In FED We Trust by David Wessel

The Great Panic was unimagined except by a few Cassandras who were routinely dismissed as cranks.
    Bush was not alone in his belief that Greenspan’s time at the Fed had been barely short of magic. During the 2000 presidential campaign, Senator John McCain had quipped that if Greenspan were to die, the smart response would be to put sunglasses on him, prop him up, and keep him in office. Greenspan’s last Federal Open Market Committee (FOMC) meeting had turned into a roast. Richard Fisher, president of the Federal Reserve Bank of Dallas, borrowed from Shakespeare. “I … am but a sprout in the crop of otherwise experienced men and women here … but I’m sure they will agree with me that Henry V’s remarks at Agincourt are appropriate: economists and bankers now asleep shall think themselves accursed they were not here.”Greenspan responded with a smile, and then said, “I went to school with Henry V. And the last time I spoke to him he gave me a good notion of strategy.” Everyone laughed.
    In the 1980s, Greenspan had turned his interest in and facility for understanding the inner workings of the American economy into a successful consulting business when Ronald Reagan’s Treasury secretary, James Baker, and chief of staff, Howard Baker, recruited him to succeed Paul Volcker. Volcker had put the U.S. economy through a wrenching recession and accomplished what most people — economists and ordinary folk — thought impossible: bring inflation from the double digits to below 5 percent. But he was not in favor in the Reagan White House. He was a Democrat, for one thing. “Jim Baker didn’t necessarily want a puppet. He just wanted a Republican,” the
Washington Posts
Bob Woodward wrote in his 2000 celebration of Greenspan,
Maestro
. “It was not a matter of trust, it was a matter of good politics. He also wanted a Fed chairman with a more agreeable temperament. Volcker’s crankiness and his I’m-above-politics air were hard to take.”
    Greenspan, in contrast, was both reliably conservative — an acolyte of philosopher Ayn Rand — and politically agile. He had come to Washington in the last dark days of the Nixon White House. (His confirmation hearing to be chairman of Nixon’s Council of Economic Advisers came the same day Nixon went on national TV to resign.) He stayed on to advise Ford and later candidate Ronald Reagan. He was comfortable with politicians and, having dated TV news stars Barbara Walters and Andrea Mitchell, with the press. He was skillful at courting and manipulating both sets of people to protect the Fed’s credibility and independence and to burnish his own reputation.
    Volcker was physically intimidating at six feet seven inches and famously opaque in his utterances. Greenspan was not physically imposing. “How did my Jewish uncle get to be the most powerful man in the world?” Clinton’s labor secretary, Robert Reich, quipped. But he could be intellectually intimidating, just as opaque as Volcker if not more so, and far better at disarming or disabling his opponents inside and outside the Fed. Best of all, he came through his first early test with flying colors.
    Only two months after Greenspan took over from Volcker, in October1987, the stock market crashed. Thanks in part to the Fed’s quick reaction, and some good luck, the crash didn’t produce even a mild recession. Thus was born Greenspan’s reputation as a wise man. Bernanke, who was still fighting off a financial crisis a year and a half after it began, would later complain good-naturedly that Greenspan had it easy.
    Greenspan cemented his status as a guru with unique foresight in the mid-1990s with an intellectually courageous call that the Internet-based New Economy was so fundamentally changing the U.S. economy that the Fed could permit the economy to grow faster than most inflation-fearing economists thought prudent. The result was lower unemployment without higher inflation — and a technology stock market bubble