, Dictators and Assorted Scoundrels (New York: Penguin Books, 2006), Kindle location 2900.

4. Kathryn Eickhoff, interview by the author, November 29, 2011.

5. Mitchell, Talking Back, Kindle location 2152.

6. Mitchell, interview by the author, May 14, 2012.

7. “He’s unique in that way. He always understood my changing plans or getting up in the middle of the night to do work, because to him, work was always the most important thing. So if I, even to this day say, ‘I’m so sorry. I have to do this.’ Go to the NATO meeting next week, which is pretty much going to be a useless exercise. And I had agreed to go to New York with him on Sunday night for dinner, and totally forgot that I have to be in Chicago Monday, and he said, ‘Well, that’s your job. Of course you have to do that.’” Ibid.

8. Mitchell, Talking Back, Kindle location 1539.

9. Ibid, Kindle location 2894.

10. Sean Wilentz, The Age of Reagan: A History, 1974–2008 (New York: HarperCollins, 2008), 180. See also Timothy J. McNulty, “In the End, Regan’s Storied Foresight Failed Him,” Chicago Tribune, February 28, 1987.

11. Sprinkel had worked for Regan at the Treasury. His near elevation to the Fed chairmanship is recalled by his friend and fishing partner, Richard McCormack. Richard T. McCormack, interview by the author, June 21, 2012.

12. Mitchell, Talking Back, Kindle location 2292.

13. James Baker recalls, “The feeling on our part was that a president is entitled at some point in his presidency to have his own chairman of the Federal Reserve. And there wasn’t anybody else in America that I thought, or that we thought, would be suitable.” James Baker, interview by the author, June 12, 2013. Greenspan recalls, “I don’t know but I must assume that there was some general view that being a good friend of Jim Baker, Howard Baker, and Ronald Reagan that I would be flexible.” Alan Greenspan, interview by the author, November 15, 2010.

14. Ronald Reagan, The Reagan Diaries, ed. Douglas Brinkley (New York: HarperCollins, 2007), 484.

15. The Fed “is not supposed to be a one-person show,” Governor Martha Seger had growled after the vote, anticipating the criticism of the “imperial chairmanship” that would later be heard under Greenspan. See William L. Silber, Volcker: The Triumph of Persistence (New York: Bloomsbury Press, 2012), 255.

16. On Volcker’s reaction, ibid. On fears of deflation, see John M. Berry, “Price Declines Spark Fears of Deflation,” Washington Post, June 22, 1986.

17. “The business has changed,” Morgan’s chairman, Lewis Preston, said. “Basic lending is never going to return to the profitability that existed in the Fifties and Sixties.” Gary Hector, “Morgan Guaranty’s Identity Crisis,” Fortune, April 28, 1986.

18. J.P. Morgan’s paper, “Rethinking Glass-Steagall,” appeared in the Morgan Economic Quarterly in December 1984.

19. Morgan’s research was vindicated by academic authors. See, for example, Eugene Nelson White, “Before the Glass-Steagall Act: An Analysis of the Investment Banking Activities of National Banks,” Explorations in Economic History 23, no. 1 (January 1986): 33–55.

20. Hector, “Morgan Guaranty’s Identity Crisis.” In 1986, J.P. Morgan underwrote more Eurobond issues for American companies than any U.S. investment bank. See “Banking on Greenspan,” Economist, June 13, 1987.

21. Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York: Grove Press, 2001), 716. Although Greenspan supported the report, its principal author, Ned Kelly, then of Davis Polk, recalls that Greenspan was not involved in the drafting of the text. Edward W. Kelly Jr., interview by the author, September 19, 2011. Expounding on the case for financial deregulation in front of an audience at the conservative Heritage Foundation on March 23, 1985, Greenspan declared, “I have never seen a constructive regulation yet.” Alan Greenspan, “Address on Interest Rates and Banking Reform” (Heritage Foundation, Washington, D.C., March 23, 1985).

22. Volcker recalls that the article was delivered to him by Lewis Preston. Paul Volcker, interview by the author, September 13, 2011.

23. Troland Link, interview by the author, September 13, 2011.

24. Kelly Jr., interview by the author, September 19, 2011.

25. The Treasury’s plan for banking deregulation had crystallized by early June 1987, when it was described in a long New York Times article. But it is safe to assume that the Treasury’s ideas had been germinating for a period of at least a couple of months before the Times article surfaced. See Nathaniel C. Nash, “Treasury Now Favors Creation of Huge Banks,” New York Times, June 7, 1987.

26. The study was conducted by First Manhattan Consulting Group. Ibid.

27. The executive was Richard S. Simmons, vice chairman of Chemical New York Corporation, the fourth-largest U.S. bank at the time. Ibid.

28. Some later research suggested that countries were less likely to suffer a financial crisis if they had a more concentrated banking system and fewer restrictions on bank activity. In other words, the case for restricting bank size was not clear ex-post, let alone ex-ante. See Thorsten Beck, Asli Demirgüç-Kunt, and Ross Levine, “Bank Concentration and Crises” (National Bureau of Economic Research working paper no. 9921, August 2003), http://www.nber.org/papers/w9921.

29. Nathaniel C. Nash, “Bank Curb Eased in Volcker Defeat,” New York Times, May 1, 1987. The point about the limits to the Fed’s statutory authority is also reported in Barbara A. Rehm, “Fed Approves Four More Banks’ Securities Bids,” American Banker, May 20, 1987. Volcker also declared that if the banks set up securities units, they should at least give them names that sounded different to their parents, adding that the proposed 5 percent ceiling on securities revenues should be defined in such a way as to minimize the banks’ headroom. (Silber, Volcker: The Triumph, 260.) Volcker’s view on how the underwriting of Treasuries should be treated is reported in John E. Yang, “Fed Vote on Banks’ Securities Dealing Blurs Legal Line,” Wall Street Journal, May 1, 1987.

30. Even his loyal general counsel, Michael Bradfield, thought he was fighting a hopeless battle. Michael Bradfield, interview by the author, February 21, 2014.

31. James Baker recalls, “We saw Alan as an anti-regulation chairman. We understood that when we brought him in.” Baker, interview by the author, June 12, 2013.

32. Greenspan’s assurances to the Treasury are quoted extensively in Nash, “Treasury Now Favors Creation of Huge Banks.” Nash had apparently gained access to a transcript of Greenspan’s answers to questions put to him by the Treasury as part of his preparation for the Fed job. In his confirmation testimony, Greenspan claimed that the Times report had captured his perspective “only partly.”

33. Greenspan was more clearly in favor of bank deregulation than he was in favor of big banks. He asserted that the Treasury’s conviction, that deregulation would lead to banking concentration, might be wrong. For instance, on March 23, 1985, he argued during an appearance at the Heritage Foundation that there was “no evidence of economies of scale in banking. On the contrary,” he continued, “evidence suggests that the smaller institutions fare better and, therefore, there is no evidence to suggest that the small commercial bank, operating with local knowledge and fairly good relationships with the community, has anything to fear from Citibank or anybody else who wants to move in.” Greenspan pointed to Citibank’s recent failure to penetrate the upstate New York market as evidence to support his view. Greenspan, “Address on Interest Rates and Banking Reform.” History proved Greenspan wrong, however.

34. Paul Volcker recalls, “After he was appointed Greenspan came in and provided a green light without any change in the law. My view was that it was not the role of the central bank to approve something that was against the law.” Volcker, interview by the author, September 13, 2011.

35. Rehm, “Fed Approves Four More Banks’ Securities Bids.”

36. Volcker, interview by the author, December 8, 2010. See also Silber, Volcker: The Triumph, 260.

37. Greenspan, Age of Turbulence, 99.

38. Ibid.

39. Mitchell, Talking Back, Kindle location 2618.

40. David Rowe recalls, “One of my grad school colleagues who was at Townsend-Greenspan said everyone in the office found out about it on television.” David Rowe, interview by the author, October 11, 2011.

41. Karin Nye, interview by the author, February 8, 2012.

42. “That picture flashes in my mind every now and then, it was very sad.” Vivian Gold, interview by the author, March 14, 2012.

43. Greenspan, interview by the author, November 15, 2010.

44. Steven V. Roberts, “Proxmire Thrives in His Chosen Role as Senate Maverick,” New York Times, September 19, 1977; see also Richard Severo, “William Proxmire, Maverick Democratic Senator from Wisconsin, Is Dead at 90,” New York Times, December 16, 2005.

45. Video of the hearing is available from C-SPAN. Greenspan Nomination (Washington, D.C., United States, 1987), http://www.c-span.org/video/?150949-1/greenspan-nomination.

46. Kenneth McLean, interview by the author, January 27, 2014. (McLean worked for Proxmire.)

47. The Senate transcript records Proxmire as invoking forecasts “in” 1976, 1977, and 1978. But it is clear from the context that Proxmire was referring to forecasts for those years, not forecasts made in those years.

48. For example, see William Fleckenstein and Frederick Sheehan, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve (New York: McGraw-Hill, 2008), 8.

49. Proxmire was citing a study that did not single out Greenspan’s Ford administration forecasts but instead heaped scorn on all three administrations covered in its analysis. See “Are We on the Road to a Balanced Budget?,” Staff Study prepared for the Joint Economic Committee of Congress, February 1986, Table 4, 8.

CHAPTER FIFTEEN

1. William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1989), 48.

2. Alan Greenspan, interview by the author, July 16, 2010.

3. “By that point I was no George Selkirk, I was a Babe Ruth.” Greenspan, interview by the author, July 18, 2014.

4. Numbers for end-1987 staff count were supplied by the Federal Reserve Board press office. Federal Reserve Board press office, February 5, 2014.

5. The frequency of Federal Reserve board meetings varied over the years, but in 1987 one meeting per week was typical.

6. Greider, Secrets of the Temple, 66.

7. “The Markets Wonder Whether Alan Can Fill Paul’s Shoes,” Economist, June 6, 1987.

8. Greider, Secrets of the Temple, 714.

9. Manley Johnson recalls that the newsletter was written by Pierre Rinfret, a fabulist who later ran for New York’s governorship. (Manley Johnson, interview by the author, January 27, 2014.) Although no copy of the newsletter could be found, its essence was recalled by Johnson, and Rinfret’s views are evident from a speech delivered in June. For the gist of the speech, see William Gruber, “Greenspan’s a Political Hack: Economist,” Chicago Tribune, June 5, 1987. Rinfret was a flamboyant character who claimed a nonexistent doctorate and filed lawsuits liberally—including, in two cases, against members of his own extended family. His newsletter was known for blunt language and wild opinions. In 1974, Rinfret had been the runner-up for the job of CEA chairman—which may help explain his animosity toward Greenspan.

10. This dialogue from the FOMC meeting is taken from the official transcript, available on the Web site of the Federal Reserve Board. Throughout the rest of this book, all quotations from FOMC meetings will come from the same source, though this will not be noted.

11. There was no change in the target federal funds rate immediately after this meeting. Just over a week later, however, it was raised by a token amount—12.5 basis points. (Note that at the time, the FOMC formally targeted the level of bank reserves, but also expressed this policy as in terms of the federal-funds target that became standard later.)

12. “By the time I got to the Fed, I had already decided that I could lead. . . . I had enough experience to realize that I knew more than most of the people who were in the room.” Greenspan, interview by the author, June 18, 2014.

13. Ricki Tigert Helfer, interview by the author, July 14, 2013. Greenspan recalls, “I decided very early on that I was going to let other people lead because they knew more than I did. . . . I did not know as much as the bank lawyers at the Federal Reserve Board about the intent of the Congress. And the reason they knew was they wrote the legislation.” (Greenspan, interview by the author, July 16, 2010.) In addition, Greenspan’s former colleagues at J.P. Morgan recalled that Greenspan was sensitive to accusations that he would show the bank favoritism. Therefore he distanced himself from regulatory decisions that would benefit it.

14. Michael J. Prell, interview by the author, May 15, 2013. Prell recalls that whereas Greenspan doubted the staff’s forecasts sometimes, Volcker often disparaged quantitative analysis. Similarly, Don Kohn, another top Fed staff member at the time, recalls that Greenspan’s appetite for forecasting detail came as a surprise. Volcker “was at 5,000 feet and Greenspan was down in the weeds in terms of the data. It’s just different tastes, different ways of looking at things. And Greenspan wanted to see the statistical results. I remember one of the first memos reported on a regression, and it just kind of reported the results. And he said no, no, no, I want to see the R-squared, and I want to see this, that, and the other thing that Volcker probably wouldn’t have wanted to see.” Donald L. Kohn, interview by the author, March 13, 2011.

15. Prell, interview by the author, May 15, 2013.

16. Greenspan believed that the hit to GDP from lower factory orders would depend on the value of the inventory as it left the factory gates, not on the inventory’s reported value, which reflected the price at which retailers planned to sell it.

17. Prell, interview by the author, May 15, 2013. Another example of the difference of approach between Greenspan and Prell was in house prices. The Fed’s forecasting model incorporated the standard wealth effect: if rising house prices made families richer, some fraction of that extra wealth would show up in extra consumption. But Greenspan wanted to go further. In order to turn higher house prices into consumption, families would have to take out bigger mortgages, so Greenspan wanted information on whether banks were in the mood to lend freely. To Prell’s way of thinking, this was another cul-de-sac: at least for most periods, mortgage availability was roughly constant, so whatever wealth effect had been observed in the past would likely hold into the future. But remembering his work on home-equity extraction in the 1970s, Greenspan was constantly on the lookout for swings in financial conditions. If banks grew suddenly keener to make loans, the relationship between housing wealth and consumption could change quite radically.

18. At the late September FOMC meeting, the Greenbook prepared by the staff projected that growth in the second half of 1987 would come in at an annualized 3.3 percent, up from 2.6 percent in the Greenbook prepared for the August FOMC meeting. Board of Governors of the Federal Reserve System, “Greenbook” (Federal Open Market Committee, August 12, 1987), http://www.federalreserve.gov/monetarypolicy/files/fomc19870818gbpt219870812.pdf. Board of Governors of the Federal Reserve System, “Greenbook” (Federal Open Market Committee, September 16, 1987), http://www.federalreserve.gov/monetarypolicy/files/fomc19870922gbpt219870916.pdf.

19. Stanley Fischer, “Recent Developments in Macroeconomics,” Economic Journal 98, no. 391 (June 1988): 331.

20. N. Gregory Mankiw, “Recent Developments in Macroeconomics: A Very Quick Refresher Course,” Journal of Money, Credit, and Banking 20, no. 3, part 2 (August 1988): 436.

21. Mitchell recalls that her mother came to Washington to help Greenspan furnish his Watergate apartment. Andrea Mitchell, interview by the author, May 14, 2012. In her memoirs, Mitchell writes that she was the one who helped on the interior design front. Andrea Mitchell, Talking Back: . . . to Presidents, Dictators, and Assorted Scoundrels (New York: Penguin Books, 2007), Kindle location 2629.

22. Justin Martin, Greenspan: The Man Behind Money (Cambridge, Mass.: Perseus Publishing, 2001), 157. Martin interviewed Wesley Halpert’s wife, who was present at the lunch.

23. Mitchell, Talking Back, Kindle location 2628.

24. Kenneth Guenther, interview by the author, January 31, 2014. Guenther was the president of the Independent Community Bankers of America and Nash’s tennis partner.

25. This Week (ABC News, October 4, 1987). The author thanks ABC News for providing a copy of the footage from this interview.

CHAPTER SIXTEEN

1. Kenneth Duberstein, interview by the author, February 20, 2014.

2. Andrea Mitchell, Talking Back: . . . to Presidents, Dictators, and Assorted Scoundrels (New York: Penguin Books, 2007), Kindle location 2157.

3. Carla Hall and Donnie Radcliffe, “Hands Across the Americas: A Night of Tributes as Reagan Hosts Duarte,” Washington Post, October 15, 1987.

4. Greenspan’s breakfast with Baker, and many other meetings whose dates are pinpointed in the following chapters, are recorded in the diary kept by Greenspan’s secretary at the Fed. I am grateful to Alan Greenspan for access to the full set of diaries. Alan Greenspan’s Diary, n.d.

5. In an early sign of the fraught nature of open central-bank communication, observers debated whether Greenspan’s comments on Brinkley’s show amounted to a tightening signal. See contrasting accounts in Matthew Winkler, “Bonds Slump as Prices Near Lows for 1987,” Wall Street Journal, October 6, 1987; and Hobart Rowen, “Big Banks Raise Prime Rate a Half Point,” Washington Post, October 8, 1987.

6. James A. Baker III, Work Hard, Study . . . and Keep Out of Politics! (Evanston, Ill. Northwestern University Press, 2008), 440–441.

7. Justin Martin, Greenspan: The Man Behind Money (Cambridge, Mass.: Perseus Publishing, 2001), 172.

8. This meeting is recounted in Leo Melamed and Bob Tamarkin, Escape to the Futures (New York: John Wiley & Sons, 1996). See Richard T. McCormack, interview by the author, June 21, 2012.

9. Ronald Reagan, The Reagan Diaries, ed. Douglas Brinkley (New York: HarperCollins, 2007), 538.

10. Corrigan recalls, “We discussed everything under the sun in terms of the Fed, its responsibilities, what were the hot issues. The topic that we probably spent more time on than any other single topic was financial stability issues.” Gerald Corrigan, interview by the author, January 22, 2014.

11. See, for example, “Commentary by Alan Greenspan,” Nightly Business Report (Miami, South Florida Public Television, WPBT, May 9, 1983).

12. The leveraging of the American economy was discussed in detail at the Federal Reserve’s Jackson Hole symposium in 1986. See in particular Henry Kaufman, “Debt: The Threat to Economic and Financial Stability”; and Benjamin Friedman, “Increasing Indebtedness and Financial Stability in the United States.” Both appear in Debt, Financial Stability, and Public Policy (Jackson Hole, Wyo.: Federal Reserve Bank of Kansas City, 1986). Friedman pointed out that in the depths of the recession of 1980, the rate of business failures had stood at 42 failures per 10,000 concerns. Five years later, the rate had tripled to 123 per 10,000—despite the fact that the economy had recovered. Leverage had increased fragility in other ways: In the mid-1970s, fourteen American bank-holding companies had enjoyed a triple-A credit rating, but by 1987 only J.P. Morgan was solid enough to qualify. The share of corporate debt rated as risky “junk” had more than doubled in the same period, with the result that any bank or investment house with an inventory of bonds was likely to be shakier.

13. Corrigan also voiced concerns about financial fragility in FOMC discussions. On November 3, 1987, for example, he noted that the ratio of nonfinancial debt to GNP had risen sharply, reaching a level last seen in the 1920s. Presciently, Governor Kelley countered, “If there is a good side to all of this debt creation, it lies in the fact that it puts tremendous pressure on everybody to be productive and, thus, it should have a long-term downward drag on the inflationary concerns that we all have.” In other words, debt was bad for financial stability but good because it kept inflation down. Here was another way in which the objectives of financial stability and price stability could work against each other.

14. Both Kaufman and Friedman made versions of this argument. Friedman argued: “A higher debt ratio raises the cost of business contractions, and hence makes policymakers less likely to accept them,” which “imparts an inflationary bias.” Benjamin Friedman, “Increasing Indebtedness and Financial Stability in the United States” (Symposium on Debt, Financial Stability, and Public Policy, Jackson Hole, Wyo., August 1986), 48. More dramatically, Kaufman declared that “monetary policy must take the risk and err even further on the side of accommodation. . . . [T]his monetary approach runs the risk of rekindling inflation, but the alternative is also punishing. Deflation is the more immediate threat to our economic and financial stability. . . . [T]he new financial world has rendered obsolete the once simple rules for conducting policy.” Henry Kaufman, “Debt: The Threat to Economic and Financial Stability” (Symposium on Debt, Financial Stability, and Public Policy, Jackson Hole, Wyo., August 1986), 23. Kaufman’s views would certainly have been known to Greenspan: the two had lunch at the Fed on August 13, 1987. (Alan Greenspan’s Diary.)

15. The following scene was recalled by Patrick Lawler, the Fed staff economist responsible for tracking the stock market. Patrick Lawler, interview by the author, February 13, 2014.

16. Lawler recalls that two of the economists in the meeting had researched the effect of margin requirements. “The staff view was that margin requirements were useless.” Ibid.

17. Manley Johnson, interview by the author, June 19, 2013. Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), 37.

18. Johnson, interview by the author, June 19, 2013.

19. Greenspan recalls having J. P. Morgan’s example in mind. Alan Greenspan, interview by the author, March 11, 2011.

20. Ruder later claimed he was misquoted. But that evening’s PBS MacNeil-Lehrer NewsHour showed a clip of Ruder floating the idea of a temporary market closure. “Selling Frenzy; Returning Fire,” Transcript, MacNeil-Lehrer NewsHour (PBS, October 19, 1987), Transcript #3146.

21. As Peter Sternlight, the head of the New York Fed’s open market operations, noted in the institution’s bloodless prose at the FOMC’s November 1987 meeting: “There were widespread concerns about the very functioning of the financial system as worries developed that steep losses would disable major market participants.”

22. This account follows Alan Murray, “Fed’s New Chairman Wins a Lot of Praise on Handling the Crash,” Wall Street Journal, November 25, 1987. Greenspan’s response to “down five oh eight” is also recorded in Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 105, and Woodward, Maestro, 36–37, with minor variations. Murray’s account is preferred because it was published so soon after the events.

23. Johnson, interview by the author, June 19, 2013. Edwin M. Truman, interview by the author, January 26, 2012.

24. Corrigan, interview by the author, January 22, 2014. Woodward describes Corrigan saying something similar on Tuesday morning, but Corrigan reports a clear recollection that the key conversation occurred on Monday night. Corrigan’s memory is corroborated by that of Manley Johnson.

25. Beryl Sprinkel was one participant who opposed interfering in the markets. A. B. Culvahouse, interview by the author, February 6, 2013. Culvahouse was White House counsel.

26. Greenspan, Age of Turbulence, 106.

27. This account of Melamed’s evening is drawn from Melamed and Tamarkin, Escape to the Futures, 358–61.

28. Bob Tamarkin, “Melamed, ‘Godfather’ at Chicago Merc, to Devote Time to Private Firm, Writing,” Wall Street Journal, December 3, 1984.

29. Melamed and Tamarkin, Escape to the Futures, 359.

30. Johnson, interview by the author, June 19, 2013.

31. Woodward, Maestro, 39. Greenspan, Age of Turbulence, 106, has the same quote without the middle sentence, “Goddamn it . . .”

32. This account is drawn from Melamed and Tamarkin, Escape to the Futures, 361–63. It is also recounted in Donald A. MacKenzie, An Engine, Not a Camera: How Financial Models Shape Markets (Cambridge, Mass. MIT Press, 2006), 1–3.

33. Tamarkin, “Melamed, ‘Godfather’ at Chicago Merc, to Devote Time to Private Firm, Writing.”

34. Melamed recounts that Continental promised the money just three minutes before the Merc was due to open. Meanwhile, Mark Carlson reports that the Merc was not alone. Morning settlement for the Options Clearing Corporation, which cleared transactions for the CBOE, was not completed on October 20 until two and a half hours after the usual time. See Melamed and Tamarkin, Escape to the Futures, 363. Mark Carlson, “A Brief History of the 1987 Stock Market Crash” (Board of Governors of the Federal Reserve System, November 2006), 13–14, http://www.federalreserve.gov/pubs/feds/2007/200713/200713pap.pdf.

35. Greenspan, Age of Turbulence, 106–7.

36. James Baker, interview by the author, June 12, 2013. See also James A. Baker III, Work Hard, Study . . . and Keep Out of Politics! (New York: G.P. Putnam’s Sons, 2006), 440–41.

37. Woodward, Maestro, 39.

38. There is some confusion as to who deserves credit for making the statement concise and direct—success has many fathers. But interviews with six participants lead to the conclusion that Corrigan was far more influential than Greenspan.

39. Greenspan later reflected on the trade-off between financial stability and price stability in a speech to the American Economic Association in December 1988: “[I]t was important that our actions not be perceived as merely flooding the markets with reserves. Haphazard or excessive reserve creation would have fostered a notion that the Federal Reserve was willing to tolerate a rise in inflation, which could itself have impaired market confidence. We were cautious to attack the problem that existed, and not cause one that didn’t.” See Alan Greenspan, remarks (Joint Meeting of the American Economic Association and American Finance Association, New York, December 29, 1988).

