Federal Reserve Chairman Alan Greenspan Renominated
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PRESIDENT CLINTON: You’re supposed to stand over here. This is the only time I’m interfering with the independence of the Fed.
MARGARET WARNER: President Clinton looked delighted today, and so did Fed Chairman Alan Greenspan, in announcing that the lifelong Republican economist had accepted appointment to a fourth term. The president said Greenspan’s policies at the Fed had played a “very large role in the current economic expansion” — now in its ninth year, the longest in post-war history.
The Federal Reserve’s job is to keep inflation in check, while allowing for sustained economic growth. Its basic tool is the power to set short-term interest rates. After an early upward tick, Greenspan’s Fed brought interest rates down and has held them down.
Today, short-term rates stand at 5.5 percent. Inflation has fallen consistently as well, to a level today of just 2.6 percent. But Greenspan’s tenure has not been without its tough times. In October 1987, two months after he took the job, the stock market fell 23 percent.
The Fed responded by cutting interest rates and pumping more money into the economy. The markets regained their lost ground within two years. Nine years later, the Fed chairman was more worried about a soaring stock market and publicly suggested as much.
ALAN GREENSPAN: How do we know when irrational exuberance has unduly escalated asset values?
MARGARET WARNER: But the market boom continued. Today the Dow Jones Industrial Average stands at more than four times its value when he took office. Greenspan was also at the helm of the Fed during the 1997-98 global financial crisis. As the Asian currency meltdown spread, hammering U.S. exports, the Fed cut interest rates three times to keep the American economy growing. Today, the 73-year-old Greenspan, who’s served as Fed chairman for three presidents, was asked why he was willing to stay on.
ALAN GREENSPAN: There’s a certain really quite unimaginable intellectual interest that one gets from working in the context where you have to put broad theoretical and fairly complex conceptual issues to a test in the marketplace. Unlike a straight academic career, you end up fully recognizing that hypotheses matter, that actions matter, and the ideas that you come up with matter. And that is a challenge which, I must say to you, is, as I said to the president before, it’s like eating peanuts. You keep doing it, keep doing it, and you never get tired, because the future is always, ultimately, unknowable.
MARGARET WARNER: Now, three views on the Greenspan reappointment. They come from Jack Kemp, former congressman and secretary of housing and urban development, and the Republican Party’s 1996 vice presidential nominee — he’s the co-director of Empower America, a nonprofit policy organization in Washington, D.C. — he joins us from Vail, Colorado; Robert Reich, former secretary of labor during President Clinton’s first term — he’s now professor of economic and social policy at Brandeis University; and Robert Hormats, former assistant secretary of state for economic affairs, and now vice chairman of the investment firm Goldman Sachs International.
MARGARET WARNER: Welcome gentlemen, Bob Hormats, did the president do the right thing in reappointing Greenspan today?
ROBERT HORMATS: Absolutely. Alan Greenspan has done a terrific job. He enjoys respect on both Main Street and Wall Street. In short, he’s really been one of the great financial leaders in American history, and he certainly deserves reappointment.
MARGARET WARNER: If you see it that way, why did the markets act the way they did today with these precipitous drops?
ROBERT HORMATS: The markets are reacting to other factors. They were reacting to concerns about higher interest rates — and a lot of profit taking took place, a lot of people made a lot of money over the last couple of years. And some of them were taking profits, it’s as simple as that. But the economy is fundamentally very sound and a large portion of the credit goes to Alan Greenspan.
MARGARET WARNER: Jack Kemp, how do you see this reappointment, a good move?
JACK KEMP: Well, Margaret, I think Bob is right, essentially, but I would add one other thing to the reappointment of a friend, Alan Greenspan, who is, as Bob pointed out, a giant of the 20th century and deserves a lot of the credit. But the fear of interest rate increases has caused markets — both at the Dow level and NASDAQ — to drop. I think you pointed out earlier a 5 percent drop in the NASDAQ and a 3 percent drop in Dow Jones. That’s not exactly a vote of confidence. And I don’t see the inflation out there that Alan Greenspan sees.
MARGARET WARNER: You mean in terms of setting interest rate policy or the expectation that he may be about to?
JACK KEMP: Right. He said, and the Fed said at the Open Market Committee meeting in December, that once we get through the Y2K fears — and we have, hopefully — they’re going to raise interest rates. And that is what the market today responded to when President Clinton reappointed Alan Greenspan. I favor the reappointment. I just don’t see the inflation that he sees. And I definitely don’t think we should be raising interest rates at this point in the economy.
