Greenspan Wins High Praise for His Stewardship

It was in late 1990 when a group of the nation’s most powerful government officials gathered around a mahogany table behind closed doors to review the American economy’s health.

“The economy has not yet slipped into a recession,” declared one of the most respected of the officials and there was thus no need to mobilize the government’s premier anti-recessionary weapon--lower interest rates.

That official was Alan Greenspan, who as chairman of the Federal Reserve Board is arguably the second-most powerful man in Washington--and the most powerful when it comes to ministering to an unhealthy economy.

And, as it soon became clear, he was dead wrong: The United States had tumbled into a bruising recession three months earlier and Greenspan’s Fed had done little to stop it.

It was one of Greenspan’s rare slips.

President Clinton on Thursday renominated the politically savvy Republican to a third four-year term at the Fed’s helm. He was appointed in 1987 by President Reagan. His confirmation by the Republican-controlled Senate looks like a sure bet--Greenspan is much admired by the financial world for keeping inflation in check--even though some presidential candidates are arguing that the Fed should relax its grip on interest rates.

Altogether, Greenspan’s tenure at the Fed--which plays such an enormous role out of the spotlight in the well-being of average American households--has drawn mostly favorable reviews.

He has done well in taming the beast of inflation, most agree. But he is criticized by some for ill-timed shifts in interest rates and disappointing economic growth.

“I’d give him an A-minus,” said Robert G. Dederick, chief economist at the Northern Trust Co. in Chicago and a Greenspan supporter. “He hasn’t been perfect in his estimation of the economy but who is?”

If the fantastically complex U.S. economy has one human symbol, it must be Greenspan, an avuncular, 69-year-old New Yorker who speaks of such curious concepts as “resource utilization,” dislikes confrontation and observes the political tides with a cool, practiced eye.

When it comes to running the economy, the Fed, which operates independent of even the president, now looms as important as the White House and Congress, whose flexibility to institute government spending programs and cut taxes is severely limited by the federal budget deficit.

When the Fed detects signs of inflation, it can push up interest rates to inhibit borrowing and thus discourage economic activity. When economic slumps loom, the Fed can reduce rates. Through its management of interest rates, the Fed can influence the price of everything that is bought on credit, from new factories to dishwashers.

Greenspan’s reappointment comes as new pressures are bearing down on the Fed, underscored by the mounting success of Patrick J. Buchanan’s quest for the Republican presidential nomination. Competition from imports, job insecurity, corporate downsizing--all the anxiety-producing disruptions that Buchanan has promised to fix--do not lend themselves to a quick solution by the central bank.

“We look to the Fed when something’s wrong, just like we look to a doctor when something’s wrong,” observed Jeremy J. Siegel, a professor of finance at the University of Pennsylvania’s Wharton School.

Not that the Fed always rises to the occasion. At times in its 83-year history, the Fed did actual harm.

When U.S. banks began to topple before the Great Depression, the Fed declined to rescue them with cash. The banks toppled like dominoes, plunging the nation into trauma.

In the late 1960s, the Fed miscalculated the effects of a tax surcharge and lowered interest rates to keep the economy growing. Instead, the miscues mostly fueled inflation.

“They actually got it backward,” said John T. Woolley, a political scientist at UC Santa Barbara.

Greenspan’s critics argue that he has committed his share of bloopers.

In 1990, when Greenspan initially misread the signs of a sagging economy, the Fed lowered interest rates only when it had become too late to reverse a slump that persisted until spring in much of the country--and many months more in California and the Northeast.

More recently, some believe, Greenspan’s Fed harmed the economy in 1994 and early 1995 when it pushed up interest rates to fend off what the critics regarded as an exaggerated threat of inflation.

“In predicting the economy, Greenspan has been a disaster,” argued James K. Galbraith, an economist at the University of Texas.

Greenspan has fared better than many of his predecessors, however, whose images still seem to haunt the quiet Fed hallways.

Arthur F. Burns, a respected economist, remains most remembered as an irascible personality who is suspected of pumping up the economy in 1972 to aid in President Nixon’s reelection campaign--a policy that contributed to rising inflation for the rest of the decade.