40. Greenspan writes of the statement in Greenspan, Age of Turbulence, 108, “It was as short and concise as the Gettysburg Address, I thought, although possibly not as stirring.”

41. “I remember that morning, after the statement was issued, Alan was very nervous about me making these calls. . . . [He] probably did not want me to call those banks that morning.” Corrigan, interview by the author, January 22, 2014.

42. High-frequency traders were widely blamed for the “Flash Crash” of May 6, 2010, in which the stock market abruptly lost 9 percent of its value and then recovered just as quickly. In hindsight, some commentators have suggested that the destabilizing impact of “portfolio insurance” in 1987 should have taught regulators to fear newfangled trading. But the old-fashioned specialist system was the larger source of the fragility. See Carlson, “A Brief History of the 1987 Stock Market Crash,” 15.

43. Corrigan, interview by the author, January 22, 2014.

44. Andrew F. Brimmer, “Central Banking and Systemic Risks in Capital Markets,” Journal of Economic Perspectives 3, no. 2 (Spring 1989): 3–16. The linkages between clearinghouses, member firms, and their customers are lucidly described in Ben S. Bernanke, “Clearing and Settlement During the Crash,” Review of Financial Studies 3, no. 1 (1990): 133–51.

45. The “TED spread”—the gap between the three-month London Interbank Borrowing Rate and the three-month Treasury bill rate—hit 3 percent on October 19, 1987. The extraordinary stress that this implied can be gauged from the fact that, the first day after the Lehman Brothers collapse, the TED spread was only 2 percent. Later in the post-Lehman panic, the spread rose, peaking at 4.6 percent on October 10, 2008.

46. Woodward writes that Corrigan discussed with Manley Johnson the option of Fed guarantees for loans to brokers. Interviewed much later, Corrigan denies Woodward’s account but says he might have been willing to countenance loans from the discount window. However, the law at the time might have made this difficult: until a reform passed in 1991 as part of the regulatory overhaul known as the Federal Deposit Insurance Corporation Improvement Act—or FDICIA—sec. 13-3 of the Federal Reserve Act, governing the use of the discount window for borrowers other than banks, effectively excluded securities firms. See Woodward, Maestro, 43. Corrigan, interview by the author, March 25, 2014.

47. Johnson, interview by the author, June 19, 2013. See also Greenspan, Age of Turbulence, 107; and Woodward, Maestro, 44.

48. According to the Brady Report, questioned trades in the NYSE were 4.02 percent of the total on October 19 and 4.25 percent of the total on October 20, about double the normal rate. Presidential Task Force on Market Mechanisms, Report of the Presidential Task Force on Market Mechanisms (Washington, D.C.: Government Printing Office, 1988), 51. See Bernanke, “Clearing and Settlement During the Crash.” See also Floyd Norris, “The Crash of 1987,” Barron’s, October 26, 1987.

49. Norris, “The Crash of 1987.”

50. A. B. Culvahouse, interview by the author, February 16, 2013.

51. “A number of people, including [Howard] Baker and [Dan] Crippen, the other [James] Baker and [John] Whitehead, started calling the Street and saying that it is really important for the country that you start buying, and some did.” Ibid. and A. B. Culvahouse, interview by the author, March 28, 2014. John Gutfreund, the head of Salomon Brothers, reportedly said that if the president wanted him to buy, he would buy, even though he feared that the crash might have cost his firm $1 billion by late morning on Tuesday.

52. Norris, “The Crash of 1987.”

53. The dominant account of the crash credits corporate stock buybacks with helping to spark the rally that began around 12:30 p.m. (See Presidential Task Force on Market Mechanisms, Report of the Presidential Task Force on Market Mechanisms, 4, sec. III, 26.) However, rules governing buybacks forbid companies from bidding up their own stock prices. Presuming these rules were observed, buybacks could have helped the market by absorbing selling pressure on the way down; and the announcement of buybacks would have encouraged other investors to act as buyers. However, as soon as the price of a stock registered an “uptick,” the buybacks would have been required to stop. Buybacks are therefore not a completely satisfying explanation for a sustained rally.

54. Stanley Shopkorn, interviews by the author, January 14, 2013, and March 21, 2014. Shopkorn remembers speaking frequently with Dan Crippen at the White House, getting a more pointed call from Richard Grasso at the NYSE, and then conferring with Mnuchin. The last of the three calls is also reported in Floyd Norris, “It Never Happened,” New York Times, October 24, 2007, Economix blog, http://economix.blogs.nytimes.com/2007/10/24/it-never-happened/ and in Floyd Norris, “The Crash of 1987.” The Shopkorn-Mnuchin theory of what rescued the market is different from, but more persuasive than, the standard history of the crash. The corporate buyback theory is unpersuasive for the reason cited in endnote 52. Another theory holds that the recovery began with a buying attack in Chicago, where futures contracts on the closely watched Major Market Index staged a miraculous recovery. But nobody has ever explained who initiated the Chicago rally. The analysis embraced here—that the rally was sparked by the Salomon-Goldman actions in New York—has the merit of featuring two named protagonists. Nevertheless, the official Brady Commission report followed the Wall Street Journal in suggesting that Chicago led the rally. See Presidential Task Force on Market Mechanisms, Report of the Presidential Task Force on Market Mechanisms, sec. III, 26.

55. “I remember Alan vividly saying we have to flood the market with liquidity. We believed that anyway. Nobody resisted Alan.” Baker, interview by the author, June 12, 2013.

56. Greenspan, Age of Turbulence, 109.

57. Woodward, Maestro, 45–46.

58. Ibid., 46.

59. Murray, “Fed’s New Chairman Wins a Lot of Praise on Handling the Crash.”

60. Invited to comment on the verdict that he had been less important during the crash than Corrigan had been, Greenspan endorsed it. Greenspan, interview by the author, November 2, 2015.

61. In 1994 to the Senate banking committee, Chairman Greenspan indicated that “[t]elephone calls placed by officials of the Federal Reserve Bank of New York to senior management of the major New York City banks helped to assure a continuing supply of credit to the clearinghouse members, which enabled those members to make the necessary margin payments.” Alan Greenspan, Banking Industry Regulatory Consolidation: Hearings Before the Committee on Banking, Housing, and Urban Affairs, Senate, Second Session, March 2, 1994. See also Bernanke, “Clearing and Settlement During the Crash,” 148.

62. The verdict that Corrigan must have pushed Citi forcefully is supported by Bernanke’s observation that the expected value of the loans to brokers must have been negative—in the climate of extreme uncertainty, borrower default must have seemed likely. See Bernanke, “Clearing and Settlement During the Crash.” On the impact of banks’ lending to securities firms, see also Brimmer, “Central Banking and Systemic Risks in Capital Markets.” See also Carlson, “A Brief History of the 1987 Stock Market Crash.”

63. Wayne Angell, interview by the author, June 13, 2013.

64. If the great inflation of the 1970s had proved the pitfalls of excessive government activism, the great crash of 1987 was the first in a series of contrary lessons, demonstrating that markets also had their pitfalls.

65. “The limits to arbitrage” was a phrase coined by the economists Andrei Shleifer and Robert Vishny. For a longer explanation of the triple critique of the efficient markets hypothesis, see Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite (New York: Penguin, 2010), 104–8.

66. As illustrated repeatedly in this book, the common view of Greenspan as a believer in efficient markets is mistaken. He believed that markets are efficient to a first order of approximation, which they are; he never believed they were perfectly efficient or, for that matter, stable. After retiring from the Fed, Greenspan announced a conversion to behavioral economics, implying that he had previously viewed investors as rational. But he had actually seen markets as prone to overshooting since the 1950s. As will be argued later in this book, it is hard to take his supposed conversion at face value.

67. Senate Committee on Banking, Housing, and Urban Affairs, Testimony by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System Before the Committee on Banking, Housing, and Urban Affairs, 100th Cong., 2nd sess., 1988.

68. All data are from the Fed’s Z.1 Financial Accounts. Corporate bonds include bonds issued by financial and nonfinancial companies. “Federal Reserve Statistical Release: Z.1 Financial Accounts of the United States, Historical Data,” Board of Governors of the Federal Reserve System, June 11, 2015, http://www.federalreserve.gov/releases/z1/Current/data.htm.

69. The growth figure is quarter on quarter, annualized. Unemployment fell from 5.9 percent in September 1987 to 5.7 percent in December 1987. Board of Governors of the Federal Reserve System, Greenbook (Federal Open Market Committee, December 15, 1987), 6, http://www.federalreserve.gov/monetarypolicy/files/fomc19971216gbpt219971211.pdf. Board of Governors of the Federal Reserve System, Greenbook (Federal Open Market Committee, February 9, 1988), 14, http://www.federalreserve.gov/monetarypolicy/files/fomc19880210gbpt219880203.pdf.

70. Alan Greenspan testimony in Senate Committee on Banking, Housing, and Urban Affairs, Testimony by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System Before the Committee on Banking, Housing, and Urban Affairs. Greenspan gave another version of his argument at a joint meeting of the American Economic Association and the American Finance Association in December 1988. See Greenspan, remarks, December 29, 1988.

71. A few years later, Greenspan would refer to “the 1987 stock market crash, which is the first and perhaps the only major stock market crash in history that actually was beneficial to the economy.”

72. It should be noted that Greenspan did not give up worrying about bubbles after 1987. But he worried less than he had done. For an example of his continued concern with financial instability, see “Federal Open Market Committee Meeting Transcript,” March 22, 1994, http://www.federalreserve.gov/monetarypolicy/files/FOMC19940322meeting.pdf.; as well as his famous “irrational exuberance” speech. Alan Greenspan, remarks (Annual Dinner and Francis Boyer Lecture of the American Enterprise Institute, Washington, D.C., December 5, 1996).

73. Bernanke, “Clearing and Settlement During the Crash.”

CHAPTER SEVENTEEN

1. David Hoffman, “Bush’s Maine Event,” Washington Post, May 28, 1988.

2. Steve Lohr, “Bush, They Say, Is Indeed a Connecticut Yankee from King Henry’s Court,” New York Times, July 5, 1988.

3. This quotation is taken from a Ford Library transcript of author Yanek Mieczkowski’s interview with Paul MacAvoy, who advised Bush in 1980.

4. David Hoffman, “Bush Says Tight Monetary Policy Could Hurt,” Washington Post, June 1, 1988, first sec.

5. Steven K. Beckner, Back from the Brink: The Greenspan Years (New York; Chichester: Wiley, 1999), 91.

6. The range of Greenspan’s acquaintances is evident from the diaries kept by his secretary at the Fed.

7. A dozen years earlier, gossip columnists had marveled about this awkward intellectual’s appetite for parties he seemed too shy to enjoy; it was as though the sideman’s insecurity compelled him to be seen—to bask in the recognition that flowed from his White House position. Now that he had scaled the heights of the Fed chairmanship, Greenspan felt more comfortable in his own skin. But he still wanted to be a visible figure on Washington’s A-list.

8. Andrea Mitchell, interview by the author, May 14, 2012; and Alan Greenspan, interview by the author, June 26, 2014.

9. Greenspan, interview by the author, June 18, 2014.

10. Ibid.

11. Mitchell, interview by the author, March 14, 2012.

12. Greenspan, interview by the author, July 18, 2014.

13. “I could not believe for weeks after the 1987 crash that there would not be more consequences. So I was not anxious to tighten up.” (Greenspan, interview by the author, April 4, 2014.) It should be noted that Greenspan had to manage doves such as Wayne Angell, who believed that even this gradual tightening of monetary conditions would upset the markets and be counterproductive. At one point during the June 1988 FOMC meeting, Greenspan offered to resolve the dispute with Angell on the tennis court, prompting Corrigan to remark, “I feel sorry for that ball!”

14. New England’s home values had leaped by a fifth in 1985 and another fifth in 1986, roughly three times faster than the national housing market; they had carried on surging through 1987; and through the first half of 1988, when Greenspan was fretting to his FOMC colleagues about the stock market’s stability, they continued to head upward.

15. David Hoffman, “Bush Says Tight Monetary Policy Could Hurt,” Washington Post, June 1, 1988.

16. Indeed, Morris suggested that, with the economy already operating at full capacity, anything higher than growth of 2 percent was likely to stoke inflation. Woodward notes that by the middle of July 1988, nine of the twelve district Fed presidents would have submitted requests to the Federal Open Market Committee for tighter policy. See Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), 51. In addition, the S&P 500 was up by about a tenth in the first half of 1988, making fears of renewed market instability seem far-fetched. The growth figure for Q2 1988 is quarter on quarter, annualized.

17. Sarah Bartlett, “Many Economists Criticize the Fed,” New York Times, August 3, 1988. In the ten days before the appearance of the article, Greenspan had had lunch with the Wall Street Journal, granted two separate interviews to the Washington Post as well as one to the San Francisco Chronicle, and met with a writer from the New York Times Magazine. But he was evidently unable to reach every potentially hostile reporter.

18. Michael Kernan, “The Marines’ Sunset Ballet,” Washington Post, August 8, 1986.

19. Robert D. Hershey Jr., “Job Surge Spurs Inflation Worry,” New York Times, August 6, 1988.

20. Woodward, Maestro, 52.

21. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 111.

22. Ibid., 112.

23. Woodward, Maestro, Kindle location 953.

24. Woodward also reports that Baker complained to Johnson, calling him a traitor, and told Fed governor Kelley that the Fed had kicked the Bush campaign in the teeth.

25. Reuters, “Baker Backs Fed’s Move to Suddenly Raise Rates,” Toronto Star, August 15, 1988. On the day of the increase, White House spokesman Marlin Fitzwater also said there was a “sound reason” for the rate hike and the Fed was “doing a good job” of keeping inflation under control.

26. Annualized quarter-on-quarter growth was 5.4 percent in the second quarter, 2.3 percent in the third quarter, and 5.4 percent in the fourth quarter.

27. Paul Blustein, “Brady Sees No Indication Interest Rates Will Rise; Concerns About Dollar’s Slide Also Dismissed,” Washington Post, November 19, 1988.

28. Manley Johnson, interview by the author, July 15, 2013.

29. Lloyd Grove, “The Kemp Constituency: Reagan, Bush & the Supply-Siders,” Washington Post, December 2, 1988.

30. Michael J. Prell, “Federal Open Market Committee Meeting Notes: Economic Outlook” (Federal Open Market Committee, December 13, 1988), 20, http://www.federalreserve.gov/monetarypolicy/files/FOMC19881214material.pdf.

31. U.S. nonfinancial, nongovernmental debt had grown more than 75 percent from the end of 1983 to the end of 1988. Board of Governors of the Federal Reserve System, “Households and Nonprofit Organizations; Credit Market Instruments; Liability, Level,” FRED, Federal Reserve Bank of St. Louis, October 1, 1949, https://research.stlouisfed.org/fred2/series/HSTCMDODNS/. Board of Governors of the Federal Reserve System, “Nonfinancial Corporate Business; Credit Market Instruments; Liability,” FRED, Federal Reserve Bank of St. Louis, October 1, 1949, https://research.stlouisfed.org/fred2/series/NCBTCMDODNS/.

32. Following the December 1988 FOMC meeting, the target federal funds rate was raised on December 15 and again on January 5, for a total move of 64 basis points.

33. Greenspan’s testimony shows him consciously embracing a policy of erring on the side of monetary tightness, despite political pressure not to do so and despite fears of colleagues such as Governor LaWare about financial fragility. “The pursuit of such a strategy on the part of the Federal Reserve embodies an acute awareness of the great cost to our economy and society should a more intense inflationary process become entrenched,” Greenspan said. “In the long-run costs of a return to higher inflation, and the risks of this occurring under current circumstances, are sufficiently great that Federal Reserve policy at this juncture might well be advised to err more on the side of restrictiveness than of stimulus.” House Committee on Banking, Finance, and Urban Affairs, Domestic Economic Issues, Financial Providers, and Safety and Soundness of the U.S. Financial System: Hearings Before the Committee on Banking, Finance, and Urban Affairs (U.S. House of Representatives, 1989), http://babel.hathitrust.org/cgi/pt?id=mdp.39015019122913;view=1up;seq=1.

34. Robert D. Hershey Jr., “Bush Cautious on Anti-Inflation Steps,” New York Times, January 26, 1989.

35. Barbara Rudolph, “The Savings and Loan Crisis: Finally, the Bill Has Come Due,” Time, February 20, 1989.

36. Greenspan’s presence on the stage was captured on video. See Savings and Loan Proposal, News Conference (White House, Washington D.C., United States, 1989), http://c-spanvideo.org/program/LoanPr.

37. The governor was Martha Seger.

38. The quantification of the S&L hit was offered by Richard Syron, president of the Boston Fed. Further demonstrating the FOMC’s preoccupation with financial stability, Governor Mike Kelley observed, “There are some very major problems in the United States, and indeed in the world, that could be severely exacerbated if we are too aggressive, too fast: S&Ls, LDCs, the budget deficit. . . .”

39. Even as the Fed’s leaders were meeting, the White House was admitting that its $90 billion estimate for the cost of the S&L bailout might be too low, not least because it excluded $36 billion in interest costs. If the Fed allowed a recession, the White House might have to explain to voters why its blockbuster bailout turned out to be even more expensive than promised. In 1996, the government’s General Accounting Office put the final cost to taxpayers at well over $100 billion.

40. David Hale, a Chicago-based economist, commented on the way that monetarism had made Volcker’s task easier than Greenspan’s. “Greenspan first will have to fight a guerrilla war, then trench warfare and finally full-scale, hand-to-hand combat.” By contrast, “Volcker just dropped the atomic bomb.” See Tom Redburn, “Fed’s Greenspan Is Likely to Play Key Policy Role,” Los Angeles Times, December 11, 1988.

41. Colin James, “Govt Formalizes Inflation Target,” Australian Financial Review, March 5, 1990.

42. Kohn had considered the pros and cons of inflation targeting in the presentation that he had prepared for this meeting. See Donald L. Kohn, “Federal Open Market Committee Meeting Notes: Long-Run Policy Alternatives Briefing” (Federal Open Market Committee, February 7, 1989), http://www.federalreserve.gov/monetarypolicy/files/FOMC19890208material.pdf.

43. Correspondence held in Alan Greenspan’s personal files.

44. Mitchell, interview by the author, July 28, 2014.

45. Barbara Carton, “Bankrupt: After a Decade of Miracles, New England Revisits the Perils of Going Bust,” Boston Globe, May 14, 1989. See also Doug Bailey, “The Trouble at Eliot Savings,” Boston Globe, June 20, 1989. Eliot had expanded its portfolio of loans by 500 percent between 1985 and 1988.

46. Michael Boskin to George H. W. Bush, “April Employment and Unemployment,” memorandum, May 4, 1989, 5/5/89 1:15 pm Budget Team Meeting, Oval Office, [OA/ID 08061], Michael Boskin Files—Meeting Files, Council of Economic Advisers, Bush Presidential Records: Staff and Office Files, George Bush Presidential Library.

47. The commentator was John Makin, a hedge-fund adviser and scholar at the American Enterprise Institute. See Jonathan Rauch, “Greenspan’s Fed,” National Journal 21 (April 8, 1989).

48. The commentator was New York Times columnist William Safire. Art Pine, “Treasury Chief’s Fortunes Slip, but Bush Is Loyal,” Los Angeles Times, March 18, 1990.

49. Marjorie Williams, “The Long and the Short of Richard G. Darman,” Washington Post, July 29, 1990.

50. Darman’s Meet the Press appearance took place on August 13, 1989. Woodward, Maestro, 62. Greenspan’s official Fed diary confirms he was there from Friday to Sunday. Alan Greenspan’s Diary, n.d. Joey Ford, Transcript, Meet the Press (NBC, August 13, 1989).

51. Woodward, Maestro, 62.

52. Richard Darman, Who’s in Control? Polar Politics and the Sensible Center (New York: Simon & Schuster, 1996), 228.

53. Ibid.

54. The son of an immigrant Irish blacksmith, Syron had studied economics at Boston College and run the Boston Home Loan Bank; he knew as much about New England’s real estate finance as anyone.

55. Data from the Bureau of Economic Analysis show New England’s personal income growing by less than 1 percent, quarter on quarter, in Q2, Q3, and Q4 1989. By comparison, the rate in the previous four quarters had averaged over 2 percent. U.S. Bureau of Economic Analysis, “SQ1 Quarterly Personal Income: 1988–1989 New England,” March 10, 2015, 1, http://www.bea.gov/iTable/iTableHtml.cfm?reqid=70&step=30&isuri=1&7022=36&7023=0&7024=non-industry&7033=-1&7025=0&7026=91000&7027=1989,1988&7001=336&7028=10&7031=0&7040=-1&7083=percentchange&7029=36&7090=70.

56. The impression created by Syron’s accent is noted in John M. Berry, “For the Fed’s Man in Boston, Battling Inflation Is Job No. 1,” Washington Post, March 24, 1989.

57. Johnson, interview by the author, June 19, 2013.

58. Bob Woodward, Maestro, Kindle locations 1185–1204.

59. Associated Press, “Visitors Line Up for View of Trading Spasms on Floor,” Los Angeles Times, October 16, 1989.

60. On Monday, October 16, 1989, the federal funds target rate was unchanged but the “effective” rate—that is, the average rate at which short-term borrowing actually occurred—fell to its lowest level that year, reflecting an injection of Fed liquidity.

61. Greenspan’s meeting with Berry and Graham appears as described in his official Fed diary. Two weeks after the lunch, on November 2, 1989, Greenspan went to Greenfield’s for dinner. Then on November 6 Greenspan joined Greenfield for lunch at her habitual restaurant in the Madison Hotel, across from the Post building.

62. Six years of inflation below 5 percent had pushed the issue off the public’s radar—whereas voters overwhelmingly selected inflation as the nation’s most important problem in polls during the 1980 elections, inflation failed to make the top five in the 1988 cycle. By then, the national deficit had emerged as the primary economic concern. Even when Gallup conducted a survey the following year asking specifically about personal financial anxieties, only 2 percent of American households named inflation as their top worry. See Roper Center Public Opinion Archives, “1988 US Presidential Election,” http://www.ropercenter.uconn.edu/elections/presidential/presidential_election_1988.html; Robin Toner, “Optimistic Mood Greets 41st President,” New York Times, January 20, 1989; and Marc Rice, “Survey: Top Money Worry Among Americans Is Paying the Mortgage with AM-Housing,” Associated Press, May 16, 1989.

63. At the FOMC meeting of March 23, 1993, Greenspan laid out a doctrine of asymmetrical response to recoveries and downturns: the Fed should act quickly to prevent a recovery from overheating, but it should act slowly in counteracting a recession. The purpose was to complete Volcker’s efforts to squeeze inflation out of the system. This bias toward toughness was the mirror opposite of the bias associated with Greenspan later. “I think that’s in the nature of a central bank because if we are too easy coming down, we set into motion a secular upward bias [in inflation]. There should be asymmetry in that respect; we should be ahead of the curve on the up side and behind the curve on the down side.”

64. Jack Nelson, “Interest Rates Peril Fed Chief’s Job,” Los Angeles Times, March 9, 1990.

65. Alan Murray and Jackie Calmes, “The Great Debate: How the Democrats, with Rare Cunning, Won the Budget War,” Wall Street Journal, November 5, 1990.

66. The conservative was United Conservatives of America chairman Richard Viguerie. See Dan Balz and John E. Yang, “Bush Abandons Campaign Pledge, Calls for New Taxes,” Washington Post, June 27, 1990.

CHAPTER EIGHTEEN

1. Kevin M. Woods, “Um Al-Ma’arik (The Mother of All Battles): Operational and Strategic Insights from an Iraqi Perspective,” Institute for Defense Analyses 1 (May 2008), www.dtic.mil/cgi-bin/GetTRDoc?AD=ada484530.

2. “By then, Alan and I were living together, quietly. I didn’t want to be away from him for such a long time, but as always, my domestic instincts were fighting my hunger for adventure.” Andrea Mitchell, Talking Back: . . . to Presidents, Dictators, and Assorted Scoundrels (New York: Penguin Group, 2006), Kindle locations 3234–35.

