Rate Cut in Perspective

JIM LEHRER:

Now some historical perspective on what the Federal Reserve did today from NewsHour regulars, presidential historians Doris Kearns Goodwin and Michael Beschloss; plus, Ranjit Dighe, a professor of American economic history at the State University of New York in Oswego.

Michael, has the Federal Reserve ever had the power, real or imagined, that it seems to have in this situation today?

MICHAEL BESCHLOSS:

Not the power that it seems to have. And one reason for that is Alan Greenspan's success. I mean a lot of this is because the focus has been so much on his role in helping to bring about this wonderful economy of the last ten years. It sort of reminds me of the old saying of, "Mr. Dooley, in America, we build our arches for our leaders out of brick so that, once they go through, we have something to throw at them at the other end." And I think there's a little bit of a sense that this is sort of a miracle worker, and so, therefore, he can be blamed if it doesn't work. Throughout most of the history of the Federal Reserve, which goes back to 1913, people have not thought that. Presidents have not depended on a Federal Reserve chairman to fix a problem like this.

JIM LEHRER:

Doris, what would you add to that?

DORIS KEARNS GOODWIN:

Well, I think Michael's right about Greenspan's personal charm, aura, mystique or whatever it is — having been there through four presidents, being more accessible as a person than most Fed chairmen in the past have. When we had Volcker, people used to have pictures of him smoking his cigar, he didn't have press conferences. There was a sense that you couldn't quite know where these characters were coming from, and Greenspan has been very much of a figure. Add to that the 50 percent of the people, as we just heard, who are now invested in the stock market. So what used to be perhaps a Wall Street moment of intense concern, waiting for what the Fed was going to do, you now have people sitting in their living rooms and parlors… I guess parlor's on old-fashioned word — sitting in their living rooms anyway, waiting for that news. And then you've got America's place in the world now where our economy touches off so many other economies, which wouldn't have been true in the '20s. The '20s is probably the only other time when you can imagine, if you were sitting there when the stock market was crumbling, you were wondering what the Fed should have done and what it was going to do. But there weren't as many people at that time involved. So this is probably a unique situation.

JIM LEHRER:

Do you agree, Professor Dighe, a unique situation for the Federal Reserve?

RANJIT DIGHE:

Yes and no. I think the Fed certainly deserves a lot of credit for the strength of the economy right now. But we've had 20 years of mostly an expanding economy. And the Fed deserves some credit for that, certainly for lowering inflation. But a lot of it really just boils down to the fundamentals of the economy. And I think a lot of the reason people are looking so much at the Fed is, as Doris said, so many people own stock right now. But the Fed is really not out there to protect stock investors so much as it is to keep the economy on an even keel and to keep inflation low. And it seems to have been doing a fairly good job of that.

JIM LEHRER:

But whether they have done a good job or a bad job, how did the situation arise where the whole world is sitting here today at 2:15 Eastern Time, this afternoon, and hanging on what this group of five people, led by Alan Greenspan, was going to do — and the whole inference was, my goodness, that they did one thing or another, it could not only affect the stock market, it could affect the economy of the United States, if not the world. How did we get into this situation?

RANJIT DIGHE:

I think in a way, this is a measure of our success, just that we're in a way spoiled because the economy has been so strong and been in a ten-year expansion. That the idea that we might be sliding into a recession or might even already be in a recession is just something that spooks a lot of people, and so they're looking for the Fed to get us out of this. And certainly with so many more people owning stock, there is a tendency for people to commit the fallacy of thinking that the stock market is the economy and that somehow the Fed can make everything well again by cutting interest rates by some magic number. It's really not quite that simple.

JIM LEHRER:

Sure. But Michael, they look at the Fed because there is no comparable action that a president of the United States could have done at 2:15 this afternoon that would have roused people, is there?

MICHAEL BESCHLOSS:

That's exactly right. And you know, you look at areas in which our political system does not work well. And one of them is that when we have a presidential campaign, for instance, there is always an assumption that the boom economy or the bad economy is the result of the president who's been serving for the last four years. And when it's a wonderful economy, a president is absolutely delighted to take credit. And that's something that really is not right. For instance, from 1945, the end of World War II, up to the early '70s, every single president from Truman through Lyndon Johnson was thrilled to say, I am responsible for this economy, because the economies were wonderful. Our competitors in the world had been ruined by World War II. Then in the 1970s, the period of stagflation when our old enemies like Germany and Japan were beginning to compete, then we began to have a little bit of a difficult problem, and that's when you heard people like Gerald Ford and Jimmy Carter saying, well, you know, a president can't really do that much. Carter rightly said that many of the problems he had to deal with in 1980 were beyond his control, generated by an oil price increase.

JIM LEHRER:

Yeah. And, Doris, it was pointed out in one of the wire stories this afternoon that, as a candidate for president, when George W. Bush was asked in one of the presidential debates what he would do at a time of financial crisis, he said he would call Alan Greenspan.

DORIS KEARNS GOODWIN:

Right.

JIM LEHRER:

I mean, that's about all there is for a president to do in a situation like this, correct?

