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　　budget, so tough cuts could be presented to incoming cabinet members as a fait accompli. Stockman was a brilliant, hungry thirty-four-year-old congressman from rural Michigan who relished being the point man for what came to be called the Reagan Revolution. In speeches Reagan had compared downsizing the government to applying fatherly discipline: "You know ,we can lecture our children about extravagance until we run out of breath. Or we can cure their extravagance by simply reducing their allowance." In Stockman&aposs version this philosophy had a fiercer name: it was called "starving the beast."

　　I worked closely with Stockman during the transition as he fashioned a budget that was tough as nails. And I was there the day shortly bore the inauguration when he presented it to Reagan. The president said, "Just tell me, David. Do we treat everyone the same? You have to cut everybody equally nastily." Stockman assured him he had, and Reagan gave his okay.

　　The Economic Policy Board found itself called into action more quickly than anyone expected. The cornerstone of the Reagan tax cuts was a bill that had been proposed by Congressman Jack Kemp and Senator William Roth. It called for a dramatic three-year, 30 percent rollback of taxes on both businesses and individuals, and was designed to jolt the economy out of its slump, which was now entering its second year. I believed that if spending was restrained as much as Reagan proposed, and as long as the Federal Reserve continued to enforce strict control of the money supply, the plan was credible, though it would be a hard sell. That was the consensus of the rest of the economic board as well.

　　But Stockman and Don Regan, the incoming treasury secretary, were having doubts. They were leery of the growing federal dicit, already more than $50 billion a year, and they began quietly telling the president he ought to hold off on any tax cuts. Instead, they wanted him to try getting Congress to cut spending first, then see whether the resulting savings would allow for tax reductions.

　　Whenever this talk of postponement would get intense, George Shultz would summon the economics advisory board to Washington. This happened five or six times during Reagan&aposs first year. We&aposd meet in the Roosevelt Room from 9:00 a.m. to 11:00 a.m. and compare our assessments of the economic outlook. Promptly at 11:00, the door would open, and in would come Reagan. Our group reported directly to him. And we&aposd tell him, "Under no circumstances should you delay the tax cut." He&aposd smile and joke; Shultz and Friedman and others were old friends of his. Regan and Stockman, who were permitted to attend the meetings but were not allowed to take seats at the conference table or to vote, would sit along the wall and smolder. Presently the session would end and Reagan would leave, fortified in his resolve to press for his tax cuts. Ultimately, of course, Congress approved a version of his economic plan. But since Congress shied away from the necessary restraints on spending, the dicit remained a huge and growing problem.

　　I played a small role in another presidential decision that first year: not to meddle with the Fed. Reagan was being urged to do so by many people in both parties, including some of his top aides. With double-digit interest rates now entering their third year, people wanted the Fed to expand money supply growth. Not that Reagan could command the chairman of the Fed to do this. But, the theory went, if he were to criticize the Fed publicly, Volcker might feel obliged to ease up.

　　Whenever the question arose, I would tell the president, "Don&apost pressure the Fed." For one thing, Volcker&aposs policy seemed right—inflation did seem to be slowly coming under control. For another thing, open disagreement between the White House and the Fed could only shake investors&apos confidence, slowing the recovery.

　　Volcker didn&apost make things easy for the new president. The two men had never met, and a few weeks after taking office, Reagan wanted to get acquainted. In order to avoid the appearance of summoning the Fed chairman to the White House, he asked if he could come see Volcker at the Fed—only to have Volcker send back word that such a visit would be "inappropriate." I was perplexed: I did not see how a visit by the president could compromise the Fed&aposs independence.

　　Nevertheless, Reagan persisted, and finally Volcker allowed that he would be willing to meet at the Treasury Department. The president&aposs opening line at their lunch in Don Regan&aposs office became part of the Reagan legend. He said mildly to Volcker, "I&aposm curious. People are asking why we need a Fed at all." I am told Volcker&aposs jaw dropped; he had to regroup bore coming back with a persuasive dense of the institution. This evidently satisfied Reagan, who went back to being his amiable self. He had communicated that the Federal Reserve Act was subject to change. The two men cooperated quietly from then on. Reagan gave Volcker the political cover he needed; no matter how much people complained, the president made it his practice never to criticize the Fed. And though Volcker was a Democrat, when his term ended in 1983, Reagan reappointed him.

　　In late 1981, Reagan asked me to take the lead in dealing with a colossal headache that had been building for years: Social Security was running out of money. During the Nixon administration, when the program had seemed flush with reserves, Congress had taken the fatul step of indexing benits to inflation. As inflation soared through the 1970s, so did the costof-living increases in people&aposs Social Security checks. The system was in such financial straits that an added $200 billion was going to be needed as early as 1983 to keep the program afloat. The long-term prospects looked even worse.

　　Reagan had shied away from talking in any detail about Social Security during his campaign—when the question came up, he&aposd pledged simply to preserve the system. And no wonder. Social Security is truly the third rail of American politics. There was nothing more explosive than Social Security rorm: everybody knew that no matter how you dressed it up, any solution was in the end going to involve either raising taxes or cutting benits for a huge and powerful bloc of voters, or both.

　　Yet the problem was serious, and leaders in both parties understood that something needed to be done—either that, or face the likelihood of not being able to mail checks to thirty-six million senior citizens and disabled Americans. We were getting down to the wire. Reagan&aposs opening gambit, in his first budget, was to propose a $2.3 billion reduction in Social Security outlays. That raised such a storm of protest that he was forced to back down. Three months later he came back harder, with a rorm proposal that would cut $46 billion in benits over five years. But it was clear that a bipartisan compromise was the only hope. Thus the Greenspan Commission was born.

　　Most commissions, of course, don&apost do anything. But Jim Baker, the architect of this one; believed passionately that government could be made to work. The commission he built was a virtuoso demonstration of how to get things done in Washington. It was a bipartisan group, with five members chosen by the White House, five by the Senate majority leader, and five by the Speaker of the House. Virtually every commissioner was an all-star in his or her field. There were congressional heavy hitters like Bob Dole, the chairman of the Senate Finance Committee; Pat Moynihan, the brilliant maverick senator from New York; and Claude Pepper, the outspoken eighty-one-year-old congressman from Florida who was a senior citizens&apos icon.Lane Kirkland, the head of the AFL-CIO, was a member and became a close friend; so was Alexander Trowbridge, the head of the National Association of Manufacturers. House SpeakerTip O&aposNeill appointed the top Democrat—Bob Ball, who had run the Social Security Administration for LB J. And the president appointed me as chairman.

　　I won&apost go into the intricacies of demographics and finance we mastered, or the policy debates and hearings that ate up more than a year. I ran the commission in the spirit that Jim Baker had envisioned, aiming for an fective bipartisan compromise. We took four key steps to make the whole thing work, which I&aposll mention because I&aposve used variations of them ever since.

　　The first was to limit the problem. In this case, it meant not taking up the issue of the future funding of Medicare—while technically part of Social Security, Medicare was a far more complex problem, and trying to solve both could mean we would do neither.

　　The second was to get everyone to agree on the problem&aposs numerical dimensions. As Pat Moynihan later put it, "You&aposre entitled to your own opinion, but you&aposre not entitled to your own facts." When it was clear that a long-term shortfall was real, commission members lost their ability to demagogue. They had to support cuts in benits and/or support a rise in revenues. Reverting to the cop-out of financing Social Security from the federal government&aposs "general revenues" was adamantly ruled out early by Pepper, who worried it would cause Social Security to become a welfare program.

　　The third smart tactic came from Baker. If we wanted a compromise to succeed, he argued, we had to bring everybody along. So we made a point of keeping both Reagan and O&aposNeill in the loop as we worked. It became Bob Ball&aposs job to inform O&aposNeill, and my job and Baker&aposs to inform the president.

　　Our fourth move was to agree among the commissioners that once a compromise was reached, we would stand firm against any amendments being imposed by either party. I later told reporters, "If you take pieces out of the package, you will lose the consensus, and the whole agreement starts to unravel." We published our report in January 1983; when it was finally time to present the rorm proposals to Congress, Ball and I resolved to testify side by side. Whenever a Republican asked a question, I would answer it. And whenever a Democrat asked a question, he would answer it. Which is just what we tried to do, though the senators didn&apost entirely cooperate.

　　Diverse as our commission was, we found ways to agree. What brought together men like Claude Pepper and the head of the manufacturers was the care we took to spread the burden. The Social Security Amendments, which Reagan ultimately signed into law in 1983, involved pain for everyone. Employers had to absorb further increases in the payroll tax; employees faced higher taxes too and in some cases saw the date when they could anticipate receiving benits pushed further into the future; retirees had to accept postponement of cost-of-living increases, and wealthier retirees began having their benits taxed. But by doing all this, we succeeded in funding Social Security over the seventy-five-year planning period that is conventional for social insurance programs. Moynihan, with his usual eloquence, declared: "I have the strongest feeling that we all have won. What we have won is a resolution of the terrible fear in this country, that the Social Security system was, like a chain letter, something of a fraud."

　　As all this was still unfolding in 1983,1 was in my office one day in New York poring over demographic projections when the telephone rang. It was Andrea Mitchell, a reporter for NBC. "I&aposve got some questions about the president&aposs budget proposals/&apos she said. She explained that she&aposd been trying to figure out whether the Reagan administration&aposs latest fiscal-policy assumptions were credible, and that David Gergen, the assistant to the White House communications chi, had suggested my name. She told me Gergen had said, "If you really want to know about the economy, why don&apost you call Alan Greenspan? He knows more than anybody."