3. Molly Moore, “Cheney Says Emirates to Host U.S. Forces; Secretary Visits Air Crews in Abu Dhabi,” Washington Post, August 21, 1990.

4. Alan Greenspan, interview by the author, June 2, 2014.

5. Greenspan had had dinner with Richard and Lynne Cheney on August 7, 1990, for example.

6. Oil-price data are from “EIA Short-Term Energy Outlook, Real and Nominal Price Dataset Series: Crude Oil-M Tab” (U.S. Energy Information Administration, February 2014).

7. DGS10 data series from FRED. Board of Governors of the Federal Reserve System, “10-Year Treasury Constant Maturity Rate,” FRED, Federal Reserve Bank of St. Louis, January 2, 1962, https://research.stlouisfed.org/fred2/series/DGS10/.

8. In July the underlying “core” rate hit 5 percent, its fastest pace in nearly six years; and the headline consumer price index seemed set to surge, thanks to the spike in oil prices.

9. The Fed governor was David Mullins.

10. Greenspan recalled later, “When Saddam went into Kuwait, I was very strongly of the view that the only reason he’s in Kuwait is as a staging area to go into Saudi Arabia. And ultimately to control the Straits of Hormuz.” Greenspan, interview by the author, May 4, 2012.

11. The skeptic was Edward Boehne, the president of the Philadelphia Fed.

12. Richard Darman, Who’s in Control? Polar Politics and the Sensible Center (New York: Simon & Schuster, 1996), 276.

13. Darman had agreed with the main thrust of a CEA report prepared for Bush in August that both cited Fed tightness as “a key factor in creating the slowdown during the last one and a half years” and suggested the Fed could stave off recession by easing soon. Ibid., 275.

14. A well-connected journalist who was close to Darman recalls, “Darman thought he owned Greenspan.”

15. Two weeks before Greenspan’s phone call, Darman had taken delivery of a memo from an economist at the Office of Management and Budget, underlining the vulnerability of the banks. See Ahmad Al-Samarrie to Richard Darman, “Banks: The Next Deposit Insurance Crisis?,” memorandum, August 10, 1990, Darman (OMB) (1990), OA/ID 29187, John Sununu Files, Bush Presidential Records: Staff and Office Files, George Bush Presidential Library.

16. Janet L. Fix, “FDIC Had Set Aside Funds to Cover the Bank of New England’s Failure,” Philadelphia Inquirer, January 9, 1991, http://articles.philly.com/1991-01-09/business/25820869_1_bank-failures-fdic-fund-alan-whitney.

17. On September 11, 1990, a GAO study reported that the FDIC held a meager 70 cents in reserves to cover every $100 in insured deposits—its lowest ratio ever.

18. Kenneth Duberstein, interview by the author, May 2, 2014.

19. Andrea Mitchell, Talking Back, Kindle locations 3194–3203.

20. Greenspan’s diary shows a meeting with Scowcroft on September 28, the day of the dinner with Cheney. Alan Greenspan’s Diary, n.d.

21. Ken Duberstein recalls that developments in the Gulf were discussed at the dinner. Interview by the author, February 20, 2014.

22. The agreement was to reduce the budget deficit by $500 billion over five years. See John E. Yang, “Bush, Hill Leaders Approve Budget Package,” Washington Post, October 1, 1990.

23. The FOMC member was Richmond Fed president Robert Black.

24. The FOMC member was Governor David Mullins.

25. The FOMC member was St. Louis Fed president Thomas Melzer.

26. The FOMC member was Cleveland Fed president Lee Hoskins.

27. The FOMC member was New York Fed president Gerald Corrigan.

28. Alan Murray, “The New Fed: Democracy Comes to the Central Bank, Curbing Chief’s Power,” Wall Street Journal, April 15, 1991. By the time Greenspan left office, he was seen as an imperial chairman, and his successor was greeted as a democratizer. The lesson is that Fed chairmen tend to become imperial with time. This may be a good argument for term limits.

29. House Committee on Government Operations, Deposit Insurance Issues and Depositor Discipline: Hearing Before the Commerce, Consumer, and Monetary Affairs Subcommittee of the Committee on Government Operations, 101st Cong., 2nd sess., 1990, http://hdl.handle.net/2027/pst.000017881975.

30. “1990–1991 might be the only recession since the 1950s in which tight money was not a significant factor in the slowdown of lending.” See Ben Bernanke, “Credit in the Macroeconomy,” Federal Reserve Bank of New York Quarterly Review 18, no. 1 (Spring 1993): 64.

31. The term “balance sheet recession” was used in a retrospective colloquium on the 1990–91 downturn, organized by the New York Federal Reserve in February 1992. However, the term was unfamiliar enough that it was bracketed with inverted commas. See “The Role of the Credit Slowdown in the Recent Recession,” Federal Reserve Bank of New York Quarterly Review 18, no. 1 (Spring 1993): 2.

32. David Wessel, “Pushing Policy: Fed’s Vice Chairman, Seeking Lower Rates, Furthers a Bush Goal,” Wall Street Journal, October 6, 1992.

33. “Darman once said to me, ‘Larry, I dreamed about you last night. I saw you running down the halls tossing grenades into every office as you went by,’” Lindsey recalled later. “Darman figured out I was a monetary dove, and he knew I was a pretty effective troublemaker. He figured he could send me to cause trouble to Alan instead of causing trouble to him.” Lawrence Lindsey, interview by the author, August 26, 2011.

34. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 121.

35. Senate Committee on Banking, Housing, and Urban Affairs, Deposit Insurance Revision and Financial Services Industry Restructuring: Hearing Before the Committee on Banking, Housing, and Urban Affairs, 101st Cong., 2nd sess., (Federal News Service, 1990).

36. C-SPAN video archive from January 23, 1991. Progress of the Resolution Trust Corporation (U.S. Senate Banking, Housing, and Urban Affairs Committee, 1991), http://www.c-span.org/video/?15872-1/progress-resolution-trust-corporation.

37. Steven Mufson, “Sweeping Bank-Reform Plan Unveiled: Treasury Package Would Bring Down Interstate, Ownership Barriers,” Washington Post, February 6, 1991.

38. The Treasury’s plan for a single bank regulator emerged in January 1991. See, for example, Stephen Labaton, “Plan to Pare Financial Supervision,” New York Times, January 7, 1991.

39. William Safire, “Bush’s Cabinet: Who’s Up, Who’s Down,” New York Times, March 25, 1990. Another New York Times article quoted a noted Brookings Institution economist: “You’re just not very conscious of his presence. . . . It’s hard to characterize the absence of a presence.” David E. Rosenbaum, “The Treasury’s ‘Mr. Diffident’: Nicholas Brady Wields Power in Washington Because He Is the President’s Best Friend,” New York Times, November 19, 1989.

40. David Wessel, “Is Brady’s Treasury Up to Doing Its Job? Many People Doubt It,” Wall Street Journal, January 31, 1991.

41. Quotes and scene come from C-SPAN video: Progress of the Resolution Trust Corporation.

42. James Risen, “Administration Plans to Weaken Fed’s Power,” Los Angeles Times, January 8, 1991.

43. Kenneth H. Bacon, “White House Alters Plan on Banking Laws,” Wall Street Journal, February 5, 1991.

44. Under the Treasury’s February proposal, the Fed would gain power over local banks previously supervised by the FDIC.

45. R. W. Apple Jr., “Allied Forces Storm Iraq and Kuwait After Hussein Ignores U.S. Deadline; Bush Sees a Swift, Decisive Victory,” New York Times, February 24, 1991.

46. Rick Atkinson, “U.S. Victory Is Absolute,” Washington Post, March 1, 1991.

47. Andrew Rosenthal, “Bush Halts Offensive Combat,” New York Times, February 28, 1991. See also George E. Jordan, “Gulf Heroes Will Get Our ‘Biggest’ Parade,” Newsday, March 4, 1991.

48. “Music Briefs,” BPI Entertainment Newswire, February 27, 1991.

49. Greenspan’s message in private meetings is recalled by Virgil Mattingly, the Fed’s general counsel at the time, who was in awe of Greenspan’s skill as a behind-the-scenes lobbyist for the Fed’s regulatory interests. Virgil Mattingly, interview by the author, February 18, 2014.

50. David E. Rosenbaum, “Fed to Fight Part of Plan on Banks,” New York Times, March 5, 1991. Of course, the Treasury was also responsible for the financial system insofar as taxpayers might be called upon to rescue it.

51. The lobbyist was Kenneth Guenther. See “In the Bank; Paradise Lost; Conversation; Strikeout,” Transcript, MacNeil-Lehrer NewsHour (PBS, July 31, 1990), Transcript #3827.

52. Barbara A. Rehm, “Lawmakers Attack Fed Lending,” American Banker, May 13, 1991, 2. Mattingly, interview by the author, February 18, 2014.

53. Barbara A. Rehm, “Lawmakers Attack Fed Lending.” To the Fed’s embarrassment, González’s committee staff found 90 percent of the 377 banks that made extended use of the discount window in the preceding six years had ultimately failed, and a House investigation into the Bank of New England collapse later revealed that the FDIC’s cleanup costs could have been cut nearly in half had the Fed not propped up the bank for months with discount window loans while billions of dollars in uninsured deposits fled. Representative Tom Ridge (the future DHS secretary), who was one of González’s allies on the committee, likened the situation to a sinking ship wherein “the stowaways were getting off with their luggage.”

54. Jerry Knight, “Panal Drops Provisions to Limit Fed,” Washington Post, June 21, 1991.

55. Brady made this pronouncement in a March 24 interview with ABC’s David Brinkley on This Week. The headline consumer price index had risen by 5.3 percent in the year to February, and would come in at 4.9 percent in the year to March. David Brinkley, This Week with David Brinkley (ABC News, March 24, 1991).

56. Hollis McLoughlin, interview by the author, January 17, 2014.

57. On May 15, the Wall Street Journal had speculated that the administration’s dawdling on Greenspan’s reappointment had caused a slide in stock prices. See “Asides: A Nervous Market,” Wall Street Journal, May 15, 1991.

58. Alan Murray, “Fed Chief Is Expected to Be Reappointed,” Wall Street Journal, May 17, 1991.

59. McLoughlin, interview by the author, January 17, 2014.

60. At the time, Lawrence Lindsey’s confirmation to the Fed Reserve Board was still pending in Congress five months after its submission, underlining the risk in attempting to install an alternative to Greenspan.

61. “We delayed reappointment because we kept waiting for the easing shoe to fall.” John Sununu, interview by the author, January 10, 2014. Hollis McLoughlin, Brady’s aide, recalls that Bush’s chief of staff John Sununu was influential on the timing of the Greenspan announcement. McLoughlin, interview by the author, January 17, 2014.

62. Michael Duffy and Dan Goodgame, Marching in Place: The Status Quo Presidency of George Bush (New York: Simon & Schuster, 1992), 249.

63. Bob Woodward, The Agenda: Inside the Clinton White House (New York: Simon & Schuster, 2005), 50.

64. Nicholas F. Brady, “A Way of Going” (Unpublished Manuscript, 2008), 241–42.

65. Ibid.

66. Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster Inc., 2000), Kindle location 1654. Darman later seethed privately to colleagues at Brady’s incompetence in failing to extract a firm commitment from Greenspan to go for growth.

67. At the May 1991 FOMC meeting, Greenspan and Corrigan had concurred that balance-sheet adjustments might temper the recovery, but that a classic inventory-restocking bounce-back was nonetheless likely. For these reasons, the Fed had decided against a cut in the federal funds rate from the existing target of 5.75 percent. The fact that the FOMC later resumed cutting, bringing the target rate down to 4 percent by December 1991 and 3 percent by September 1992, constituted a retrospective admission that the policy of mid-1991 had been excessively tight. For an exposition of the lessons learned from this error, see Ben Bernanke, “Credit in the Macroeconomy,” 50–70.

68. See Ben Bernanke, “Credit in the Macroeconomy.” Bernanke’s paper applied new research on asymmetric information to the field of monetary policy, pointing out that borrowers paid a premium to lenders that reflected lenders’ imperfect information. This premium increased when falling asset prices, higher interest rates, or a recession heightened doubts about creditworthiness. Although Greenspan would not have couched his arguments in terms of information asymmetries, he would certainly have recognized that stressed economic conditions could disrupt the credit channel.

69. This meeting was recalled by two participants, David Shulman and Ken Rosen. Both had been involved in real estate research at Salomon Brothers, and Shulman continued to direct the firm’s real estate research unit. David Shulman, interview by the author, August 5, 2011, and Kenneth Rosen, interview by the author, May 6, 2014.

70. Alarmingly, the scale of this problem dwarfed even the Latin American debt mess: U.S. banks had lent far greater sums to domestic real estate projects than they had ever lent to developing nations. In 1990, government data showed that banks’ exposure to commercial real estate amounted to 19 percent of all loans, or five times their exposure to third-world debt as of 1987. See Stephen Kleege, “Fate of Banking in the 1990s Hinges on Real Estate Loans,” American Banker, October 15, 1990, 1.

71. Ibid. Darman was widely recognized to be a champion Washington leaker. See for example Marjorie Williams, “The Long and the Short of Richard G. Darman,” Washington Post, July 29, 1990.

72. Bob Woodward, The Agenda, 53.

73. Greenspan recalls that when he realized he was being frozen out, his main feeling was “hallelujah.” Greenspan, interview by the author, April 1, 2011. Brady affirms that he viewed Greenspan as socially insecure. Nicholas F. Brady, interview by the author, September 19, 2011.

74. Steven Greenhouse, “Bush Calls on Fed for Another Drop in Interest,” New York Times, June 24, 1992.

75. Lawrence Lindsey was the only FOMC member to even mention Bush’s remarks, and then only to declare himself appalled by them. “We’d clearly establish credibility if we stood tall,” Lindsey told the FOMC meeting. “Perhaps we could even raise rates and, who knows, really show our independence.”

76. In the Fed staff forecast prepared for the June 30 meeting, the projection for growth in 1992 had been revised down from 2.6 percent to 2.4 percent. Lawrence Lindsey summed up the divided sentiment in the Fed boardroom. Although he wondered aloud about tightening policy in order to rebuff the president, he also advocated looser policy because the economy needed it.

77. “George Bush: A President’s Story,” One on One with David Frost(A&E, June 1998).

CHAPTER NINETEEN

1. Marion Burros, “Bill Clinton and Food: Jack Sprat He’s Not,” New York Times, December 23, 1992.

2. Joe Klein, “Clinton: The Survivor,” Newsweek, July 20, 1992.

3. Bob Woodward, The Agenda: Inside the Clinton White House (New York: Simon & Schuster Inc., 2005), 64.

4. Alan Greenspan, The Age of Turbulence: Adventures in a New World, (New York: Penguin Books, 2008), 143.

5. Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000).

6. Clinton’s advisers had already warned him that the Bush team had achieved nothing by pressuring the Fed. Alan Blinder, interview by the author, January 23, 2012.

7. Greenspan, Age of Turbulence, 143.

8. Greenspan’s argument to Clinton is summarized in Woodward, Maestro; Bob Woodward, The Agenda, 67–68; and Greenspan, Age of Turbulence, 144. These sources are corroborated by contemporaneous primary sources that capture Greenspan’s thinking about long-term interest rates at this time. Both in testimony to Congress and in FOMC meetings, Greenspan made it clear that he believed deficit reduction led to diminishing inflation expectations and hence to lower long-term bond rates.

9. A former Fed economist recalls that Greenspan asked the staff to do statistical work that might support his inflations-expectation hypothesis.

10. These quotes are reported in Bob Woodward, The Agenda, 60, and Greenspan, Age of Turbulence, 144. Ted Truman, the head of the international division of the Fed, also recalls Greenspan returning from Arkansas favorably impressed. Ted Truman, interview by the author, January 26, 2012. Greenspan reiterated his favorable view of Clinton in an FOMC conference call on December 14, 1992.

11. Albert Hunt, interview by the author, February 4, 2014.

12. Robert Rubin, interview by the author, March 5, 2015.

13. The argument for expansionary austerity assumed that deficit reduction would bring down interest rates fast enough to offset the economic drag from budget austerity; and further, that lower interest rates would pull down the dollar. Part of the projected boost to the economy came from a stimulus to exports.

14. Blinder, interview by the author, January 23, 2012.

15. Bob Woodward, The Agenda, 92.

16. The visit from Bentsen and Rubin is recorded in the Fed chairman’s official diary. Alan Greenspan’s Diary, n.d.

17. Woodward, Maestro, 98. According to Greenspan’s official diary, he met Hillary Clinton at the White House on March 1, 1993, presumably to discuss health reform. Alan Greenspan’s Diary.

18. Tyson recalls that Greenspan advised her to clasp her hands under her chin. This pose had the dual function of projecting earnestness and controlling hand gestures. Laura Tyson, interview by the author, July 2, 2014.

19. Greenspan’s movements back and forth to New York are recorded in the diary kept for him by his Fed secretary. Alan Greenspan’s Diary.

20. Greenspan recalls, “Lloyd Bentsen listened to me on fiscal restraint, and we talked Bill Clinton into it.” Alan Greenspan, interview by the author, June 18, 2014. See also Woodward, Maestro, 99.

21. On the length of the meeting see Stephen A. Davies and Dean J. Patterson, “President Meets with Greenspan, Requests Backing to Aid Economy,” Bond Buyer, January 29, 1993. On Clinton’s reaction, see Woodward, Maestro, 99.

22. Robert Solow is quoted in Linton Weeks and John M. Berry, “The Shy Wizard of Money: Fed’s Enigmatic Greenspan Moves Easily in His Own World,” Washington Post, March 24, 1997.

23. Greenspan also predicted that if bond rates fell back toward 5 percent, the result would be “a far greater stimulus effect . . . than any of these numbers we are talking about.” Senate Committee on the Budget, Statement by Alan Greenspan Before the Committee on the Budget, 103rd Cong., 1st sess., 1993. Greenspan’s testimony gave his audience room to believe that the economy might speed up under the impact of deficit cuts. Hence the Clinton administration memo of February 5, 1993, citing him in favor of the idea that interest rate declines would more than offset the drag from a tighter budget.

24. In the first half of 1967, the ten-year government bond rate had moved between about 4.5 percent and 4.9 percent. The thirty-year bond had not existed until 1977; but between then and the time of Greenspan’s testimony, the average spread between thirty-year and ten-year rates was 6 basis points. Therefore the ten-year rate in 1967 implied a thirty-year rate under 5 percent.

25. As it turned out, inflation expectations five to ten years ahead (as measured by the University of Michigan surveys) subsided gradually over the 1990s; they did not fall suddenly in response to the budget deal of 1993, contrary to what Greenspan appeared to be predicting. Moreover, over the first five years of Clinton’s presidency, long-run inflation expectations fell by only half a percentage point, implying a reduction in the long-bond rate substantially smaller than the reduction Greenspan dangled before the Senate.

26. Steven Greenhouse, “Fed’s Chief Also Likes Clinton Plan on Deficit,” New York Times, January 29, 1993.

27. Wil S. Hylton, “Alan Greenspan Takes a Bath,” GQ, April 2005, 7, http://www.gq.com/news-politics/newsmakers/200503/alan-greenspan-budget-federal-reserve?currentPage=1.

28. Bob Woodward, The Agenda, 113.

29. Nicholas F. Brady, “A Way of Going” (Unpublished Manuscript, 2008), 242–43.

30. Senate Committee on Banking, Housing, and Urban Affairs, Federal Reserve’s First Monetary Report for 1993: Hearing Before the Committee on Banking, Housing, and Urban Affairs, 103rd Cong., 1st sess., 1993.

31. This sequence was reported in “1994 Economic Report of the President,” February 1994, 84, https://fraser.stlouisfed.org/title/?id=45#!8093.

32. In a speech delivered to the Economic Club of New York on April 19, 1993, Greenspan reiterated the view that inflation expectations were oddly elevated and therefore presented an opportunity for policy makers to bring them down. Alan Greenspan, remarks (Economic Club of New York, New York, April 19, 1993), https://fraser.stlouisfed.org/docs/historical/greenspan/Greenspan_19930419.pdf.

33. The best measure of whether deficit reduction was reducing long-run inflation expectations comes from the University of Michigan’s survey of five-ten-year-ahead inflation expectations. Expectations stood at 3.4 percent in February 1993 and 3.5 percent in October 1993. One-year-ahead expectations rose from 2.9 percent to 3.3 percent over this period. “University of Michigan Inflation Expectation,” FRED, Federal Reserve Bank of St. Louis, January 1, 1978, https://research.stlouisfed.org/fred2/series/MICH/.

34. Lindsey’s position anticipated later debates about using monetary policy to “lean against the wind.” “There’s probably not a lot of real effect [on asset prices] from 25 basis points on the fed funds rate,” he said at the March 1993 FOMC meeting. “I do think, though, that it is a signal to those markets that perhaps we think they are overextended. And I would rather raise the fed funds rate 25 points now to put a little cold water on them than to be in a situation in a few months where we might have to raise it significantly more.” Lindsey’s explicit advocacy of using monetary policy to combat asset bubbles represents the path not taken by central banks over the next decade.

35. In his 1959 paper, Greenspan had argued that rather than allowing the money supply to expand to “meet the legitimate demands of business,” as it did with disastrous consequences in the run-up to the 1929 crash, the Fed should have reacted to the danger posed by “speculative flights from reality.” See chapter three.

36. The tension between Greenspan’s policy and his former belief in gold was noted at the time by the supply-side gold bug Jude Wanniski, who wrote to Greenspan pointing out that gold prices signaled continued inflation fears, implying that the bond rally might be a bubble. “You’ve persuaded the bond market that you’re going to maintain a sound money policy, but you haven’t persuaded the gold market. Either gold is going to come down or bond yields are going to go up, depending on how you handle yourself in the very near term,” Wanniski wrote, suggesting that the Fed should raise interest rates. Jude Wanniski to Alan Greenspan, letter, July 30, 1993, Correspondence: Greenspan, Alan, 1991–1993, box 14, Jude Wanniski, Hoover Institution Archives.

37. The position to which Greenspan began to gravitate in 1993 was cautiously questioned after the financial crisis. In a speech delivered on July 2, 2014, Fed chairman Janet Yellen conceded that higher short-term interest rates can mitigate bubbles, noting that “the level of interest rates does influence house prices, leverage, and maturity transformation.” Moreover, unlike the later Greenspan Fed, the Yellen Fed accepted that its responsibilities included fighting asset bubbles. Still, Yellen’s preferred tool for doing so was regulatory policy rather than higher interest rates. See Janet Yellen, Inaugural Michel Camdessus Central Banking Lecture, International Monetary Fund Headquarters, Washington, D.C., July 2, 2014, http://www.imf.org/external/np/seminars/eng/2014/camdessus/.

38. The alarming buildup of personal debt was a running theme in Lindsey’s commentary throughout this period; at the February 1994 FOMC meeting, he disaggregated elderly and rich Americans from the rest, pointing out that “the non-rich, non-old live paycheck to paycheck, quite literally.” To a remarkable degree, Lindsey was pointing to the dynamic that contributed to the fragility of the economy years hence. Low inflation, reflecting cheap imports, allowed monetary policy to stay loose; in turn, low interest rates encouraged excessive personal borrowing.

39. Lindsey was advocating an approach adopted by Nordic central banks two decades later. Norway’s central bank increased the policy interest rate in mid-2010 when it faced escalating household debt, undeterred by the fact that inflation was below target; the goal was “guarding against the risk of future imbalances.” Sweden’s Riksbank held its policy rate “slightly higher than we would have done otherwise” because of financial stability concerns. Both examples are noted by Yellen, Inaugural Michel Camdessus Central Banking Lecture. Sweden’s tightening later proved to be an error, but generalizing from this example may constitute a further error. Sweden embarked on its tightening in 2010, at a time when the economy was weak: the Riksbank’s forecast for inflation was below the target and the forecast for unemployment was far above the long-run sustainable rate. As will be suggested in later chapters, Greenspan faced opportunities to tighten policy in pursuit of financial stability when the U.S. economy was stronger than Sweden’s in 2010.

