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(Oct. 27, '00)
Get some Democrats on the Fed, President Clinton instructed his economic advisers in early 1994. The entire Federal Reserve Board of Governors was made up of Reagan and Bush appointees, but now Clinton had a chance to name two governors to the seven-member board, his first Fed appointments. With interest rates rising, he wanted Treasury and the White House staff to move fast. The instructions weren't quite "Sink Greenspan," but the president wanted some counterweight to the Fed's Republican chairman, Alan Greenspan.
The search began for two academic economists who were Democrats and who would be at least sympathetic to Clinton's overall economic policies.
Robert Rubin, the director of the National Economic Council, sought out Alan Blinder, the deputy on the president's Council of Economic Advisers, one of his allies in the White House.
How about being the Fed vice chairman? Rubin asked.
Blinder, 48, was a tall, thin, balding Princeton economics professor on leave. He wore thick glasses and had the uneasy erudition of many professors, but he also had a sense of humor that demonstrated he knew how dry and pedantic economics could be.
Blinder kept one foot in the traditional mainstream liberalism that looked out for those on the bottom of the economic ladder, but he was a Democrat who didn't use the class-warfare rhetoric Rubin detested. In Rubin's view, Blinder was just about the right mix.
Blinder had earlier declined appointment as one of the Fed's seven governors, but now he thought hard about Rubin's offer. The job at the Fed meant a step up in the Washington pecking order. A Fed governor was C list, anonymous politically and socially, which was about where Blinder was with his current White House position. Vice chairman of the Fed would put him on the B list. As he thought about whether to take the job, Blinder admitted to himself that he had a human foible, shared by many in Washington -- status.
Blinder figured that the vice chairmanship would offer him a seat at the table and a hand in the great interest rate game. Part of his job at the Council of Economic Advisers had been to phone Greenspan a day in advance of the release of the various Commerce and Labor Department economic statistics. He marveled at how Greenspan wallowed in the numbers, frequently asking questions that sent him deep into the charts. Greenspan and he would be number one and two at one of the most important arms of the most important government in the world. After about a day, Blinder told Rubin yes.
When Greenspan got word that Blinder would be coming as the new vice chairman, he asked outgoing Vice Chairman David Mullins to conduct a due diligence review, to check out Blinder's previous publications and statements. Just so we have no surprises, the chairman said.
Mullins dug into columns that Blinder had written for Business Week, old articles and books. Blinder had criticized Paul Volcker, Fed chairman from 1979-87, for clamping down too hard on inflation, declaring at one point that the American economy was not like a Vietnamese hamlet that must be destroyed in order to be saved. In his 1987 book, Hard Heads, Soft Hearts, Blinder wrote that there was too much hysteria about the evils of inflation. Inflation was more like a head cold than a serious disease, and you don't prescribe a lobotomy for a head cold.
Several days later, Mullins, looking worried, came to see Greenspan.
"It's not perfect," he said.
"Don't worry," Mullins said, "it's not like he's a Communist or anything. It's just in his early publications he's noticeably soft on inflation." The Fed's job was to fight inflation.
Greenspan quipped, "I would have preferred he were a Communist."
* * *
Before he joined the Fed, Blinder had several encouraging conversations with the chairman. Greenspan indicated that the board was shorthanded, needed help, and would welcome Blinder.
In the period after his nomination, Blinder followed his own press clippings carefully. The initial press coverage was flattering. Though a piece in The New York Times characterized Blinder as an inflation dove who "does not see inflation as a problem," most of the stories, like the Associated Press piece on the day of his Senate confirmation, noted that the appointment "could put him in line" to succeed Greenspan as chairman. Other stories dubbed Blinder Greenspan's "likely successor," and one story in Investor's Business Daily included a brash prediction from the chief economist at a large Wall Street firm: "A new coalition will form around Blinder. I think this is the beginning of the end for Greenspan." Because Blinder was the first Democratic appointee to the Fed in more than 12 years, the press simply assumed that Blinder would vie for the chairmanship with the Republican Greenspan, whose term was set to expire in March of 1996.
