WASHINGTON -- Alan Greenspan, the revered chairman of the Federal Reserve Board who once was a highly partisan Republican, takes the non-political nature of his office seriously enough not to choose sides in the presidential long count. But serious Fed-watchers believe he is secretly rooting for Al Gore against George W. Bush -- a preference with deep implications for the real economy.
The warmth of Greenspan's eight-year partnership with the Clinton administration is matched by his frosty relationship with the Bush family. The next president will name four of the Federal Reserve's seven governors, and a Bush-appointed board imperils Greenspan's mastery. As a superb Washington political chess player, the chairman is well aware of the danger posed by a Bush victory.
All the more reason, then, that Greenspan finessed last week's meeting of the Federal Open Market Committee (FOMC). Citing dubious inflationary pressures, the central bank's policymaking body maintained its "bias" for tightening money when capital markets actually need lower interest rates. But Wall Street whispered that Greenspan was behind the curve, hinting that the chairman has no clothes. The election stalemate is difficult for him to handle.
Greenspan proved so politically maladroit as an economic adviser in Richard M. Nixon's 1968 presidential campaign that he was barred from halls of power until Nixon fell and he became chairman of President Gerald Ford's Council of Economic Advisers. Over three decades, Greenspan has become a political grandmaster who was first appointed Fed chairman by Ronald Reagan and named to a fourth term by Bill Clinton. He has few critics and hardly any enemies.
With one big exception. High officials in President George Bush's administration still rage that Clinton was elected in 1992 because of Greenspan's tight money policy at the Fed. Intended or otherwise, revenge could be exercised by the son. Even though George W. Bush's economic adviser Lawrence Lindsey is Greenspan's friend and former colleague at the Fed, the new Republican president would be likely to name four new governors at the central bank not nearly so docile as Greenspan's current associates.
Greenspan remembers how he attained power 13 years ago. In 1986, Paul Volcker's prestige as Fed chairman then approached Greenspan's today but not his control over the Board of Governors. In 1986, a largely Reagan-appointed board secretly out-voted Jimmy Carter-appointee Volcker, 4-to-3, to lower interest rates (then tried to cover it up with a public unanimous vote a week later, a deception revealed in this column). Volcker's authority was shredded, and Reagan replaced him with Greenspan in 1987. Greenspan does not relish a similar undermining.
Given how critical the Gore-Bush recount may be to his future, Greenspan is sitting tight with Fed policy. But even his admirers raise eyebrows over the FOMC's justification for keeping its anti-inflation bias because "the increase of energy prices still harbors the possibility of raising inflation expectations." No serious economist believes that, particularly with a likely drop in oil prices ahead.
For the past month, the sickly corporate bond market has signaled to financiers the prospect of a painful "hard landing" (a recession) from prosperity's heights instead of the comfortable "soft landing" (diminished growth) sought by Greenspan's tightened money. The FOMC's puzzling talk about inflationary expectations only deepened the gathering gloom in Wall Street.
The growing consensus is that the economy cries out for new capital formation, and that requires help on both monetary and fiscal fronts. In monetary policy, an interest-rate cut is needed from the Fed. In fiscal policy, the relatively small tax cut package containing important pension reforms is needed from the lame-duck session of Congress beginning Dec. 5 rather than waiting for the uncertainty of the 2001 session. Few dare utter the word, but the economy's worsening problem is deflation.
In late 1996, supply-side advocate Jude Wanniski wrote his then friend Alan Greenspan to congratulate him on his marriage and to wryly express the hope that the falling price of gold signaling a coming deflation would not spoil his honeymoon. The current deflationary gold price is $265 an ounce, representing a $35 drop since Jan. 1, 2000. That promises to be more dangerous for the country than threats by future Fed governors to the chairman's domination or a phantom oil inflation.