40. Bob Woodward, The Agenda, 329.

41. The decision to announce the FOMC decision in a public statement contrasted with the practice Greenspan had earlier defended. In October 1989, Greenspan had told a House committee that immediate announcement of FOMC decisions “would be ill-advised and could impede timely and appropriate adjustments to policy.” As recently as October 1993, Greenspan had told FOMC colleagues in a conference call that public announcements could roil markets, and that fear of this might inhibit the Fed from moving rates appropriately. Of course, this position was muddled. It was precisely by provoking moves in market interest rates that Fed decisions influenced the economy. Alan S. Blinder and Ricardo Reis, “Understanding the Greenspan Standard,” Working Paper (CEPS, September 2005), 35–36.

42. From 1994 to the end of his tenure, Greenspan moved the target rate between meetings on only four occasions, and in all cases he obtained consent from the committee. For analysis of intermeeting moves, see Ellen E. Meade, “The FOMC: Preferences, Voting, and Consensus,” Federal Reserve Bank of St. Louis Review 87, no. 2, Part 1 (April 2005): 101, http://research.stlouisfed.org/publications/review/05/03/part1/Meade.pdf. One instance of an intermeeting move for which Greenspan secured FOMC approval was to come soon: in April 1994.

43. The target federal funds rate had last been raised in February 1989, from 9.3 percent to 9.75 percent.

44. Greenspan, Age of Turbulence, 155.

45. The allegation that Angell foot-faulted comes, admittedly, from Greenspan. Greenspan, interview by the author, June 18, 2014. The allegation that Greenspan was deeply keen on winning comes from conversations with several people who played with him.

46. A fuller account of hedge funds’ expansion and their interactions with Fed tightening in early 1994 is provided in Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite (New York: Penguin Group, 2010), Kindle location 3133ff.

47. In the April 1991 Treasury auction, Steinhardt and a hedge-fund manager named Bruce Kovner bid for just over half the Treasury bonds on offer, but then immediately lent them out and bought them back again, ending up with exposure equivalent to more than 100 percent of the auction. Steinhardt and Kovner applied similarly aggressive tactics to the May 1991 auction.

48. The mortgage-trading hedge fund was Askin Capital Management.

49. The thirty-year rate, admittedly, had preserved more of its gain, not least because hedge funds preferred to trade the more plentiful ten-year paper.

50. Late Edition (CNN, April 3, 1994).

51. At the May 1994 FOMC meeting, Greenspan reiterated that “the issue of uncertainty as being helpful or unhelpful is really not clear-cut. We experienced periods of relative certainty in the latter part of 1993. . . . That clearly was a very unhappy state of affairs; the mere fact that uncertainty did not exist was not a good; it clearly was a bad.”

CHAPTER TWENTY

1. Carrie Mason-Draffen, “One of Clinton’s Fed Choices Is Former Syosset High Hoopster,” Newsday, April 23, 1994.

2. Alan S. Blinder, Hard Heads, Softer Hearts: Tough-Minded Economics for a Just Society (Cambridge Mass.: Perseus Books, 1987), ix.

3. John Cassidy, “Fleeing the Fed,” New Yorker, February 19, 1996.

4. Clay Chandler, “Blinder Tops Candidate List for Fed Post; Princeton Economist Could Be Bank’s Next Vice Chairman,” Washington Post, February 18, 1994.

5. Blinder, Hard Heads, Softer Hearts, 33. Blinder also wrote that “inflation’s most devout enemies exhibit verbal hysteria.” See ibid., 51.

6. Blinder, Hard Heads, Softer Hearts, 51.

7. Ibid., 33–34.

8. Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), Kindle locations 2601–04.

9. Ibid., Kindle locations 2608–14.

10. Greenspan had described this hypothesis in a speech on April 19, 1993, to the Economic Club of New York. Alan Greenspan, remarks (Economic Club of New York, New York, April 19, 1993), https://fraser.stlouisfed.org/docs/historical/greenspan/Greenspan_19930419.pdf.

11. Glenn Rudebusch, interview by the author, July 14, 2014.

12. Senate Committee on Banking, Housing, and Urban Affairs, Testimony by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, Before the Committee on Banking, Housing, and Urban Affairs, 103rd Cong., 2nd sess., 1994, http://fraser.stlouisfed.org/docs/historical/greenspan/Greenspan_19940527.pdf.

13. Addressing his FOMC colleagues in July 1996, Greenspan confessed, “I must admit that several years ago I raised this hypothesis with our staff colleagues and had them take a look at what happens to productivity as the inflation rate moves toward zero. Lo and behold, they got a reasonably good correlation that unfortunately disappeared to a large extent when the data were revised.”

14. Keith Bradsher, “New Fuel for the Fed’s Rate Fire,” New York Times, June 9, 1994.

15. The best effort to explain the costs of inflation came from Donald Kohn: “Higher levels of inflation tend to be more variable; you get a lot more uncertainty; people have to interact with the tax system and other things that aren’t indexed to inflation rates.” But Kohn made his point tentatively, and at the very end of the discussion. Nobody picked up on it.

16. Paul R. Krugman, The Age of Diminished Expectations: U.S. Economic Policy in the 1990s (Cambridge, Mass.: MIT Press, 1997). See also Laurence M. Ball, “The Case for Four Percent Inflation,” Central Bank Review 13 (May 2013): 17–31. Ball’s paper summarizes attempts to demonstrate macroeconomic costs from inflation, noting that growth is generally thought to suffer from inflation once the inflation rate rises above only a certain threshold; efforts to quantify that threshold produce estimates ranging from 8 percent to 40 percent. Ball, a professor at Johns Hopkins University, concludes, “Policymakers have developed an aversion to inflation that is out of proportion to its true costs.” Ball’s verdict as of 2013 was shared contemporaneously by some FOMC members. In an extensive debate on inflation targeting at the FOMC meeting of January/February 1995, several members stressed that the benefits of low inflation had not been empirically established. Likewise, at the January 1996 FOMC meeting, Governor Janet Yellen cited the work of Truman Bewley of Yale, which suggested that excessively low inflation might be harmful because of downward rigidity in nominal wages; and Mike Prell observed that it was “very hard to get definitive, empirical measures of the costs and benefits of varying inflation between 3 percent and, say, 1 percent as measured by the CPI.” The dominant arguments as to why inflation mattered were that firms respond to inflation by adjusting nominal prices at different times, creating inefficient variability in relative prices; and that inflation interacted inefficiently with the tax system. At low levels of inflation, neither cost appeared significant.

17. Warning of the unmeasured cost of inflation, Greenspan said, “The temptation to assume that our forecast point estimates or reduced-form model simulations somehow adequately capture these risks is probably an illusion.”

18. Blinder, Hard Heads, Softer Hearts, 51. In a similar vein, Blinder had dared to ask whether the popular aversion to inflation was justified: “After all, public opinion also lines up solidly behind the existence of flying saucers, angels, and extrasensory perception.” Ibid., 45.

19. Blinder, Hard Heads, Softer Hearts, 46.

20. Blinder’s past attendance at Jackson Hole symposia distinguished him from Greenspan, who had not been invited before acceding to the Fed chairmanship. Adam Posen, president of the Peterson Institute for International Economics and a former member of the Bank of England’s monetary policy committee, recalls that academic economists at Jackson Hole regarded Greenspan as a lightweight into the mid-1990s.

21. “The employment rate of five to ten years from now has nothing to do with today’s macroeconomic policy,” Blinder said. The long-run role for central banks was to control inflation. Alan S. Blinder, “Overview: Proceedings: Reducing Unemployment: Current Issues and Policy Options” (symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyo., August 1994).

22. Keith Bradsher, “Fed Official Disapproves of Rate Policy,” New York Times, August 28, 1994. Bradsher’s story seems unfair in light of the fact that in congressional testimony four months later, Greenspan repeated Blinder’s view of the Phillips curve. “Over the long run I don’t see any trade off between inflation on the one hand and sustainable economic growth and . . . employment. . . . It is true, however, that in the short run there are trade offs.” Joint Economic Committee, Testimony by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, Before the Joint Economic Committee, 103rd Cong., 2nd sess., 1994. Likewise, on the first day of the FOMC meeting that ran from January 31 to February 1, 1995, Greenspan echoed Blinder, stating, “There still is a short-term Phillips Curve.” To be fair, part of the stormy reaction to Blinder’s comments came from European central bankers, whom Blinder had accused (correctly) of excessive tightness. But with the notable exception of the Wall Street Journal, press accounts built this real disagreement between Blinder and the Europeans into a fake clash between Blinder’s Jackson Hole speech and the Fed’s monetary orthodoxy. For the Journal’s commendably fair take, see David Wessel, “Blinder Denies There’s a Rift with Fed Chief,” Wall Street Journal, September 9, 1994.

23. “A Grizzly Subject,” Economist, September 3, 1994. “Division of Labor Day,” Financial Times, September 3, 1994. Robert J. Samuelson, “Economic Amnesia,” Washington Post, September 7, 1994.

24. Alan Greenspan, interview by the author, November 2, 2015.

25. Andrea Mitchell, interview by the author, July 28, 2014.

26. Maureen Dowd, “On Washington, High Up in the Box,” New York Times, December 12, 1993.

27. Evan Thomas is quoted in Dowd, ibid.

28. Christopher Meyer, interview by the author, May 23, 2013.

29. Greenspan’s idea of the proper model for a House Speaker was also influenced by Gerald Ford, who had conducted himself in that job with unflashy decency.

30. John M. Berry, “After a GOP Revolution That Is Likely to Make Greenspan’s Job Tougher,” Washington Post, January 1, 1995.

31. In the first and second quarter of 1995, annualized growth was 1.4 percent. Thereafter the economy accelerated. Greenspan’s mentor Arthur Burns had declared in 1969 that “we need to make necessary shifts of economic policy more promptly, so that they may be gradual rather than abrupt.” (See Julio Rotemberg, “Federal Reserve Goals and Tactics for Monetary Policy: A Role for Penitence?,” Journal of Economic Perspectives 27, no. 4 [Fall 2013]: 73.) Unlike Greenspan, Burns had failed to live by this prescription.

32. From 1994 until the end of Greenspan’s tenure, core PCE inflation never exceeded 2.4 percent.

33. As frequently happened with Greenspan, a genuine achievement somehow came to be regarded as an almost superhuman feat. The soft landing of 1995 was frequently referred to as unprecedented in the postwar era, even though the Fed had slowed the economy while avoiding a recession in 1967 and 1986. For an example of the belief that 1995 was unprecedented, see Edmund L. Andrews, “Economy Often Defies Soft Landing,” New York Times, August 11, 1996. Andrews writes, “The Fed has achieved only one true soft landing—in 1994–95.” However, between late 1961 and late 1966, the Fed steered the effective federal funds rate up from 1.2 percent to 5.8 percent, creating a desired slowdown without a recession. Equally, the Fed guided the effective federal funds rate up from 8.5 percent to 11.6 percent between February 1983 and August 1984. Again, growth slowed, but recession was avoided.

34. Putting the same point differently, Blinder said, “He was much, much savvier than the average uncle.” Alan Blinder, interview by the author, January 23, 2012.

35. As Greenspan later put it in his memoir, “The soft landing of 1995 was one of the Fed’s proudest accomplishments during my tenure.” Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 156.

36. Laurence Meyer, a highly respected economic modeler who served as a Fed governor starting in the summer of 1996, later wrote in his memoir, “I ended my term not sure I had ever influenced the outcome of an FOMC meeting. This was one of the frustrating aspects of serving on the Greenspan FOMC.” Laurence H. Meyer, A Term at the Fed: An Insider’s View (New York: HarperBusiness, 2006), 52.

37. Additionally, President Jerry Jordan of the Cleveland Fed argued in the August 16, 1994, FOMC meeting that, over the previous year, the Fed had been more fortunate than skillful. Growth and jobs had outperformed the Fed’s expectations, and monetary policy had in retrospect been looser than the staff would have recommended if its growth and jobs forecasts had been accurate. Yet this policy looseness had not been punished by inflation. The modern state of low inflation had been achieved partly by luck.

CHAPTER TWENTY-ONE

1. “Market Surveys Data, 1987–2010” (International Swaps and Derivatives Association, Inc., June 30, 2010).

2. Carol J. Loomis, “Untangling the Derivatives Mess,” Fortune, March 20, 1995, http://fortune.com/2012/11/21/untangling-the-derivatives-mess/.

3. Kelley Holland, Linda Himelstein, and Zachary Schiller, “The Bankers Trust Tapes,” BusinessWeek, October 16, 1995, http://www.businessweek.com/1995/42/b34461.htm.

4. Richard Spillenkothen, interview by the author, June 5, 2013. Spillenkothen was the head of supervision at the Federal Reserve Board. Susan M. Phillips, a Fed governor from 1991 to 1998, confirms the point that Greenspan did not overtly push deregulation or lax enforcement on regulatory issues, contrary to the widespread assumption that he pursued a Randian agenda. “We used to say, he has never seen a regulation that he liked,” she said, adding that he voted with the majority on the board and did not want to use up chips to push regulatory things. He wanted to keep his chips for monetary arguments that he really cared about. Susan Phillips, interview by the author, June 7, 2013.

5. Carol J. Loomis, “Untangling the Derivatives Mess.”

6. The quote comes from PaineWebber Inc. analyst Lawrence Cohn. See “Bankers Trust to Revamp Derivatives,” Los Angeles Times, December 6, 1994, sec. Business, http://articles.latimes.com/1994-12-06/business/fi-5557_1_bankers-trust.

7. Carol J. Loomis, “Untangling the Derivatives Mess.” See also Robert A. Rosenblatt, “Orange County in Bankruptcy,” Los Angeles Times, December 8, 1994.

8. In a similar hearing in the House in 1994, Charles Bowsher, the head of the government’s General Accounting Office, testified of derivatives that “the sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole.” In contrast, Greenspan testified at the same hearing that “risks in financial markets, including derivatives markets, are being regulated by private parties. . . . There is nothing involved in federal regulation per se which makes it superior to market regulation.” Later that year, the House considered derivatives regulation but failed to pass it. See Peter S. Goodman, “The Reckoning: Taking Hard New Look at a Greenspan Legacy,” New York Times, October 8, 2008, sec. A.

9. Greenspan’s lucid take on the challenges of successful financial regulation is evident, for example, in a speech delivered on November 16, 1995. Even though he devoted part of his speech to the shortcomings of value-at-risk models used by Wall Street, dwelling at length on these models’ underestimation of the probability of extreme market moves, his bottom line was that flawed private risk management was superior to even more flawed regulation. “The effective acceleration of financial events also complicates the task of central banks. . . . Capital adequacy can be an elusive concept for portfolios that are turning over rapidly. Measurement of capital may be muddled by . . . over-the-counter derivative contracts and structured notes. . . . With instruments trading that represent highly leveraged exposures, a large chunk of capital can disappear, and then reappear, all within the trading day. Supervisors may have to resort to basing their analyses chiefly on assessments of managerial capabilities rather than on the portfolio held at a given instant.” After 2008, it became taboo to assert that regulators would have to put their faith in the risk assessments made by private managers. But Greenspan was correct in pointing out the immense challenges involved in the alternative of second-guessing them. After Greenspan’s speech, he received a note from Bob Rubin: “I thought your remarks on risk management, and price behavior, were easy to understand and congruent with my experience as a trader. I have saved it for future discussions on regulation. Bob.” Evidently, even if post-2008 commentators are quick to condemn Greenspan for his attitude toward financial regulation, and even though Rubin was more sympathetic to the case for regulating derivatives than Greenspan (see chapter twenty-three), his analysis was taken seriously. Alan Greenspan, remarks (Research Conference on Risk Measurement and Systemic Risk, Washington, D.C., November 16, 1995), https://fraser.stlouisfed.org/docs/historical/greenspan/Greenspan_19951116.pdf. Robert Rubin to Alan Greenspan, note, (n.d.), personal files of Alan Greenspan.

10. Greenspan repeatedly expressed this hope that financiers would learn from errors. In a speech on June 20, 1995, he assured his audience at the Economic Club of New York that “risk-management systems were exposed to a very real life stress test in 1994, when sharp increases in interest rates created large losses in fixed income markets. As a consequence, firms’ models and judgments should be sounder today than those that prevailed in early 1994.” Alan Greenspan, remarks (Economic Club of New York, New York, N.Y., June 20, 1995), https://fraser.stlouisfed.org/docs/historical/greenspan/Greenspan_19950620.pdf.

11. In Age of Turbulence, published in 2007, Greenspan stuck to the view that financiers would learn from their errors. “It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade. The worst have failed; investors no longer fund them and are not likely to in the future.” In a footnote, Greenspan noted the danger of “a chain reaction of defaults.” But the caveat was consistently buried beneath the sanguine headline. See Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), Kindle Location 9109.

12. Katharine Q. Seelye, “Republicans Get a Pep Talk from Rush Limbaugh,” New York Times, December 12, 1994, Late edition. Limbaugh had nearly twenty million listeners. Fully 44 percent of Americans identified him and his fellow conservative talk-radio hosts as their main source of political information. See Richard Corliss, “Look Who’s Talking,” Time, January 23, 1995, http://content.time.com/time/subscriber/article/0,33009,982262,00.html.

13. Lawrence Summers recalls that Greenspan was in favor of helping Mexico even at the very beginning of their deliberations—before it became clear which way the Clinton administration would come out. Lawrence Summers, interview by the author, March 7, 2012.

14. Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), 139–140.

15. Edwin M. Truman, interview by the author, January 26, 2012.

16. The conditionality is not reflected in the transcript of the call but was part of the committee’s understanding. Edwin M. Truman, e-mail to the author, August 2, 2015.

17. Jeffrey Shafer, who was assistant secretary for international affairs at the Treasury, recalls that Greenspan changed his thinking from a bailout solution to a bailout-plus-policy solution. Jeffrey Shafer, interview by the author, July 16, 2014.

18. Rubin’s memoir records that “Larry [Summers] and I shared Alan’s view that we should put up a significant amount of money, significantly more than we thought would be needed. In this, we were employing a corollary to Colin Powell’s doctrine of military intervention.” Robert Rubin and Jacob Weisberg, In an Uncertain World: Tough Choices from Wall Street to Washington (New York: Random House, 2003), 12. Looking back on the crisis, Rubin felt his relationship with Greenspan was cemented by the deliberations of this period. “Despite his opposition to government intervention in markets, Alan weighed the moral hazard against the risk of having Mexico go into default. He was a pragmatist.” Ibid., 9.

19. Robert Rubin and Jacob Weisberg, In an Uncertain World, 3.

20. Some sources have this as January 11, but Rubin’s own memoir has January 10, the day he was sworn in as Treasury secretary. Rubin’s memory is corroborated by Ted Truman of the Fed, a key player in the Mexico policy. Ted Truman, e-mail to the author, August 1, 2015.

21. Woodward, Maestro, 141.

22. Greenspan, Age of Turbulence, 159. See also Lucy Howard and Carla Koehl, “Courting Rush,” Newsweek, February 13, 1995; and see Robert Novak, “Fed Boss Can’t Budge Rush on Mexico,” Chicago Sun-Times, January 29, 1995.

23. Keith Bradsher, “Lately, a Much More Visible Fed Chief,” New York Times, January 17, 1995.

24. Robert Rubin and Jacob Weisberg, In an Uncertain World, 22.

25. Woodward reports that Greenspan expressed misgivings about circumventing Congress with the rescue from the Exchange Stabilization Fund. However, Truman recalls specifically and vividly that Greenspan’s willingness to take the heat from FOMC conservatives made the ESF plan workable. “Greenspan deserves all the credit,” according to Truman. See Woodward, Maestro, 143. Truman, e-mail to the author, August 1, 2015.

26. Gene Sperling, a White House economics official, recalls, “When Mexico happened, Clinton saw the point of being on good terms with Greenspan. He helped when we had our backs to the wall.” Gene Sperling, interview by the author, May 20, 2014.

27. Greenspan’s support for the administration’s Mexico rescue cost him some support among conservatives. On February 16, 1995, the supply-sider Jude Wanniski wrote to warn him that “despite what Rubin thinks are the commitments of Dole and Gingrich, the Republicans are building a base from which to lob grenades at Treasury and Clinton when Mexico falls apart.” Jude Wanniski to Alan Greenspan, letter, February 16, 1995, Correspondence: Greenspan, Alan 1995–1997, box 14, Jude Wanniski, Hoover Institution Archives. On February 27, Wanniski wrote again: “Please tell me you do not really think the Rubin-Summers plan for Mexico will do good. There has to be a gun at your head on this fiasco. . . . Some of our mutual friends are saying you should be horsewhipped for endorsing the Rubin plan. There is more than a suggestion that you are willing to endorse all kinds of silliness in order to win renomination next year. . . .” Jude Wanniski to Alan Greenspan, letter, February 27, 1995, Correspondence: Greenspan, Alan 1995–1997, box 14, Jude Wanniski, Hoover Institution Archives.

28. One half-developed idea was that the Fed could induce bond-holders to accept losses by putting pressure on the banks that held the bonds in custody, but it is not clear that this was ever legal or practical.

29. In a National Bureau of Economic Research paper published in 2011, Frederic S. Mishkin wrote, “Before the recent financial crisis, the common view, both in academia and in central banks was that achieving price and output stability would promote financial stability. This was supported by research (Bernanke, Gertler, and Gilchrist, 1999; and Bernanke and Gertler, 2001) which indicated that monetary policy which optimally stabilizes inflation and output is likely to stabilize asset prices, making asset-price bubbles less likely. Indeed, central banks’ success in stabilizing inflation and the decreased volatility of business cycle fluctuations, which became known as the Great Moderation, made policymakers complacent about the risks from financial disruptions.” It is striking that this hypothesized complacency inside central banks is an inadequate description of Greenspan. See Frederic S. Mishkin, “Monetary Policy Strategy: Lessons from the Crisis,” Working Paper (Cambridge, Mass.: National Bureau of Economic Research, February 2011). Ben S. Bernanke, Mark Gertler, and Mark Gilchrist, “The Financial Accelerator in a Quantitative Business Cycle Framework,” in Handbook of Macroeconomics, vol. 1, 1999, 1341–93. Ben S. Bernanke and Mark Gertler, “Should Central Banks Respond to Movements in Asset Prices?,” American Economic Review 91, no. 2 (2001): 253–57.

CHAPTER TWENTY-TWO

1. Jaret Seiberg, “$1M Fed Boardroom Makeover Gets Warm Reception,” American Banker, September 5, 1995.

2. Susan Phillips, interview by the author, June 7, 2013.

3. Alan Blinder’s failure to influence monetary decisions was the best but by no means the only example of Greenspan’s dominance of the FOMC. Laurence Meyer, a respected forecaster who joined the FOMC in 1996, made equally little impact and found himself being discouraged from staking out independent ground. Meyer’s memoir relates, “At one of our FOMC meetings, the Chairman said he thought too much ‘chatter’ was going on between FOMC meetings. By that he means that the press was attributing too many opinions on the outlook or monetary policy to specific FOMC members or to unnamed sources. . . . The Chairman preferred Committee members to talk as little as possible about the outlook and monetary policy.” Laurence H. Meyer, A Term at the Fed: An Insider’s View (New York: HarperBusiness, 2006), 130–31.

4. In the year to August 1995, core CPI inflation was 2.9 percent. It had been as low or fractionally lower in 1994. But other than that, core CPI inflation had last been lower in July 1966.

5. Keith Bradsher, “The Art and Science of Alan Greenspan: How to Stay Popular in a Divided Washington, and Keep Inflation in Check,” New York Times, January 4, 1996.

6. The regulator was Ricki Helfer, chairman of the Federal Deposit Insurance Corporation. Ricki Tigert Helfer, interview by the author, July 4, 2013.

7. “Coming in from the Cold,” Economist, September 25, 1999.

8. Arthur Levitt, interview by the author, November 19, 2012.

9. Given the opportunity to comment on this passage, Greenspan did not do so directly but said that it was broadly right. (Alan Greenspan, interview by the author, November 2, 2015.) In other interviews, Greenspan was open about the fact that he disliked the prospect of Rohatyn’s appointment, and the opportunities for him to express this view privately to senators would have been numerous. To pick one suggestive example from his calendar: on December 16, 1995, Greenspan played tennis with Senators John Warner and Larry Pressler, and lobbyist Lloyd Hand. Likewise, Bob Woodward’s politically astute account strongly implies that Greenspan obstructed Rohatyn. See Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), 161–62. Meanwhile, a Senate staff member observed to the Washington Post that at a minimum, Greenspan might have been able to secure Rohatyn’s confirmation if he had announced that he wanted it. See Clay Chandler, “Rohatyn Withdraws Name for No. 2 Spot at the Fed,” Washington Post, February 13, 1996.