　　"I&aposll bet you say that to all the economists/&apos I replied, "but sure, let&aposs talk." I&aposd noticed Andrea on NBC newscasts. She was a White House correspondent. I thought she was very articulate and that her voice had the nicest authoritative resonance. Also, I&aposd noted, she was a very good-looking woman.

　　We talked that day and a few more times, and soon I became a regular source. Over the next two years, Andrea would phone whenever she had a big economics story in the works. I liked the way she handled the material on TV; even when the issues were too complex to present in their full technical detail, she would find the crux of the story. And she was accurate with the facts.

　　In 1984 Andrea asked if I&aposd come with her to the White House Correspondents&apos Dinner, where reporters invite their sources. I had to tell her that I&aposd already agreed to go with Barbara Walters. But I added, "Do you ever get to New York? Maybe we could have dinner."

　　It took another eight months bore we could connect—it was an election year, and Andrea was extremely busy through November, when Reagan deated Mondale in a landslide. Finally when the holidays arrived, we scheduled a date, and I made a reservation at Le Perigord, my favorite restaurant in New York, for December 28. It was a snowy night and Andrea rushed in late, looking very beautiful if a bit disheveled after a day of reporting the news and trying to hail cabs in the snow.

　　That night I discovered she was a former musician like me; she&aposd played violin in the Westchester Symphony. We loved the same music—her record collection was similar to mine. She liked baseball. But mainly we shared an intense interest in current affairs—strategic, political, military, diplomatic. There was no shortage of things to talk about.

　　It might not be everybody&aposs idea of first-date conversation, but at the restaurant we ended up discussing monopolies. I told her I&aposd written an essay on the subject and invited her back to my apartment to read it. She teases me about that now, saying, "What, you didn&apost have any etchings?" But we did go to my apartment and I showed her this essay I&aposd written on antitrust for Ayn Rand. She read it and we discussed it. To this day, Andrea claims I was giving her a test. But it wasn&apost that; I was doing everything I could think of to keep her around.

　　For much of Reagan&aposs second term, Andrea was my main reason to go to Washington. I stayed in touch with people in the government, but my focus was almost entirely in the business and economics world of New York. As business economics matured as a profession, I&aposd gotten deeply involved in its organizations. I&aposd served as president of the National Association of Business Economists and as chairman of the Conference of Business Economists, and was slated to become chairman of the Economic Club of New York, the financial and business world&aposs equivalent of the Council on Foreign Relations.

　　Townsend-Greenspan itself had changed. Large economics firms with names like DRI and Wharton Econometrics had grown up to supply much of the basic data needed by business planners. Computer modeling had become much more widespread, and many corporations had economists of their own. I&aposd experimented with diversifying into investment and pension-fund consulting, but while those ventures made money, they weren&apost as lucrative as corporate consulting. Also, more projects meant more employees, which meant more of my time had to be spent managing the business.

　　Ultimately I concluded that the best course was to focus exclusively on what I did best: solve interesting analytical puzzles for sophisticated clients who needed answers and couldpay high-end fees. So in the second half of the Reagan administration I planned to scale back Townsend-Greenspan. But bore I could implement those plans, in March 1987, I received a phone call from Jim Baker. Baker was by this time treasury secretary—after an intense four years as White House chi of staff, he&aposd made an unusual job swap, trading posts in 1985 with Don Regan. Jim and I had been friends since the Ford days, and I&aposd helped him prepare for his Senate confirmation hearing the spring he took over at Treasury. He had his assistant call to ask if I could come to Washington for a meeting at his house. This struck me as odd—why not meet at his office? But I agreed.

　　The next morning a Washington driver delivered me to Baker&aposs nice old Georgian colonial on an elegant stretch of Foxhall Road. I was surprised to find waiting for me not only Jim but also Howard Baker, President Reagan&aposs current chi of staff. Howard got right to the point. "Paul Volcker may be leaving this summer when his term runs out/&apos he began. "We&aposre not in a position to offer you the job, but we&aposd like to know—if it were to be offered, would you accept?"

　　I was brily at a loss for words. Until a few years bore, I&aposd never thought of myself as a potential Fed chairman. In 1983, as Volcker&aposs first term was ending, I&aposd been startled when one of the Wall Street firms conducted a straw poll of who might replace Volcker if he were to leave and my name turned up on top of the list.

　　As close as I was to Arthur Burns, the Fed had always been a black box to me. Having watched him struggle, I did not feel equipped to do the job; setting interest rates for an entire economy seemed to involve so much more than I knew. The job seemed amorphous, the type of task in which it is very easy to be wrong even if you have virtually full knowledge. Forecasting a complex economy such as ours is not a ninety-ten proposition. You&aposre very fortunate if you can do sixty-forty. All the same, the challenge was too great to turn down. I told the Bakers that if the job were offered, I would accept.

　　I had plenty of time to get cold feet. Over the next two months, Jim Baker would phone to say things like "It&aposs still under discussion" or "Volcker is thinking about whether he wants to stay." I felt alternately fascinated by the possibility and a little unsettled. It wasn&apost until just bore Memorial Day that Baker phoned and said, "Paul has decided to leave." He asked if I was still interested and I said yes. He said, "You&aposll be getting a call from the president in a few days."

　　Two days later I was at my orthopedist&aposs office and the nurse came in to say the White House was on the line. It had taken the call a few minutes to get through because the receptionist had thought it was a prank. They let me use the doctor&aposs private office to take the call. I picked up the phone and heard that familiar, easy voice. Ronald Reagan said, "Alan, I want you to be my chairman of the Federal Reserve Board."

　　I told him I would be honored to do so. Then we chatted a bit. I thanked him and hung up.

　　As I stepped back into the hall, the nurse seemed very concerned. "Are you all right?" she asked. "You look like you&aposve gotten bad news."

　　FIVE BLACK MONDAY

　　I&aposd scrutinized the economy every working day for decades and had visited the Fed scores of times. Nevertheless, when I was appointed chairman, I knew I&aposd have a lot to learn. That was reinforced the minute I walked in the door. The first person to greet me was Dennis Buckley, a security agent who would stay with me throughout my tenure. He addressed me as "Mr. Chairman."

　　Without thinking, I said, "Don&apost be silly. Everybody calls me Alan."

　　He gently explained that calling the chairman by his first name was just not the way things were done at the Fed.

　　So Alan became Mr. Chairman.

　　The staff, I next learned, had prepared a series of intensive tutorials diplomatically labeled "one-person seminars," in which I was the student. This meant that for the next ten days, senior people from the professional staff gathered in the Board&aposs fourth-floor conference room and taught me my job. I learned about sections of the Federal Reserve Act I never knew existed—and for which I was now responsible. The staff taught me arcana about banking regulation that, having been a director of both JPMorgan and Bowery Savings, I was amazed I&aposd never encountered. Of course, the Fed had experts in every dimension of domestic and international economics as well as the capability to call in data from everywhere—privileged access that I was eager to explore.

　　Though I&aposd been a corporate director, the Board of Governors of the Federal Reserve System, as it is formally known, was an order of magnitude larger than anything I&aposd ever run—today the Federal Reserve Board staff includes some two thousand employees and has an annual budget of nearly $300 million. Fortunately, running it wasn&apost my job—the long-standing practice is to designate one of the other Board members as the administrative governor to oversee day-to-day operations. There is also a staff director for management who acts as a chi of staff This way, only issues that are out of the ordinary or that might spark public or congressional interest are brought to the chairman, such as the massive challenge of upgrading the international payments system for the turn of the millennium. Otherwise

　　he is free to concentrate on the economy—just what I was eager to do.

　　The Fed chairman has less unilateral power than the title might suggest. By statute I controlled only the agenda for the Board of Governors meetings—the Board decided all other matters by majority rule, and the chairman was just one vote among seven. Also, I was not automatically the chairman of the Federal Open Market Committee, the powerful group that controls the federal funds rate, the primary lever of U.S. monetary policy* The FOMC is made up of the seven Board governors and the presidents of the twelve regional Federal Reserve banks (only five can vote at any one time), and it too makes decisions by majority rule. While the Board chairman is traditionally the chair of the FOMC, he or she must be elected each year by the members, and they are free to choose someone else. I expected precedent to prevail. But I was always aware that a revolt of the six other governors could remove all of my authority, except writing the Board agendas. [*When the FOMC changes this rate, the committee directs the Fed&aposs so-called open market desk in New York to either buy or sell treasury securities—often billions of dollars&apos worth in a day Selling by the Fed acts as a brake, withdrawing from the economy the money received in the transaction and pushing short-term interest rates higher, while buying does the reverse. Today the fed funds rate that the FOMC is seeking is publicly announced, but in those days it wasn&apost. So Wall Street firms would assign "Fed watchers" to divine changes in monetary policy from the actions of our traders or changes in our weekly reported balance sheet. ]

　　I quickly got hold of Don Kohn; the FOMC secretary and had him walk me through the protocols of a meeting. (Don; who would prove to be the most fective policy adviser in the Fed system during my eighteen years, is now vice chairman of the Board.) The FOMC held its meetings in secret, so I had no idea what the standard agenda or timetable was, who spoke first, who derred to whom, how to conduct a vote, and so on. The committee also had its own lingo that I needed to get comfortable with. For example, when the FOMC wanted to authorize the chairman to notch up the fed funds rate if necessary bore the next regular meeting, it did not say, "You may raise interest rates if you decide you have to"; instead it voted to give an "asymmetric directive toward tightening."* I was scheduled to run one of those meetings the following week, on August 18, so I was a highly motivated student. Andrea still jokes about my coming over to her house that weekend to curl up with Robert&aposs Rules of Order.

