Stock Talk Bob Woodward on Greenspan
TMF Interview With Author and Editor Bob Woodward

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With David Gardner and Tom Gardner
January 18, 2001

Immortalized in the political/journalistic thriller flick "All the President's Men" -- based, of course, on his co-authored book by the same name -- Washington Post Assistant Managing Editor Bob Woodward is widely respected for his reportorial acumen.

In his new book Maestro: Greenspan's Fed and the American Boom, Woodward takes on a man who's served many presidents: Federal Reserve Chairman Alan Greenspan. David and Tom Gardner turned the microphone on Woodward last month for the Motley Fool Radio Show. Here is an edited transcript of that conversation, broadcast in two parts on Dec. 9 and 16. 

TMF:
Why did you decide to write about Alan Greenspan?

Woodward: I approached this by asking the question "What is the most important thing to have happened in the last 10 years?" If you look at that broadly or even narrowly, the answer is the economic boom, so as a reporter I set out to attempt to answer the questions, "Why do we have the boom? Who is responsible? How can you tell the story of the government's role in all of this?"

I found that many of the significant roads led to Greenspan -- that he is kind of the controller, as much as anyone, of the economic conditions we live in. When you dig behind the scenes, you find that he is often the main player coming up with the strategy, the theory, or the idea -- or even cutting a deal with people in congress.

TMF: Who deserves more credit for the economic success: Greenspan or Clinton?

Woodward: Well, Greenspan's been there 13 years and he plays this role where not only is he adjusting interest rates... As you know, the Fed only controls the short-term interest rate -- it can have brutal leverage in the financial markets and set the credit conditions, and in setting the credit conditions, it determines what kind of economic weather we're going to have.

Obviously you need a good strong economy ... but in terms of the guy steering all of these factors, Greenspan gets much more credit based on the evidence than Clinton does, though Clinton gets more credit than a lot of people would give him.

TMF: Bob, in the book you write about Greenspan making the intellectual transition from understanding the old economy to really getting a good grasp on the new economy. Can you talk a little bit about how the Fed Chairman got a head start in understanding the high-tech economy?

Woodward: Yes, that's a really important question. First of all, Greenspan is now 74 years old. You and I should have as open a mind as he has at his age. He's somebody who's empirical. He is not driven by theory, and being the kind of classic, conservative, anti-inflation Republican economist [that he is], he in 1993 starting looking at the data about productivity, and it showed the productivity was going down in some sectors and it just didn't seem logical to him at all -- productivity being output per worker, per hour -- and then over the next three years realized that productivity was going up significantly.

It meant that with the old economic models, when you give low unemployment, the old economic models would say that you have to raise interest rates and cool down the economy. He stayed his hand in that at the Federal Reserve and in critical periods, '96-''97-'98, let the new economy incubate and grow without coming in and saying, "My god, we've got 4%, 3.9% unemployment, we have to raise interest rates.

TMF: Bob, Greenspan has been criticized over the years for being hyper-sensitive to inflation, and this past year alone we've seen a number of interest rate hikes. Do you think history will say that Greenspan overreacted to the threat of inflation?

Woodward: No, not at all. Obviously the job of the Federal Reserve is to keep inflation under control: It's kind of rule one, and there's good reason. If you go back to what happened in the '70s when inflation got out of control, it really hurt the economy, drove millions of people out of work, [and] was a giant setback for everyone who lived in the country at the time when you really look at it historically, so that's his job: To fight inflation.

What's interesting probably, is if you ask the question, "What's the most important thing Greenspan's done?" In '94-'95, it was executing that so-called soft landing, meaning he raised interest rates before inflation was showing up because there was this at least year-long lag before interest rate changes have an impact on the real economy and what he was doing was unprecedented, untested -- he really took a chance.

It's a very emotional story, and at one point, he believed it was kind of like jumping out of a 60-story building hoping you land on your feet. You look at Greenspan and you say "This isn't the kind of guy who's going to be jumping out of 60-story buildings and taking those kinds of chances," but he did -- and it worked magnificently. That, right now in the year 2000, is what he is doing with the interest rate increases last year and the first part of this year. [The Fed has since cut interest rates.]

Again, preemptive efforts to cool down the economy, slow it down, but not so much that we go into a recession. In fact it is a recession-avoiding strategy that possibly might work, and his speech this week -- which, at least initially, sent the stock market soaring through the roof -- was not only a hint that maybe we're going to go into a time in the somewhat near future where the interest rate, the short term interest rate, will be lowered.

I read his speech very carefully... [to try to] untangle the gobbledy-gook rhetoric which he often talks in. He essentially said we have an incredibly strong economy, that there is an adherent stability in it, productivity growth. He said it would not be inconsistent to think that it will go on into the years ahead. Of course, that productivity growth is the engine of the economy we have now. He said the banks are strong, modernized, and again, you see Greenspan referring in this speech I believe to the November Senior Loan Officer Opinion Survey. Now, have either of you read the November Senior Loan Officer Opinion Survey?

