Client: McGraw-Hill
Project/product: The Greenspan Effect

The project
Sometimes publishers generate book ideas and seek out appropriate authors to write those books. McGraw-Hill's business-and-finance trade book division decided that an insightful and accessible book about Federal Reserve Board chairman Alan Greenspan might succeed in the marketplace. They approached our longtime collaborator, Dr. David B. Sicilia -- University of Maryland professor, author, and business historian -- who accepted the assignment and invited us to participate.

Jointly, we produced a manuscript that gives insight into Greenspan's thinking on critical economic issues, and helps investors understand what's important (and what's not) about the activities of Greenspan and the Fed.

The Greenspan Effect has been translated into Japanese, Korean, German, Portuguese, and Chinese.

Excerpt:
Greenspan's [1987] nomination [as Fed chairman] inspired some cheers at the White House -- but also a number of jeers. A national election was looming. What if Greenspan stuck to his Volcker-like anti-inflation principles, took a bite out of the economy, and damaged the chances for a Republican victory in 1988? These concerns were somewhat offset by the numbers. By 1987, the Fed's Board of Governors was completely stacked with Reagan appointees. Surely this concentration of fervent supply-siders could defend the interests of the Republicans and Reagan's anointed successor, George Bush.

Outside the White House, too, there was ample skepticism about the cerebral, baritone-voiced business economist, who possessed absolutely no experience in central banking and only limited credentials in the international arena. Henry Kaufman, a widely respected economist at Salomon Brothers, wondered aloud whether Greenspan would prove able to act in "more than just an advisory capacity." Business Week commented that "Greenspan's skill at maneuvering through the political minefields of Washington remains a big question."

An interesting question began to be asked in the halls of power within the Beltway: Was the Fed taking a step down? No one accused Reagan of trying to undercut the Fed's authority (as Nixon had by attempting to appoint nonentities to the U.S. Supreme Court). But Volcker, stepping down, was taking with him a towering reputation. He was widely heralded as the chief architect of a five-year recovery that had followed years of crippling stagflation. Newsweek called him "arguably the most powerful central banker in modern United States history." As for the White House claim that Greenspan was "as respected as Volcker," the magazine demurred, damning with faint praise: "That isn't quite true -- but he is as close as anyone could get."

None of this was academic. Both inflation and interest rates had declined almost without interruption since 1980, but now were on the rise again. And there was more. Growth in the United States, Germany, and Japan was tepid at best. The dollar was collapsing against foreign currencies, thereby scuttling hopes for greater international cooperation. The U.S. and Japan were arm-wrestling and name-calling over trade issues. Newsweek put it bluntly: "The timing of Volcker's departure could hardly be worse."

Financial markets around the world recorded their opinion of the changing of the guard -- and denominated that opinion in dollars. Immediately following the announcement of Greenspan's appointment, the Dow fell a then-noticeable 22 points. Bond prices did far worse, experiencing their worst one-day decline in five years. In Tokyo, the U.S. dollar fell from 145 yen to 142.5; in Paris, the dollar fell 2 percent against the French franc.

But all rebounded quickly. The following day, the Dow climbed 42.47, and the dollar recovered some of its lost ground both in Tokyo (where it finished the week at 143.6) and in Paris (where it recouped half of its losses from the previous day).

In other words, even before he had taken office, the new Fed chairman had produced his first Greenspan Effect. There would be many more to follow, and they are the subject of this book.

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