　　I felt a real need to hit the ground running because I knew the Fed would soon face big decisions. The Reagan-era expansion was well into its fourth year, and while the economy was thriving, it was also showing clear signs of instability. Since the beginning of the year, when the Dow Jones Industrial Average had risen through 2,000 for the first time, the stock market had run up more than 40 percent—now it stood at more than 2,700 and Wall Street was in a speculative froth. Something similar was happening in commercial real estate.

　　The economic indicators, meanwhile, were far from encouraging. Huge government dicits under Reagan had caused the national debt to the public to almost triple, from just over $700 billion at the start of his presidency to more than $2 trillion at the end of fiscal year 1988. The dollar was falling, and people were worried about America losing its competitive edge— the media were full of alarmist talk about the growing "Japanese threat." Consumer prices, which had gone up just 1.9 percent in 1986, were rising at nearly double that rate in my first days in office. Though 3.6 percent inflation was far milder than the double-digit nightmare people remembered from the 1970s, once inflation begins, it usually grows. We were in danger.[*For the record, even as I learned "Fedspeak," I would joke to the staff, "Whatever happened to the English language?" ]of forfeiting the victory that had been gained at such great misery and cost under Paul Volcker.

　　These were vast economic issues, of course, far beyond the power of the Fed alone to resolve. Yet the worst course would be to sit idly by. I thought a rate increase would be prudent, but the Fed hadn&apost raised interest rates for three years. Hiking them now would be a big deal. Any time the Fed changes direction, it can rattle the markets. The risk in clamping down during a stock-market surge is especially acute—it can pop the bubble of investor confidence, and if that scares people enough, can trigger a severe economic contraction.

　　Though I was friendly with many of the committee members, I knew better than to think that a chairman who had been around for a week could walk into a meeting and shape a consensus on such a risky decision. So I did not propose a rate increase; I simply listened to what the others had to say. The eighteen committee members* were all seasoned central bankers and economists, and as we went around the table comparing assessments of the economy, it was apparent that they, too, were concerned. Gerry Corrigan, the gruff president of the New York Fed, said we ought to raise rates; Bob Parry, the Fed president from San Francisco, reported that his district was seeing good growth, high optimism, and full employment—all reasons to be leery of inflation; Si Keehn from Chicago agreed, reporting that the Midwest&aposs factories were running near full capacity and that even the farm outlook had improved; Tom Melzer of the St. Louis Fed told of how even the shoe factories in that district were operating at 100 percent; Bob Forrestal from Atlanta described how his staff had been surprised at the strength of employment figures even in chronically depressed sections of

　　the South. I think everyone walked away persuaded that the Fed would have to raise rates soon.

　　The next opportunity to do so was two weeks later, on September 4, at a meeting of the Board of Governors. The Board controls the other main lever of monetary policy, the "discount rate" at which the Federal Reserve lends to depository institutions. This rate generally moves in lockstep with the rate on fed funds. Prior to the scheduled Board meeting, I spent a few [*There was one vacancy on the Federal Reserve Board. ]days working my way up and down the corridor seeking out the governors in their offices, building consensus. The meeting, when it came, moved quickly to a vote—the rate increase, from 5.5 percent to 6 percent, was approved by the governors unanimously.

　　To subdue inflationary pressures, we were trying to slow the economy by making money more expensive to borrow. There&aposs no way to predict how severely the markets will respond to such a move, especially when investors are gripped with speculative fervor. I couldn&apost help but remember accounts I&aposd read of the physicists at Alamogordo the first time they detonated an atom bomb: Would the bomb fizzle? Would it work the way they hoped? Or would the chain reaction somehow go out of control and set the earth&aposs atmosphere on fire? After the meeting ended, I had to fly to New York; from there I was scheduled to leave that weekend for Switzerland, where I was attending my first meeting of the central bankers of the ten leading industrialized nations. The Fed&aposs hope was that the key markets— stocks, futures, currency, bonds—would take the change in stride, maybe with stocks cooling off slightly and the dollar strengthening. I kept calling back to the office to check how the markets were responding.

　　The sky did not catch fire that day. Stocks dipped, banks upped their prime lending rates in line with our move, and the financial world, as we&aposd hoped, noted that the Fed had begun acting to quell inflation. Perhaps the most dramatic impact was rlected in a New York Times headline a few days later: "Wall Street&aposs Sharpest Rise: Anxiety." I was finally allowing myself to breathe a sigh of reli when a message reached me from Paul Volcker. He knew exactly what I&aposd been going through. "Congratulations," it read. "You are now a central banker."

　　I did not for a minute think we were out of the woods. Signs of trouble in the economy continued to mount. Slowing growth and a further weakening of the dollar put Wall Street on edge, as investors and institutions began confronting the likelihood that billions of dollars in speculative bets would never pay off. In early October, that fear turned to near panic. The stock market skidded, by 6 percent the first week, then another 12 percent the second week. The worst loss was on Friday, October 16, when the Dow Jones average dropped by 108 points. Since the end of September nearly half a trillion dollars of paper wealth had evaporated in the stock market alone—not to mention the losses in currency and other markets. The decline was so stunning that Time magazine devoted two full pages to the stock market that week under the headline "Wall Street&aposs October Massacre."

　　I knew that from a historical perspective this "correction" was not nearly the most severe. The market slump in 1970 had been proportionally twice as large, and the Great Depression had wiped out fully 80 percent of the market&aposs value. But given how poorly the week had ended, everyone was worried about what might happen when the markets opened again on Monday.

　　I was supposed to fly on Monday afternoon to Dallas, where on Tuesday I was to speak at the American Bankers&apos Association convention—my first major speech as chairman. Monday morning I conferred with the Board of Governors, and we agreed that I should make the trip, lest it seem that the Fed was in a panic. The market that morning opened weakly, and by the time I had to leave it looked awful—down by more than 200 points. There was no telephone on the airplane. So the first thing I did when I arrived was to ask one of the people who greeted me from the Federal Reserve Bank of Dallas, "How did the stock market finally go?"

　　He said, "It was down five oh eight."

　　Usually when someone says "five oh eight," he means 5.08. So the market had dropped only 5 points. "Great," I said, "what a terrific rally." But as I said it, I saw that the expression on his face was not shared reli. In fact, the market had crashed by 508 points—a 22.5 percent drop, the biggest one-day loss in history, bigger even than the one on the day that started the Great Depression, Black Friday 1929.

　　I went straight to the hotel, where I stayed on the phone into the night. Manley Johnson, the vice chairman of the Fed&aposs Board, had set up a crisis desk in my office in Washington, and we held a series of calls and teleconferences to map out plans. Gerry Corrigan filled me in on conversations he&aposd had in New York with Wall Street executives and officials at the stock exchange; Si Keehn had talked to the heads of the Chicago commodities futures exchanges and trading firms; Bob Parry in San Francisco reported what he was hearing from the chis of the savings and loan industry, who were mainly based on the West Coast.

　　The Fed&aposs job during a stock-market panic is to ward off financial paralysis—a chaotic state in which businesses and banks stop making the payments they owe each other and the economy grinds to a halt. To the senior people on the phone with me that night, the urgency and gravity of the situation was apparent—even if the markets got no worse, the system would be reeling for weeks. We started exploring ways we might have to supply liquidity if major institutions ran short of cash. Not all of our younger people understood the seriousness of the crisis, however. As we discussed what public statement the Fed should make, one of them suggested, "Maybe we&aposre overreacting. Why not wait a few days and see what happens?"

　　Though I was new at this job, I&aposd been a student of financial history for too long to think that made any sense. It was the one moment I spoke sharply to anybody that night. "We don&apost need to wait to see what happens," I told him. "We know what&aposs going to happen." Then I backed up a little and explained. "You know what people say about getting shot? You feel like you&aposve been punched, but the trauma is such that you don&apost feel the pain right away? In twenty-four or forty-eight hours, we&aposre going to be feeling a lot of pain."

　　As the discussion ended, it was clear that the next day would be full of major decisions. Gerry Corrigan made a point of telling me solemnly, "Alan, you&aposre it. The whole thing is on your shoulders." Gerry is a tough character and I couldn&apost tell whether he meant this as encouragement or as a challenge for the new chairman. I merely said, "Thank you, Dr. Corrigan."

　　I was not inclined to panic, because I understood the nature of the problems we would face. Still, when I hung up the phone around midnight, I wondered if I&aposd be able to sleep. That would be the real test. "Now we&aposre going to see what you&aposre made of," I told myself. I went to bed, and, I&aposm proud to say, I slept for a good five hours.

　　Early the next morning, as we were honing the language of the Fed&aposs public statement, the hotel operator interrupted with a call from the White House. It was Howard Baker, President Reagan&aposs chi of staff. Having known Howard a long time, I acted as though nothing unusual were going on. "Good morning, Senator," I said. "What can I do for you?" "Help!" he said in mock plaintiveness. "Where are you?"