Blinder knew that no vice chairman had ever ascended to the chairmanship. When the press began to talk about him as Greenspan's heir, Blinder said little to fan the flames, but he also made little effort to extinguish them. He said nothing about the press coverage to Greenspan, and the chairman, who had been following the news reports, did not raise the subject.
On the morning of June 27, 1994, the day after his official confirmation in the Senate, Blinder and his wife, Madeline, arrived at the Fed building on Constitution Avenue. Greenspan swore Blinder in as vice chairman, and photographers snapped pictures of the new Fed leadership team. After the ceremony ended, the chairman said he had arranged for two governors and some staff to take Blinder to lunch -- and then walked out the door. Good-bye.
Blinder wasn't sure what to make of it all, but his wife told him that the reception seemed ominously cold. On day one, minute one, the chairman was out the door as soon as he could be. What could it mean?
* * *
On August 16, several days before Blinder attended his second meeting of the Fed's key interest rate-setting committee, the Federal Open Market Committee (FOMC), Greenspan's secretary called him to say that the chairman was coming over to see him.
Greenspan appeared promptly. "This thing," the chairman said, referring to the overall economy, "is heating up." He made it clear that he wanted to raise the rate that the FOMC controlled, the so-called fed funds rate, by 1/2 percent at the next meeting.
Blinder said that he thought 1/4 percent would be sufficient. That was the standard Fed increase, and Blinder saw no need for more, given that the Fed had already raised rates four times since the beginning of the year.
Greenspan disagreed. The economy was hot. The chairman indicated, in no uncertain terms, that more than the normal increase was required.
Blinder was less concerned about individual rate increases than he was about where the Fed would wind up in this series of increases. Where was this going? How much was enough? What would tell them when to stop? Blinder was in favor of keeping inflation low, but he was worried that the Fed might be headed toward overkill, a crash instead of a soft landing.
The FOMC didn't like to accompany its rate decisions with any clear wording, Blinder knew. Zero wording -- implying that the rate decision could speak entirely for itself -- was beautiful in the world of the Fed. But Blinder thought that the Fed needed to explain itself if it were going to raise rates by 1/2 percent. He asked Greenspan, If the 1/2 percent raise were inevitable, would it be possible to issue a statement declaring that the Fed would go to the sidelines after the rate hike, indicating that no immediate additional rate increases would be forthcoming?
Greenspan said a statement would be possible.
Blinder said he thought a statement would be essential if the entire committee were going to vote for a 1/2 percent hike.
After about fifteen minutes of discussion, Greenspan agreed and left. He had promised Blinder a statement of some kind, and Blinder in turn gave the chairman his vote.
Greenspan knew that Blinder had essentially issued an ultimatum. Ultimatums were not useful around the Fed.
* * *
At the August 16 FOMC meeting, Greenspan, Blinder and the others gathered in the second-floor meeting room at the Fed. For more than an hour, Greenspan led a discussion on the state of the economy. Committee members talked about the economic performance they saw, ranging from hot to middling to even somewhat cold -- reflecting the sometimes wide variation of economic activity in different geographical areas.
"Let me get started," Greenspan said, after everybody had spoken. "A statistic we don't talk about very often," Greenspan said, "is the extraordinary rise in net business formation." New business formation had taken a "fairly sharp upswing," an event that is not consistent with an economy that is in its final and declining stages. A sharp upswing in business formation showed that the momentums in the economy were hardly slowing, as some had argued.
The situation as a whole made Greenspan nervous. "This stuff is really beginning to move," he said.
"I think one has to conclude, as far as policy is concerned, that another upward notch in rates is clearly called for at some point," he went on. If they moved 1/2 percent now, the chairman said, the chances were better than 50-50 that they would not have to increase rates any further before the end of the year.
