Gary H. Stern - President, 1985-2009
Published June 1, 1991 | June 1991 issue
By David M. Jones
New York Institute of Finance/Simon and Schuster
David Jones, one of the truly knowledgeable "Fed Watchers" on Wall Street, has written The Politics of Money: The Fed Under Alan Greenspan, a selective review of the rather tumultuous financial developments of the past six years. The book is not aimed at the financial professional already familiar with the events, practices and policies Jones describes. Rather, it is intended for the interested but casual observer who wants to gain further perspective and insight on recent financial developments and the Federal Reserve's role in them. In this effort, Jones succeeds remarkably, although occasionally he trades depth for breadth and gives some events a "nice over lightly" treatment.
The book is particularly valuable in discussing the institutional aspects of monetary policy, including the composition and decision-making process of the Federal Open Market Committee (FOMC), the key policy group in the Federal Reserve. It includes a scorecard of Federal Reserve chairmen, in which Marriner Eccles (chairman from 1934-48) receives the highest grade and G. William Miller (1978-79) the lowest. Paul Volcker is graded A and Alan Greenspan B, for what it is worth. The book also addresses the political pressures sometimes put on Federal Reserve policymakers and discusses some of the more novel financial practices and instruments that emerged in the 1980s.
There were a number of financial "accidents" in the latter half of the 1980s that Jones summarizes effectively. The stock market collapse of October 1987 and the Fed's response are described, as is the somewhat different experience of October 1989. The 1989 Thanksgiving Fiasco, when Fed watchers seriously misjudged monetary policy, is covered, along with the collapse of Drexel Burnham Lambert and the liquidity crisis at First Republic Bank of Dallas. Jones also relates fascinating details of the fateful Feb. 24, 1986, meeting of the Federal Reserve Board, at which Vice Chairman Preston Martin and several other governors nearly succeeded in overthrowing Chairman Volcker. The accuracy of Jones' account is difficult to assess, however, because many of the principals are not yet speaking for the record.
If I have reservations about the book, they mostly have to do with Jones' depiction of recent monetary policy. On occasion, he tends to exaggerate rather minor developments and invests them with more significance than they warrant. For example, Jones reports on the use by some policymakers of "auction market" variables to measure the impact, and help chart the future course, of monetary policy. To be sure, such variables are important to individual members of the FOMC, but they have not gained widespread, much less official, acceptance from the FOMC.
Jones also believes that the FOMC was preoccupied with achieving the "fabled" soft landing of the economy during 1989-90. While a soft landing may have been desirable, I do not think that the FOMC ever took such an outcome as its objective. For one thing, the FOMC has in recent years consistently put emphasis on achieving price stability, a goal endorsed frequently in both congressional testimony and speeches by a wide spectrum of Federal Reserve officials. Moreover, while the economic forecast prepared by the staff of the Board of Governors may have had the contours of a soft landing, policymakers know of the uncertainty that necessarily accompanies such forecasts and do not accept such projections without reservation.
Perhaps Jones' most serious charge about the conduct of policy during the Greenspan years is that, because of the chairman's preference to "look at everything"that is, all available evidence on the economydecisions were difficult to reach and occasionally paralysis arrested the decision-making process. In short, Jones believes monetary policy did not react as rapidly as it could and should have to emerging economic trends because the FOMC was slow to discern changes in business activity.
This charge seems questionable on at least two grounds. First, there is no sense in throwing away information, so the concern that policymakers unnecessarily examine a plethora of statistics before reaching a conclusion is, in my view, without merit. More fundamentally, I am unaware of instances of paralysis plaguing policy. Indeed, one of the hallmarks of the Greenspan years has been frequent, incremental changes in policy as the situation warrants.
Of course, interpretations of deliberations and actions may differ, and Jones may simply be suggesting that, were he chairman of the Federal Reserve, he would do some things differently and act more decisively. In this spirit, and since he is into scorecards, I will grade his bookgive it a (strong) B.