　　"In Dallas," I said. "Is something bothering you?" Handling the administration&aposs response to a Wall Street crisis is normally the job of the treasury secretary. But Jim Baker was in Europe trying to make his way back; and Howard didn&apost want to deal with this one on his own. I agreed to cancel my speech and return to Washington—I&aposd been inclined to do so anyway, because in light of the 508-point market drop, going back seemed the best way to assure the bankers that the Fed was taking matters seriously. Baker sent a military executive jet to pick me up.

　　The markets that morning gyrated wildly—Manley Johnson sat in our makeshift operations center giving me the play-by-play while I was airborne. After I got in a car at Andrews Air Force Base, he told me the New York Stock Exchange had called to notify us it was planning to shut down in one hour—trading on key stocks had stalled for lack of buyers. "That&aposll blow it for everybody," I said. "If they close, we&aposve got a real catastrophe on our hands." Shutting down a market during a crash only compounds investors&apos pain. As scary as their losses on paper may seem, as long as the market stays open investors always know that they can get out. But take away the exit and you exacerbate the fear. To restore trading afterward is extraordinarily hard—because no one knows what prices should be, no one wants to be the first to bid. The resuscitation process can take many days, and the risk is that in the meantime the entire financial system will stall, and the economy will suffer a crippling shock. There wouldn&apost have been much we could do to stop the executives at the exchange, but the marketplace saved us by itself. Within those sixty minutes enough buyers materialized that the

　　NYSE decided to shelve its plan.

　　The next thirty-six hours were intense. I joked that I felt like a seven-armed paperhanger, going from one phone to another, talking to the stock exchange, the Chicago futures exchanges, and the various Federal Reserve presidents. My most harrowing conversations were with financiers and bankers I&aposd known for years, major players from very large companies around the country, whose voices were tightened by fear. These were men who had built up wealth and social status over long careers and now found themselves looking into the abyss. Your judgment is less than perfect when you&aposre scared. "Calm down," I kept telling them, "it&aposs containable." And I would remind them to look beyond the emergency to where their long-term business interest might lie.

　　The Fed attacked the crisis on two fronts. Our first challenge was Wall Street: we had to persuade giant trading firms and investment banks, many of which were reeling from losses, not to pull back from doing business. Our public statement early that morning had been painstakingly worded to hint that the Fed would provide a safety net for banks, in the expectation that they, in turn, would help support other financial companies. It was as short and concise as the Gettysburg Address, I thought, although possibly not as stirring: "The Federal Reserve, consistent with its responsibilities as the nation&aposs central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system." But as long as the markets continued to function, we had no wish to prop up companies with cash.

　　Gerry Corrigan was the hero in this fort. It was his job as head of the New York Fed to convince the players on Wall Street to keep lending and trading—to stay in the game. A Jesuit-educated protege of Volcker&aposs, he&aposd been a central banker for his entire career; there was no one more streetwise or better suited to be the Fed&aposs chi enforcer. Gerry had the dominant personality necessary to jawbone financiers, yet he understood that even in a crisis, the Fed must exercise restraint. Simply ordering a bank to make a loan, say, would be an abuse of government power and would damage the functioning of the market. Instead, the gist of Gerry&aposs message to the banker had to be: "We&aposre not telling you to lend; all we ask is that you consider the overall interests of your business. Just remember that people have long memories, and if you shut off credit to a customer just because you&aposre a little nervous about him, but with no concrete reason, he&aposs going to remember that." That week Corrigan had dozens of conversations along these lines, and though I never knew the details, some of those phone calls must have been very tough. I&aposm sure he bit off a few earlobes.

　　As all this was going on, we were carul to keep supplying liquidity to the system. The FOMC ordered the traders at the New York Fed to buy billions of dollars of treasury securities on the open market. This had the fect of putting more money into circulation and lowering short-term rates. Though we&aposd been tightening interest rates bore the crash, we were now easing them to help keep the economy moving.

　　Despite our best forts, there were a half dozen near disasters, mostly involving the payment system. A lot of transactions during the business day on Wall Street aren&apost made simultaneously: companies will do business with one another&aposs customers, for instance, and then settle up at day&aposs end. On Wednesday morning Goldman Sachs was scheduled to make a $700 million payment to Continental Illinois Bank in Chicago, but initially withheld payment pending receipt of expected funds from other sources. Then Goldman thought better of it, and made the payment. Had Goldman withheld such a large sum, it would have set off a cascade of daults across the market. Subsequently, a senior Goldman official confided to me that had the firm anticipated the difficulties of the ensuing weeks, it would not have paid. And in future such crises, he suspected, Goldman would have second thoughts about making such unrequited payments.

　　We also went to work on the political front. I spent an hour Tuesday at the Treasury Department as soon as Jim Baker returned (he&aposd been able to catch the Concorde). We huddled in his office with Howard Baker and other officials. President Reagan&aposs initial reaction to Wall Street&aposs calamity on Monday had been to speak optimistically about the economy. "Steady as she goes," he&aposd said, later adding, "I don&apost think anyone should panic, because all the economic indicators are solid." This was meant to be reassuring, but in the light of events sounded disturbingly like Herbert Hoover declaring after Black Friday that the economy was "sound and prosperous." Tuesday afternoon we met with Reagan at the White House to suggest he try a different tack. The most constructive response, Jim Baker and I argued, would be to offer to cooperate with Congress on cutting the dicit, since that was one of the long-term economic risks upsetting Wall Street. Even though Reagan had been at loggerheads with the Democratic majority, he agreed that this made sense. That afternoon he told reporters that he would consider any budget proposal Congress put forward, short of cutting Social Security. Though this overture never led to anything, it did help calm the markets.

　　We manned the operations center around the clock. We tracked markets in Japan and Europe; early each morning we&aposd collect stock quotes on U.S. companies trading on European bourses and synthesize our own Dow Jones Industrial Average to get a preview of what the New York markets were likely to do when they opened. It took well over a week for all the crises to play out, though most of them were hidden from public view. Days after the crash, for example, the Chicago options market nearly collapsed when its biggest trading firm ran short of cash. The Chicago Fed helped engineer a solution to that one. Gradually, though, prices in the various markets stabilized, and by the start of November the members of the crisis management team returned to their regular work.

　　Contrary to everyone&aposs fears, the economy held firm, actually growing at a 2 percent annual rate in the first quarter of 1988 and at an accelerated 5 percent rate in the second quarter. By early 1988 the Dow had stabilized at around 2,000, back where it had been at the beginning of 1987, and stocks resumed a much more modest, and more sustainable, upward path. Economic growth entered its fifth consecutive year. This was no consolation to the speculators who had lost their shirts, or to the scores of small brokerage houses that failed, but ordinary people hadn&apost been hurt. In retrospect, it was an early manifestation of the economic resilience that would figure so prominently in the coming years.

　　The Federal Reserve and the White House are not automatically allies. In giving the Fed its modern mandate in 1935, Congress took great care to shield it from the influence of the political process. While the governors are all appointed by the president, their positions are semipermanent— Board members serve terms of fourteen years, longer than any appointees except the justices of the Supreme Court. The chairmanship itself is a four-year appointment, but the chairman can do little without the votes of the other Board members. And while the Fed must report twice a year to Congress, it controls its own purse strings by funding itself with interest income from the treasury securities and other assets it holds. All this frees the Fed to focus on its statutory mission: putting in place the monetary conditions needed for maximum sustainable long-term growth and employment. In the view of the Federal Reserve and most economists, a necessary condition for maximum sustainable economic growth is stable prices. In practice, this means Federal Reserve policies that contain inflationary pressures beyond the current election cycle.

　　No wonder politicians often find the Fed a hindrance. Their better selves may want to focus on America&aposs long-term prosperity, but they are far more subject to constituents&apos immediate demands. That&aposs inevitably rleeted in their economic policy prerences. If the economy is expanding, they want it to expand faster; if they see an interest rate, they want it to be lower—and the Fed&aposs monetary discipline interferes. As William McChesney Martin Jr., a legendary chairman in the 1950s and 1960s, is alleged to have put it, the Fed&aposs role is to order "the punch bowl removed just when the party was really warming up."

　　You could hear that frustration in the voice of Vice President George Herbert Walker Bush in spring 1988 as he campaigned for the Republican presidential nomination. He told reporters that he had "a word of caution" for the Fed: "I wouldn&apost want to see them step over some [line] that would ratchet down, tighten down on the economic growth."

　　In fact, tightening was just what we were doing. Once it became clear that the stock-market crash had not seriously damaged the economy, the FOMC had started inching up the fed funds rate in March. We&aposd done so because again signs were accumulating that inflation pressures were rising and the long Reagan-era boom had maxed out: factories were full, and joblessness was at its lowest level in eight years. This tightening proceeded into the summer, and by August it was necessary to raise the discount rate too.

　　Since the discount rate, unlike the fed funds rate, was publicly announced, raising it was much more politically explosive—Fed officials called such a move "ringing the gong." The timing for the Bush campaign could not have been worse. Bush wanted to piggyback on Reagan&aposs success, and he was trailing the Democratic contender, Michael Dukakis, by as much as 17 points in the polls. The vice president&aposs campaign staff was hypersensitive to any news that might point to a slowing economy or otherwise dim the luster of the administration. So when we voted to raise the rate just afew days bore the Republican convention, we understood that people were going to be upset.