10. Greenspan, interview by the author, June 10, 2011.

11. “There was a certain benevolence about him which suggested to me that his body language was communicating more than what his words were saying,” Greenspan later recalled. Ibid.

12. Linton Weeks and John M. Berry, “The Shy Wizard of Money,” Washington Post, March 24, 1997.

13. Sworn in for his third term as chairman in June 1996, Greenspan took care to thank “the American economy.” “It has behaved well these last four years,” he acknowledged, modestly. “I do not deny that policy has had something to do with it, but history tells us it truly has a mind of its own. It—the economy, that is—can be most cantankerous, wholly oblivious to the ministrations of monetary policy.” But even as he warned that the economy had “not been fine-tuned into perpetual tranquility,” ever rosier news burnished his reputation further. See John M. Berry, “Greenspan Hails Economy at Swearing-in Ceremony,” Washington Post, June 26, 1996.

14. See chapter seventeen.

15. Yellen’s stance was ironic given that as vice chairwoman and then chairwoman many years later, she would help to lead the Fed in its full conversion to inflation targeting.

16. The fact that inflation targeting was adopted on the basis of shaky evidence is perhaps unsurprising—monetarism had been adopted in 1979 on an equally uncertain foundation. In 1978 Volcker himself had written an article in the Journal of Monetary Economics arguing that the demand for money was sufficiently unstable that fixing the supply of it would lead to excessive swings in interest rates. See Julio Rotemberg, “Federal Reserve Goals and Tactics for Monetary Policy: A Role for Penitence?,” Journal of Economic Perspectives 27, no. 4 (Fall 2013): 78.

17. Yellen took issue with research by Martin Feldstein of Harvard, which suggested that the interaction between inflation and the tax system distorted savings behavior and imposed significant costs on the economy. Yellen objected that Feldstein’s paper brushed over the reality that retirement savings were mostly not subject to tax, and suggested that Feldstein’s calculation of a large economic cost was therefore unpersuasive. “Feldstein’s number could be off by an order of magnitude,” she said, forcefully.

18. As Greenspan said to the FOMC, “The next item on our agenda—the issue of long-term inflation goals—is something that we have been discussing on and off for a long while, and I think we will continue to do so. It is important that we move forward on this issue and more specifically that we agree on what the goals mean before we can find some consensus within the Committee regarding their implementation.”

19. In January 1995, Yellen declared, “[W]hen I look at countries that have adopted and carried through inflation targeting programs, I consider the results discouraging. . . . I do not think inflation targets would raise credibility for the simple reason that they would not be credible.”

20. For Greenspan’s arguments to Reagan and his progold allies, see chapters ten and twelve.

21. The example set by foreign inflation targeters did not point unambiguously to a 2 percent target, further underlining the sense that it was adopted somewhat arbitrarily. Of three early adopters analyzed in a 1994 Fed paper, Canada had adopted a 2 percent target in 1991; Britain in 1992 had adopted an immediate 1–4 percent target coupled with a longer-term objective of 2 percent; and New Zealand, following three years of experimentation with other targets, settled in 1993 on a range of 0–2 percent. See John Ammer and Richard T. Freeman, “Inflation Targeting in the 1990s: The Experiences of New Zealand, Canada, and the United Kingdom,” International Finance Discussion Papers (Board of Governors of the Federal Reserve System, June 1994).

22. Scholarly attempts to date the start of the Fed’s inflation targeting find that monetary policy was consistent with the existence of an inflation target from 1993. (This literature is summarized in David Beckworth, “Inflation Targeting: A Monetary Policy Regime Whose Time Has Come and Gone” [Mercatus Center, George Washington University, July 10, 2014]. See in particular endnote 22.) However, the transcript of July 1996 makes it clear that this was not a target that the FOMC had consciously embraced before 1996; and indeed the discussion of July 1996 resulted in an agreement to move toward 2 percent inflation, with no clarity as to whether the Fed would then decide to stick at 2 percent or push even lower. Consistent with the reading of the transcript presented here, Marvin Goodfriend, a Richmond Fed economist who attended the 1996 meeting and later published a description of the debate, emphasizes his own sense of disappointment that the discussion resulted in a loose understanding of the Fed’s inflation goal rather than a formal commitment to a target. See Marvin Goodfriend, chapter in a 2011 book that resulted from an Atlanta Fed Conference, Marvin Goodfriend, “Policy Debates at the Federal Open Market Committee: 1993–2002,” in The Origins, History, and Future of the Federal Reserve: A Return to Jekyll Island, ed. Michael D. Bordo and William Roberds (New York: Cambridge University Press, 2013). The looseness of the 1996 understanding is captured in the transcripts by Cathy Minehan, president of the Boston Fed: “I am in complete agreement with the two things on which I think they agreed. That is, we should at a minimum hold the line on inflation where it is and go somewhat further if we can do so.” The fuzzy nature of the inflation target, even after 1996, is also evident from Greenspan’s willingness to call it into question during later meetings. In February 1997, for example, he suggested that asset prices should be part of the target. “Product prices alone should not be the sole criterion if we are going to maintain a stable, viable financial system whose fundamental goal, let us remember, is the attainment of maximum sustainable economic growth.”

23. Greenspan had met Martin Wolf and Michael Prowse of the Financial Times on June 25, 1996.

24. At the FOMC meeting beginning February 4, 1997, Greenspan reiterated his view that a public commitment to an inflation target would be unhelpful. “There is no evidence in my experience that words have had the slightest effect. It has not helped the Bundesbank, and if it has not helped the Bundesbank, how is it going to help anybody? The Bundesbank has succeeded because it has taken effective actions. It is what we do, not what we say, that is going to matter.” However, in the same meeting Greenspan also insisted that it was essential to signal rate increases before implementing them. Clearly, Greenspan’s real objection was not to communicating; it was to any reduction in his room for discretion.

25. Even more than Gary Stern, Mike Kelley was a constant optimist about businesses’ ability to drive productivity increases.

26. In his ninth NBI lecture, delivered in 1964, Greenspan had declared that “standards of living tend to grow at an accelerating rate.” The more ideas people generated, the more they were in a position to generate further ideas.

27. The Wall Street seer was Barton Biggs, speaking to John Cassidy of the New Yorker. See John Cassidy, “Striking It Rich: The Rise and Fall of Popular Capitalism,” New Yorker, January 14, 2002.

28. Woodward, Maestro, 171. See also Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 172. Slifman notes that Greenspan’s view that profits were relatively easy to measure was not shared by staff experts. Larry Slifman, e-mail to the author, October 7, 2015.

29. In his academic writing, Summers had pointed to the limits of market efficiency. See, for example, Andrei Shleifer and Lawrence H. Summers, “The Noise Trader Approach to Finance,” Journal of Economic Perspectives 4, no. 2 (Spring 1990).

30. Woodward, Maestro, 171.

31. Isabelle Clary, “Rate Hike Request Reported: Eight of 12 District Banks Are Said to Have Appealed to the Fed to Raise the Discount Rate,” Philadelphia Inquirer, September 18, 1996.

32. The result of this investigation is unclear, though Meyer speculates that the chairman discovered the leaker and “dealt with this person directly and quietly.” On the leaks and the ensuing tension, see David Johnston, “F.B.I. to Aid Fed in Inquiry of Sensitive Rate Leak Data,” New York Times, September 22, 1996. See also Laurence H. Meyer, A Term at the Fed: An Insider’s View.

33. Minehan mentioned, among others, Rudiger Dornbusch and Paul Samuelson of MIT and Ben Friedman and Martin Feldstein of Harvard.

34. Lawrence Summers, interview by the author, March 7, 2012. Similarly, in their retrospective on the Greenspan years delivered at Jackson Hole in 2005, Alan Blinder and Ricardo Reis singled out Greenspan’s forbearance in not raising interest rates for particular praise. Alan S. Blinder and Ricardo Reis, “Understanding the Greenspan Standard,” Working Paper (CEPS, September 2005), 26 and 60. Laurence H. Meyer, a productivity skeptic on the FOMC, wrote that Greenspan’s “call on the productivity acceleration was truly a great one. . . . He got it right before the rest of us did.” See Laurence H. Meyer, A Term at the Fed: An Insider’s View, 125 and 134.

35. Greenspan reflected in his memoir, “This was a classic example of why you can’t just decide monetary policy based on an econometric model.” See Greenspan, Age of Turbulence, 174.

36. For an exposition of the difference between demand shocks and supply shocks, see Ben Bernanke, “The Great Moderation” (remarks, Meetings of the Eastern Economic Association, Washington, D.C., February 20, 2004); and Daniel L. Thornton, “The Evolution of Inflation Targeting: How Did We Get to Inflation Targeting and Where Do We Need to Go Now?,” Paper prepared for the 6th Norges Bank Monetary Policy Conference (Federal Reserve Bank of St. Louis, June 11, 2009). Economists had recognized this distinction before in the context of a negative supply shock such as the oil price jumps in the 1970s. But the experience of a productivity-based positive supply shock was novel.

37. In addition to the demand shock/supply shock distinction, some observers have argued that a productivity acceleration combined with an inflation target is likely to cause the central bank to cut rates just when the equilibrium or “natural” interest rate is rising. As productivity gains raise the expected return on capital, firms will invest more. Unless savings rise commensurately, this extra demand for capital means that interest rates should, all else equal, go up. However, since productivity gains also create deflationary pressure, and since that deflationary pressure is easier to see than the rise in the natural interest rate, an inflation-targeting central bank will tend to cut interest rates. Monetary authorities, therefore, will tend to push interest rates below the stable, market-clearing level. The result will be too much leverage and soaring asset prices: in short, a bubble. This argument was made by Richmond Fed president Al Broaddus during the May 1997 FOMC meeting. For a more recent version, see David Beckworth, “Inflation Targeting.”

38. The debate over the costs and merits of inflation targeting continues until the time of writing, but there is evidence that central banks should target the stability of growth and asset prices rather than the stability of inflation when confronted by a supply shock. See for example Gertjan W. Vlieghe, “Imperfect Credit Markets: Implications for Monetary Policy,” Working Paper (Bank of England, March 2010). A different line of research has emphasized that, rather than focusing exclusively on inflation, central banks should lean against bubbles by tightening in response to above-trend credit growth, particularly above-trend mortgage credit growth. See Òscar Jordà, Moritz Schularick, and Alan M. Taylor, “The Great Mortgaging: Housing Finance, Crises, and Business Cycles,” Working Paper, NBER Working Paper Series (National Bureau of Economic Research, September 2014).

39. John Carmody, “Brinkley’s Parting Shots at Clinton,” Washington Post, November 10, 1996.

40. W. Speers, “Sports of All Sorts,” Philadelphia Inquirer, November 7, 1996. For color on the race, see Jere Longman, “New York City Marathon: It’s Viva Italia! (and Viva Romania! as Well),” New York Times, November 4, 1996.

41. Exit polls found that more than 6 in 10 said the economy was in good shape, and Mr. Clinton got most of their votes. R. W. Apple Jr., “The 1996 Election: The Presidency—News Analysis: The Economy Helps Again,” New York Times, November 6, 1996.

42. In the week of the election, the S&P 500 index rose by almost 4 percent.

43. I am grateful to David Shulman for providing me with a copy of Prell’s memo of November 18, 1996, as well as his own presentation at the December 3 meeting.

44. David Wessel to Sebastian Mallaby, June 15, 2015.

45. Abby Cohen, interview by the author, September 12, 2011; John Cassidy, Dot.con: The Greatest Story Ever Sold (New York: HarperCollins, 2003), 120–22.

46. I am grateful to Abby Joseph Cohen for providing me with copies of her Goldman Sachs reports on the equity markets from late November and early December 1996.

47. Cohen, interview by the author, September 12, 2011. During the February 1997 FOMC meeting, Greenspan would mock Cohen’s model. “I grant Abby Cohen her little relationship, and I wish her well. I hope she spends her bonus, which I gather is very substantial this year, prudently.”

48. Ibid. Cohen’s estimate of the market’s value was based on multiple inputs, one of which was interest rates. If tighter Fed policy had raised both short- and longer-term interest rates, her model would have shown a lower estimate for the stock market’s fair value. If the Fed had coupled higher rates with explicit communications indicating that it was targeting equities, Cohen believes that the market might have come down substantially.

49. Shulman also suggested that political cycles signaled danger up ahead. The bull markets of 1968 and 1972 had coincided with elections, and had been followed by falls of 18 percent and 23 percent in 1969 and 1973; perhaps the election year rally of 1996 would be followed by a similar reversal?

50. Abby Cohen, interview by the author, September 12, 2011.

51. John Cassidy, “All Together Now: New Theories on Why We Can’t Stay Out of the Stock Market,” New Yorker, March 27, 2000.

52. Quoted in John Cassidy, “Striking It Rich: The Rise and Fall of Popular Capitalism.”

53. John Makin, interview by the author, October 30, 2014. Makin held a position at AEI and was also on the staff of the hedge fund Caxton Associates.

54. “It took me a long time to live that down.” Byron Wien, interview by the author, September 9, 2011.

55. John Cassidy, “Striking It Rich: The Rise and Fall of Popular Capitalism.”

56. Don Kohn confirms that the “irrational exuberance” phrase was intended to attract notice. “The paragraph on irrational exuberance was debated a lot internally. He wrote it himself, although I wrote some of the rest of that speech.” Donald L. Kohn, interview by the author, March 13, 2011.

57. The commentator was Christopher Quick of Quick & Reilly Group. See Floyd Norris, “Greenspan Asks a Question and Global Markets Wobble,” New York Times, December 7, 1996.

58. Greenspan himself shared the conclusion that the irrational exuberance speech had demonstrated the limits to his own influence. “What was very obvious is that there was no such thing as a verbal intervention in the market. So the question essentially is this, you’re sitting with a problem that successful product price inflation engenders asset price inflation. How do you solve that problem? And there is no simple solution to that.” Greenspan, interview by the author, September 6, 2011.

59. The message from the visiting Wall Street strategists on December 3 had been precisely that stock prices were supported by low interest rates; if rates went up, equities would adjust downward.

60. In retirement, Greenspan implied that the Fed had made a serious effort to curb the stock market. “I had raised the specter of ‘irrational exuberance’ over a decade before, only to watch the dot-com boom, after a one-day stumble, continue to inflate for 4 more years, unrestrained by a cumulative increase of 350 basis points in the federal funds rate from 1994 to 2000.” (Alan Greenspan, “The Crisis,” Brookings Papers on Economic Activity [Washington, D.C.: Brookings Institution, Spring 2010], 208.) But the truth was that in the twenty-one months following the irrational exuberance speech, the Fed raised its rate only once, by 25 basis points; and after that it began cutting. Most of the tightening that Greenspan invoked had come more than two years before his speech, in 1994—and had disproved his thesis by triggering a sharp bond-market correction. Barring that one hike in March 1997, the rest of the tightening had come in late 1999 and early 2000—and had again disproved his thesis by triggering the Nasdaq correction.

61. Laurence Meyer, who became a Fed governor in 1996, is among those who stress the courage that would have been involved in a firm determination to deflate bubbles. “The Fed might find itself in the ‘wealth destruction’ business. It would be as if the Chairman were telling the American people: ‘Sure I just took a trillion dollars out of your portfolios, but believe me, you will come to appreciate the wisdom of my action.’” Laurence H. Meyer, A Term at the Fed: An Insider’s View, 144.

62. Andrea Mitchell, Talking Back: . . . to Presidents, Dictators, and Assorted Scoundrels (New York: Penguin Group, 2006), 444.

63. The friend was Ricki Helfer. Helfer, interview by the author, June 24, 2013.

CHAPTER TWENTY-THREE

1. Roxanne Roberts, “The Groom’s Lips Were Sealed: Greenspan Weds Mitchell with a Kiss to Remember,” Washington Post, April 7, 1997.

2. Andrea Mitchell, Talking Back: . . . to Presidents, Dictators, and Assorted Scoundrels (New York: Penguin Group, 2006), 240.

3. Roxanne Roberts, “The Groom’s Lips Were Sealed.”

4. Alan Greenspan, interview by the author, January 10, 2013.

5. “He had learned something which meant there was an opening up on his part with Andrea that I don’t think he had ever visualized.” Kathryn Eickhoff, interview by the author, November 29, 2011.

6. Andrea Mitchell, Talking Back, 241.

7. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 181.

8. David Wessel, “Just Call It Irrational Exuberance: Cartoonists Warm to Fed’s Chief,” Wall Street Journal, December 31, 1998.

9. Result based on a Nexis search of American newspapers and wires between January 1 and August 1, 1997, excluding duplicate articles.

10. Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite (New York: Penguin Group, 2010), Kindle location 3698.

11. The lack of worry about Thailand was such that the FOMC meeting on July 1–2, 1997, held just as the baht was collapsing, barely touched on the subject. The August and September 1997 FOMC meetings also skipped over the Asia crisis quickly. The Fed was more concerned with the dollar/yen exchange rate than with the collapse of Southeast Asia’s economies.

12. Greenspan’s only contribution to the crisis debates in Hong Kong was to support the Treasury in thwarting the Japanese, who wanted to set up a new regional rival to the IMF, to be known as the Asian Monetary Fund. Greenspan signed a letter supporting the Treasury’s pro-IMF position.

13. Andrea Mitchell, interview by the author, July 28, 2014.

14. As of September 30, 1997, U.S. banks’ exposure to South Korea came to $23 billion, considerably more than Thailand or Indonesia, which came to $10 billion and $9 billion, respectively. For the big “money center” banks, Korea exposure probably amounted to about a quarter of Tier I capital, implying that they could have absorbed the hit of a default but that it would have been painful. See David E. Palmer, “U.S. Bank Exposure to Emerging-Market Countries During Recent Financial Crises,” Federal Reserve Bulletin, February 2000, http://www.federalreserve.gov/pubs/bulletin/2000/0200lead.pdf. The estimate for exposure relative to Tier I capital is derived from Tables 2, 8, and 9.

15. Ted Truman, e-mail to the author, August 26, 2015.

16. Charles Siegman, e-mail to the author, August 28, 2015.

17. This meeting is reported in Greenspan, Age of Turbulence, 189, which reports that the conversation took place over Thanksgiving weekend. However, other sources, including Greenspan’s official diary, Siegman’s recollection, and Blustein’s The Chastening, make it seem overwhelmingly likely that the interchange took place the day before Thanksgiving. Paul Blustein, The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the IMF (New York: PublicAffairs, 2001).

18. Robert Rubin and Jacob Weisberg, In an Uncertain World: Tough Choices from Wall Street to Washington (New York: Random House, 2003), 228. See also Blustein, The Chastening, 136–37.

19. As noted above (endnote 14), U.S. money center banks had exposure to South Korea equivalent to about a quarter of Tier I capital. However, exposure of U.S. money center banks to “troubled Asia” (Thailand, Indonesia, South Korea, Malaysia, and the Philippines) came to slightly more than 60 percent of Tier I capital. (This ratio is estimated using data from Tables 2, 8, and 9 in David E. Palmer, “U.S. Bank Exposure to Emerging-Market Countries During Recent Financial Crises.”) Moreover, default in Asia threatened knock-on effects for emerging economies elsewhere, which might in turn feed back into additional losses for the U.S. banking system. Total international exposure to South Korea alone as of mid-1997 was $114 billion, almost double total international exposure of $63 billion to Mexico three years earlier, according to BIS figures. This would suggest that South Korea in particular and East Asia in general posed a larger threat of contagion than Mexico had done.

20. Looking back, Greenspan said, “Whatever Rubin decided to do, I was on board.” Alan Greenspan, interview by the author, December 22, 2010.

21. Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), 190–91.

22. Truman recalls, “Greenspan said I am not getting involved in this. ‘You, Rubin, must call the bank CEOs and bail them in.’” Edwin M. Truman, interview by the author, June 20, 2013.

23. The banks were Bank of America, Bankers Trust, Bank of New York, Chase Manhattan, Citibank, and J.P. Morgan.

24. William J. McDonough, interview by the author, January 14, 2013.

25. Jill Dutt and John M. Berry, “In Rescue, Banks See Least Pain: Action Called ‘Calming Force,’” Washington Post, December 25, 1997.

26. Truman, e-mail to the author, August 1, 2015.

27. David Wessel and Stephen E. Frank, “Korean Loan Deal Looks Favorable for Seoul: International Banks Face Possibility for Big Losses on Items Outside Pact,” Wall Street Journal, January 30, 1998.

28. Ibid.

29. Gordon Matthews, “Market Value Growth of Top 100 in Orbit for 3rd Consecutive Year,” American Banker, January 12, 1998.

30. Sanford Weill, interview by the author, May 20, 2015.

31. On a strict definition, Weill’s desired legislative change did not usher in “universal banking.” Fed officials drew a distinction between “universal banking,” involving nonbank activities located in bank subsidiaries, and “financial conglomeration,” involving affiliations between banks and nonbanks in a single holding company.

32. Jordan went on to say, “I thought that your remarks, Mr. Chairman, developed a persuasive case for acting now. . . . A ¼ percentage point increase in the federal funds rate now would deliver a very important message.” He was the lone dissenter against Greenspan’s decision to hold interest rates steady.

33. Peter Pae, “Bank, Insurance Giants Set Merger: Citicorp, Travelers in $82 Billion Deal,” Washington Post, April 7, 1998.

34. “Travelers-Citicorp Deal Faces Regulatory Hurdles,” BestWire, April 6, 1998.

35. Timothy L. O’Brien and Joseph B. Treaster, “Shaping a Colossus: The Overview; in Largest Deal Ever, Citicorp Plans Merger with Travelers Group,” New York Times, April 7, 1998.

36. Jill Dutt and John M. Berry, “Citicorp-Travelers Deal to Test Regulatory View; Laws Ban Bank-Insurance Mixture,” Washington Post, April 7, 1998. See also Leslie Wayne, “Deal Jump-Starts a Stalled Banking Bill,” New York Times, April 8, 1998.

37. Randy Jones, illustration, New York Times, April 7, 1998, D1.

38. “A Monster Merger,” New York Times, April 8, 1998.

39. Peter Pae, “Deal Would Create Nationwide Bank; BankAmerica, NationsBank to Merge,” Washington Post, April 14, 1998.

40. Sharon Walsh, “What’s the Deal? NationsBank Merger Continues Trend of Power Sharing at Top,” Washington Post, April 14, 1998. See also Jerry Knight, “Banks Now Shift Focus to Global Markets; Creation of Nationwide Firms Through Deals Sets Stage for Worldwide Strategies,” Washington Post, April 14, 1998.

41. “America Bubbles Over,” Economist, April 18, 1998.

42. Woodward, Maestro, 195. Greenspan repeated this line almost verbatim in testimony before the Joint Economic Committee of Congress on June 10, 1998.

CHAPTER TWENTY-FOUR

1. The CNBC “Briefcase Indicator” was launched at the end of 1997 and gained notice over the course of the following year.

2. Justin Martin, Greenspan: The Man Behind Money (Cambridge, Mass.: Perseus Books, 2001), 223.

3. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), Kindle location 3558.

4. Justin Martin, Greenspan: The Man Behind Money, 221.

5. Ibid., 223.

6. On at least one occasion, Greenspan asked an aide to track Wall Street’s reactions as he testified before Congress. If he said something inadvertently that caused investors to take fright, he wanted a heads-up; that way, he could drive the markets up again before his testimony was over. Ibid., 222.

7. According to the ISDA market surveys, the notional value of outstanding currency and interest-rate swaps rose from $11.3 trillion in H2 1994 to $37 trillion in H1 1998. “Market Surveys Data, 1987–2010” (International Swaps and Derivatives Association, Inc., June 30, 2010).

8. Robert Rubin and Jacob Weisberg, In an Uncertain World: Tough Choices from Wall Street to Washington (New York: Random House, 2003), 287–88.

