Treasury And The Fed Were Never This Close

The unusual and unlikely partnership of Greenspan and Summers

A few years back, at a weekly lunch attended by officials from the Treasury Dept. and the Federal Reserve, the talk turned to flaws in measuring gross domestic product. Most participants tuned out. Not Fed Chairman Alan Greenspan and then-Treasury Under Secretary Lawrence H. Summers, though. "You can't believe how enthralled they were getting into all this minutiae on national income accounts," recalls economist Alicia H. Munnell, an Assistant Treasury Secretary at the time.

That happens a lot when the Fed Chief and Treasury Secretary-designate get together, associates say. Over the years, an intimate bond has been forged between the two: They admire each other's intellect and share a love of analyzing the most obscure economic data. Indeed, they may be closer than any previous duo running the Fed and Treasury, says Munnell. "They have a terrific relationship, personally and professionally," departing Secretary Robert E. Rubin told BUSINESS WEEK. "I have no doubt that will continue."

HIGH PRAISE. On the surface, Greenspan and Summers make an odd match. The Fed chief, 73, was a late bloomer who didn't earn his doctorate (from New York University) until he was 51. Meanwhile, the 44-year-old Summers, the precocious scion of a famous line of economists, became, at 28, the youngest tenured professor in Harvard University's history. What's more, Greenspan, a former devotee of the writer Ayn Rand, is a conservative Republican who distrusts Big Government. Summers is a centrist Democrat who doesn't place blind faith in the markets.

Despite their ideological differences, they take the same empirical approach. As they grapple with economic issues, both men let the evidence--not a preconceived theoretical viewpoint--lead them to similar conclusions. That process has guided Greenspan's monetary-policy stewardship and made Summers a big fan of the Fed chief's performance. "I've heard Larry say: `Greenspan rarely gets it wrong,"' says a friend of the Treasury Secretary-designate. High praise indeed from Summers, who has no lack of appreciation for his own intellect.

The feeling is clearly mutual. Greenspan issued an unprecedented statement of support when President Clinton nominated Summers on May 12. The statement was meant to reassure Wall Street, which is nervous about Summers' lack of market experience. Still, friends of Greenspan's say Rubin's successor is one of the rare officials the Fed chairman considers "brilliant." Notes Gene B. Sperling, director of the White House National Economic Council: "The chairman appreciates Larry's intellectual firepower, and Larry holds very few people in higher regard than Alan Greenspan."

Accordingly, they influence each other. Associates say Summers helped persuade Greenspan to support tighter regulation of hedge funds, while the Fed boss has persuaded Summers that weakening the dollar is not a wise method of reducing a high trade deficit. Recently, Summers has also come around to Greenspan's view that technology is spurring a rise in productivity.

BANKING BREAKTHROUGH? One possible outcome of the friendship between Summers and Greenspan--who play tennis together regularly, too--is final passage of a banking-reform bill. With Rubin gone, some Clinton aides anticipate an end to the deadlock between the Fed and the Treasury over how to tear down Depression-era walls between the banking and securities businesses. Rubin and Greenspan have each insisted that his agency take the lead role in overseeing a deregulated industry. "Larry won't reverse course right away, but he'd be inclined to look for a compromise," predicts an Administration insider.

How long will this partnership last? Greenspan's term expires in June, 2000, and it is already being suggested privately within the Administration that the Fed chairman be nominated for a fourth term. The chief proponent, of course, is Summers. So Greenspan, who shows no interest in retiring, is likely to stay a while longer. Summers could stay on, too, but only if Vice-President Al Gore wins in 2000 and keeps him on as Treasury Secretary.

Even if Summers does leave at the end of Clinton's term, both the Fed chief and the incoming Treasury boss agree that someday, Summers could return to Washington as--what else?--Fed chairman. After all, he has been trained by the master.