　　I&aposm a believer in delivering bad news in person, privately, and in advance—especially in Washington, where officials hate to be blindsided and need time to decide what they want to say publicly. I don&apost enjoy doing it, but there&aposs no alternative if you want to have a relationship thereafter. So as soon as we voted, I lt the office and drove over to the Treasury Department to see Jim Baker. He had just announced he was leaving his job as secretary of the treasury to become chi of staff of the Bush campaign. Jim was an old friend, and as treasury secretary he needed to be told.

　　As we sat down in his office, I caught his eye and said, "I&aposm sure you&aposre not going to be happy about this, but after a long discussion of all the factors"—I listed a few—"we arrived at a decision to raise the discount rate. It&aposs going to be announced in an hour." The increase, I added, was not the usual one-quarter of a percentage point, but twice that, from 6 percent to 6.5 percent.

　　Baker sat back in his chair and jabbed his fist into his stomach. "You&aposve hit me right here," he growled.

　　"I&aposm sorry, Jim," I said.

　　Then he cut loose and lambasted me and the Fed for not being responsive to the real needs of the country, and expressed whatever other angry thoughts came into his head. Having been friends for a while, I knew this tirade was just an act. So after a minute, when he paused for air, I smiled at him. Then he laughed. "I know you had to do it," he said. A few days later, he publicly endorsed the rate increase as essential for the long-term stability of the system. "In the medium and long term it will be a very good thing for the economy," he added.

　　When George Bush won that fall, I hoped the Fed and his administration would get along. Everybody knew that whoever came in after Reagan would face big economic challenges: not just an eventual downturn in the business cycle, but whopping dicits and the rapidly mounting national debt. I thought Bush had upped the ante substantially when he&aposd declared in his acceptance speech at the Republican convention: "Read my lips: no new taxes." It was a memorable line, but at some point he was going to have to tackle the dicit—and he&aposd tied one hand behind his back.

　　People were surprised by the thoroughness with which the new administration replaced Reagan appointees. My friend Martin Anderson, who had long since shifted out of Washington back to the Hoover Institution in California, joked that Bush fired more Republicans than Dukakis would have. But I told him it didn&apost bother me. It was a new president&aposs prerogative, and the moves did not affect the Fed. Besides, the senior economic team coming in—Treasury Secretary Nicholas Brady Budget Director Richard Darman, CEA chairman Michael Boskin, and others—were longtime professional acquaintances and friends of mine. (Jim Baker, of course, moved up to become secretary of state.)

　　My main concern, shared by many senior people within the Fed, was that the new administration attack the dicit right away, while the economy was still strong enough to absorb the shock of cuts in federal spending. Big dicits have an insidious fect. When the government overspends, it must borrow to balance its books. It borrows by selling treasury securities, which siphons away capital that could otherwise be invested in the private economy. Our dicits had been running so high—well over $150 billion a year on average for five years—that we were undermining the economy I highlighted this problem just after the election, testifying bore the National Economic Commission, a bipartisan group Reagan had set up in the wake of the 1987 crash. The dicit was no longer a manana problem, I told them: "The long run is rapidly becoming the short run. If we do not act promptly, the fects will be increasingly felt and with some immediacy." Unsurprisingly, because of Bush&aposs no-new-taxes pledge, the commission ended in a stalemate, with the Republicans arguing that spending should be cut and the Democrats arguing to raise taxes, and it never had any fect.

　　I quickly found myself in the same public conflict with President Bush that we&aposd had during the campaign. In January, I testified to the House Banking Committee that inflation risks were still high enough that Fed policy would be to "err more on the side of restrictiveness rather than stimulus." The next day with reporters, the president challenged this approach. "I do not want to see us move so strongly against inflation that we impede growth," he said. Normally such differences would get aired and resolved behind the scenes. I&aposd been looking toward building the same collaborative relationship with the White House that I&aposd seen during the Ford administration and that I knew had existed at times between Reagan and Paul Volcker. It was not to be. Great things happened on George Bush&aposs watch: the fall of the Berlin Wall, the end of the cold war, a clear victory in the Persian Gulf, and the negotiation of the NAFTA agreement to free North American trade. But the economy was his Achilles&apos heel, and as a result we ended up with a terrible relationship.

　　He faced a worsening trade dicit and the politically damaging phenomenon of factories moving overseas. The pressure to cut the federal dicit finally forced him; in July 1990, to accept a budget compromise in which he broke his no-new-taxes pledge. Just days later came Iraq&aposs invasion of Kuwait. The ensuing Gulf War proved to be great for his approval ratings. But the crisis also threw the economy into the recession we&aposd been worried about, as oil prices rose and uncertainty hurt consumer confidence. Worse still, the recovery, which began in early 1991, was unusually slow and anemic. Most of these events were beyond anyone&aposs control, but they still made "the economy, stupid" an fective way for Bill Clinton to beat Bush in the 1992 election, despite the fact that the economy during that year had grown by 4.1 percent.

　　Two factors greatly complicated the economic picture. The first was the collapse of America&aposs thrift industry, which put a big, unexpected drain on the federal budget. Savings and loans, which had been instituted in their modern form to finance the building of the suburbs after World War II, had been failing in waves for a decade. The inflation of the seventies—compounded by mismanaged deregulation and, ultimately, fraud—did hundreds of them in. As originally conceived, an S&L was a simple mortgage machine, not much different from the Bailey Building and Loan run by Jimmy Stewart in It&aposs a Wonderful Life. Typically, customers would deposit money in passbook savings accounts, which paid only 3 percent interest but were federally insured; then the S&L would lend out those funds in the form of thirty-year mortgages at 6 percent interest. As a result, S&Ls for decades were dependable moneymakers—and the thrift industry grew huge, with more than 3,600 institutions and $1.5 trillion in assets by 1987.

　　But inflation spelled doom for this tidy state of affairs. It drove both short-term and long-term interest rates sharply higher, putting the S&Ls in a terrible squeeze. For the typical S&L, the cost of deposits soared immediately, but because the mortgage portfolios turned over only slowly, revenues lagged. Soon many S&Ls were in the red, and by 1989 the great majority were technically insolvent: if they&aposd sold all their loans, they wouldn&apost have had enough money to pay off all their depositors.

　　Congress tried repeatedly to prop up the industry but mainly succeeded in making the problem worse. Just in time for the building boom of the Reagan era, it increased the level of taxpayer-funded deposit insurance (from $40,000 to $100,000 per account) and relaxed the restrictions on the kinds of loans S&Ls could make. Bore long, emboldened S&L executives were financing skyscrapers and resorts and thousands of other projects that in many cases they barely understood, and they were often losing their shirts.

　　Others took advantage of the loosened rules to commit fraud—most notoriously Charles Keating, a West Coast entrepreneur who was ultimately sent to prison for racketeering and fraud for having misled investors through sham real estate transactions and the sale of worthless junk bonds. Salesmen at Keating&aposs Lincoln Savings were also said to have talked unsophisticated people into shifting their savings from passbook accounts into risky, uninsured ventures controlled by him. When the business collapsed, cleaning up the mess cost taxpayers $3.4 billion, and as many as twenty-five thousand bond buyers lost an estimated $250 million. The revelation in 1990 that Keating and other S&L executives were major contributors to Senate campaigns made for a full-blown Washington drama.

　　I had a complicated involvement in this mess not only because of my job but also because of a study I&aposd done while still a private consultant. Years bore, at Townsend-Greenspan, a major law firm representing Keating had hired me to evaluate whether Lincoln was financially healthy enough to be allowed to invest directly in real estate. I&aposd concluded that with its then highly liquid balance sheet, it could do so safely. This was bore Keating undertook dangerous increases in the leveraging of his balance sheet and long bore he was exposed as a scoundrel. To this day I don&apost know whether he&aposd started committing crimes by the time I began my research. My report surfaced when the Senate Ethics Committee opened hearings into Keating&aposs connections to five senators, who came to be known as the Keating Five. John McCain, one of those being investigated, testified that my assessment had helped reassure him about Keating. I told the New York Times that I was embarrassed by my failure to foresee what the company would do, and added, "I was wrong about Lincoln."

　　The incident was doubly painful for me because it caused trouble for Andrea. By this time she had become her network&aposs chi congressional correspondent, and she was covering the Keating scandal. Andrea had always taken extreme care to keep what she called a firewall between my work and hers as our relationship deepened. For example, she never attended any of my congressional testimonies; she strove to avoid even the appearance of a conflict of interest. The Keating hearings put this to the test. Reluctantly, Andrea decided to take herself off the story while the news media explored my connection to the case.

　　No one knew how much the final cleanup of the thrift industry would cost taxpayers—the estimates were in the hundreds of billions of dollars. As the work proceeded, the drain on the Treasury was perceptible, worsening the fiscal challenge for President Bush. The job of trying to recoup some of the losses fell to the Resolution Trust Corporation, which Congress had created in 1989 to sell off the assets of the ruined companies. I was on its oversight board, which was chaired by Treasury Secretary Brady and included Jack Kemp, then the secretary of housing and urban development; real estate developer Robert Larson; and former Fed governor Philip Jackson. The RTC had a professional staff, but for me by early 1991 being on the oversight board was almost like having a second job. I spent large amounts of time poring over detailed documents and attending meetings. The vast numbers of uninhabited properties we managed were deteriorating rapidly from lack of maintenance, and unless we moved quickly to get rid of them, we would end up with one huge write-off. Moreover, we would probably have been saddled with a bill to tear a lot of them down. I kept adding up the cost in my mind. It was not a pretty thought.

