The Maneuver1
(Oct. 27, '00)

Get some Democrats on the Fed, President Clinton instructed his economic advisers in early 1994. The entire Federal Reserve Board of Governors was made up of Reagan and Bush appointees, but now Clinton had a chance to name two governors to the seven-member board, his first Fed appointments. With interest rates rising, he wanted Treasury and the White House staff to move fast. The instructions weren't quite "Sink Greenspan," but the president wanted some counterweight to the Fed's Republican chairman, Alan Greenspan.

The search began for two academic economists who were Democrats and who would be at least sympathetic to Clinton's overall economic policies.

Robert Rubin, the director of the National Economic Council, sought out Alan Blinder, the deputy on the president's Council of Economic Advisers, one of his allies in the White House.

How about being the Fed vice chairman? Rubin asked.

Blinder, 48, was a tall, thin, balding Princeton economics professor on leave. He wore thick glasses and had the uneasy erudition of many professors, but he also had a sense of humor that demonstrated he knew how dry and pedantic economics could be.

Blinder kept one foot in the traditional mainstream liberalism that looked out for those on the bottom of the economic ladder, but he was a Democrat who didn't use the class-warfare rhetoric Rubin detested. In Rubin's view, Blinder was just about the right mix.

Blinder had earlier declined appointment as one of the Fed's seven governors, but now he thought hard about Rubin's offer. The job at the Fed meant a step up in the Washington pecking order. A Fed governor was C list, anonymous politically and socially, which was about where Blinder was with his current White House position. Vice chairman of the Fed would put him on the B list. As he thought about whether to take the job, Blinder admitted to himself that he had a human foible, shared by many in Washington --- status.

Blinder figured that the vice chairmanship would offer him a seat at the table and a hand in the great interest rate game. Part of his job at the Council of Economic Advisers had been to phone Greenspan a day in advance of the release of the various Commerce and Labor Department economic statistics. He marveled at how Greenspan wallowed in the numbers, frequently asking questions that sent him deep into the charts. Greenspan and he would be number one and two at one of the most important arms of the most important government in the world. After about a day, Blinder told Rubin yes.

When Greenspan got word that Blinder would be coming as the new vice chairman, he asked outgoing Vice Chairman David Mullins to conduct a due diligence review, to check out Blinder's previous publications and statements. Just so we have no surprises, the chairman said.

Mullins dug into columns that Blinder had written for Business Week, old articles and books. Blinder had criticized Paul Volcker, Fed chairman from 1979-87, for clamping down too hard on inflation, declaring at one point that the American economy was not like a Vietnamese hamlet that must be destroyed in order to be saved. In his 1987 book, Hard Heads, Soft Hearts, Blinder wrote that there was too much hysteria about the evils of inflation. Inflation was more like a head cold than a serious disease, and you don't prescribe a lobotomy for a head cold.

Several days later, Mullins, looking worried, came to see Greenspan.

"It's not perfect," he said.

Greenspan grimaced.

"Don't worry," Mullins said, "it's not like he's a Communist or anything. It's just in his early publications he's noticeably soft on inflation." The Fed's job was to fight inflation.

Greenspan quipped, "I would have preferred he were a Communist."

Copyright © 2000 by by Bob Woodward, Simon & Schuster