"I'm a little concerned that 1/4 a point would merely raise the issue of when the other shoe is going to drop," Greenspan continued. He offered his personal assessment of the market reaction to a 1/2 point raise: "My own view -- I'm being a little more detailed than I usually am, so I hope people will excuse me in this respect -- is that it's very important if we were to do 1/2 a point, that we not give the impression that somehow we anticipate major accelerations and this is just the beginning of a long series of 1/2 percent increases. I think we have to be very careful to avoid giving that impression. The only realistic way we can avoid that is to issue some type of statement." The statement could declare the Fed's "intention to hold for a while without tying our hands, which we cannot do."
Pleased that Greenspan was living up to his agreement, Blinder thought there was now a fighting chance that this might be the last needed rate increase.
"The more I think about that as a potential sort of policy package, the less I like all the other alternatives," the chairman concluded.
"I just want to take two minutes to emphasize that it really is a package," Blinder said shortly after the chairman had finished. "So with such a strong statement, I not only support but support enthusiastically the suggestion of the chairman." Just in case his point was missed, he added, "Without it, I would not."
Greenspan read a draft of a proposed statement, which stated vaguely that the Fed expected the rate hike to be sufficient "at least for a time." That could mean months, or to the end of the year, but the chairman knew that it could also mean precisely 4 minutes and 37 seconds -- or less. In other words, the statement meant almost nothing.
Greenspan called for the votes on the 1/2 percent increase, to be accompanied by the statement.
The vote in favor was unanimous. After the meeting, Greenspan complimented Blinder, and told him that he had earned his pay.
The interest rate hike caused rallies in the stock and bond markets, where traders saw the Fed's half point hike as a strong offensive against inflation. It angered some Congressional Democrats and others who believed that the rate hike risked sending the economy into a severe downturn.
Nearly all of the coverage in the media focused on the 1/2 percent hike, with very little mention of the Fed's statement regarding its intention "at least for a time" to avoid any further moves.
A confrontation had been avoided. Blinder felt it was a good outcome, but he also realized that Greenspan was in total control.
* * *
Less than two weeks later, most of the FOMC members attended the Kansas City Federal Reserve's annual retreat in Jackson Hole, Wyoming. The overall theme of the gathering was "Reducing Unemployment," and Blinder was asked to give some concluding remarks at the end of the conference on Saturday, August 27.
He had spoken at the Jackson Hole conference before, as an academic unbound by the customs and responsibilities of working at the Fed. He made it clear at the outset of his 20-minute speech that he understood the difference: "It is quite clear that in my new job, my role is to say nothing -- and certainly not to say anything interesting," he joked.
Still, Blinder then argued that the Fed might be too focused on preserving price stability and fighting inflation. Shouldn't the Fed embrace with equal intensity the goal of maximum employment, a goal explicitly written into the most recent law governing the Fed? "The central bank does have a role in reducing unemployment," he said.
The next day, Blinder was dismayed to read the New York Times story on page 26, which stated that in his speech he "publicly broke ranks with most of his colleagues" and that his comments "revealed an intellectual split" within the Fed. On Monday, August 29, the Times pounced again with a business section front page story headlined "A Split Over Fed's Role; Clashes Seen After Vice Chairman Says Job Creation Should Also Be a Policy Goal." The story drew a sharp contrast between Blinder and Greenspan, who had recently reaffirmed his view that inflation fighting was the primary goal of the Fed.
As Blinder saw it, he'd been asked to deliver the summation speech at a seminar called "Reducing Unemployment." What else was he supposed to talk about?
The Full Employment and Balanced Growth Act of 1978, called the Humphrey-Hawkins Act after its legislative sponsors, mandated that the Fed do its best to achieve maximum employment, and Blinder thought he had merely drawn attention to that responsibility. A New York Times story disagreed, noting that emphasizing jobs over inflation was like "sticking needles in the eyes of central bankers."
