In Greenspan's Shadow

The author offers a peek at how the Fed chairman wields clout

A TERM AT THE FED

An Insider's View

By Laurence H. Meyer

HarperBusiness -- 264pp -- $26.95

For much of the late 1990s, then-Federal Reserve Governor Laurence H. Meyer was on the wrong side of the argument over the New Economy. He was skeptical of Fed Chairman Alan Greenspan's claim that the U.S. had entered an era of productivity-powered prosperity. And he wasn't shy about saying so, stressing in speeches and in testimony to Congress the limits to economic growth and the risks of faster inflation.

In his new book, A Term at the Fed: An Insider's View, Meyer displays that same sort of frankness in discussing his performance as a central-bank policymaker from 1996 to 2002. He's candid about the mistakes he made, admitting that he was late in recognizing the productivity revolution and ruing the fact that he -- and the Fed -- didn't pay more attention to the developing stock-market bubble. Meyer, who's now at the Center for Strategic & International Studies, a Washington think tank, even wonders whether he had any real influence on interest rates at the Fed, given the large sway Greenspan has at the central bank.

Promoted as a behind-the-scenes look at "the people and policies of the world's most powerful institution," this clearly written book is better at dissecting the terms of the economic debate than providing insights into Fed personalities. Indeed, in the final chapter, entitled "Alan, I hardly knew you," Meyer confesses that, despite his 5 1/2-year membership on the Fed board, he was barely acquainted with Greenspan on a personal level. In general, says Meyer, Fed governors kept to themselves, and Greenspan savored "his distance from the rest of us." While Meyer respects Greenspan as a person and a policymaker, he acknowledges that he was frustrated by the chairman's "disproportionate power" over interest rates.

Meyer never offers a comprehensive critique of Greenspan's leadership style -- a surprising shortcoming given how he felt about the chairman's predominance. But the book is peppered with insights into how Greenspan exercises his influence. We learn that prior to each meeting of the policymaking Federal Open Market Committee (FOMC), which includes regional Fed bank presidents as well as central bank governors, Greenspan would meet colleagues in Washington to lay out his views and line up their implicit support for his predetermined positions. That ensured that he was never voted down at the FOMC meeting.

Before the meeting, Greenspan would also draw up the statement on the economy and monetary policy that the committee would issue after its gathering. "The fact that the statements were prepared by the chairman, without any real input from the committee, created a degree of tension...that never diminished during my term," Meyer says. That friction continued until recently, with Greenspan agreeing in the past few months to distribute different versions of key parts of the statement beforehand for the comments of others.

Greenspan's finest hour undoubtedly came during the late 1990s, when he successfully resisted calls from Meyer and others at the Fed to raise rates and rein in the New Economy. At each meeting, the Fed chief would acknowledge the case for higher rates but suggest that an increase be put off until the FOMC's next gathering. When that meeting rolled around, Greenspan would repeat the pattern. Meyer doesn't think this was a deliberate strategy to delay, just that Greenspan was waiting for signs of inflation to appear. Yet the monetary maestro never let himself be pinned down on how fast he thought the economy could grow or how far unemployment could fall before generating inflation, further frustrating Meyer.

The author also discusses what he calls the Fed's "signal corps" -- the chairman's use of speeches, congressional testimony, and even talks with reporters to hint at upcoming rate changes. The author suggests that the approach could have forced the FOMC to accept preordained decisions, but Meyer stops short of saying that that ever occurred.

The book excels at setting out the economic challenges the Fed faced during Meyer's tenure, including the Asian financial crisis, the end of the U.S. stock-market bubble, and finally, the September 11 attacks. There are also some felicitous turns of phrase: At one point, Meyer depicts his differences with Greenspan as a debate between those, like himself, who thought the U.S. was enjoying a run of good luck -- "temporary bliss" -- and the chairman's view of the "permanent bliss" of higher productivity. And throughout, Meyer displays a refreshing sense of humor about himself. Of a profile one journalist described as "gushy," Meyer says: "Gushy? I just thought [it] captured the real essence of me!"

As a Fed policymaker, Meyer experienced some of the most exhilarating -- and frightening -- of economic times the U.S. has faced. While the book is not without flaws, it is a welcome addition to the history of the past decade.

By Rich Miller

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