Can You Blame Him?

By John Greenwald

Even as a saxophone player in a 1940s swing band, Alan Greenspan had a passion for staying in control. While some of his fellow musicians smoked marijuana or snorted stronger drugs, the future chairman of the Federal Reserve Board kept track of the band's money. "Some people used to complain that the band was smoking these funny hand-rolled cigarettes," recalls Washington lawyer Leonard Garment, another sober-sided member of the touring ensemble. "But Alan was clean as Clark Kent: he handled the books and never ran a deficit."

Yet since the U.S. Federal Reserve raised short-term interest rates on Feb. 4 and again on March 22, the man who is often called the second most powerful official in Washington has seen the world's financial markets spin far beyond his -- or anyone else's -- control. Worse yet, Greenspan, probably one of the most political of the political appointees in the job, now finds himself under assault -- and not just because some have blamed him for the markets' recent bungee jumping. Ironically, it is his almost Clintonian sense of dealmaking and compromise, often for the purpose of protecting his turf, that helps explain why so many people lately have been second-guessing the Republican appointee.

The complaints begin with the chaos that has sent global stock and bond prices reeling in recent weeks, knocking nearly 10% off the Dow Jones industrial average since its peak on Jan. 31 and placing the future of Wall Street's three-year-old bull run in serious doubt. But beneath the immediate outcry lies a more fundamental criticism of the way Greenspan has tried to keep his balance between several constituencies. According to this line of attack, Greenspan, who fiercely resisted White House pressure for lower interest rates during the Bush Administration, has sought to make an ally of Clinton in an effort to fend off those in Congress who want to encroach on the Fed's autonomy. At the same time, he has tried to satisfy the inflation hawks inside the Fed. The result, say some critics, is that his approach to fighting inflation has been too gradual. Instead of soothing the markets, the Fed's modest one-quarter-point rate increases in February and March simply fueled ) suspicions that more rate hikes were on the way. While no central bank official has publicly criticized Greenspan, one Fed watcher asserts, "I have found by talking to regional Federal Reserve Bank presidents that there is a revolt going on, with them saying that they want to make interest policy, not have the White House do it."

The financial turmoil fed through to home buyers last week as rising long- term rates pushed the average cost of 30-year, fixed-rate home mortgages to 8.47%, the highest level in 22 months. Just last October, the rate stood at 6.74%. At the same time, stock prices gave jittery investors another wild ride as the Dow average plunged nearly 84 points at the opening bell Monday before finishing up 38 points for the week on Friday.

To those who criticize him for having been too accommodating to the White House, Greenspan can say it has not always brought him peace. Indeed, the Fed had to spend much of last winter fending off a proposal by Treasury Secretary Lloyd Bentsen that would have created a superagency to regulate banks and thus usurp much of the Fed's supervisory authority. (The original plan is virtually dead.) Greenspan has also had to contend with some of Congress's most powerful members, who have long chafed at the secretive behavior of the Fed and in the past year have drafted legislation that would require the central bank to release promptly the transcripts of its rate-setting meetings.

In this context, Greenspan's close relationship with the Clinton Administration, which burst into the spotlight with his now famous appearance beside Hillary Rodham Clinton at the President's first address to a joint session of Congress in February 1993, has turned out to be useful. "Both sides need each other," says Felix Rohatyn, a partner at the investment firm Lazard Freres. "The Administration benefits from the reflected cachet of a conservative Republican like Greenspan, whose job is made easier by the deficit-reduction policies and fiscal prudence that Clinton has so far demonstrated." Besides the saxophone, both men have in common a love of policy and statistical minutiae: if Clinton can cite the number of medically uninsured workers in most of the 50 states, Greenspan is said to follow how many freight cars are loaded in Texas. Their first preinaugural conversation lasted more than four hours.

Since then, Greenspan has gone out of his way to keep the White House informed, at least in general terms, about the Fed's monetary moves. While policy differences limited contacts between Greenspan and the Bush White House, the Fed chairman met at least four times with Clinton last year and has so far held two closed-door meetings with the President in 1994. On Jan. 21, for instance, Greenspan indicated to Clinton and his top advisers that the Fed was planning a small increase in interest rates as a pre-emptive strike against inflation. While Clinton expressed an understanding of Greenspan's position, he said he hoped that raising short-term rates would not jack up long-term rates as well -- and that proved to be exactly what happened. A second Clinton-Greenspan meeting on March 18 embarrassed both sides when the Fed chairman abruptly canceled a scheduled speech to attend the session and word of it leaked out. News of the meeting, during which Greenspan again explained his thinking to Clinton in general terms, helped rattle the markets when the Fed boosted interest rates on March 22. "Greenspan might have warned us that he'd have to cancel a public appearance in order to come to the White House," says an Administration official. "If he had, we could have avoided much of the overheated reaction from the markets and the press."