Greenspan went on vacation without commenting, leaving Blinder to twist in media winds, which eventually dubbed the situation "L'affair Blinder." A three-inch stack of stories about a rift at the Fed followed.
A simple word or sentence to key Fed reporters from the chairman, even off the record, noting that the whole matter was part of a standard policy debate could have ended the furor, Blinder believed. He interpreted Greenspan's silence as intentional. For one reason or another, Greenspan wanted to let him twist.
Yet Blinder did not raise the issue with him directly, realizing that Greenspan had not only plausible but perfect deniability. The chairman hadn't created the controversy, and surely he couldn't be held accountable for the media. Blinder didn't want to go begging. In his mind, the "chairman who wouldn't speak" took on a life of its own. Blinder believed that Greenspan was manipulating the press. His silence was just as damaging as, if not more so than, any negative comments that he might have made. Nobody, Blinder believed, knew how skillfully Greenspan played the Washington political inside game. He was witnessing its subtle but deadly sting first hand.
Blinder was scheduled to give a speech in a downtown Washington hotel on September 8. Afterwards, dozens of reporters and many cameras awaited him. Blinder realized he had a choice either to act like a football player or to stop like a civilized person to answer a few questions. He stopped and answered the questions, downplaying any philosophical rift between himself and the chairman.
The next day, The New York Times reported that Blinder had held an "unscheduled" press conference. Son of a bitch, he said to himself. It looked as if he were putting himself forward, showboating. Fed governors didn't have press conferences. If he hadn't been discussed as a possible contender for Greenspan's job in 1996, Blinder believed the press attention would have subsided. He consistently maintained that he had never spoken to the White House about the possibility, and he seemed hurt that his relationship with Greenspan had been damaged. Nonetheless, Blinder refused to close the door on the possibility he might become the next Fed chairman.
He talked to The Wall Street Journal and was asked if he wanted to succeed Greenspan. "I don't spend a lot of time thinking about it," he said, suggesting that he spent at least some time on the subject. "It's a fantastic opportunity if it comes along. For the time being," he continued suggestively, "we have a very good chairman of the Fed. The job is not open."
* * *
In the days before the FOMC meeting on November 15, Blinder thought the economy was looking stronger -- too strong. A roar was coming up from the markets, saying that the Fed had goofed with its sideline statement and was behind the curve. Greenspan asked to see him again. When the chairman arrived, he said he wanted to make a dramatic gesture to show that the Fed was not behind the curve, to show the Fed's teeth in a big way.
Blinder agreed, saying that the economy was running hard and something had to be done. He told Greenspan that he would have no trouble with a 1/2 percent increase at the coming meeting.
Greenspan wanted to move a full 3/4 percent.
Blinder was a little bit surprised. He had concluded that they would eventually have to move a total of 3/4 percent, but he thought that it might be wise to do it incrementally.
Greenspan wanted to get there right away. He didn't cite any specific data, focusing instead on his feeling that the pot was boiling and that 3/4 percent was the only way for the Fed to get out ahead of the markets.
It was a major disagreement. Blinder was worried that 3/4 of a point all at once could shatter confidence in the markets and have a negative effect on the rest of the economy, particularly on the people who were out there trying to buy homes.
Greenspan stood firm.
Hmmmmm-hmmmmm, Blinder finally said noncommittally -- a kind of unspoken "I don't know." He did not indicate to the chairman that he would go along.
At the November meeting, Blinder said they might be heading toward raising rates so much that the Fed might chokes off most economic growth. What they were contemplating was not trivial. "It is very strong medicine," he said. Enough to stop even an economy with considerable momentum. "It is therefore not to be prescribed lightly."
"I must say the discussion this morning has been one of the best discussions I have heard around this table in quite a long while," Greenspan said when the others had finished. He said he would not dismiss Blinder's comments.
"I think we are behind the curve," he added, after offering a brief assessment of the economy. "I think that creating a mild surprise would be of significant value.
