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Chairman Moved a Nation

Federal Reserve Chairman Alan Greenspan escorts Nancy Reagan out of the Ronald Reagan Presidential Library on April 9, 2003, in Simi Valley, Calif.
Federal Reserve Chairman Alan Greenspan escorts Nancy Reagan out of the Ronald Reagan Presidential Library on April 9, 2003, in Simi Valley, Calif. (Ric Francis - AP)

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"What came out was essentially the commission report pre-agreed to by the speaker of the house and . . . President Reagan," Greenspan said during his testimony.

He and Ball also crafted a pact on how to handle the House Ways and Means Committee's hearing on the report. "I said to Ball, 'When the Republicans ask you a question, I will answer it, and I hope you will answer the questions that the Democrats ask me.' And it worked remarkably well."

It was during the Nixon, Ford and Reagan years that Greenspan worked with the officials who later would elevate him to become Fed chairman in 1987, replacing Paul A. Volcker.

The Fed's main job is to keep inflation and unemployment low by adjusting interest rates -- acting independently of the White House or Congress.

During the administration of President George H.W. Bush, from 1989 through 1992, Greenspan resisted White House pressure to keep interest rates lower than he thought necessary. Bush later blamed Greenspan for his electoral loss to Clinton in 1992.

Greenspan had smoother relations with Bush's Democratic successor. In early 1993, the Fed chairman lent critical support to Clinton's deficit-reduction plan -- even though it included tax increases -- describing it on Capitol Hill as "a very positive force for the American economy." The package passed with no Republican votes, but Greenspan's public backing helped win some dearly needed Democratic ones, recalled Rep. Barney Frank (D-Mass.).

During the mid-1990s, Greenspan worked closely with Clinton's economic team in crafting responses to financial crises in Mexico, Asia, Russia and elsewhere -- even when those efforts occasionally required government influence on the markets -- and drumming up support for them on Capitol Hill and elsewhere.

By early 1995, Greenspan's political influence was so great that House Majority Leader Newt Gingrich asked him to call conservative talk show host Rush Limbaugh to explain the Clinton administration's plan to rescue Mexico, which was close to defaulting on its debts. Gingrich supported the plan, which the Fed chairman had helped design, but congressional Republicans were balking.

"I was looking for ways to get the conservative community to understand. . . . Rush is a leading communicator to 14 to 15 million conservatives," Gingrich recalled in an interview. Greenspan "is the leading economic policy analyst in the U.S. and arguably the world."

The Fed chief reluctantly made the call. Even so, Congress refused to back the plan, forcing the administration to take a different approach that didn't require lawmakers' approval.

Meanwhile, as the economy boomed in the late 1990s, unemployment fell, stock prices soared and the federal budget deficits turned into surpluses.

"The Clinton administration had huge successes carrying out the economic policies essentially fathered by Alan Greenspan and [Clinton Treasury Secretary Robert E.] Rubin, and they see that as an enormous feather in their hat," Rohatyn said.

Greenspan then argued for several years that the White House and Congress should "let the surpluses run" to pay down the government's debt rather than cut taxes or raise spending.

So many Democrats were outraged in January 2001, when Greenspan urged Congress to cut taxes, lending a key political boost to President George W. Bush's tax cut proposal. Critics charged that Greenspan had become too partisan for a Fed chief; others saw him simply reverting to his anti-government ideology.

But Greenspan believed the surpluses would continue and suggested that policymakers design "triggers" to scale back the tax cuts if deficits reemerged. Congress later passed a reduced form of Bush's tax cut without such provisions.

After the budget swung back into deficit in 2001 and more tax cuts followed, Greenspan repeatedly supported making the temporary tax cuts permanent -- one of the Bush administration's top policy goals -- while cutting spending.

Greenspan's influence on Capitol Hill has waned since 2001, as the political parties have grown bitterly divided over economic policy, leaving them less open to compromise. Lawmakers did not follow his advice last year to create Social Security private accounts, or to cut Social Security and Medicare commitments to future retirees -- positions that Democrats adamantly oppose. Nor did they heed him and adopt stricter budget controls -- which the White House and congressional Republicans reject.

But lawmakers of both parties continue to quote his ideas and arguments and seek his support for their positions. And he plans to offer his opinions after he leaves the Fed by giving speeches, writing a book and creating a new Washington-based consulting firm, Greenspan Associates, friends say.

And as Greenspan said in a speech earlier this year, "In the broad sweep of history, it is ideas that matter. Indeed the world is ruled by little else."


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