TMF: You know, it's on my bedside table.

Woodward: I'll buy you dinner if you know of anyone who did or even anyone who knows it exists, but again he is reading, sampling everything.

TMF: He's a geek. He is a numbers geek.

Woodward: He is a numbers geek, but he then looks at the numbers -- and he is not a prisoner of old ways of doing things which is, of course, why he has been able to adapt to the new economic situations we have and exploit them.

TMF: Greenspan's been concerned in the past with overvaluations in the stock market. In 1996, he used the now-famous phrase "irrational exuberance." How do you think this guy measures what is rational and what is not rational?

Woodward: He measures it by what has occurred historically, and in the book I talked in great detail about exactly what he is assessing. There is a firm called I/B/E/S that assesses what sort of growth businesses expect in the future and I noticed in his speech this week he referred to that. He is somebody who is continually sifting the data and when you look at it, the run up on the stock market was almost off the charts. He, a number of years ago, and Bob Rubin when he was Treasury Secretary, were profoundly worried about it and Greenspan gave his famous irrational exuberance speech.

Of course, the stock market kept going up. I think in his heart, what his goal is, what the Fed's goal is as you know, is sustainable economic growth. In other words, something in the two, three, four percent range, something that can go on year after year after year. You don't want these astronomical highs because then you are going to get lows. The same way with the stock market. What you want is rational incremental growth rather than the stock market doubling in two years or something like that, which has occurred in the last decade.

TMF: Bob, in your book you write about the extensive networking that Greenspan does in terms of the stock market, in terms of Wall Street. Who are some of the people that Greenspan consults on a regular basis?

Woodward: Well, I'll give examples. He talks to somebody like Jack Welch, the CEO of General Electric (NYSE: GE), who apparently is maybe going to leave next year -- this again goes back years when Welsh had one of the best inventory control systems in American business  -- and Greenspan would personally call him up and say, "How are light bulbs selling, how are jet engines selling?" as an index to what's going on in the economy.

As I said, he has this network and then he will read. I suspect there are statistical documents published by the Bureau of Labor Statistics and the Commerce Department, that no one else reads but Greenspan.

TMF: Okay, now let's pick up with the public view of Greenspan because I think it's primarily limited to select images of the Fed Chief testifying on the Hill or going in and out of the Fed with a briefcase in his hand. Does Greenspan have a less serious side or is the public persona a lot like the private persona?

Woodward: Well, he has a sense of humor. He, a number of years ago married Andrea Mitchell, the NBC television correspondent, and they lived together for years. Andrea, I think, has really kind of opened him up and broadened his horizons. They love music. He's a serious musician. Someone told me once he was going over to Switzerland or over to Europe for some event -- because again, part of his network is an international network and he goes to these conferences all around the world regularly -- and he was bitterly complaining that he had to fly on an airline that only had one classical music channel. He prefers Swissair, which has three classical music channels.

TMF: Bob, you talk in the book extensively about Greenspan's relationship with President Clinton, but I was most intrigued by a quote that's actually on the back cover of the book. It's a quote from former President Bush and the quote is, referring to Greenspan: "I reappointed him and he disappointed me." What was former President Bush's take on Alan Greenspan, and what do you think that may say about Greenspan's relationship with [President-Elect] George W. Bush?

Woodward: It's a very important question. First of all, the relationship with father Bush as president was good on a personal level because Greenspan and father Bush are friends going back to the Reagan administration. In fact, the first time Greenspan was sworn in as Federal Reserve Chairman in '87, it was George Bush, Vice President, who swore him in. But Bush and his economic advisors during the Bush presidency pressured Greenspan to lower interest rates more and faster. Greenspan resisted this political pressure.

If you look at the chart on what happened to the short-term interest rates, they went down from about 10% to 3% in the Bush presidency. That is a monumental drop, but Bush wanted more. He felt that if Greenspan had done more, faster, the recovery after the '90-'91 recession would have been more visible to people. Bush has actually said publicly that he believes he was not reelected because of Greenspan not doing this. I think if you look at the economics of it, that is an unfounded criticism of what Greenspan did and if you look at the politics of it and go back to the '92 election, George Bush just did not convey to the American public that he knew the economic pain people had experienced or were experiencing.

Of course, Bill Clinton came in and ran on a pledge essentially to say "I'm going to use the power of the presidency to fix the economy," which you have to give Clinton credit for -- he basically did.

TMF: Any insight into what this may mean for Greenspan's relationship with George W. Bush?

Woodward: As I outlined in the book in some detail, one of Greenspan's best friends is [Vice President-elect] Dick Cheney. They met in the Ford White House when Cheney was Secretary of Defense during the Gulf War a decade ago, and Cheney essentially gave top-secret briefings to Greenspan about the war, how long it might go on, what the likely outcome was going to be -- because Greenspan was petrified, and rightly so, about the impact on oil prices which of course have this ripple effect in the American economy. I think that Cheney would, in his way, counsel that it would be very important for a new Bush Administration to have the kind of alliance relationship with Greenspan that Clinton had.