9. It is sometimes pointed out that Born’s concerns related mainly to interest-rate swaps, not to the credit-default swaps that proved dangerous when the insurer AIG failed in 2008. But if Born’s instincts on central clearing and margin requirements had been adopted for interest-rate swaps, the same principles would presumably have been applied to credit-default swaps as that market developed in the next decade. Further, it is true that Born did not present a fully fleshed-out proposal; rather, the CFTC issued a “concept release,” consisting of a laundry list of discussion points, and Timothy Geithner, then at the Treasury, recalls her ideas as “mostly impenetrable.” But the implication of the release was that the over-the-counter market would benefit from safer foundations. When the OTC derivatives market was regulated after 2008, the CFTC based its actions on Born’s earlier position. See Timothy F. Geithner, Stress Test: Reflections on Financial Crises (New York: Crown Publishers, 2014), 87.

10. Phillips recalls of Born, “Her lack of success was not because she was a woman, but it was the way she went about things. She alienated people, including me.” Susan Phillips, interview by the author, June 7, 2013. In addition, at least one senior woman at the CFTC shared Phillips’s view that Born was abrasive.

11. Patrick Parkinson, interview by the author, June 18, 2013. Parkinson, e-mail to the author, October 7, 2015.

12. Arthur Levitt, interview by the author, November 19, 2012. Greenspan’s official diary confirms that he played golf with Levitt on April 5, 1998. Alan Greenspan’s Diary, n.d.

13. A senior Fed official recalls that Levitt was strongly motivated by the SEC’s turf concerns.

14. Alan Greenspan’s Diary; Arthur Levitt, interview by the author, November 19, 2012.

15. Bethany McLean and Joe Nocera, All the Devils Are Here: The Hidden History of the Financial Crisis (New York: Penguin Group, 2010), 104.

16. Michael Hirsh, Capital Offense: How Washington’s Wise Men Turned America’s Future over to Wall Street (Hoboken, NJ: Wiley, 2010), 13.

17. Looking back, Greenspan raised the possibility that concentrating risk in derivatives clearinghouses might backfire, an argument that was credibly revived by some experts after the 2008 crisis. (See, for example, Credit Default Swaps, Clearing Houses, and Exchanges, Squam Lake Working Group on Financial Regulation, July 2009.) However, while clearinghouses are not without risk, they are on balance less threatening to systemic stability than opaque webs of over-the-counter transactions, a point that Greenspan does not contest with any vigor. Alan Greenspan, interview by the author, November 2, 2015.

18. Reflecting on the fact that Born had the advantage of a Treasury secretary who shared her skepticism about derivatives, Pat Parkinson recalls, “She snatched defeat from the jaws of victory.” Parkinson, interview by the author, June 5, 2013. However, in addition to the certainty of congressional resistance, it should be noted that swaps were not regulated in other countries at the time, either. Even if Born had played her cards better, the obstacles to reform were considerable.

19. Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite (New York: Penguin Group, 2010), 233–34.

20. It should be recalled that early in his tenure, Greenspan had shown his grit by driving down inflation from a high of 6 percent and standing up to the Bush administration. But Greenspan’s first phase in office was different from the second.

21. Bob Rubin’s memoir recalls this communiqué as crucial and emphasizes Greenspan’s role in persuading foreign leaders to support it. See Robert Rubin and Jacob Weisberg, In an Uncertain World, 283. See also Greenspan, Age of Turbulence, 193.

22. The date is given in When Genius Failed, by Roger Lowenstein. Woodward’s Maestro gives the day before, but this would imply an implausibly long lag between the call and the Fed official’s visit to LTCM’s office. Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000), 183. Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), 200.

23. LTCM had leverage of twenty-five to one, but counting in the additional leverage embedded in its derivatives, the ratio was ten times higher. See Mallaby, More Money Than God, 388.

24. “When he called to say he’d decided to intervene, I wasn’t happy with the idea, but I couldn’t disagree.” See Greenspan, Age of Turbulence, 194.

25. Greenspan’s attendance is recorded in his official diary. The performance is described in Pamela Sommers, “A Surreally Big Show,” Washington Post, September 23, 1998.

26. Bill Clinton, speech before the Council on Foreign Relations, September 14, 1998.

27. Woodward, Maestro, 203.

28. “Federal Reserve Press Release: Order Approving Formation of a Bank Holding Company and Notice to Engage in Nonbanking Activities,” September 23, 1998, 17, http://www.federalreserve.gov/boarddocs/press/bhc/1998/19980923/19980923.pdf.

29. The guru was Robert V. DiClemente, cohead of U.S. economic research for Salomon Smith Barney in New York. See Peter G. Gosselin, “Greenspan Hints at Cut; Market Leaps; Fed Chief Says World Woes May Halt U.S. Boom,” Boston Globe, September 24, 1998.

30. Lowenstein, When Genius Failed, 207–8.

31. The question was posed by Representative Maurice Hinchey, a Democrat from upstate New York. See transcript of hearing on LTCM. House Committee on Banking and Financial Services, Systemic Risks to the Global Economy and Banking System from Hedge Fund Operations: Hearing Before the Committee on Banking and Financial Services, 105th Cong., 2nd sess., 1998.

32. Ibid.

33. Two administration officials recall pushing for consideration of derivatives reform that would not have involved more power for the CFTC. Greenspan was an implacable opponent. Greenspan’s continued opposition to derivatives regulation is evident from “Over the Counter Derivatives Markets and the Commodity Exchange Act,” a report of the President’s Working Group on Financial Markets, published in November 1999. Endnote 40 of this report states Greenspan’s objections to the majority view among his fellow regulators, which favored limited derivatives regulation. President’s Working Group on Financial Markets, “Over-the-Counter Derivatives Markets and the Commodity Exchange Act” (President’s Working Group on Financial Markets, November 9, 1999), http://www.treasury.gov/resource-center/fin-mkts/Documents/otcact.pdf.

34. Spreads between private borrowing rates and government bond yields had grown, but this was more because of falling government bond rates than because of rising private borrowing rates. “We have these widening spreads, but the question is what kind of impact they are having on the real economy,” Tom Hoenig of Kansas City correctly noted.

35. The fund manager was James O’Shaughnessy. See Kenneth Klee and Rich Thomas, “The Party Rolls On,” Newsweek, December 28, 1998.

36. The economist was William Dudley. See John M. Berry, “Greenspan Orders Interest Rate Cut,” Washington Post, October 16, 1998.

37. David Shulman, interview by the author, August 5, 2011.

38. Indeed, conceding that the market was buoyant, Greenspan told the FOMC, “Concerns about an asset bubble are not without validity.”

39. Louis Uchitelle, “Economists Reject Notion of Stock Market ‘Bubble,’” New York Times, January 6, 1999.

40. Robert B. Reich, “Trial Ties Up Senate? Don’t Worry, Congress Is Irrelevant,” USA Today, January 7, 1999.

CHAPTER TWENTY-FIVE

1. The seer was Nicholas Negroponte, head of the MIT Media Lab. See John Cassidy, Dot.con: The Greatest Story Ever Sold (New York: HarperCollins, 2003), 27.

2. The guru was Michael Hauben. Ibid., 40.

3. Peter Grant and Bill Egbert, “Dow’s Batting 10,000: Market’s Record Close Signals a New Bull Run,” Daily News, March 30, 1999.

4. Cassidy, Dot.con, 3.

5. On February 17, 2000, Greenspan’s Humphrey-Hawkins testimony contained a note saying that the Fed was switching from using consumer price inflation in its report to Congress to the alternative Personal Consumption Expenditure index. But as of 1999, core CPI remained the official measure. “Monetary Policy Report to Congress,” Humphrey-Hawkins Report (Federal Reserve Board, February 17, 2000), http://www.federalreserve.gov/boarddocs/hh/2000/february/ReportSection1.htm.

6. It should be noted that the Bernanke-Gertler prescription was difficult to implement. The “inflationary or deflationary pressures generated by asset price movements” were hard to anticipate. Indeed, Greenspan had stressed this challenge in his Jackson Hole speech. The Fed had a sketchy grasp of the “wealth effect” that asset prices exerted on economic growth, he explained; more research was needed on how different types of asset price movements affected the behaviors of businesses and investors. He cited three “open questions of particular importance”: whether investors responded differently to realized than unrealized gains; how home-equity extraction influenced consumer demand; and what effect speculation-driven movements in stock prices had on business investment spending. Greenspan, “New Challenges for Monetary Policy.” Moreover, sharp asset price movements could strongly affect the behavior of the credit channel—as became evident during the 2008 crisis, when wealth effects were dwarfed by the freeze in financial markets.

7. As noted in chapter twenty-two, Bernanke considered the distinction between demand shocks and supply shocks in 2004. See Ben S. Bernanke, “The Great Moderation” (Remarks, Eastern Economic Association, Washington, D.C., February 20, 2004), http://www.federalreserve.gov/boarddocs/speeches/2004/20040220/default.htm.

8. As discussed in chapter twenty-two, a productivity revolution may well lead to higher demand for capital and lower savings, implying a higher natural rate of interest. A central bank that targets inflation will tend to cut interest rates as the productivity shock holds down prices. In some scenarios, therefore, the policy rate will be cut just when the natural rate rises, fueling a bubble. To state the risk in a more general way, inflation is not a reliable signal of when a central bank should tighten, which is why many observers propose the alternative policy of nominal GDP targeting—meaning the targeting of a combination of the growth and the inflation rate.

9. In the years immediately following the Bernanke-Gertler presentation at Jackson Hole, a substantial literature questioned its conclusions. For example, Cecchetti et al. (2000) argue in favor of using interest rates to “lean against the wind” when there is evidence of an asset bubble. (See Stephen G. Cecchetti et al., “Asset Prices and Central Bank Policy,” The Geneva Report on the World Economy No. 2 [International Center for Monetary Banking Studies, May 30, 2000].) Anticipating the objection that bubbles are hard to identify, the authors point out that it is also difficult to judge the output gap, which many central banks attempt to infer as part of a standard inflation-targeting policy. Similarly, Bordo and Jeanne (2002) argue that central banks should be open to using interest rates to prick bubbles: “The linkages between asset prices, financial stability, and monetary policy are complex. . . . The complexity of these linkages does not imply, however, that they can be safely ignored.” (See Michael D. Bordo and Olivier Jeanne, “Monetary Policy and Asset Prices: Does ‘Benign Neglect’ Make Sense?,” IMF Working Paper, [December 2002], http://www.imf.org/external/pubs/ft/wp/2002/wp02225.pdf.) Most forthrightly, White (2006) declares that “history also teaches that the stability of consumer prices might not be sufficient to ensure macroeconomic stability. Past experience is replete with examples of major economic and financial crises that were not preceded by inflationary pressures.” (See William R. White, “Is Price Stability Enough?,” BIS Working Paper [Bank of International Settlements, April 2006], http://www.bis.org/publ/work205.pdf.) After the 2008 crisis, a new wave of research added financial “frictions” (such as the possibility of market freezes and cascading bankruptcies) to Keynesian models; this additional sophistication led to research findings that supported the view that central banks should adopt financial stability as a target. (For a summary of this literature, see Tamim Bayoumi et al., “Monetary Policy in the New Normal,” IMF Discussion Note [International Monetary Fund, April 2014], https://www.imf.org/external/pubs/ft/sdn/2014/sdn1403.pdf.) Adopting a more historical approach, Oscar Jorda, Moritz Schularick, and Alan Taylor examine data from seventeen countries extending back to 1870: they find that bubbles, especially those associated with high leverage, merit prophylactic central-bank action. (See in particular, “Leveraged Bubbles,” September 2015.) Even skeptics of the view that interest rates should be used to resist bubbles became willing to concede that financial stability required active regulatory attention—and that if this attention failed, there would be no choice but to address bubbles with monetary policy. This position was embraced by most senior central bankers. See, for example, speeches by Ben Bernanke and Janet Yellen: Bernanke, “The Effects of the Great Recession on Central Bank Doctrine and Practice”; and Janet Yellen, “Monetary Policy and Financial Stability” (2014 Michel Camdessus Central Banking Lecture, International Monetary Fund, Washington, D.C., July 2, 2014), http://www.federalreserve.gov/newsevents/speech/yellen 20140702a.htm.

10. Greenspan seemed to take Mussa’s comment as an implicit criticism and devoted his one intervention—and, coincidentally, the last audience question of the session—to challenging Mussa’s premise. “I just wanted to make a very simple point that should be obvious but that I suspect is not,” Greenspan began a bit testily, “that there is a form of asymmetry in response to asset rises and asset declines, but not if the rate of change is similar.” Asset prices tend to rise gradually and fall sharply, he was saying, so the Fed’s response to falls was naturally more dramatic. “New Challenges for Monetary Policy, General Discussion: Monetary Policy and Asset Price Volatility” (symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyo., August 26, 1999), http://www.kc.frb.org/publicat/sympos/1999/S99disc2.pdf.

11. Mark Gertler, interview by the author, January 7, 2015. See also John Cassidy, “Anatomy of a Meltdown: Ben Bernanke and the Financial Crisis,” New Yorker, December 1, 2008, http://www.newyorker.com/magazine/2008/12/01/anatomy-of-a-meltdown.

12. Josh Sens, “Childhood Dreams, Adult Ambitions: Hyatt Heir John Pritzker’s Vision of Turning Carmel Valley Ranch into an Always-Open, Everyone-Welcome Version of Summer Camp,” Monterey County Weekly, December 16, 2010, http://www.montereycountyweekly.com/news/cover/hyatt-heir-john-pritzker-s-vision-of-turning-carmel-valley/article_ebfe3453-8c14-5fd2-bac9-4cf7499 e21e7.html.

13. Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), 219.

14. David E. Sanger, “Rubin Is Kidnapped, but, Hey, Who Cares?,” New York Times, July 3, 1999, http://www.nytimes.com/1999/07/03/business/rubin-is-kidnapped-but-hey-who-cares.html.

15. Woodward, Maestro, 219.

16. Greenspan’s preoccupation with improved bank disclosures led in April 2000 to the formation of the Working Group on Public Disclosure. However, Greenspan’s public statements on banking risks became if anything more complacent. In July 2000, Greenspan testified to the House that “there are no institutions in this country which we perceive as too big to fail”; and further that “the general growth in large institutions has occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically—I should say, fully—hedged.” House Committee on Banking and Financial Services, Statement of Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, Before the Committee on Banking and Financial Services, 106th Cong., 2nd sess., 2000. After 2008, Greenspan admitted his error. Citing his own warnings about megabanks in 1999, he confessed, “Regrettably, we did little to address the problem.” Alan Greenspan, “The Crisis,” Brookings Papers on Economic Activity (Washington, D.C.: Brookings Institution, Spring 2010), 231.

17. Catherine Reagor, “Greenspan Addresses Bankers’ Group in Phoenix,” Arizona Republic, October 12, 1999, 1E.

18. Monica Langley, Tearing Down the Walls: How Sandy Weill Fought His Way to the Top of the Financial World . . . and Then Nearly Lost It All (New York: Simon & Schuster, 2003), 341.

19. “Killing Glass-Steagall,” Economist, October 30, 1999, http://www.economist.com/node/253588.

20. Katrina Brooker, “Citi’s Creator, Alone with His Regrets,” New York Times, January 3, 2010.

21. Monica Langley, Tearing Down the Walls, 344.

22. Ibid.

23. Ibid., 341. See also “Three’s Company,” Economist, October 30, 1999. Many observers also suggested that Rubin’s move to Citi raised questions about the cozy nexus between government and finance. However, Treasury Secretary Rubin had been a principal obstacle to passage of the banking reform that ratified Citi’s structure.

24. John Waggoner, “Fear Sting of Y2K? Try Corporate Bond Funds,” USA Today, July 30, 1999.

25. At the FOMC meeting in August, Greenspan argued that the staff had underestimated the effects of Y2K.

26. “If we’re completely successful in the message we give, we may never have a single one of these options exercised. That would be victory,” Vice Chairman McDonough said at the August 24 FOMC meeting. “Not exercised and not even purchased,” Greenspan replied.

27. The Fed continued auctioning off Y2K financing options each week until December 1, when the dwindling number of participants signaled that demand had been satisfied. By the time the auctions ended, participating banks had bought options on $489 billion in backup funding. See Evangeline Sophia Drossos and Spence Hilton, “The Federal Reserve’s Contingency Financing Plan for the Century Date Change,” Current Issues in Economic and Finance 6, no. 15 (December 2000), https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci6-15.pdf.

28. Jonathan Fuerbringer, “Year 2000 Insurance Is Hot on Wall St., but Not a Sign of Fear,” New York Times, November 13, 1999.

29. Ibid.

30. The Fed’s Y2K options were designed to avoid a backdoor loosening. The interest rate for borrowing from this facility was set at 150 bps over the fed funds rate, so as to provide insurance against a funding drought without lowering borrowing costs. However, the effect of the policy was nonetheless to ease credit conditions in November, when the spread between rates on December and January monthly LIBOR futures contracts roughly halved. (See chart 1 in Evangeline Sophia Drossos and Spence Hilton, “The Federal Reserve’s Contingency Financing Plan for the Century Date Change.”) To counteract that easing while leaving the Y2K insurance in place, the Fed could have tightened the funds rate more aggressively.

31. Eddie Baeb, “For Rich Shoppers, the Price Is Right,” Crain’s Chicago Business, December 6, 1999, http://www.chicagobusiness.com/article/19991204/ISSUE01/100013196/for-rich-shoppers-the-price-is-right.

32. Sebastian Mallaby, “. . . East and West,” Washington Post, April 2, 2000, Op-Ed, B7.

33. Ron Hutcheson, “A Campaign Issue? Candidates’ Opinions About the Fed Chairman Vary Widely,” Philadelphia Inquirer, December 25, 1999, D edition, sec. Business, LexisNexis. John M. Berry, “Rising Campaign Rhetoric over a Reappointment,” Washington Post, December 21, 1999, Final edition, sec. E, LexisNexis.

34. Hutcheson, “A Campaign Issue? Candidates’ Opinions About the Fed Chairman Vary Widely.”

35. Fox News, “Republican Presidential Candidates Debate,” C-SPAN Video Library, December 2, 1999, http://c-spanvideo.org/clip/4469789.

36. The governor was Roger Ferguson.

37. Woodward, Maestro, 220.

38. Roxanne Roberts, “The Clintons Host a Historic Fete,” Washington Post, January 1, 2000.

39. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), Kindle locations 3665–70.

40. Ibid., Kindle locations 3670–3684.

41. Richard W. Stevenson, “Greenspan Named to Fourth Term as Fed Chairman,” New York Times, January 5, 2000.

42. The high reached 70 degrees that day, well above the 40-degree temperatures that are typical for Washington at that time of year. “Climate Data Online: Station Data Inventory” (National Oceanic and Atmospheric Administration, n.d.), http://www.ncdc.noaa.gov/cdo-web/datasets/GHCND/stations/GHCND:USC00186350/detail.

43. CNN in the Money, January 4, 2000.

44. The description of this scene is based on C-SPAN’s video archive. See Federal Reserve Chairman Re-Nomination (White House, Washington, D.C., United States, 2000), http://www.c-span.org/video/?154511-1/federal-reserve-chairman-renomination.

45. Ibid.

46. Description based on Reuters photo. MMR/JP—RTR319, Photograph, January 4, 2000, Reuters Pictures.

47. Richard W. Stevenson, “Senate Ratifies Nomination of Greenspan to 4th Term,” New York Times, February 4, 2000.

CHAPTER TWENTY-SIX

1. Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), Kindle locations 3711–37.

2. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), 207.

3. Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O’Neill (New York: Simon & Schuster Inc., 2004), 7.

4. Barton Gellman, Angler: The Cheney Vice Presidency (New York: Penguin Group, 2008), 15.

5. The following passage and others in this chapter involving Paul O’Neill are based closely on Ron Suskind, Price of Loyalty. Suskind’s account is based mainly on extensive interviews with Paul O’Neill conducted soon after he left office. Critics have accused the book of excessive sympathy with O’Neill’s perspective, and its author, a Pulitzer Prize winner and former Wall Street Journal reporter, of too much reliance on unnamed sources and occasional sloppiness with facts. (For examples of criticisms of Suskind and O’Neill, see Lawrence Lindsey, “The Value of Loyalty,” Wall Street Journal, January 14, 2004; and Jacob Weisberg, “Don’t Believe Ron Suskind: His Book About Obama Is as Spurious as the Ones He Wrote about Bush,” Slate, September 22, 2011.) However, O’Neill, a named source, proof-read Suskind’s manuscript before publication and affirmed its accuracy after publication; Greenspan, for his part, confined his public objection to a single quote in the manuscript. (See David Wessel, “A Tale of Two Treasury Secretaries: Robert Rubin and Paul O’Neill,” Wall Street Journal, January 15, 2004.) Further, while critics have accused O’Neill of seeking revenge against enemies in the Bush administration, O’Neill had no such motive to distort his account of conversations with Greenspan, who remained an ally and a friend. In sum, although aspects of the Suskind-O’Neill version of history are contested, the reconstructions of meetings involving Greenspan rely on a firsthand witness interviewed soon after the events with no evident ax to grind; they are hard to improve upon. The passage that follows here is drawn from Ron Suskind, Price of Loyalty, 28ff.

6. Suskind, Price of Loyalty, 30. See also Greenspan, Age of Turbulence, Kindle locations 3765–69.

7. Michael Lewis, “O’Neill’s List,” New York Times Magazine, January 13, 2002.

8. The account of the meeting that follows is drawn from Ron Suskind, Price of Loyalty, 36ff.

9. “The Long-Term Budget Outlook,” Study (Congress of the United States, 2000), http://www.cbo.gov/sites/default/files/long-term%20budget%20outlook.pdf.

10. On the coffee war, see Dick Cheney, “Memoranda for Jim Connor,” August 30, 1975, James E. Connor Collection, box 18, Gerald R. Ford Library; and Dick Cheney, “Memoranda for Jim Connor,” October 20, 1975, James E. Connor Collection, box 18, Gerald R. Ford Library. On salt shakers, see James Mann, Rise of the Vulcans: The History of Bush’s War Cabinet (New York: Penguin Group, 2004), 60.

11. In laying out his tax plan on December 1, 1999, Bush provided several rationales, including the possibility that the tax cut might act as insurance against the recession. This last rationale was the one to which Cheney now returned. However, it had not dominated the Bush team’s public statements in the interim.

12. Suskind, Price of Loyalty, 45.

13. The following interchange is based on ibid., 61.

14. In later congressional testimony, Greenspan argued that the government would buy stock only in politically favored firms, distorting stock prices and hence capital allocation. However, this argument underestimated the response from private investors, who could be expected to shift funds into stocks that were temporarily undervalued as a result of the government’s portfolio decisions. See Sebastian Mallaby, “Greenspan on Going Private,” Washington Post, February 5, 2001.

15. Lawrence Lindsey, interview by the author, March 25, 2015. Greenspan’s response is also quoted in Lawrence B. Lindsey, Economic Puppetmasters: Lessons from the Halls of Power (Washington, D.C.: AEI Press, 1999), 53. As an adviser to Candidate Bush, Lindsey had ensured that the bubble-insurance rationale for the tax cut had been included in the president’s speeches. In laying out his tax cut in Iowa on December 1, 1999, Bush said that his plan would “provide insurance against economic recession.”

16. Barton Gellman, Angler, 70–71.

17. Senate Committee on Banking, Housing, and Urban Affairs, Federal Reserve’s First Monetary Policy Report for 2001: Hearing Before the Committee on Banking, Housing, and Urban Affairs, 107th Cong., 1st sess., 2001.

18. Greenspan later claimed to have been surprised by the way his testimony was construed. “I’d misjudged the emotions of the moment,” he wrote in his autobiography. Greenspan, Age of Turbulence, Kindle locations 4006–9. But he had understood from the beginning how his testimony would be perceived—he was too savvy for it to be otherwise.

19. Suskind, Price of Loyalty, 162.

20. According to revised data from the Bureau of Economic Analysis, the economy contracted in Q1 2001 but expanded in Q2; there were not two consecutive quarters of decline, so by some definitions this was not a true recession. However, the chief arbiter of recessions is the National Bureau of Economic Research. Using monthly data, and not using the two-consecutive-quarters test, the NBER determined that a recession began in March 2001 and lasted for eight months. See “The Business-Cycle Peak of March 2001” (National Bureau of Economic Research: Business Cycle Dating Committee, November 26, 2001), http://www.nber.org/cycles/november2001/.