G. William Miller, President Carter’s first nominee to chair the Fed, presided over loose money policies that sent inflation into double digits.

It took Carter’s second nominee, the autocratic, cigar-chomping, 6-foot 7-inch Paul A. Volcker to conquer inflation in the beginning of the 1980s--at the cost of a punishing national recession that helped doom Carter’s reelection bid.

Volcker handed Greenspan an economy in which much of the dirty work against inflation had already been done. This will deny Greenspan the chance to equal Volcker in stature, concludes Donald F. Kettl, a University of Wisconsin political scientist and author of “Leadership at the Fed.”

Still, Greenspan’s tenure already has encompassed a stock market crash, recession, recovery, stock market boom and Mexican peso crisis.

In the process he has won credibility for calm, cautious stewardship, which is why the administration seemed to have little choice but to nominate him for another four-year term.

“He’s had his hands full,” Kettl said. “And given the rather remarkable stability of the economy, I think he deserves high marks. . . . Based on what we’ve seen so far, Greenspan will surely rank among the top Fed chairmen.”

Trying to assess Greenspan’s performance may be even a less precise business than setting monetary policy. Nonetheless, interviews with economists and Fed scholars suggest general agreement in some key areas:

* Inflation--Greenspan’s Fed deserves credit for highlighting the goal of price stability and, to a significant degree, achieving it. Consumer inflation has run at 3% or less for five straight years and nobody expects much change in the near future.

The subdued inflation rate is especially noteworthy given the brisk pace of economic growth in 1994, a type of surge often accompanied by price jumps. At the same time, Greenspan may have benefited from lucky timing: Fed policy aside, a host of financial pressures has made it harder for firms to raise prices than it used to be.

* Jobs--The United States has created about 7.8 million payroll jobs since the current expansion began in 1991. But to the disappointment of many, that 8.1% gain is only half that of previous expansions. The lackluster record may reflect job cuts from corporate restructuring as well as some job loss to overseas competitors.

Greenspan’s detractors say that the Fed should be pushing for stronger growth through lower interest rates. Such growth, they say, would enhance job security and also spark new jobs for those who have been left out of the recovery. Greenspan’s defenders retort that his options are limited by the inflationary effects of today’s huge federal budget deficits.

* Political skill--Although Greenspan has long demonstrated an ability to cultivate those in power, Fed-watchers have been intrigued by his cordial relationship with the Democratic Clinton administration. Such skills matter, because they help the Fed resist periodic pressure to alter its interest-rate policies or to give up some of its financial regulatory responsibilities to the Treasury Department.

Although Clinton recently has called for a debate on whether the economy should be growing faster, he largely has refrained from meddling in monetary policy. “Clinton didn’t complain when Greenspan was raising interest rates in 1994,” Siegel pointed out.

* Openness--To the dismay of open-government advocates, the Fed continues to conduct key policy meetings behind closed doors. It releases summaries several weeks later but waits five years to disclose the full minutes of the meetings, contending that earlier disclosure would have a chilling effect on its internal debate.

“The Fed has historically been a very secretive institution and it still is a secretive institution,” said UC Santa Barbara’s Woolley. “But among central banks in the world, the Fed is far and away the most open.”

* Leadership--Shortly after his appointment, Greenspan faced a hair-raising crisis--a stock market crash that seemed to threaten the stability of the entire financial system. He quickly promised to provide banks and other financial institutions with needed cash, a departure from the misguided Fed policy of the 1930s, and won plaudits for his stand.

* Timing--This is the trickiest part of the job. Greenspan, more than his predecessors, has sought to anticipate economic upturns and downturns in advance and to manipulate interest rates accordingly. Done right, this approach can maintain economic growth without fueling inflation. Poor timing can trigger a recession or unleash inflation.

What happens this year may be most important of all. The Fed has begun lowering rates amid mounting evidence of a slowdown. If the effort keeps the economy headed in the right direction, Greenspan will be credited with engineering an extraordinary “soft landing”--sustained growth with low inflation.

* STOCKS SURGE: Stocks post their biggest one-day gain since 1991. D1