Despite such miffed feelings, Greenspan and the Clinton camp have remained on friendly terms. Speaking at an electronic town hall in Charlotte, North Carolina, last week, Clinton blamed the volatile financial markets on what he called "an overreaction to what the Federal Reserve did." And Greenspan, who last year praised Clinton's deficit-reduction policies for improving the country's long-term economic outlook, last week told a San Francisco audience that the outlook remains strong. "Most people think that Greenspan is generally in the same mind-set as we are," says a member of the Clinton economic team. "There's a basic agreement on principles."

Yet that hardly kept Greenspan from having to marshal his political cunning to defend himself against the Treasury's bid for a banking superagency. He deployed a full-time lobbyist, dropped in on members of Congress to attack the plan, and dispatched senior Fed officials to spread the word among important bankers that the Treasury plan was ill-advised. Among other things, the emissaries reminded bankers that the Fed had handed out loans to keep floundering financial institutions afloat in the late 1980s. And the banks needed no reminders that the Fed can deny them permission for acquisitions and ( mergers. Meanwhile, the Treasury was lobbying too. "It was a basic conflict of interest," says a Washington lawyer who witnessed the Fed campaign. "But it had the desired impact."

Greenspan has used subtler tactics to parry thrusts by Congressmen like Henry Gonzalez of Texas, who chairs the House Banking Committee. First, Clinton dampened support for the Texan's proposals for more Fed openness by sending him a letter last September opposing any fundamental changes in the Federal Reserve Act. Then Greenspan sought to outflank Gonzalez in February and March by taking the unprecedented step of announcing the rate hikes the same day the Fed decided to enact them.

Such adroitness comes naturally to a Fed chairman who has been in political training all his life and has managed to serve an extraordinary number of masters. A former student of the Juilliard school of music and a disciple of libertarian thinker Ayn Rand, Greenspan first entered politics as a domestic adviser to Richard Nixon's 1968 campaign and rose to hold key economic posts under five Presidents. He suffered his greatest embarrassment in 1985 when, as a private economist, Greenspan wrote letters to regulators and Congress endorsing Charles Keating and his Lincoln savings and loan. Lincoln subsequently collapsed at a cost to taxpayers of $2.6 billion, and Keating landed in jail.

Greenspan succeeded Paul Volcker as Fed chairman in 1987. Experts give him high marks for providing ample credit to the financial community and thereby helping overcome disasters ranging from the crash of '87 to the near collapse of the banking industry when it was saddled in the late 1980s with bad real estate loans. Notwithstanding his bookish appearance, Greenspan has long been a fixture on the Washington cocktail circuit, where he has squired such high- profile and politically connected companions as ABC newswoman Barbara Walters and NBC correspondent Andrea Mitchell.

Kevin Phillips, author and former Republican political theorist, sees Greenspan as "sort of the financial equivalent of an operative instead of a statesman. He may know all the players, but he has a strain of intertwined parochialisms -- Republican strategist; Ayn Rand devotee; Wall Street forecaster; writer of letters for special pleaders like Keating. It isn't the background of a great economic statesman. It's the profile of an Austro- Hungarian court figure."

Greenspan will continue to have more influence over interest rates than anyone else, at least until his term expires in March 1996. For now, Fed watchers expect the board to avoid any more rate increases until May at the earliest, to give the jittery markets a chance to calm down. The former jazz player who chairs the Fed hardly wants to provoke investors into another round of blowing their cool.

CHART: NOT AVAILABLE

CREDIT: CREDIT: From a telephone poll of 800 Adult Americans taken for TIME/ CNN on April 6-7 by Yankelovich Partners Inc. Sampling error is plus or minus 3-5% Not Sures omitted

CAPTION: How would you describe economic conditions in the country today?

Has the recession ended in the area where you live?

With reporting by Bernard Baumohl/New York and James Carney, Suneel Ratan and Adam Zagorin/Washington