Clintonomics Watch: Keep Calm
Jude Wanniski
February 22, 1993


We would be advising you to head for the hills if, as The New York Times reported Saturday, Fed Chairman Alan Greenspan had told the Senate Banking Committee Friday: 1) He endorsed the Clinton economic plan, and 2) He more or less said he would accommodate the plan's contractionary fiscal policy with easy money. I watched every minute of Greenspan's three hours of testimony and can assure you he did not endorse the plan and, most important of all, he did not give the committee Democrats the slightest indication that he would offset an economic contraction by flooding the banking system with reserves, which is what they wanted to hear. Indeed, the hearing went on as long as it did because Chairman Donald Riegel (D-Mich.) and Senator Paul Sarbanes (D-Md.) spent the last hour trying to get Greenspan to say just that, while he drove them crazy with subtleties, refusing to be pinned down. Greenspan's performance was a masterful job in which he preserved his independence and prestige. He did no more than commend the President for putting a credible plan on the table, initiating a debate that was necessary. He refused several times to say whether the plan would work or not work, pointedly saying he had not analyzed it beyond its outline. He said it was up to Congress to do that work and if they did it well, their work would be rewarded in the bond market with lower long-term interest rates, not by easy money by the Fed.

Nevertheless, the press uniformly decided Greenspan had endorsed the plan and promised easy money. Senator Pat Moynihan, chairman of the Senate Finance Committee, read the front page account in the Times prior to his Saturday morning interview on the Evans & Novak television show. He was clearly thrilled that Greenspan had "endorsed" the plan and had promised to offset the contractionary effects of the plan with an increase in the money supply, although he seemed a bit puzzled when Novak informed him Greenspan had done no such thing. Moynihan indicated he could vote for the Clinton plan as is, without risk that it would cause economic decline, precisely because he had read of Greenspan's promise in the newspapers. This is exactly why Greenspan is so critical to this process. It is why I advise remaining calm instead of heading for the hills, because Greenspan, the smartest man in Washington in these matters, is becoming the most powerful man in Washington in the unfolding economic debate. As Moynihan and Treasury Secretary Lloyd Bentsen learn the subtleties of Greenspan's thinking -- as opposed to reports in the press, they will realize the enormous risks they are undertaking. He is saying it is not possible for the Fed to offer them a safety net if they screw up. They are in the hands of the financial markets, a very tough audience.

The most important part of his testimony was a professorial lecture he delivered in his opening statement, in which he noted that there was a time, in the '50s and '60s, when the Fed could aggressively print money with no adverse reaction by the markets. This, he said, is because the markets had been conditioned to a history of low or negligible inflation in the United States. Buyers of government debt overlooked monetary "accommodations." But these excesses in the '70s finally caused "the dam to break," as Greenspan put it, and creditors are now sensitized to the slightest hint that the Fed will pay fast and loose with them. They will "dump bonds," he said, if they see such signs. Greenspan was telling them in this little talk that what they wanted out of him was impossible for him to give. It was clear from the questioning that followed that none of the Senators, with perhaps the exception of Senator Gramm of Texas, understood or even listened to what he was saying.

Senator Kerry (D-Mass.) asked Greenspan if it wasn't inconceivable that the deficit could be closed without raising taxes. Greenspan said no, it was not inconceivable. As an economist, he said, he would say it would be better to do the job completely without tax increases, because deficits tend to actually be reduced when done in that fashion. He added, however, that the Congress does have political considerations that may override pure economic considerations. This was not an invitation or an endorsement of tax increases, however. Greenspan made it painfully clear that he believed the plan presented by the President would be contractionary, but if its ingredients at the end of the process are acceptable to the markets, they will lower long-term interest rates, which will be expansionary. Greenspan read from the precise language of the Humphrey-Hawkins legislation that provides the basic mandate of the Fed. He did this to point out that he is charged with the long-term economic interests of the nation, on growth, employment, and interest rates. He did this also to remind the committee that while the Federal Reserve is bound to recommend money-supply targets compatible with those long-term goals, it is not required to hit them.

With this kind of thinking at the Fed's helm, it is no wonder that the 30-year bond hit the 7 percent mark on Friday afternoon. He is telling the nation's creditors that he is unshakable. This is precisely the reason we predicted in early 1992 that at the end of the year the 30-year bond would hit at least 7% (David Goldman) and probably 6.5% (me) by year-end 1992 or shortly thereafter. Late Friday afternoon, after Greenspan's testimony hit the wires, several clients who had not watched the proceedings called to ask if it wasn't time to bail out of the bond market. Absolutely not. The press corps completely missed the import of Greenspan's testimony. Perhaps by this morning, Senator Moynihan will have been further advised that there ain't going to be a deal with the Fed after all.

There is no question that the Clinton team would like nothing more than to overturn the Reagan Revolution in its entirely. As The Wall Street Journal editorialized Friday, they wish to "erase" the last 12 years. There are people in the White House who I am catching on C-SPAN interviews who are as radically left wing in their hatred of "the rich" as any I've encountered on the fringes of the political spectrum. If Clinton could pass his program "as is," he would do so, thinking it would be painful, but would eventually "solve the problem." He, himself, seems to have no particular ideology, which is why he seems so comfortable changing his perspective and his promises as easily as he changes his socks.

His economic plan is terrible, and as the details emerge it looks worse and worse. But there is little chance it is going to pass into law "as is." The worse it looks, the easier it will be for the Congress to take matters into its own hands, as we have been advising all along.