21. The survey was conducted by the Wall Street advisory firm Medley Global Advisers. Previous surveys by the firm had put Greenspan’s strong approvals in the 60 percent to 80 percent range. Now they languished below 40 percent. See Glenn Kessler, “Playing to a Larger Audience; Bush Team Starts Sending Its Message to Wall St. and the World,” Washington Post, March 29, 2001.

22. Core PCE inflation had accelerated from 1.5 percent in January to 1.7 percent in February to 1.9 percent in March. It fell back to 1.7 percent in April, but this was not known at the time of the FOMC’s May meeting. (These PCE measures were subsequently revised, though the trend was not much affected.) The FOMC did have an April reading for the less important CPI inflation measure at the time of its May meeting, and this hinted that inflation pressures were ebbing. But this single reassuring data point had to be weighed against several others that pointed toward higher inflation, and the Fed staff supported Greenspan’s mistaken decision, a reminder that an inflation-targeting regime is not always easy to operate.

23. “Net Domestic Investment: Private: Domestic Business,” FRED, Federal Reserve Bank of St. Louis, http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=RIf.

24. As the economy had softened in the first Bush presidency, in the first part of 1991, Greenspan had taken three months to bring interest rates down by a full percentage point. In January 2001, he cut by that much in a single month. Likewise, in 1991 the second 1 percentage point reduction in interest rates had taken six months. In 2001 it took less than four. The faster loosening in the later episode was made possible by the fact that inflation expectations were so subdued.

25. This was the perception of Kenneth Guenther, and was probably also Greenspan’s perception. A White House source with knowledge of these matters finds Guenther’s view plausible. Lindsey, for his part, denies any such expectation. Greenspan denies memory of the incident. Kenneth Guenther, interview by the author, January 31, 2014. Lawrence Lindsey, interview by the author, March 25, 2015. Alan Greenspan, interview by the author, November 2, 2015.

26. Nicole Duran, “In Brief: Amrey Says He Lobbied for Friend Jorde,” American Banker 166, no. 84 (May 2, 2001).

27. Kenneth Guenther, interview by the author, January 31, 2014.

28. Aircraft make and model were determined from airline operating data reported on the Department of Transportation’s Form 41 and made available via Bureau of Transportation Statistics at the TranStats Air Carrier Statistics (Form 41 Traffic)—All Carriers’ database, http://www.transtats.bts.gov/Tables.asp?DB_ID=111&DB_Name=Air%20Carrier%20Statistics%20%28Form%2041%20Traffic%29-%20All%20Carriers&DB_Short_Name=Air%20Carriers.

29. Greenspan, Age of Turbulence, Kindle locations 80–87.

30. From Age of Turbulence: “We’d always thought that if you wanted to cripple the U.S. economy, you’d take out the payment systems. Banks would be forced to fall back on inefficient physical transfers of money. Businesses would resort to barter and IOUs; the level of economic activity across the country could drop like a rock.” Ibid., 91–93.

31. Emily Walker, “Memorandum for the Record of Meeting with William J. McDonough” (National Commission on Terrorist Attacks upon the United States, January 21, 2004), https://catalog.archives.gov/OpaAPI/media/2610306/content/arcmedia/9-11/MFR/t-0148-911MFR-00711.pdf.

32. Ibid.

33. Jeff Ingber, Resurrecting the Street: Overcoming the Greatest Operational Crisis in History (Jeff Ingber, 2012), Kindle locations 387–88.

34. Andrea Mitchell, Talking Back: . . . to Presidents, Dictators, and Assorted Scoundrels (New York: Penguin Group, 2006), 341.

35. Greenspan, Age of Turbulence, Kindle locations 120–23.

36. The discount window supplied $200 million in loans on an average day. Bruce Champ, “Open and Operating: Providing Liquidity to Avoid a Crisis” (Federal Reserve Bank of Cleveland, February 15, 2003), https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/economic-commentary-archives/2003-economic-com mentaries/ec-20030215-open-and-operating-providing-liquidity-to-avoid-a-crisis.aspx.

37. Jeffrey M. Lacker, “Payment System Disruptions and the Federal Reserve Following September 11, 2001,” Working Paper, Working Paper Series (Richmond: Federal Reserve Bank of Richmond, December 23, 2003), 40, http://www.richmondfed.org/publica tions/research/working_papers/2003/pdf/wp03-16.pdf.

38. Roger W. Ferguson Jr., “September 11, the Federal Reserve, and the Financial System” (Remarks, Vanderbilt University, Nashville, Tenn., February 5, 2003), http://www.federalreserve.gov/boarddocs/speeches/2003/20030205/. See also Dina Temple-Raston, “The Week the Fed Saved the World: An Inside Glimpse at the Greenspan-McDonough-Ferguson Team’s Backroom Maneuvering,” International Economy, November 1, 2001.

39. Roger W. Ferguson Jr., interview by the author, March 3, 2015. Greenspan endorsed this account of Ferguson playing the lead role. Greenspan, interview by the author, November 2, 2015.

40. Michael J. Fleming and Kenneth D. Garbade, “When the Back Office Moved to the Front Burner: Settlement Fails in the Treasury Market After 9/11,” Federal Reserve Bank of New York Economic Policy Review, November 2002, 12, https://www.newyorkfed.org/medialibrary/media/research/epr/02v08n2/0211flempdf.pdf. See also Donald Donahue and Larry Thompson, “Proposed NSCC Rule Change,” September 14, 2006, 7, http://www.sec.gov.edgekey.net/comments/Sr.-nscc-2006-04/nscc200604-10.pdf.

41. Suskind, Price of Loyalty, 183: They were aboard another military cargo plane full of U.S. officials and military brass headed back to the United States from Europe “like a city bus at rush hour.” The flight took ten hours and was spare on creature comforts—just a boxed lunch and earplugs.

42. Greenspan, Age of Turbulence, Kindle locations 127–28.

43. Ibid., Kindle locations 128–32.

44. Alan Greenspan, interview by the author, February 6, 2013.

45. Andrea Mitchell, Talking Back, 345.

46. Dan Barry, “After the Attacks: The Vigils; Surrounded by Grief, People Around the World Pause and Turn to Prayer,” New York Times, September 15, 2001.

47. “We have the building wrapped in bunting, we have a big flag flying, and we’re playing patriotic music from the parapet,” Bill McDonough said during the September 17 FOMC conference call. See also Jeff Ingber, Resurrecting the Street: Overcoming the Greatest Operational Crisis in History, Kindle locations 2920–35.

48. The Fed’s loans to the banking system had already shot up from $13 billion on the eve of the attacks to fully $120 billion. Jeffrey M. Lacker, “Payment System Disruptions and the Federal Reserve Following September 11, 2001,” 29.

49. Andrea Mitchell, interviews by the author, March 14, 2012, and July 28, 2014.

CHAPTER TWENTY-SEVEN

1. The University of Michigan began to carry out monthly surveys of inflation expectations in 1978 but had conducted annual surveys since 1966. Until the terrorist attacks, only one reading had come in lower than 2 percent.

2. Core CPI exceeded the federal funds rate in October 1992, and again in five out of the next seven months.

3. The Fed had held a conference on policy in a low-interest-rate environment in Woodstock, Vermont, in October 1999. Research presented there shaped senior staff’s thinking, and to a lesser extent Greenspan’s.

4. Data on late-nineteenth-century deflation come from Susan B. Carter et al., Historical Statistics of the United States: Millennium Edition (Cambridge, UK: Cambridge University Press, 2006).

5. Some economists came to see the early 2000s as a period of good disinflation: prices were coming down, according to this view, because of the flood of new supply from China, which joined the World Trade Organization in December 2001. While there is some merit to this view, the China surge mostly postdates the FOMC’s November 2001 debate, and is inadequate for two further reasons. First, the surge in supply from China resulted in a huge increase in China’s trade surplus, which was mirrored in an increase in the U.S. trade deficit. This shift in the balance of payments represented a subtraction from U.S. demand, meaning that the China shock combined elements of good (supply boosting) and bad (demand reducing) disinflation. Second, whatever the nature of the China shock, the overhang from the tech bubble and 9/11 clearly contributed to disinflation, and these two factors were unambiguously in the bad-disinflation category. Ex-post, it is correct to argue that the Fed overreacted to the fear of deflation, and so planted the seeds for the property bubble. Ex-ante, the deflation worry was reasonable, at least until the end of 2003. For a critique of excess fear of deflation, see Claudio Borio et al., “The Costs of Deflations: A Historical Perspective,” BIS Quarterly Review, March 2015.

6. The extent to which monetary policy after November 2001 fueled the real estate bubble is debated, as will be explained in chapter twenty-eight.

7. For an example of an observer who draws a distinction between the “harmless” tech bubble and the harmful mortgage bubble, see Frederic S. Mishkin, “Monetary Policy Strategy: Lessons from the Crisis,” Working Paper (Cambridge, Mass.: National Bureau of Economic Research, February 2011).

8. The critique of Greenspan’s monetary policy advanced here is different from that advanced by John Taylor. Whereas Taylor assumes that the Fed seeks to optimize a combination of targeted inflation and full usage of the economy’s capacity, the critique here is that the Fed must take account of financial stability, because instability will cause the Fed to deliver poor inflation and capacity utilization over the longer run. The Taylor critique is effectively rebutted by Ben S. Bernanke, “Monetary Policy and the Housing Bubble” (Annual Meeting of the American Economic Association, Atlanta, Georgia, January 3, 2010). The financial stability critique is less successfully addressed in Bernanke’s speech.

9. It is often asserted that plausibly higher interest rates would have made no difference to asset prices. See, for example, Alan S. Blinder and Ricardo Reis, “Understanding the Greenspan Standard,” Working Paper (CEPS, September 2005), 71. This assertion cannot be proved because the connection between interest rates and asset prices depends on market psychology, which is fickle and unpredictable. However, as explained in chapter twenty-two, a close study of 1996–97 suggests that the claim of monetary impotence is probably wrong. Market strategists such as Byron Wien and Abby Cohen justified their bullish view of stocks using a dividend discount model. Given a higher discount rate, their view of the market would have been less bullish.

10. Paul R. Krugman, “Dubya Double Dip?,” New York Times, August 2, 2002. Krugman was citing Paul McCulley of the investment management firm Pimco. Embracing a similar analysis at the June 2005 FOMC meeting, Janet Yellen acknowledged the link between the tech hangover and the housing boom: “To offset the drags, we’ve needed to give the economy a strong dose of stimulus, which inevitably boosted the housing sector—and that just to get reasonable economic growth.” Equally, staff economist Glenn Rudebusch commented at the same meeting: “The dot-com bubble spurred overinvestment in fiber optic cable and decimated the provision of venture capital for new technology startups for years.” He drew the lesson: “It is possible to conceive of a situation in which reducing the bubble in advance is a preferred policy strategy.”

11. Alan Greenspan, remarks (Stern School of Business, New York University, New York, March 26, 2002), http://www.federalreserve.gov/boarddocs/speeches/2002/200203262/default.htm.

12. Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O’Neill, First paperback edition (New York: Simon & Schuster, 2004), 211.

13. Ibid., 223.

14. Following passage draws on ibid., 224–30.

15. Ibid., 226–27. This passage is also based on the author’s background interviews with participants at the meeting.

16. Ibid., 228.

17. Richard Clarida, interview by the author, April 30, 2015.

18. Greenspan was testifying to the Senate on March 7, 2002. His interchange with Senator Jon Corzine offers a good summary of his view of financial innovation. Senate Committee on Banking, Housing, and Urban Affairs, Federal Reserve’s First Monetary Policy Report for 2002: Hearing Before the Committee on Banking, Housing, and Urban Affairs, 107th Cong., 2nd sess., 2002, http://hdl.handle.net/2027/pst.000049 649147.

19. “Federal Subsidies and the Housing GSEs” (Washington, D.C.: Congressional Budget Office, May 2001), http://www.cbo.gov/sites/default/files/gses.pdf.

20. Alan Greenspan, remarks (Institute of International Finance, New York, April 22, 2002), http://www.federalreserve.gov/boarddocs/Speeches/2002/20020422/default.htm.

21. Alex Berenson, “Market Place: Fannie Mae and Freddy Mac Pressed Again, This Time on Disclosure and Derivatives,” New York Times, April 25, 2002.

22. Kevin Warsh, interview by the author, October 21, 2011.

23. In a further sign of the administration’s deference to Greenspan on the question of Fed appointments, Greenspan’s official diary notes that on March 27, 2002, Glenn Hubbard, the Council of Economic Advisers chairman, visited Greenspan “to discuss Fed. appts.” (from Alan Greenspan’s Diary, n.d.).

24. Starting in the second quarter of 1996, net private domestic investment had exceeded an annualized rate of $300 billion every quarter until the stock market crash in 2000. Then, from the fourth quarter of 2001 until the first quarter of 2004, it languished below the $300 billion mark. This “investment recession” therefore lasted for ten quarters in total. Although this period was often described as one of “savings glut,” the deflationary pressure of the time also reflected weak investment. For data on investment, see “Net Domestic Investment: Private: Domestic Business.”

25. In May through August 2002, the S&P/Case-Shiller ten-city house price index sustained four consecutive months of 1.4 percent month-on-month growth, the fastest spurt since the index began in 1987. S&P Dow Jones Indices, “S&P/Case-Shiller 10-City Composite Home Price Index,” FRED, Federal Reserve Bank of St. Louis, https://research.stlouisfed.org/fred2/series/SPCS10RSA.

26. Matt Richtel, “Bay Area Real Estate Prices Too Hot for Some to Touch,” New York Times, May 29, 2002, http://www.nytimes.com/2002/05/29/business/bay-area-real-estate-prices-too-hot-for-some-to-touch.html.

27. Gregg Fields, “Sales, Prices Rise in South Florida,” Miami Herald, June 30, 2002.

28. George W. Bush, “Remarks by the President on Homeownership” (Atlanta, Georgia, June 17, 2002), http://www.prnewswire.com/news-releases/remarks-by-the-president-on-homeownership-77912977.html.

29. George W. Bush, “Remarks by President George W. Bush Re: Homeownership” (Department of Housing and Urban Development, Washington, D.C., June 18, 2002).

30. The analyst was Paul Miller of Friedman, Billings, Ramsey Group Inc. in Arlington, Va. See Tommy Fernandez, “Bush’s Minority-Loan Plan Gives GSEs Political Cover,” American Banker, June 21, 2002.

31. Kenneth Harney, “Making Dreams Become Reality,” Washington Post, June 22, 2002, http://www.washingtonpost.com/archive/realestate/2002/06/22/making-dreams-become-reality/0a5e17ec-4002-4e08-99f8-e5585f6b8cd2/.

32. Brian Collins, “President Bush Calls on Industry to Help Boost Minority Homeownership,” National Mortgage News, October 28, 2002.

33. Although the S&P/Case-Shiller housing index was rising at its fastest pace in fifteen years, it would rise even faster during the first half of 2004 and the first quarter of 2005. See S&P Dow Jones Indices, “S&P/Case-Shiller 10-City Composite Home Price Index.”

34. The risk of rising consumer debt was raised by Thomas Hoenig.

35. The Treasury munchkins were so dubbed by Grover Norquist, a Cheney ally. See Barton Gellman, Angler: The Cheney Vice Presidency (New York: Penguin, 2008), 264.

36. Suskind, Price of Loyalty, 284.

37. Gellman, Angler, 267–268. The Fed study concluded that long-term interest rates rose 25 basis points in response to a 1 percentage point increase in the projected deficit-to-GDP ratio, and 4 basis points in response to a 1 percentage point increase in the projected debt-to-GDP ratio. Thomas Laubach, “New Evidence on the Interest Rate Effects of Budget Deficits and Debt” (Board of Governors of the Federal Reserve System, May 2003), http://www.federalreserve.gov/pubs/feds/2003/200312/200312pap.pdf.

38. Gellman, Angler, 268.

39. Suskind, Price of Loyalty, 291.

40. Edmund L. Andrews, “Greenspan Throws Cold Water on Bush Arguments for Tax Cut,” New York Times, February 12, 2003, http://www.nytimes.com/2003/02/12/business/12FED.html.

41. John Cranford, “Greenspan’s Days Numbered?,” Seattle Times, February 22, 2003.

42. The allies comprised Britain, Australia, and Poland, with the latter contributing a grand total of 194 personnel to the first phase of the operation.

43. In January 2003, Greenspan told the FOMC, “The Iraqis have relatively high-tech chemical and biological warfare capability, and they are likely to spring it on us, perhaps even in advance of our attack.”

44. “AOLTW to Sell Stake in Comedy Central,” CNN Live at Daybreak (CNN, April 22, 2003), http://www.cnn.com/TRANSCRIPTS/0304/22/lad.05.html.

45. John M. Berry, “Bush Signals Another Term for Greenspan,” Washington Post, April 23, 2003, http://www.washingtonpost.com/archive/business/2003/04/23/bush-signals-another-term-for-greenspan/52f0c11a-db01-4607-8a33-76224a69f4fe/.

46. Edmund L. Andrews, “Greenspan Agrees to Another Term Leading the Fed,” New York Times, April24, 2003, http://www.nytimes.com/2003/04/24/business/24FED.html.

47. Daniel Akst, “On the Contrary; Cult of the Personality Lives at the Fed,” New York Times, May 4, 2003, http://www.nytimes.com/2003/05/04/business/on-the-contrary-cult-of-the-personality-lives-at-the-fed.html.

48. Airing his concern about low inflation during the FOMC’s August 2003 meeting, Ben Bernanke observed, “Though I can see that output gaps are extremely hard to measure, the most reasonable guess is that the current gap remains substantial.” Looking back on this period in 2010, Bernanke noted that unemployment had remained high in the first half of 2003, and that this may have been another consequence of the tech bubble. Because they had stocked up on capital goods, companies hired relatively few workers. See Bernanke, “Monetary Policy and the Housing Bubble.”

49. An FOMC member recalls, “Bernanke did not seem to have any agenda when he joined. He was low key. He was comfortable doing great research without attempting to become the next chair.”

50. Bernanke suggested “a working definition of price stability expressed as a range of measured core inflation,” adding that “in issuing such guidance, the FOMC would not need to make any explicit commitment.” He later acknowledged that he was deliberately couching his proposal in a way that might make it acceptable to Greenspan. Ben Bernanke, interview by the author, September 14, 2015.

51. Greenspan was open to a discussion of how he might communicate the Fed’s stance in forthcoming congressional testimony. But he was not ready to change the post-meeting statement.

52. Kohn said this at the February 1989 FOMC meeting. See chapter seventeen.

53. At the FOMC meeting on September 16, 2003, Greenspan said, “In retrospect, I think it was a mistake to include a sentence in our press statement in August indicating that an accommodative policy can be maintained for a considerable period.”

54. According to the Mortgage Bankers Association, the number of outstanding subprime mortgages serviced in the fourth quarter of 2003 was double the number serviced in the previous quarter. “U.S. Number of Subprime Loans Serviced,” Mortgage Bankers Association via Bloomberg LP, retrieved March 12, 2015.

55. “Homeownership Rate for the United States,” FRED, Federal Reserve Bank of St.. Louis, https://research.stlouisfed.org/fred2/graph/?g=YYQ.

CHAPTER TWENTY-EIGHT

1. Liaquat Ahamed, Lords of Finance: The Bankers Who Broke the World (London: Penguin, 2009), 160.

2. Ibid., 483.

3. Steve Quinn and Katie Fairbank, “What’s in It for Texas? Naming-Rights Deal with Ameriquest Will Mean Some Changes,” Dallas Morning News, May 8, 2004.

4. Ibid.

5. Jody Shenn, “ARMed—Not ‘Stuck,’” American Banker, June 21, 2004.

6. The share of “low doc” and “no doc” loan originations in the securitized subprime market rose from 20 percent in 2000, to 30 percent in 2004, to 40 percent in 2006. See 12 C.F.R. 226 Revised as of October 1, 2009, 44540–44541, Federal Register, http://www.gpo.gov/fdsys/pkg/FR.-2008-07-30/pdf/E8-16500.pdf.

7. Edmund L. Andrews, “The Ever More Graspable, and Risky, American Dream,” New York Times, June 24, 2004, http://www.nytimes.com/2004/06/24/business/the-ever-more-graspable-and-risky-american-dream.html.

8. Miguel Segoviano et al., “Securitization: Lessons Learned and the Road Ahead,” Working Paper (International Monetary Fund, November 2013), http://www.imf.org/external/pubs/ft/wp/2013/wp13255.pdf, 11.

9. William Shear, “Characteristics and Performance of Nonprime Mortgages” (Washington, D.C.: Government Accountability Office, July 28, 2009), http://www.gao.gov/new.items/d09848r.pdf. See also Andrews, “The Ever More Graspable, and Risky, American Dream.” On the proliferation of repayment holidays, see Ben S. Bernanke, “Monetary Policy and the Housing Bubble” (Annual Meeting of the American Economic Association, Atlanta, Georgia, January 3, 2010), Slide 8, 34.

10. Bethany McLean and Joe Nocera, All the Devils Are Here: The Hidden History of the Financial Crisis (New York: Portfolio/Penguin, 2010), Kindle locations 2828–32.

11. Mike Hudson and E. Scott Reckard, “Workers Say Lender Ran ‘Boiler Rooms,’” Los Angeles Times, February 4, 2005, http://articles.latimes.com/2005/feb/04/business/fi-ameriquest4.

12. Greenspan’s faith in financial innovation had held up over a longer period than the “classical gold standard,” which is commonly dated from 1880 to 1914. (For an example of dating, see Michael D. Bordo, “The Classical Gold Standard: Some Lessons for Today,” Federal Reserve Bank of St. Louis Review, May 1981.)

13. Alan Greenspan, remarks (Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C., February 23, 2004), http://www.federalreserve.gov/boarddocs/Speeches/2004/20040223/default.htm. In this speech, Greenspan also suggested that consumers might benefit from variable-rate mortgages. After the crisis, this led him to be painted as a cheerleader for risky borrowing. However, Greenspan’s aim was to show that fixed-rate mortgages, as facilitated by the GSEs, were less than indispensable.

14. Senate Committee on Banking, Housing, and Urban Affairs, The State of the Banking Industry: Testimony of Alan Greenspan Before the Committee on Banking, Housing, and Urban Affairs (Washington, D.C.: Federal Reserve Board, 2004), http://www.federalreserve.gov/boarddocs/testimony/2004/20040420/.

15. This interchange was recalled by Robert Gnaizda, the general counsel of the Greenlining Institute. McLean and Nocera, All the Devils, Kindle locations 1775–1777.

16. The delegate was John Taylor. Ibid.

17. Whether the advocates were right to emphasize the risks posed to consumers depended on the timing: in the 1990s, subprime lending may have done more good than harm because it allowed marginal borrowers a shot at home ownership in a rising market; by the early 2000s, mortgages had grown wilder and the case for a clampdown was stronger. But whatever the right judgment on consumer protection, the key thing is that these conversations were about just that: consumer protection.

18. One exception to the emphasis on consumer protection was Joshua Rosner, a mortgage analyst who warned about deteriorating underwriting standards and a potential market reversal as early as 2001. However, Rosner’s paper did not make the connection between a housing reversal and systemic risk. Senior Fed staff members who recalled hearing from community activists with concerns about housing had no recollection of Rosner. Joshua Rosner, interview by the author, October 14, 2014.

19. The meetings were in Charlotte, Boston, Chicago, and San Francisco.

20. Federal Reserve Board, Public Hearing on Home Equity Lending (Boston: Federal Reserve Board, 2000), http://www.federalreserve.gov/events/publichearings/20000804/20000804.htm.

21. Greg Ip, “Did Greenspan Add to Subprime Woes?,” Wall Street Journal, June 9, 2007, http://www.wsj.com/articles/SB118134111823129555.

22. I am indebted to Lewis Alexander of Nomura Securities for this metaphor.

23. Dolores Smith and Glenn Loney to Edward Gramlich, “Compliance Inspections of Nonbank Subsidiaries of Bank Holding Companies,” memorandum, August 31, 2000, Financial Crisis Inquiry Commission, http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2000-08-31_Federal_Reserve_Board_Memo_from_Dolores_Smith_and_Glenn_Loney_re_Compliance_Inspection.pdf.