MARGARET WARNER: OK. Bob Reich, how do you see the reappointment and how much credit he deserves for this incredible expansion we’re in?
ROBERT REICH: Margaret, it’s good reappointment. He deserves a great deal of credit. He did not raise interest rates when a lot of economists were saying that unemployment is getting down so low and the economy is booming so quickly that you need to raise interest rates in order to stop the possibility of inflation. Now, having said that, let me also, perhaps for the first time in history, agree with Jack Kemp by saying that there is no inflation. There is no reason to even fool around with the possibility of an increase in short-term interest rates at this time.
MARGARET WARNER: Jack Kemp back to you, is this the same man that Ronald Reagan appointed 13 years ago in terms of his views and philosophy? Have you seen him evolve?
JACK KEMP: Yeah. I do think it is. And I credit President Clinton for the appointment and reappointment. But what bothers me somewhat about — more than somewhat, about Alan Greenspan, Chairman Greenspan, is he seems to have shifted from believing in a price rule that is targeting prices in the marketplace — to today, where he’s targeting unemployment, asset values, stock prices and GNP (Gross National Product). The purpose of the Fed is to maintain and preserve price stability, not micromanage the GNP or unemployment rate or other factors. And that is what bothers me the most about Chairman Greenspan’s recent pronouncements.
MARGARET WARNER: Bob Hormats, weigh in on this point. Do you think he’s changed this philosophy, if so, do you see it the way Jack Kemp does, or in a different way?
ROBERT HORMATS: Well, I think he’s been very pragmatic. Robert Reich is correct. I think that he, in this circumstance, is willing to allow the economy to grow at a very rapid rate and allow unemployment to come down very low. In the past, central bank governors — in this country and others — might have stepped on the brakes much earlier.
I think Greenspan was pragmatic in letting the economy run. We’ve had very high rates of growth, very low unemployment and still very low inflation. I think he has been very pragmatic in the way he has conducted monetary policy, and we have this unique combination of low interest rates, low inflation and low unemployment and a very robust economy. That’s largely his doing.
MARGARET WARNER: And would you say his pragmatism is because he does see — at least from what we could tell from what he says — that there is a new economy at work here thanks to the digital revolution, the technological revolution?
ROBERT HORMATS: Exactly. I think that he has understood that there are many changes in the U.S. economy. Productivity is stronger, we’ve had a much more flexible workforce, a much more flexible financial market which supplies capital to underpin this very high rate of growth that we have been having.
And, by and large, it’s an economy which is operating on the basis of a new paradigm, plus a lot of international competition, which enables us to hold down inflation without the Fed having to step on the brakes as hard as it have in the past.
MARGARET WARNER: Bob Reich, do you see it that way, that he’s responded appropriately to what Bob Hormats just called the new paradigm or the new economy?
ROBERT REICH: Absolutely, Margaret. Alan Greenspan is a pragmatist, an empiricist. He did not come to office and has not been in office with a model of how the economy ought to run. He looks at the data and continues to study the data as it comes in. And that’s why he has allowed up until now interest rates to fall even though the economy is doing so well. The real question for the Open Market Committee, for Alan Greenspan — who continues to be the most powerful economist in the world, if not the most powerful person in the world economy —
MARGARET WARNER: The envy of all you economists.
ROBERT REICH: The real question is whether he will continue to allow the economy to expand at a rate that does not generate inflation but seems to be higher than anybody expected.
MARGARET WARNER: And you think he should do so?
ROBERT REICH: Certainly he do so. Again, the question is whether you try to preempt inflation before you see it. I think that in these days with this kind of flexible economy you can actually move along, allowing interest rates to be very low until you see inflation begin to accelerate. There’s no reason to try to preempt it in advance.
MARGARET WARNER: Jack Kemp, you want to get back in here?
JACK KEMP: Well, dressed as informally as I am here, coming off the ski slopes in Vail, Colorado, but I’m deeply and profoundly concerned that what Bob Hormats and Robert Reich have both said is that Alan Greenspan has in his head the rule for the conduct of monetary policy. And very frankly, and with all due respect to distinguished economists, we don’t want an economy run by one man or one person.
And my concern with the Fed is that we are on a Greenspan standard. And none of us know what it is. He said in December that if the economy continues to grow, if asset values continue to rise, if unemployment continues to fall, he’s got to raise interest rates and put on those brakes. And Robert Hormats said he was hopeful he wouldn’t do.