　　S&L mortgages that were still paying interest had sold off readily in the market. But now the RTC had gotten down to the assets nobody seemed to want: half-built malls in the desert, marinas, golf courses, tacky new condo complexes in overbuilt residential markets, repossessed half-empty office buildings, uranium mines. The scope of the problem beggared the imagination: Bill Seidman, who chaired both the RTC and the Federal Deposit Insurance Corporation, calculated that if the RTC sold off $1 million of assets a day, it would need three hundred years to sell them all. Clearly, we needed a different approach.

　　I&aposm not sure who came up with the creative sales idea. As we finally presented it, the plan was to group the properties into $ 1 billion blocks. For the first package, which we offered at auction, we especially solicited the bids of a few dozen qualified buyers, mostly businesses with track records of turning around sick properties. "Qualified" doesn&apost necessarily mean "savory"—the groups we approached included so-called vulture funds and speculators whose reputations could have used a face-lift.

　　Only a few bids materialized, and the package went for a comparative song—just over $500 million. What&aposs more, the winning bidder had to make a down payment of only a fraction of the price, and then pay installments based on how much cash the properties generated. The deal looked like a giveaway, and as we&aposd expected, public watchdogs and Congress were outraged. But there&aposs nothing like a bargain to stimulate demand. Large numbers of greedy investors rushed to get in on the action, the prices of the remaining blocks of property soared, and within a few months the RTC&aposs shelves were stripped bare. By the time it disbanded in 1995, the RTC had liquidated 744 S&Ls—more than a quarter of the industry. But thanks in part to the asset sales, the total bill to taxpayers was $87 billion, far less than originally feared.

　　Commercial banks also were in serious trouble. This was an even bigger headache than the S&Ls because banks represent a far larger and more important sector of the economy. The late 1980s was their worst period since the Depression; hundreds of small and medium-size banks failed, and giants like Citibank and Chase Manhattan were in distress. Their problem, as with the S&Ls, was too much speculative lending: in the early eighties, the major banks had gambled on Latin American debt, and then, as those loans went bad, like amateur gamblers trying to get square they&aposd bet even more by leading the whole industry into a binge of commercial real estate lending.

　　The inevitable collapse of the real estate boom really shook the banks. Uncertainty about the value of the real estate collateral securing their loans made bankers unsure how much capital they actually had—leaving many of them paralyzed, frightened, and reluctant to lend further. Big businesses were able to tap other sources of funds, such as innovative debt markets that had sprung up on Wall Street—a phenomenon that helped keep the 1990 recession shallow. But small and midsize manufacturers and merchants all over America were finding it hard to get even routine business loans approved. And that, in turn, made the recession unusually difficult to snap out of.

　　Nothing we did at the Fed seemed to work. We&aposd begun easing interest rates well bore the recession hit, but the economy had stopped responding. Even though we lowered the fed funds rate no fewer than twenty-three times in th SAT阅读材料：格林斯潘回忆录第二页第三页

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　　budget, so tough cuts could be presented to incoming cabinet members as a fait accompli. Stockman was a brilliant, hungry thirty-four-year-old congressman from rural Michigan who relished being the point man for what came to be called the Reagan Revolution. In speeches Reagan had compared downsizing the government to applying fatherly discipline: "You know ,we can lecture our children about extravagance until we run out of breath. Or we can cure their extravagance by simply reducing their allowance." In Stockman&aposs version this philosophy had a fiercer name: it was called "starving the beast."

　　I worked closely with Stockman during the transition as he fashioned a budget that was tough as nails. And I was there the day shortly bore the inauguration when he presented it to Reagan. The president said, "Just tell me, David. Do we treat everyone the same? You have to cut everybody equally nastily." Stockman assured him he had, and Reagan gave his okay.

　　The Economic Policy Board found itself called into action more quickly than anyone expected. The cornerstone of the Reagan tax cuts was a bill that had been proposed by Congressman Jack Kemp and Senator William Roth. It called for a dramatic three-year, 30 percent rollback of taxes on both businesses and individuals, and was designed to jolt the economy out of its slump, which was now entering its second year. I believed that if spending was restrained as much as Reagan proposed, and as long as the Federal Reserve continued to enforce strict control of the money supply, the plan was credible, though it would be a hard sell. That was the consensus of the rest of the economic board as well.

　　But Stockman and Don Regan, the incoming treasury secretary, were having doubts. They were leery of the growing federal dicit, already more than $50 billion a year, and they began quietly telling the president he ought to hold off on any tax cuts. Instead, they wanted him to try getting Congress to cut spending first, then see whether the resulting savings would allow for tax reductions.

　　Whenever this talk of postponement would get intense, George Shultz would summon the economics advisory board to Washington. This happened five or six times during Reagan&aposs first year. We&aposd meet in the Roosevelt Room from 9:00 a.m. to 11:00 a.m. and compare our assessments of the economic outlook. Promptly at 11:00, the door would open, and in would come Reagan. Our group reported directly to him. And we&aposd tell him, "Under no circumstances should you delay the tax cut." He&aposd smile and joke; Shultz and Friedman and others were old friends of his. Regan and Stockman, who were permitted to attend the meetings but were not allowed to take seats at the conference table or to vote, would sit along the wall and smolder. Presently the session would end and Reagan would leave, fortified in his resolve to press for his tax cuts. Ultimately, of course, Congress approved a version of his economic plan. But since Congress shied away from the necessary restraints on spending, the dicit remained a huge and growing problem.

　　I played a small role in another presidential decision that first year: not to meddle with the Fed. Reagan was being urged to do so by many people in both parties, including some of his top aides. With double-digit interest rates now entering their third year, people wanted the Fed to expand money supply growth. Not that Reagan could command the chairman of the Fed to do this. But, the theory went, if he were to criticize the Fed publicly, Volcker might feel obliged to ease up.

　　Whenever the question arose, I would tell the president, "Don&apost pressure the Fed." For one thing, Volcker&aposs policy seemed right—inflation did seem to be slowly coming under control. For another thing, open disagreement between the White House and the Fed could only shake investors&apos confidence, slowing the recovery.

　　Volcker didn&apost make things easy for the new president. The two men had never met, and a few weeks after taking office, Reagan wanted to get acquainted. In order to avoid the appearance of summoning the Fed chairman to the White House, he asked if he could come see Volcker at the Fed—only to have Volcker send back word that such a visit would be "inappropriate." I was perplexed: I did not see how a visit by the president could compromise the Fed&aposs independence.

　　Nevertheless, Reagan persisted, and finally Volcker allowed that he would be willing to meet at the Treasury Department. The president&aposs opening line at their lunch in Don Regan&aposs office became part of the Reagan legend. He said mildly to Volcker, "I&aposm curious. People are asking why we need a Fed at all." I am told Volcker&aposs jaw dropped; he had to regroup bore coming back with a persuasive dense of the institution. This evidently satisfied Reagan, who went back to being his amiable self. He had communicated that the Federal Reserve Act was subject to change. The two men cooperated quietly from then on. Reagan gave Volcker the political cover he needed; no matter how much people complained, the president made it his practice never to criticize the Fed. And though Volcker was a Democrat, when his term ended in 1983, Reagan reappointed him.

　　In late 1981, Reagan asked me to take the lead in dealing with a colossal headache that had been building for years: Social Security was running out of money. During the Nixon administration, when the program had seemed flush with reserves, Congress had taken the fatul step of indexing benits to inflation. As inflation soared through the 1970s, so did the costof-living increases in people&aposs Social Security checks. The system was in such financial straits that an added $200 billion was going to be needed as early as 1983 to keep the program afloat. The long-term prospects looked even worse.

　　Reagan had shied away from talking in any detail about Social Security during his campaign—when the question came up, he&aposd pledged simply to preserve the system. And no wonder. Social Security is truly the third rail of American politics. There was nothing more explosive than Social Security rorm: everybody knew that no matter how you dressed it up, any solution was in the end going to involve either raising taxes or cutting benits for a huge and powerful bloc of voters, or both.

　　Yet the problem was serious, and leaders in both parties understood that something needed to be done—either that, or face the likelihood of not being able to mail checks to thirty-six million senior citizens and disabled Americans. We were getting down to the wire. Reagan&aposs opening gambit, in his first budget, was to propose a $2.3 billion reduction in Social Security outlays. That raised such a storm of protest that he was forced to back down. Three months later he came back harder, with a rorm proposal that would cut $46 billion in benits over five years. But it was clear that a bipartisan compromise was the only hope. Thus the Greenspan Commission was born.