"So, I think that we have to be very careful at this stage and be certain that we are ahead of general expectations. I think we can do that with 3/4 of a point."
To underscore his strong feelings, the chairman added, "I must tell you that 1/2 percent makes me a little nervous. No, I take that back: It makes me very nervous and I would be disinclined to go in that direction." Anyone voting against him, in other words, was in favor of a very nervous chairman.
"I fear that doing 3/4 of a point today rather than 1/2 of a point may send us down an oversteering path," Blinder said. He reminded the committee that "the Greenspan Fed has never once moved the Fed funds rate by 3/4 of a point in either direction. Not once. When this Fed has erred, it has been on the side of caution....I always thought that was a good idea.
"My personal preference is strongly for 1/2," Blinder concluded. "I thought hard about whether I should dissent on this matter, and I did not decide until last night. I finally decided that I won't....I think it is better to show a united Federal Reserve against the criticism that we are surely going to get for this move." Blinder would go along with the rate hike, but he made it clear that he would stand strongly against raising rates again at the next meeting.
"Okay," Greenspan said, right on the tail of Blinder's long speech about his struggle. "I propose that we move 3/4 percent."
All 12 members voted yes.
Blinder had gone with the chairman because he didn't want to use the power of his dissent on what could be seen as a tactical dispute. The practical difference between 1/2 percent and 3/4 percent, in terms of measurable effects on the economy, was quite small. Blinder's chief concern was where they might be heading in the months to come.
He also knew that there was a tradition at the Fed that members go along with the chairman unless they are really uncomfortable, terribly uncomfortable. This is especially true of the vice chairman. Nobody at the Fed, as far as Blinder knew, could remember the last time a vice chairman had dissented from the will of the chairman.
Blinder also realized that if he shot his cannonball now, it would be wasted -- because he wasn't going to change the decision. He would have fallen on his sword for no reason.
Blinder came from an academic environment, where he was used to following his conscience. It had become clear to him that voting solely on the basis of his convictions and economic conclusions wouldn't work at the Fed.
* * *
The year 1995 was no better for Blinder, and he and his wife Madeline flew to Acapulco, Mexico after Christmas to vacation on the beach, so he could stare at the water and decide whether he should seek reappointment as vice chairman when his term expired in early 1996. It was a hard decision. After less than two years at the Fed, he was profoundly frustrated.
Blinder believed he had figured out what was so disconcerting. Greenspan didn't allow any risk. If there was a 2 percent or a 4 percent probability that something might happen -- such as Blinder succeeding him or Blinder's star rising -- Greenspan worked to bring the probability down to zero. Most people would tolerate low chances. Greenspan wanted to stomp out the slightest probability. That's why Greenspan had stuck the knife in him, Blinder believed, in so many ways and so skillfully. And there were no fingerprints.
Blinder decided he should leave. He wanted to be a lame duck for as short a time as possible, so he cut it tight and told the White House only two weeks before the expiration of his term. As a little piece of revenge, he decided not to tell Greenspan. Blinder figured the chairman could read about his departure in the newspapers. After all, Greenspan had never really told him anything, never really let him in the way Blinder had hoped. He realized it was childish on his part. The news of his departure hit the papers on January 17, 1996.
Greenspan said nothing to Blinder, but he presided at a little going away party for him.
You know, Greenspan said graciously at the ceremony, it seems like you just got here, it's been wonderful to have you.
Ha, ha, Blinder thought as he stood nearby in deep discomfort.
How much, Greenspan continued, he had enjoyed having Blinder as a colleague, how valuable he had been to the FOMC and the board, what a shame he was leaving so soon.
Ha, Blinder thought again. He concluded that Greenspan was not a straight person, not open and direct in the way that Blinder expected of colleagues. He had just wanted to be part of the interest rate game, and Greenspan had not permitted it.
Excerpted by permission of Simon & Schuster, Inc. Copyright © 2000 by Bob Woodward, Simon and Schuster. Researcher Jeff Himmelman contributed to this report.