DORIS KEARNS GOODWIN:

I think that's true. I mean I agree with what was just said. What's also interesting is that Congress is also waiting for what the Fed chairman is going to do and the Constitution actually gave to Congress the right to coin money to value and figure out what its value would be. They in turn set up the Fed at the turn of the century because there was this feeling at the turn of the century that you needed experts to do a lot of things that politicians couldn't do. And they've created a very unusual agency in the whole Fed system. It's exempt from normal government appropriations, it doesn't have to wait for Congress because it has its own money that it continues to work around. It's exempt from GAO looking at its monetary situation. It's even exempt from part of the federal… the Freedom of Information Act.

And so it's got this mystery to it, and I think in a certain sense, however, the buck doesn't stop on them even though sometimes the presidents like to blame them. And there are times when they do, during the recession of 1992 and 1993, Democrats were arguing for changing the reform system, for letting the president actually appoint the presidents of the regional banks, do something. Only then when Alan Greenspan came around and endorsed Clinton's economic stimulus package, understanding that growth matters to presidents — that's always the tension. Growth is what the presidents care about, whereas keeping the inflation under control is what the Fed cares about. But only then, it was said, "his switch in time saved 19," a memory of the old stitch in time saves nine when the Supreme Court followed the returns and finally gave Roosevelt what he wanted with a Supreme Court decision.

JIM LEHRER:

Well, today Ari Fleischer, the president's spokesman was asked, was the White House or the president going to have any comment on what the Federal Reserve did today and he said, "no." And Professor Dighe, that's how it's supposed to work, right?

RANJIT DIGHE:

Well, yes and no. In reality, there is quite a bit of contact between presidents and Federal Reserve chairs. If you look at the history of Presidents and Federal Reserve chairs, there is often quite a bit of contact. And presidents have sometimes persuaded Fed chairs to go slow or to sometimes to shift course. One infamous example of that was that, in 1972, it was widely believed that the Federal Reserve chair, Arthur Burns, and President Richard Nixon had an overly cozy relationship and that Nixon was able to persuade Burns to persuade an overly expansionary monetary policy that helped Nixon coast to re-election but also helped to produce an inflation a couple of years down the road.

DORIS KEARNS GOODWIN:

You know, Jim, —

JIM LEHRER:

Yeah. Go ahead, Doris.

DORIS KEARNS GOODWIN:

There's a funny story that when Kennedy was running for the presidency and he was trying to figure out the difference between monetary and fiscal policy, he said, "I know what monetary policy is, that's the Fed because Martin of the Federal Reserve starts with an M. M equals Martin, equals monetary policy." So that's not a very cozy relationship. That's trying to figure out what's going on.

JIM LEHRER:

But, Michael, the separation or the isolation of this strange organization, the Federal Reserve, it was done very intentionally, was it not?

MICHAEL BESCHLOSS:

It was intentional because you wanted to protect if from political short-term interest. That's why these terms are so long, both the chairman and also the governors. And it really also goes back to something that's at the beginning of the republic because the Bank of the United States, 1790, which George Washington signed the charter of, the idea even then was of Alexander Hamilton, you've got a small group that's going to regulate credit in the national interest. Even then, Thomas Jefferson thought, you know, you don't want this little elite manipulating the economy of the country. He thought it was unconstitutional. Finally, the Bank of the United States, the second one, was abolished under Andrew Jackson but you even see that tension today. Some people are delighted to have this group because they think that it's a wonderful thing to have a small group of experts that can fine tune the economy in all of our interests, and you also see people in various parts of the country who are worried about that kind of thing.

JIM LEHRER:

Professor Dighe, your reading of history here, how much of it do you think will carry on after Alan Greenspan leaves? Is it an institutional power — an institutional influence now, or is it a Greenspan institutional influence?

RANJIT DIGHE:

I think it really comes down to results. The economy over the last 20 years has been quite good. And the Fed certainly receives and deserves quite a bit of credit for that. If the economy continues to do well, then I think the Fed is going to be in pretty good standing. And if things go sour, then naturally the Fed is going to be under great criticism. That's the way it always is. In the late 1970s and early 1980s, the Fed was under tremendous pressure because first you had very high inflation, even before the oil shock of 1979, and after that, you had 10 percent unemployment in Paul Volcker's, that is the Fed chair appointed in 1979's war on inflation which drove unemployment to double digit levels in 1982.

JIM LEHRER:

So if this works out, great – then it's the Greenspan method and the Greenspan method will continue. If it doesn't, good-bye Greenspan method, is that what you're saying?

RANJIT DIGHE:

I think it's very much like that. In a very stable economy, someone is naturally going to get the credit for it. And with fiscal policy; that is deliberate changes in the size of the government budget deficit in order to stimulate the economy, no longer being quite a commonly exercised option, it's really gone to the Fed. And monetary policy has reigned supreme. So people are naturally crediting the Fed with a lot to do with the state of the economy.

JIM LEHRER:

Okay. Well, we'll see what happens. Thank you all three very much.