　　Most commissions, of course, don&apost do anything. But Jim Baker, the architect of this one; believed passionately that government could be made to work. The commission he built was a virtuoso demonstration of how to get things done in Washington. It was a bipartisan group, with five members chosen by the White House, five by the Senate majority leader, and five by the Speaker of the House. Virtually every commissioner was an all-star in his or her field. There were congressional heavy hitters like Bob Dole, the chairman of the Senate Finance Committee; Pat Moynihan, the brilliant maverick senator from New York; and Claude Pepper, the outspoken eighty-one-year-old congressman from Florida who was a senior citizens&apos icon.Lane Kirkland, the head of the AFL-CIO, was a member and became a close friend; so was Alexander Trowbridge, the head of the National Association of Manufacturers. House SpeakerTip O&aposNeill appointed the top Democrat—Bob Ball, who had run the Social Security Administration for LB J. And the president appointed me as chairman.

　　I won&apost go into the intricacies of demographics and finance we mastered, or the policy debates and hearings that ate up more than a year. I ran the commission in the spirit that Jim Baker had envisioned, aiming for an fective bipartisan compromise. We took four key steps to make the whole thing work, which I&aposll mention because I&aposve used variations of them ever since.

　　The first was to limit the problem. In this case, it meant not taking up the issue of the future funding of Medicare—while technically part of Social Security, Medicare was a far more complex problem, and trying to solve both could mean we would do neither.

　　The second was to get everyone to agree on the problem&aposs numerical dimensions. As Pat Moynihan later put it, "You&aposre entitled to your own opinion, but you&aposre not entitled to your own facts." When it was clear that a long-term shortfall was real, commission members lost their ability to demagogue. They had to support cuts in benits and/or support a rise in revenues. Reverting to the cop-out of financing Social Security from the federal government&aposs "general revenues" was adamantly ruled out early by Pepper, who worried it would cause Social Security to become a welfare program.

　　The third smart tactic came from Baker. If we wanted a compromise to succeed, he argued, we had to bring everybody along. So we made a point of keeping both Reagan and O&aposNeill in the loop as we worked. It became Bob Ball&aposs job to inform O&aposNeill, and my job and Baker&aposs to inform the president.

　　Our fourth move was to agree among the commissioners that once a compromise was reached, we would stand firm against any amendments being imposed by either party. I later told reporters, "If you take pieces out of the package, you will lose the consensus, and the whole agreement starts to unravel." We published our report in January 1983; when it was finally time to present the rorm proposals to Congress, Ball and I resolved to testify side by side. Whenever a Republican asked a question, I would answer it. And whenever a Democrat asked a question, he would answer it. Which is just what we tried to do, though the senators didn&apost entirely cooperate.

　　Diverse as our commission was, we found ways to agree. What brought together men like Claude Pepper and the head of the manufacturers was the care we took to spread the burden. The Social Security Amendments, which Reagan ultimately signed into law in 1983, involved pain for everyone. Employers had to absorb further increases in the payroll tax; employees faced higher taxes too and in some cases saw the date when they could anticipate receiving benits pushed further into the future; retirees had to accept postponement of cost-of-living increases, and wealthier retirees began having their benits taxed. But by doing all this, we succeeded in funding Social Security over the seventy-five-year planning period that is conventional for social insurance programs. Moynihan, with his usual eloquence, declared: "I have the strongest feeling that we all have won. What we have won is a resolution of the terrible fear in this country, that the Social Security system was, like a chain letter, something of a fraud."

　　As all this was still unfolding in 1983,1 was in my office one day in New York poring over demographic projections when the telephone rang. It was Andrea Mitchell, a reporter for NBC. "I&aposve got some questions about the president&aposs budget proposals/&apos she said. She explained that she&aposd been trying to figure out whether the Reagan administration&aposs latest fiscal-policy assumptions were credible, and that David Gergen, the assistant to the White House communications chi, had suggested my name. She told me Gergen had said, "If you really want to know about the economy, why don&apost you call Alan Greenspan? He knows more than anybody."

　　"I&aposll bet you say that to all the economists/&apos I replied, "but sure, let&aposs talk." I&aposd noticed Andrea on NBC newscasts. She was a White House correspondent. I thought she was very articulate and that her voice had the nicest authoritative resonance. Also, I&aposd noted, she was a very good-looking woman.

　　We talked that day and a few more times, and soon I became a regular source. Over the next two years, Andrea would phone whenever she had a big economics story in the works. I liked the way she handled the material on TV; even when the issues were too complex to present in their full technical detail, she would find the crux of the story. And she was accurate with the facts.

　　In 1984 Andrea asked if I&aposd come with her to the White House Correspondents&apos Dinner, where reporters invite their sources. I had to tell her that I&aposd already agreed to go with Barbara Walters. But I added, "Do you ever get to New York? Maybe we could have dinner."

　　It took another eight months bore we could connect—it was an election year, and Andrea was extremely busy through November, when Reagan deated Mondale in a landslide. Finally when the holidays arrived, we scheduled a date, and I made a reservation at Le Perigord, my favorite restaurant in New York, for December 28. It was a snowy night and Andrea rushed in late, looking very beautiful if a bit disheveled after a day of reporting the news and trying to hail cabs in the snow.

　　That night I discovered she was a former musician like me; she&aposd played violin in the Westchester Symphony. We loved the same music—her record collection was similar to mine. She liked baseball. But mainly we shared an intense interest in current affairs—strategic, political, military, diplomatic. There was no shortage of things to talk about.

　　It might not be everybody&aposs idea of first-date conversation, but at the restaurant we ended up discussing monopolies. I told her I&aposd written an essay on the subject and invited her back to my apartment to read it. She teases me about that now, saying, "What, you didn&apost have any etchings?" But we did go to my apartment and I showed her this essay I&aposd written on antitrust for Ayn Rand. She read it and we discussed it. To this day, Andrea claims I was giving her a test. But it wasn&apost that; I was doing everything I could think of to keep her around.

　　For much of Reagan&aposs second term, Andrea was my main reason to go to Washington. I stayed in touch with people in the government, but my focus was almost entirely in the business and economics world of New York. As business economics matured as a profession, I&aposd gotten deeply involved in its organizations. I&aposd served as president of the National Association of Business Economists and as chairman of the Conference of Business Economists, and was slated to become chairman of the Economic Club of New York, the financial and business world&aposs equivalent of the Council on Foreign Relations.

　　Townsend-Greenspan itself had changed. Large economics firms with names like DRI and Wharton Econometrics had grown up to supply much of the basic data needed by business planners. Computer modeling had become much more widespread, and many corporations had economists of their own. I&aposd experimented with diversifying into investment and pension-fund consulting, but while those ventures made money, they weren&apost as lucrative as corporate consulting. Also, more projects meant more employees, which meant more of my time had to be spent managing the business.

　　Ultimately I concluded that the best course was to focus exclusively on what I did best: solve interesting analytical puzzles for sophisticated clients who needed answers and couldpay high-end fees. So in the second half of the Reagan administration I planned to scale back Townsend-Greenspan. But bore I could implement those plans, in March 1987, I received a phone call from Jim Baker. Baker was by this time treasury secretary—after an intense four years as White House chi of staff, he&aposd made an unusual job swap, trading posts in 1985 with Don Regan. Jim and I had been friends since the Ford days, and I&aposd helped him prepare for his Senate confirmation hearing the spring he took over at Treasury. He had his assistant call to ask if I could come to Washington for a meeting at his house. This struck me as odd—why not meet at his office? But I agreed.

　　The next morning a Washington driver delivered me to Baker&aposs nice old Georgian colonial on an elegant stretch of Foxhall Road. I was surprised to find waiting for me not only Jim but also Howard Baker, President Reagan&aposs current chi of staff. Howard got right to the point. "Paul Volcker may be leaving this summer when his term runs out/&apos he began. "We&aposre not in a position to offer you the job, but we&aposd like to know—if it were to be offered, would you accept?"

　　I was brily at a loss for words. Until a few years bore, I&aposd never thought of myself as a potential Fed chairman. In 1983, as Volcker&aposs first term was ending, I&aposd been startled when one of the Wall Street firms conducted a straw poll of who might replace Volcker if he were to leave and my name turned up on top of the list.

　　As close as I was to Arthur Burns, the Fed had always been a black box to me. Having watched him struggle, I did not feel equipped to do the job; setting interest rates for an entire economy seemed to involve so much more than I knew. The job seemed amorphous, the type of task in which it is very easy to be wrong even if you have virtually full knowledge. Forecasting a complex economy such as ours is not a ninety-ten proposition. You&aposre very fortunate if you can do sixty-forty. All the same, the challenge was too great to turn down. I told the Bakers that if the job were offered, I would accept.

　　I had plenty of time to get cold feet. Over the next two months, Jim Baker would phone to say things like "It&aposs still under discussion" or "Volcker is thinking about whether he wants to stay." I felt alternately fascinated by the possibility and a little unsettled. It wasn&apost until just bore Memorial Day that Baker phoned and said, "Paul has decided to leave." He asked if I was still interested and I said yes. He said, "You&aposll be getting a call from the president in a few days."

　　Two days later I was at my orthopedist&aposs office and the nurse came in to say the White House was on the line. It had taken the call a few minutes to get through because the receptionist had thought it was a prank. They let me use the doctor&aposs private office to take the call. I picked up the phone and heard that familiar, easy voice. Ronald Reagan said, "Alan, I want you to be my chairman of the Federal Reserve Board."

　　I told him I would be honored to do so. Then we chatted a bit. I thanked him and hung up.

　　As I stepped back into the hall, the nurse seemed very concerned. "Are you all right?" she asked. "You look like you&aposve gotten bad news."