I don’t think there’s any reason to raise interest rates. Commodity prices are stable. The gold price is low. The dollar is strong. The economy is strong. Where is the inflation? And why do we have to just rely on one person in his head with his rule that no one knows what his legacy is going to be?
My concern is not now, my concern is what happens to the world economy and the U.S. economy after Alan Greenspan leaves. And that’s a problem. What’s his legacy?
MARGARET WARNER: So, Bob Hormats, Jack Kemp seems to be saying in a sense that Alan Greenspan has too much power.
ROBERT HORMATS: Well, I think certainly the Fed chairman has a lot of power. But I think we’re not relying on economy run by one man. He has power, but what’s really driving this economy is the dramatic change that’s taking place in the private sector in this country. We’ve had government deregulation, which has held. But the private sector has improved its productivity; it’s invested a lot of capital in new technology, particularly information technology. The workforce of the economy is much more flexible than it was before. This is an economy where the private sector is in the lead. What the Fed has done is provided the policy framework which has enabled this private sector to go ahead and create a lot of jobs, increase its productivity and invest in new technological capability which is going to propel us into higher rates of growth for quite some period of time.
MARGARET WARNER: Robert Reich, I want to go back to Greenspan and his impact. There were a lot of stories and even books that Greenspan has had an unusually close relationship with this administration. He and former Treasury Secretary Bob Rubin and current Treasury Secretary Larry Summers, by Rubin’s own account on this program, have weekly breakfasts and lunches. There have been accounts that he influenced the Clinton administration’s decision to go for deficit reduction. How do you as a former member of the administration see Greenspan’s influence on the overall economic policy that has been pursued the last seven years?
ROBERT REICH: Undoubtedly he’s had a tremendous impact right from the beginning when Lloyd Bentsen was Treasury secretary. Greenspan was saying — whispering in the administration’s ear — if you reduce the deficit, we will begin to alleviate the pressure, we again to reduce short-term interest rates. And that became well understood in the administration. The goal was to get that deficit down. Unless the deficit was actually going to go down, there would be no hope of getting the economy moving because the Fed would not reduce short-term interest rates.
MARGARET WARNER: Do you — Jack Kemp — you weren’t on the inside, but did you see that hand at work?
JACK KEMP: Well, I worry a little bit, Margaret, more than a little bit, actually. I don’t think we should have an economy or at least a Fed and White House or even Fed, White House and Congress, so inextricably linked. For instance, the president announced today or yesterday, I guess, that he was going to come out with some tax credits. I don’t want to enter the 21st century with more tax credits in the tax code. I think we need tax simplification and rate reduction.
Chairman Greenspan, I wrote him a note about this, and I’m sorry to make the public, but I think it should be right now. I wrote him a note when he criticized the Republican Congress for trying to cut marginal income tax rates. So I worry that the Fed is going to oppose tax rate reductions, support more tax credits and end up raising interest rates at the next FOMC (Open Market Committee) meeting in early February. There’s no reason for an interest rate increase and some people, even at Goldman Sachs where Bob Hormats works, have called for two or three — but two or three interest rates increases in the next FOMC meeting. I think that is a mistake. Don’t put the brakes on. Let this economy run its course.
MARGARET WARNER: All right. Bob Hormats, let me bring you back to Greenspan and his closeness with this administration. “Time” magazine put Greenspan, Rubin, and Summers on their cover as the committee to save the world and how the three marketeers prevented the global economic meltdown. I mean, do you see a close collaboration in international economic policy?
ROBERT HORMATS: Yes, and I think it’s been all to the good on the international economic side. Alan Greenspan and the U.S. Fed really for a time in 1997-1998 were central bankers to the world. We were in the midst of a major financial crisis, particularly after the meltdown in Russia. And there was a drying up of liquidity in this country and elsewhere markets were seizing up, and the Fed injected liquidity, but more importantly it injected competence, it demonstrated it was willing to take the lead, it lowered rates here, other countries lowered rates as well.
And that leadership by the Fed in conjunction with Bob Rubin and Larry Summers working with the administration was very important in preventing a further deterioration in the international financial environment. And after that, we’ve seen a major pick up in global financial markets and money beginning to return to the emerging economies, which were suffering from a major outflow of capital. So that collaboration was very, very important to stability in the global economy and to our own economy, because we depend on the global economy to a very substantial degree.
MARGARET WARNER: All right. Well, Bob Hormats, Robert Reich and Jack Kemp, thank you all three very much.