A Term at the Fed: An Insider's View [Paperback]

There is no question that the Federal Reserve Board (the Fed) is the world's most powerful institution, even stronger than the United States military. The members of the board understand this power, and follow an effective code of secrecy concerning their plans. However, representatives of the board are regularly required to speak in public, even testify before Congress. Therefore, Alan Greenspan, the chairman of the Fed, has raised the art of obfuscation to a level never seen before. I have watched tapes of him testifying before Congress and have never been exactly sure what he is saying. Apparently, this trait is so ingrained in him that when he proposed marriage, his wife wasn't exactly sure what he was talking about.
Laurence H. Meyer served a term at the Fed from 1996 until the end of January, 2002. Therefore, he was there during the incredible boom of the late nineties and the economic downturn of the early years of the twenty-first century. This enormous contrast in economic performance means that the debate within the Fed, as related by Meyer, covers the entire range of positions.
In the early years, the debate was always about whether to raise rates, in order to stave off the possibility of inflation. During most of that time, Meyer and Greenspan were on opposite sides of the discussion. Greenspan took the position that the incorporation of new technology was causing a dramatic increase in productivity that was not reflected in the economic data. Meyer did not believe this until the data forced the conclusion.
The core of the argument was the value of NAIRU (Non-accelerating Inflation Rate of Unemployment), an economic statistic that is not universally accepted to say nothing of having ever been accurately measured. It is the level of unemployment considered the bound, where if the rate drops below the NAIRU, then employers are forced to increase wages in order to attract and retain workers. The end result will then be a strong inflationary pressure. It was very illuminating to read Meyer's account of the discussions inside the Fed regarding whether this "mythical" value had indeed been reached. Those discussions reveal a great deal of what actually goes on inside the Fed and how so much of their work is on the order of reading the tea leaves. While the consequences of their actions are very practical and dynamic, it also shows that the governors are sometimes forced to rely on unproven economic theories to make their decisions.
The last years of Meyer's term were spent in cutting interest rates, as the economy began to enter a deep slide. In this case, the discussions were completely different, with the theory now being based on deflationary models. Deflation is what occurred in the depression of the thirties and in Japan in the nineties. Prices begin dropping, leading to purchasing being delayed, hoping for a better price. If a feedback loop begins, it can be disastrous, considered even worse than inflation. The governors of the Fed became concerned about that possibility, and the arguments were now over how much to cut interest rates and how fast to do it.
Those who are hoping for a juicy expose of dramatic arguments or revelations about personalities will be disappointed with this book. There is very little about Alan Greenspan that was not already known and the arguments between the Fed governors are described as being quite tame. In some ways the descriptions seem too tame. Human nature and the major consequences of their actions dictate that the discussions would be carried out more passionately than Meyer describes.
I commend Meyer for his approach in writing this book. So many of the books written by former government officials are "explanations" of why they were right and so many others were wrong. They are filled with as much dirty linen as possible, without really explaining how decisions were arrived at. Meyer describes how things were done at the Fed, how it is run under Greenspan and how decisions were made. While he does criticize Greenspan, it has none of that spiteful tone that so many others use. Therefore, if you really want to know how the Fed makes the decisions that drive the world economy up or down, then this is the book to read.

Years ago, I was intrigued with the idea of "The New Economy" and wanted to educate myself on the topic. I began with Woodward's Maestro, then picked up some textbooks on Macroeconomics, all the while keeping up with the business news. Dr. Laurence Meyer, known as a "hawk," popped up in the news frequently, and caused many Wall Street types to tremble ...which I found very amusing. I also enjoyed his sense of humor, transparency and trustworthy (if not always welcome) insights which turned up in the news as well. This set me up to grab his book when it came out.

When "The New Economy" fell apart, I, like everyone else, wondered what happened and where we would go from the wreckage. I've been waiting for this book.

Humorous asides that allow one to vicariously enjoy Meyer's trip into "DC land" while studying an account of the economic history taking place during his term, make the book hard to put down. The likable Meyer reveals an endearing humility and strength of character in drawing himself not only as person who is proud of his accomplishments, but one secure enough to share his foibles and fears for the amusement of the reader. Most importantly, Meyer's experience as a professor shines as he magically makes complex economics concepts easier to understand for non experts such as myself.

If you want another tome about Greenspan, this one is not going to tell you anything earthshaking or new. But if you are interested in a educational report written by an extremely knowledgeable, intelligent, forthright, and witty man, on the workings of the Fed during an intriguing time in US economics , Meyer's book is for you.

If you are looking for a tell-all confessional about the wild coke-filled parties that take place before meetings of the FOMC, this book will be sorely disappointing to you. But if you want to be reassured about the level of economic discourse at the meetings of the FOMC, you will also be disappointed. More than one academic economist has commented on the low level of economic discourse in Washington (see, for example, 'Peddling Prosperity' by Paul Krugman or 'The Roaring Nineties' by Joe Stiglitz). This book will do little to disabuse readers of the notion that most economic policy is made with a good deal of intuitive guesswork (e.g., about where the NAIRU is in this case) and great uncertainty about even the current economic situation (e.g., the lack of evidence on productivity growth until years after the Fed was being forced to make decisions). While hardly reassuring, this probably gives a pretty good idea of how most policy is made!

The book has some interesting parts (e.g., the power of Mr Greenspan, the importance of consensus, the lack of internal discussion outside of the meetings, and the great uncertainty about even short-term policy making). But it is very slow--no revelations about the personalities involved (including Mr Greenspan) or the internal politics of the Fed. Moreover, if you have been reading the popular press over the past decade (e.g., The Economist or Business Week), most of the economic discussion (e.g., over productivity growth) will be old news. So should you buy it? If you want a primer on how the Fed works, this is probably a good place to start. Just drink lots of coffee before attempting to read it!