　　FIVE BLACK MONDAY

　　I&aposd scrutinized the economy every working day for decades and had visited the Fed scores of times. Nevertheless, when I was appointed chairman, I knew I&aposd have a lot to learn. That was reinforced the minute I walked in the door. The first person to greet me was Dennis Buckley, a security agent who would stay with me throughout my tenure. He addressed me as "Mr. Chairman."

　　Without thinking, I said, "Don&apost be silly. Everybody calls me Alan."

　　He gently explained that calling the chairman by his first name was just not the way things were done at the Fed.

　　So Alan became Mr. Chairman.

　　The staff, I next learned, had prepared a series of intensive tutorials diplomatically labeled "one-person seminars," in which I was the student. This meant that for the next ten days, senior people from the professional staff gathered in the Board&aposs fourth-floor conference room and taught me my job. I learned about sections of the Federal Reserve Act I never knew existed—and for which I was now responsible. The staff taught me arcana about banking regulation that, having been a director of both JPMorgan and Bowery Savings, I was amazed I&aposd never encountered. Of course, the Fed had experts in every dimension of domestic and international economics as well as the capability to call in data from everywhere—privileged access that I was eager to explore.

　　Though I&aposd been a corporate director, the Board of Governors of the Federal Reserve System, as it is formally known, was an order of magnitude larger than anything I&aposd ever run—today the Federal Reserve Board staff includes some two thousand employees and has an annual budget of nearly $300 million. Fortunately, running it wasn&apost my job—the long-standing practice is to designate one of the other Board members as the administrative governor to oversee day-to-day operations. There is also a staff director for management who acts as a chi of staff This way, only issues that are out of the ordinary or that might spark public or congressional interest are brought to the chairman, such as the massive challenge of upgrading the international payments system for the turn of the millennium. Otherwise

　　he is free to concentrate on the economy—just what I was eager to do.

　　The Fed chairman has less unilateral power than the title might suggest. By statute I controlled only the agenda for the Board of Governors meetings—the Board decided all other matters by majority rule, and the chairman was just one vote among seven. Also, I was not automatically the chairman of the Federal Open Market Committee, the powerful group that controls the federal funds rate, the primary lever of U.S. monetary policy* The FOMC is made up of the seven Board governors and the presidents of the twelve regional Federal Reserve banks (only five can vote at any one time), and it too makes decisions by majority rule. While the Board chairman is traditionally the chair of the FOMC, he or she must be elected each year by the members, and they are free to choose someone else. I expected precedent to prevail. But I was always aware that a revolt of the six other governors could remove all of my authority, except writing the Board agendas. [*When the FOMC changes this rate, the committee directs the Fed&aposs so-called open market desk in New York to either buy or sell treasury securities—often billions of dollars&apos worth in a day Selling by the Fed acts as a brake, withdrawing from the economy the money received in the transaction and pushing short-term interest rates higher, while buying does the reverse. Today the fed funds rate that the FOMC is seeking is publicly announced, but in those days it wasn&apost. So Wall Street firms would assign "Fed watchers" to divine changes in monetary policy from the actions of our traders or changes in our weekly reported balance sheet. ]

　　I quickly got hold of Don Kohn; the FOMC secretary and had him walk me through the protocols of a meeting. (Don; who would prove to be the most fective policy adviser in the Fed system during my eighteen years, is now vice chairman of the Board.) The FOMC held its meetings in secret, so I had no idea what the standard agenda or timetable was, who spoke first, who derred to whom, how to conduct a vote, and so on. The committee also had its own lingo that I needed to get comfortable with. For example, when the FOMC wanted to authorize the chairman to notch up the fed funds rate if necessary bore the next regular meeting, it did not say, "You may raise interest rates if you decide you have to"; instead it voted to give an "asymmetric directive toward tightening."* I was scheduled to run one of those meetings the following week, on August 18, so I was a highly motivated student. Andrea still jokes about my coming over to her house that weekend to curl up with Robert&aposs Rules of Order.

　　I felt a real need to hit the ground running because I knew the Fed would soon face big decisions. The Reagan-era expansion was well into its fourth year, and while the economy was thriving, it was also showing clear signs of instability. Since the beginning of the year, when the Dow Jones Industrial Average had risen through 2,000 for the first time, the stock market had run up more than 40 percent—now it stood at more than 2,700 and Wall Street was in a speculative froth. Something similar was happening in commercial real estate.

　　The economic indicators, meanwhile, were far from encouraging. Huge government dicits under Reagan had caused the national debt to the public to almost triple, from just over $700 billion at the start of his presidency to more than $2 trillion at the end of fiscal year 1988. The dollar was falling, and people were worried about America losing its competitive edge— the media were full of alarmist talk about the growing "Japanese threat." Consumer prices, which had gone up just 1.9 percent in 1986, were rising at nearly double that rate in my first days in office. Though 3.6 percent inflation was far milder than the double-digit nightmare people remembered from the 1970s, once inflation begins, it usually grows. We were in danger.[*For the record, even as I learned "Fedspeak," I would joke to the staff, "Whatever happened to the English language?" ]of forfeiting the victory that had been gained at such great misery and cost under Paul Volcker.

　　These were vast economic issues, of course, far beyond the power of the Fed alone to resolve. Yet the worst course would be to sit idly by. I thought a rate increase would be prudent, but the Fed hadn&apost raised interest rates for three years. Hiking them now would be a big deal. Any time the Fed changes direction, it can rattle the markets. The risk in clamping down during a stock-market surge is especially acute—it can pop the bubble of investor confidence, and if that scares people enough, can trigger a severe economic contraction.

　　Though I was friendly with many of the committee members, I knew better than to think that a chairman who had been around for a week could walk into a meeting and shape a consensus on such a risky decision. So I did not propose a rate increase; I simply listened to what the others had to say. The eighteen committee members* were all seasoned central bankers and economists, and as we went around the table comparing assessments of the economy, it was apparent that they, too, were concerned. Gerry Corrigan, the gruff president of the New York Fed, said we ought to raise rates; Bob Parry, the Fed president from San Francisco, reported that his district was seeing good growth, high optimism, and full employment—all reasons to be leery of inflation; Si Keehn from Chicago agreed, reporting that the Midwest&aposs factories were running near full capacity and that even the farm outlook had improved; Tom Melzer of the St. Louis Fed told of how even the shoe factories in that district were operating at 100 percent; Bob Forrestal from Atlanta described how his staff had been surprised at the strength of employment figures even in chronically depressed sections of

　　the South. I think everyone walked away persuaded that the Fed would have to raise rates soon.

　　The next opportunity to do so was two weeks later, on September 4, at a meeting of the Board of Governors. The Board controls the other main lever of monetary policy, the "discount rate" at which the Federal Reserve lends to depository institutions. This rate generally moves in lockstep with the rate on fed funds. Prior to the scheduled Board meeting, I spent a few [*There was one vacancy on the Federal Reserve Board. ]days working my way up and down the corridor seeking out the governors in their offices, building consensus. The meeting, when it came, moved quickly to a vote—the rate increase, from 5.5 percent to 6 percent, was approved by the governors unanimously.

　　To subdue inflationary pressures, we were trying to slow the economy by making money more expensive to borrow. There&aposs no way to predict how severely the markets will respond to such a move, especially when investors are gripped with speculative fervor. I couldn&apost help but remember accounts I&aposd read of the physicists at Alamogordo the first time they detonated an atom bomb: Would the bomb fizzle? Would it work the way they hoped? Or would the chain reaction somehow go out of control and set the earth&aposs atmosphere on fire? After the meeting ended, I had to fly to New York; from there I was scheduled to leave that weekend for Switzerland, where I was attending my first meeting of the central bankers of the ten leading industrialized nations. The Fed&aposs hope was that the key markets— stocks, futures, currency, bonds—would take the change in stride, maybe with stocks cooling off slightly and the dollar strengthening. I kept calling back to the office to check how the markets were responding.

　　The sky did not catch fire that day. Stocks dipped, banks upped their prime lending rates in line with our move, and the financial world, as we&aposd hoped, noted that the Fed had begun acting to quell inflation. Perhaps the most dramatic impact was rlected in a New York Times headline a few days later: "Wall Street&aposs Sharpest Rise: Anxiety." I was finally allowing myself to breathe a sigh of reli when a message reached me from Paul Volcker. He knew exactly what I&aposd been going through. "Congratulations," it read. "You are now a central banker."

　　I did not for a minute think we were out of the woods. Signs of trouble in the economy continued to mount. Slowing growth and a further weakening of the dollar put Wall Street on edge, as investors and institutions began confronting the likelihood that billions of dollars in speculative bets would never pay off. In early October, that fear turned to near panic. The stock market skidded, by 6 percent the first week, then another 12 percent the second week. The worst loss was on Friday, October 16, when the Dow Jones average dropped by 108 points. Since the end of September nearly half a trillion dollars of paper wealth had evaporated in the stock market alone—not to mention the losses in currency and other markets. The decline was so stunning that Time magazine devoted two full pages to the stock market that week under the headline "Wall Street&aposs October Massacre."

　　I knew that from a historical perspective this "correction" was not nearly the most severe. The market slump in 1970 had been proportionally twice as large, and the Great Depression had wiped out fully 80 percent of the market&aposs value. But given how poorly the week had ended, everyone was worried about what might happen when the markets opened again on Monday.

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