How is this for quotable clarity: "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"
That was Alan Greenspan, the Chairman of the Federal Reserve Board, as I heard him speak at a dinner of the American Enterprise Institute on December 5, 1996. His remark moved the stock market in Tokyo downward. American Fed watchers parsed the turn of phrase, but largely shrugged it off. Three years later, the dot-com bubble spectacularly burst and Greenspan's comment was resurrected.
As a correspondent for two business news networks (CNN and Bloomberg), I had to listen to almost every public utterance of Chairman Greenspan and his successor, Ben Bernanke. In 1978, an act of Congress instructed the Federal Reserve Board to report to Congress twice a year on its policies, and set forth twin goals of stable prices and maximum employment. And so the chairman came to Capitol Hill every six months to testify before the financial services committees of both houses.
I sat through his reading the same prepared testimony to both and then he took questions at length. Greenspan's goal, on the Hill and in his occasional speeches, was to say nothing that would move the markets, so he exercised extreme caution.
"If I turn out to be particularly clear," he once quipped, "you've probably misunderstood what I've said."
And when the Fed raised or reduced interest rates, it did so by quietly buying or selling government securities, and leaving it to the bond market to discern what was happening. As the country slipped into occasional recession, or inflation threatened, Fed officials came to feel they had more explaining to do. A page of written explanation was released following the meeting every six weeks of the policy-making committee of board members and regional bank presidents.
It was my assignment to rush to a microphone to summarize those statements after a breathless anchor built suspense leading up to the release time at approximately 2:15 p.m. After the crash of 2008, the Federal Reserve became an ever-greater center of attention. By then, the chairman, appointed by President George W. Bush two years earlier to succeed Greenspan, was Ben Bernanke.
Chairman Bernanke, Treasury Secretary Henry Paulson, and the president of the New York Fed, Tim Geithner, were suddenly confronted with the looming collapse of the nation's banking system. Congress was asked to pass an emergency bank bailout worth $700 billion. The House refused. The stock market plunged. The Senate passed the bill and I watched the House reverse itself and follow suit. It was one month before election day 2008, when the voters chose Barack Obama as their next president.
Days after taking office, Obama pressed Congress for an economic stimulus to make up for some of the 2 trillion-dollar hit the economy took from the plunge in consumer and business spending. The Congressional Budget Office advised Congress that the most benefit would come from putting money in the hands of Americans who would quickly spend it, notably the unemployed and public employees facing layoffs, and putting construction workers back to work fixing dilapidated roads and bridges. Tax rebates, judging from past experience, might largely be used by recipients to pay down debt.
After much pulling and hauling, Congress passed a stimulus, smaller than originally requested, and more than one-third of the money went to tax breaks. As I went to the Labor Department for its monthly reports, layoffs continued in the construction industry and the frustrated makers of construction machinery, as well as manufacturing and retail trade. Automakers, who got money from the Bush bailout, were guided into structured bankruptcy by Obama appointees.
The bailout bill also authorized the appointment of an oversight committee, its members to be appointed by the leaders of Congress. Democratic leader Harry Reid chose its chairman, Harvard Professor Elizabeth Warren. I watched the hearings from start to finish, conducted by Warren in a no-nonsense fashion. She particularly faulted the inadequate effort to keep families facing foreclosure from losing their homes with loan modifications -- and roasted Tim Geithner, who was Treasury Secretary, for the failure.
Alan Greenspan had reacted to concerns about a bubble in house prices in 2005 by conceding that there might be "froth" in some local markets. Never mind that the head of the agency that insured bank deposits was warning her colleagues that the banks were playing fast and loose with depositors' money. Though he was the regulator of bank holding companies, with his auditors all over Wall Street, Greenspan was compelled to admit to Congress that his lifelong belief that markets were self-regulating, that banks were capable of protecting their own shareholders, was wrong, and he reacted to the crash with "shocked disbelief."
And I heard Bernanke explain month after month that the Fed was cutting interest rates to zero and essentially printing money to buy government bonds, while Congress had done nothing much since the initial stimulus to boost the economy, such as investing in infrastructure. In essence, his unelected outfit was doing what it could to fill the gap created by our elected representatives.
Congress has failed for a dozen years to pass a highway construction bill. When it returned from its Memorial Day recess, it found that two lanes of the Arlington Memorial Bridge that brings many of the members from suburban Virginia, including from Reagan National Airport, had to be closed for emergency repairs, and buses are being banned from the bridge lest one plunge into the Potomac.
And as to the Fed's harping on those idle construction workers, some in Congress have another proposal in mind: repeal the full-employment part of the Fed's mandate, and just let it worry only about inflation. If they succeed, in the next downturn, a do-nothing Congress will be joined by a hamstrung Fed unable to act as a monetary fire brigade.
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