24. Gramlich’s fellow governor recalled, “He never raised a deep concern about housing and subprime with me. I have asked other governors about this, and nobody can really recall that as a fixed idea in Ned’s head.” In addition, interviews with Fed staff confirm this interpretation. Greenspan’s version of this episode—in House testimony on October 23, 2008, he noted that Gramlich could have pursued the matter further but had chosen to drop it—therefore appears accurate. House Committee on Oversight and Government Reform, The Financial Crisis and the Role of Federal Regulators: Hearing Before the Committee on Oversight and Government Reform, 2008, http://www.gpo.gov/fdsys/pkg/CHRG-110hhrg55764/html/CHRG-110hhrg55764.htm.

25. When it moved to tighten income documentation rules more decisively in late 2007, the Fed was scolded for burdening borrowers who lack traditional, neatly documented sources of income. “Not every consumer applying for a loan fits into the tight little box of Ward and June Cleaver,” lectured one commenter on the Fed’s draft proposal. See Brian T. McLaughlin, “Comments on Regulation Z—Truth in Lending” (Federal Reserve Board, December 18, 2007), http://www.federalreserve.gov/SECRS/2007/December/20071227/R-1305/R-1305_36_1.pdf. After the Fed adopted these rules in 2008, consumer advocates continued to point out that some borrowers were adversely affected. Given these reactions, it is clear that resistance would have been much fiercer in the early 2000s, when subprime delinquencies were actually declining.

26. Board of Governors of the Federal Reserve System, Regulation Z (Truth in Lending)—Amendments to Implement the Home Ownership and Equity Protection Act (HOEPA) to Address Abusive Lending Practices in Home Equity Lending, Audio Cassette (Washington, D.C.: 12/12/01, 1 of 1 [Open], 2013), Federal Reserve Board Freedom of Information Office.

27. Of the nearly $600 billion in subprime lending in 2006, about half was originated by lenders that were not beholden to any banking regulator. “Although these lenders were subject to certain federal consumer protection and fair lending laws, they were generally not subject to the same routine monitoring and oversight by federal agencies that their bank counterparts were.” “Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System” (Government Accountability Office, January 2009), 24, http://www.gao.gov/new.items/d09216.pdf.

28. Board of Governors of the Federal Reserve System, Regulation Z (Truth in Lending)—Amendments to Implement the Home Ownership and Equity Protection Act (HOEPA) to Address Abusive Lending Practices in Home Equity Lending.

29. Financial Crisis Inquiry Commission, “The Financial Crisis Inquiry Report: The Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States” (Financial Crisis Inquiry Commission, January 2011), http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf.

30. Edward Gramlich to Alan Greenspan, letter, August 25, 2007. Greenspan was criticized for releasing this letter to journalists, one of whom provided a copy to the author. See Sewell Chan, “Greenspan Criticized for Characterization of Colleague,” New York Times, April 9, 2010, http://www.nytimes.com/2010/04/10/business/10gramlich.html.

31. The Senate staff member was an ex–Fed economist named Patrick Lawler. Patrick Lawler, interview by the author, February 13, 2014.

32. Richard Baker, interview by the author, April 21, 2015.

33. Capital-asset ratios at Fannie and Freddie were less than half those at large banks. Wayne Passmore, “The GSE Implicit Subsidy and the Value of Government Ambiguity,” Working Paper (Washington, D.C.: Federal Reserve Board, May 2005), http://www.federalreserve.gov/pubs/feds/2005/200505/200505pap.pdf, 36, Exhibit 7.

34. Ibid. Passmore’s study found that GSE lending reduced borrowing costs for some homeowners, but only by around 7 basis points.

35. Barbara Rehm, “How One Day of Testimony Transforms the Debate,” American Banker 169, no. 37 (February 25, 2004).

36. Bethany McLean, “The Fall of Fannie Mae,” Fortune, January 24, 2005, http://archive.fortune.com/magazines/fortune/fortune_archive/2005/01/24/8234040/index.htm.

37. Timothy F. Geithner, Stress Test: Reflections on Financial Crises (New York: Crown Publishers, 2014), 96.

38. Ibid., 99.

39. Ibid., 103.

40. Alan Greenspan, “The Crisis,” Brookings Papers on Economic Activity (Washington, D.C.: Brookings Institution, Spring 2010); and Ben S. Bernanke, “Monetary Policy and the Housing Bubble” (Annual Meeting of the American Economic Association, Atlanta, Georgia, January 3, 2010). For reasons to suspect that a low federal funds rate materially encouraged dangerous lending and a reach for yield, see numerous citations provided in Frederic S. Mishkin, “Monetary Policy Strategy: Lessons from the Crisis,” Working Paper (Cambridge, Mass.: National Bureau of Economic Research, February 2011).

41. Bernanke, “Monetary Policy and the Housing Bubble.” Criticizing Bernanke’s argument, which later also became Greenspan’s argument, Jeremy Stein of Harvard noted that low policy rates may have mattered a great deal for income-constrained borrowers. Adjustable-rate mortgages were used more in expensive cities, a trend that became more pronounced as home prices took off, starting in 2004. See Figure 1 in Jeremy Stein, “Discussant’s Comments on: ‘The Crisis’ by Alan Greenspan,” Brookings Papers on Economic Activity (Brookings Institution Press, April 2010).

42. The role of a low federal funds rate in expanding investment-bank balance sheets, and the impact of that expansion on interest-rate-sensitive sectors such as real estate, is explored in Tobias Adrian and Hyun Song Shin, “Financial Intermediaries, Financial Stability, and Monetary Policy,” Working Paper (Federal Reserve Bank of New York, September 2008), http://www.econstor.eu/bitstream/10419/60839/1/587563303.pdf. The authors find that greater certainty regarding the future path of short rates also expands longer-term lending by market-based intermediaries, underlining the role of the Fed’s forward guidance in boosting real-estate lending. The authors explicitly criticize conventional central-bank thinking for excluding investment banks from the understanding of the relationship between short-term interest rates and sectors such as housing.

43. Kohn was most explicit about this view at the next FOMC meeting, in March 2004. Noting that the Fed’s critics feared “that policy accommodation—and the expectation that it will persist—is distorting asset prices,” he declared: “Most of this distortion is deliberate and a desirable effect of the stance of policy.”

44. Invited to comment on this book’s characterization of his view of bubbles, Greenspan emphatically endorsed the significance of his preference for the certainty of mechanical relationships. Fair value for assets could be statistically estimated but not proved, and Greenspan never liked to rely on uncertain models. Alan Greenspan, interview by the author, November 2, 2015.

45. At the March 2004 meeting, Kohn argued: “[A] high burden of proof would seem to be on policies that would slow the expansion, leaving more slack and less inflation in the economy in the intermediate run to avoid hypothetical instabilities later.”

46. This gain is based on the Case-Shiller ten-city composite index. S&P Dow Jones Indices, “S&P/Case-Shiller 10-City Composite Home Price Index,” FRED, Federal Reserve Bank of St. Louis, https://research.stlouisfed.org/fred2/series/SPCS10RSA.

47. The Fed’s unpredictability in Greenspan’s early years was not confined to 1994. Prior to June 1989, the Greenspan Fed moved interest rates twenty-seven times in less than two years. Only six of these moves were quarter-point ones. Alan S. Blinder and Ricardo Reis, “Understanding the Greenspan Standard,” Working Paper (CEPS, September 2005), 30.

48. Remarks by Chairman Alan Greenspan, “The Mortgage Market and Consumer Debt,” (speech, America’s Community Bankers Annual Convention, Washington, D.C., October 19, 2004).

49. The following episode is based on an interview with David Stockton, Prell’s successor as head of the Fed’s research division. David Stockton, interview by the author, June 17, 2013.

50. For a retrospective analysis on economists’ difficulty in reaching firm conclusions on house prices, see Kristopher S. Gerardi, Christopher L. Foote, and Paul S. Willen, “Reasonable People Did Disagree: Optimism and Pessimism About the U.S. Housing Market Before the Crash,” Public Policy Discussion paper (Boston, Massachusetts: Federal Reserve Bank of Boston, September 2010), http://www.bostonfed.org/eco nomic/ppdp/2010/ppdp1005.pdf.

51. The mortgage strategist was from UBS, a Swiss bank. See “Portrait of a Market on Steroids,” Washington Post, May 22, 2005, http://www.washingtonpost.com/wp-dyn/content/article/2005/05/21/AR2005052100118.html.

52. In May and June 2004, the Bank of England had taken a step in this direction, raising interest rates twice in quick succession, partly in response to an overheating housing market.

53. The FOMC member was Edward Gramlich.

54. In his February 2005 testimony, Greenspan declared, “It is difficult to attribute the long-term interest rate declines of the last nine months to glacially increasing globalization.” Likewise, in testimony before the Senate on July 25, 2005, Greenspan again downplayed the influence of the savings glut on U.S. bond rates, saying that foreign purchases of U.S. bonds had probably depressed the ten-year rate by less than 50 basis points. The argument that foreign purchases rendered the Fed impotent was one that he emphasized only after retiring.

55. Later research suggested that foreign purchases of U.S. bonds lowered U.S. ten-year rates by about 80 basis points in the year to May 2005. See “International Capital Flows and U.S. Interest Rates,” by Francis E. Warnock and Veronica Cacdac Warnock, Journal of International Money and Finance 28 (2009): 903–19. However, this downward pressure could have been counteracted by a different monetary policy; after all, U.S. long-term interest rates rose in the two years following Greenspan’s conundrum speech even though net capital inflows grew and gross portfolio inflows remained strong. The limits to the linkage between foreign capital inflows and long-term interest rates are explored in Claudio Borio and Piti Disyatat, “Global Imbalances and the Financial Crisis: Link or No Link,” BIS Working Paper No. 346, May 2011.

56. See chapter eleven.

57. In his House testimony, Greenspan himself acknowledged that the federal funds rate was “fairly low.”

58. Some economists argue that slowly rising short rates cannot be blamed for encouraging financiers to borrow short and lend long; after all, rising short rates reduced the profit from each dollar allocated to this “carry” trade. However, greater certainty about the path of short rates could magnify the risk-adjusted profit in the carry trade, encouraging banks to increase the size of their bets in order to sustain their earnings. The importance of Fed policy in driving savings into mortgages is underlined by the large yen carry trade in the period before 2007. Feeling confident that a predictable Fed policy meant a predictable path for the dollar, investment banks borrowed yen and extended loans in dollars, with many of those loans financing the purchase of mortgage securities. See Masazumi Hattori and Hyun Song Shin, “Yen Carry Trade and the Sub-Prime Crisis,” IMF Staff Papers (2009) 56, 384–409.

59. Thomas G. Maheras, interview by the author, June 5, 2015. Lewis Alexander, interview by the author, April 28, 2015. Alexander was Citi’s chief economist.

60. Geithner, Stress Test: Reflections on Financial Crises, 109.

61. Commenting after reading the manuscript, Greenspan noted with almost passive detachment that his conversion to forward guidance, and to the avoidance of shocks to the markets, was part of a larger shift to central-bank transparency. “I was caught in the middle of a transition. What I did was part of a larger change.” Greenspan, interview by the author, November 2, 2015.

62. Nell Henderson, “Administration Considers Delaying Fed Chief’s Exit,” Washington Post, May 18, 2005, http://www.washingtonpost.com/wp-dyn/content/article/2005/05/17/AR2005051701586.html.

63. Alan S. Blinder and Ricardo Reis, “Understanding the Greenspan Standard,” (speech, Kansas City Fed Economic Policy Symposium, August 2005).

CHAPTER TWENTY-NINE

1. “‘Irrational Exuberance’: Music Inspired by Greenspan,” NPR Music, January 31, 2006, http://www.npr.org/templates/story/story.php?storyId=5180083.

2. Amy Argetsinger and Roxanne Roberts, “The Reliable Source,” Washington Post, February 1, 2006, http://www.washingtonpost.com/archive/lifestyle/2006/02/01/the-reliable-source/1f94edb5-afc3-4b68-a6f9-95d64cf9532c/.

3. “Presidential Medal of Freedom,” C-SPAN Video Library, November 9, 2005, http://www.c-span.org/video/?189856-1/presidential-medal-freedom. Greenspan was one of fourteen Presidential Medal of Freedom recipients that year.

4. Ashley Seager, “Christmas Goodies for Greenspan,” The Guardian, December 4, 2005, http://www.theguardian.com/business/2005/dec/05/useconomy.

5. The comparison of Greenspan to Henry V came from Richard Fisher of the Dallas Fed.

6. Edmund L. Andrews, “Exit Greenspan Amid Questions on Economy,” New York Times, February 1, 2006, http://www.nytimes.com/2006/02/01/busi ness/01fed.html?pagewanted=all.

7. “Greenspan Cookie,” Flickr, January 31, 2006, https://www.flickr.com/photos/sarah835/310675063/in/photolist-tshSD-BH9Ei-tsmAA-tsmAB-tshSP-tshSM-tshSJ-tshSB-tshSH/.

8. “The Atrium at the Fed. Greenspan’s Retirement Party,” Flickr, January 31, 2006, https://www.flickr.com/photos/sarah835/310675065/in/photolist-tshSD-BH9Ei-tsmAA-tsmAB-tshSP-tshSM-tshSJ-tshSB-tshSH/.

9. Alan Greenspan, interview by the author, July 16, 2010.

10. Richard Beales, Jennifer Hughes, and Andrew Balls, “Life After Fed Proves Tricky for Greenspan,” Financial Times, February 9, 2006, http://www.ft.com/intl/cms/s/0/4fffd952-99aa-11da-a8c3-0000779e2340.html#axzz3h DZT9Txn; Barbara Hagenbaugh, “Greenspan Steps Up to Microphone Immediately,” USA Today, February 14, 2006; Louis Uchitelle, “After the Fed, Exuberance,” New York Times, March 10, 2006, http://www.nytimes.com/2006/03/10/politics/10greenspan.html?pagewanted=all.

11. Amy Argetsinger and Roxanne Roberts, “The Reliable Source,” Washington Post, May 31, 2007.

12. Paul Bedard, “Washington Whispers,” US News and World Report, May 21, 2007.

13. As late as April 2007, the International Monetary Fund reported that “global economic risks [have] declined since . . . September 2006. . . . The overall U.S. economy is holding up well . . . [and] the signs elsewhere are very encouraging.” “World Economic Outlook: Spillovers and Cycles in the Global Economy” (International Monetary Fund, April 11, 2007).

14. Pat Bagley, “Greenspan Speaks,” Cartoon, September 19, 2007, Salt Lake Tribune, http://www.politicalcartoons.com/cartoon/095ce19a-2e00-465f-b9f5-31b3484d6aa2.html.

15. Tribune Media Services, “Celebrity News,” Baltimore Sun, October 15, 2007, http://articles.baltimoresun.com/2007-10-15/features/0710150171_1_barbara-walters-rosie-barbra-streisand.

16. “Subprime Mortgage Crisis,” University of North Carolina–Chapel Hill, 2012, http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf.

17. This was the view of Governor Rick Mishkin, for example.

18. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008), Kindle locations 4161–68 and 4187–88.

19. Meet the Press Transcript for September 23, 2007 (NBC, September 23, 2007), http://www.nbcnews.com/id/20941413/ns/meet_the_press/t/meet-press-transcript-sept/#.VbFZGbNVhBf.

20. Alan Greenspan, “The Roots of the Mortgage Crisis,” Wall Street Journal, December 12, 2007, http://www.wsj.com/articles/SB119741050259621811.

21. “Greenspan: Recession Odds ‘Clearly Rising,’” NPR.org, December 14, 2007, http://www.npr.org/templates/story/story.php?storyId=17210282.

22. After the crisis, some commentators drew the lesson that forward guidance could be useful to combat falling inflation but that it should be withdrawn once inflation rose back to target. Thus Angel Ubide, a leading hedge-fund economist, observed, “As slack is being absorbed in a recovery, the best way for monetary policy to preserve financial stability is to avoid generating one way bets and time inconsistent policies. Thus guidance should be softened as the economy approaches the steady state.” See Angel Ubide, “Unconventional Monetary Policies—Recent Experiences, Impact, and Lessons,” in Monetary Policy After the Great Recession, ed. Javier Vallés (Madrid: Funcas, 2014), 183.

23. Ambrose Evans-Pritchard, “Anna Schwartz Blames Fed for Subprime Crisis,” Telegraph, January 13, 2008, http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/2782488/Anna-Schwartz-blames-Fed-for-sub-prime-crisis.html.

24. Daniel Gross, “Heckuva Job, Bernanke!,” Slate, December 13, 2007, http://www.slate.com/articles/business/moneybox/2007/12/heckuva_job_bernanke.html.

25. Paul R. Krugman, “Blindly into the Bubble,” New York Times, December 21, 2007.

26. The liberal economist was Dean Baker, codirector of the Center for Economic Policy Research. See Edmund L. Andrews, “In Reversal, Fed Approves Plan to Curb Risky Lending,” New York Times, December 19, 2007, http://www.nytimes.com/2007/12/19/business/19subprime.html?_r=1.

27. Alan Greenspan, “We Will Never Have a Perfect Model of Risk,” Financial Times, March 17, 2008, http://www.ft.com/intl/cms/s/0/edbdbcf6-f360-11dc-b6bc-0000779fd2ac.html#axzz3ZBRaIhqN.

28. Financial Crisis Inquiry Commission, “The Financial Crisis Inquiry Report: The Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States” (Financial Crisis Inquiry Commission, January 2011), 150–53, http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf.

29. “Global Credit Crunch: Deutsche Bank Head Calls for Government Help,” Der Spiegel, March 18, 2008, http://www.spiegel.de/international/business/global-credit-crunch-deutsche-bank-head-calls-for-government-help-a-542140.html.

30. Martin Wolf, “The Rescue of Bear Stearns Marks Liberalization’s Limit,” Financial Times, March 26, 2008, http://www.ft.com/intl/cms/s/0/8ced5202-fa94-11dc-aa46-000077b07658.html#axzz3ZBRa IhqN.

31. Alan Greenspan, “The Fed Is Blameless on the Property Bubble,” Financial Times, April 7, 2008, http://www.ft.com/intl/cms/s/0/81c05200-03f2-11dd-b28b-000077b07658.html#axzz 3ZBRaIhqN.

32. John Crudele, “Paulson’s Plan Is More an April Fool’s Joke,” New York Post, April 1, 2008, http://nypost.com/2008/04/01/paulsons-plan-is-more-an-april-fools-joke/.

33. W .C. Varones, Greenspan’s Body Count, n.d., http://greenspansbodycount.blogspot.com/.

34. “‘The Impact Was Larger Than I Expected’: Greenspan’s Chats with the Journal,” Wall Street Journal, April 8, 2008.

35. Ibid.

36. In December 2007, Fannie reported capital equivalent to 1.45 percent of assets plus guarantees. The ratio at Freddie was 1.7 percent. Financial Crisis Inquiry Commission, “The Financial Crisis Inquiry Report: The Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States,” 312.

37. Andrew Ross Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves (New York: Viking Press, 2009), 190.

38. As reported in chapter thirteen, the total rescue in 1907 came to $300 million, or $6.8 billion in 2008 dollars.

39. Financial Crisis Inquiry Commission, “The Financial Crisis Inquiry Report: The Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States,” 320–21.

40. In a new epilogue to the paperback edition of his memoir, published a week before Lehman’s collapse, Greenspan had written, “It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade.” Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Books, 2008).

41. “Economic Downfall,” This Week with George Stephanopoulos (ABC News, September 14, 2008).

42. “Had AIG been building derivatives exposures on-exchange rather than in the OTC markets, its reckless speculation would have been brought to a halt much earlier owing to minute-by-minute exposure-tracking in the clearinghouse and unambiguous mark-to-market and margining rules.” See Benn Steil, “Derivatives Clearinghouses: Opportunities and Challenges”: Prepared Statement by Dr. Benn Steil Before the Committee on Banking, Housing, and Urban Affairs; Subcommittee on Securities, Insurance, and Investment, May 25, 2011.

43. On superior risk management at hedge funds, the contrast between the disasters of the investment banks and the unaided survival of the hedge fund Citadel is instructive. See Sebastian Mallaby, “The Code Breakers,” chapter thirteen in More Money Than God: Hedge Funds and the Making of a New Elite (New York: Penguin Group, 2010).

44. House Committee on Oversight and Government Reform, The Financial Crisis and the Role of Federal Regulators: Hearing Before the Committee on Oversight and Government Reform, 2008, http://www.gpo.gov/fdsys/pkg/CHRG-110hhrg55764/html/CHRG-110hhrg55764.htm.

45. Steve Coll, “The Whole Intellectual Edifice,” New Yorker, October 23, 2008, http://www.new yorker.com/news/steve-coll/the-whole-intellectual-edifice.

46. Tim Rutten, “What the Oracle Didn’t See,” Los Angeles Times, October 25, 2008, http://articles.latimes.com/2008/oct/25/opinion/oe-rutten25.

47. Paul R. Krugman, “How Did Economists Get It So Wrong?,” New York Times Magazine, September 2, 2009, http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all&_r=0.

48. Alan Greenspan, “The Global Financial Crisis—Causes and Consequences” (C. Peter McColough Series on International Economics, New York, October 15, 2009). The case against megabanks was belatedly supported by research from the International Monetary Fund. “[L]arge banks, on average, create more individual and systemic risk than smaller banks. The risks of large banks are especially high when they have insufficient capital, unstable funding, engage more in market-based activities, or are organizationally complex. This, taken together with the evidence from the literature that the size of banks is at least in part driven by too-big-to-fail subsidies and empire-building incentives, suggests that today’s large banks might be too large from a social welfare perspective.” See Luc Laeven, Lev Ratnovski, and Hui Tong, “Bank Size and Systemic Risk,” IMF Staff Discussion Note (International Monetary Fund, May 2014), http://www.imf.org/external/pubs/ft/sdn/2014/sdn1404.pdf.

49. Alan Greenspan, “The Crisis,” Brookings Papers on Economic Activity (Washington, D.C.: Brookings Institution, Spring 2010), 221–222.

50. Under questioning by Brooksley Born, Greenspan did reiterate his view that capital buffers should be thickened. “We were undercapitalizing the banking system probably for 40 or 50 years, and that has to be adjusted.” The Financial Crisis Inquiry Commission Hearing (Washington, D.C., 2010).

51. Lucette Lagnado, “After the Bubble, Beauty Is but Fleeting for Greenspan Portraits,” Wall Street Journal, February 19, 2010, http://www.wsj.com/articles/SB20001424052748703615904575053632386180598.

CONCLUSION

1. “J. J. Hill Dead in St. Paul Home at the Age of 77,” New York Times, May 30, 1916.

2. Mill also suggested that, without Caesar, “the venue . . . of European civilization might . . . have been changed.” John Stuart Mill, “Elucidations of the Science of History,” in Virtual History: Alternatives and Counterfactuals, Niall Ferguson, ed. (New York: Basic Books, 1999), 32–33.

3. Thomas Carlyle, “Heroes, Hero-Worship, and the Heroic in History,” Echo Library (Teddington: 2007), 1. Lecture originally delivered on May 5, 1840.

4. Lawrence Summers, interview by the author, March 7, 2012. Laurence H. Meyer, A Term at the Fed: An Insider’s View (New York: HarperBusiness, 2006), 125 and 134.

5. Burton Malkiel, interview by the author, June 25, 2012.

6. For this metaphor I am indebted to my friend the writer Jonathan Rauch.

7. The fact that inflation targeting leads central banks to ignore bubbles and debt buildups is acknowledged even by its advocates. Thus UK chancellor George Osborne declared in his Mansion House speech of 2010 that “the very design of the policy framework [that is, inflation targeting] meant that responding to the explosion in balance sheets, asset prices and macro imbalances was impossible. The Bank of England was mandated to focus on consumer price inflation to the exclusion of other things.” George Osborne, speech (Mansion House, London, June 16, 2010), https://www.gov.uk/government/speeches/speech-by-the-chancellor-of-the-exchequer-rt-hon-george-osborne-mp-at-mansion-house.

8. Donald Mackenzie, An Engine, Not a Camera: How Financial Models Shape Markets (Cambridge, Mass.: MIT Press, 2006), 114.