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
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.