A Term at the Fed: An Insider's View
Laurence H. Meyer | 2006-01-01 00:00:00 | Harper Paperbacks | 288 | Economics
As a governor of the Federal Reserve Board from 1996 to 2002, Laurence H. Meyer helped make the economic policies that steered the United States through some of the wildest and most tumultuous times in its recent history. Now, in A Term at the Fed, Governor Meyer provides an insider's view of the Fed, the decisions that affected both the U.S. and world economies, and the challenges inherent in using monetary policy to guide the economy.
When Governor Meyer was appointed by President Clinton to serve on the Federal Reserve Board of Governors in 1996, the United States was entering one of the most prosperous periods in its history. It was the time of "irrational exuberance" and the fabled New Economy. Soon, however, the economy was tested by the Asian financial crisis, the Russian default and devaluation, the collapse of Long-Term Capital Management, the bursting of America's stock bubble, and the terrorist attacks of 9/11.
In what amounts to a definitive playbook of monetary policy, Meyer now relives the Fed's closed-door debates -- debates that questioned how monetary policy should adapt to the possibility of a New Economy, how the Fed should respond to soaring equity prices, and whether the Fed should broker the controversial private sector bailout of LTCM, among other issues. Meyer deftly weaves these issues with firsthand stories about the personalities involved, from Fed Chairman Alan Greenspan to the various staffers, governors, politicians, and reporters that populate the world of the Fed.
Since the end of his term, Meyer has continued to watch the Fed and the world economy. He believes that we are witnessing a repetition of some of the events of the remarkable 1990s -- including a further acceleration in productivity and perhaps another bull market. History does not repeat itself, yet Meyer shows us how the lessons learned yesterday may help the Fed shape policy today.
Reviews
I have just finished reading A Term at the Fed: An Insider's View by Laurence A. Meyer, first published in 2004. There is not much to say about this book that other reviewers have not already said. I found it to be enjoyable and educational, though perhaps a little dry at times. Meyer is not a titan like Alan Greenspan, but more of a regular guy. He was a professor for almost 30 years in St. Louis before working as a Fed governor, and gives the point of view of a Washington outsider.
I did not know much about the Federal Reserve Board before reading this book, and now I feel that I have a better grasp on the operations there in deciding monetary policy. The Fed is truly powerful, and the governors have a heavy burden of responsibility and stewardship. The Chairman steers the course and is probably more important that all other members of the committee combined. However the Chairman could not exist without the committee. I do not believe markets would react well to one man alone setting monetary policy.
Meyer also details his constant struggle to be correctly interpreted by the media. As a relative newcomer to Washington and being covered by the press, he believes actually might at sometime be portrayed accurately. More experienced people recognize this as futile. For a Fed governor, it is probably better to just remain silent. It's a hard load to bear, and after six years, Meyer is only too happy to leave the Fed.
I half-heartedly recommend this book.
Reviews
On Money and Markets: A Wall Street Memoir; The Age of Turbulence: Adventures in a New World; In an Uncertain World: Tough Choices from Wall Street to Washington; What A President Should Know: An Insider's View on How to Succeed in the Oval Office
"A Term at The Fed" by Laurence H. Meyer is a very educational and thought provoking book regarding the decision making processes at the Fed. Meyer readily admits that his thoughts did not always agree with thoughts of the other Fed Governors. The book also gives some detail regarding the Fed staff support information to which Fed Governors have access. One sobering realization is that the Federal Reserve Governors and staff DO NOT KNOW THE CORRECT ANSWER BEF0RE MAKING A DECISION!! However they probably make the best decisions possible based on the available information at the time of the decisions. This book would be of value to persons managing a business and to individuals self-managing personal assets and personal pensions, as well as to commercial and investment bankers. Some talking-heads in the media might be enlightened also.
Reviews
A must for anyone interested in monetary policy. It stimulates an intense interest in the subject.
Reviews
Productivity is the measure of the economic well being of society. Productivity is the maximum sustainable level of output of an economy without lowering the unemployment rate and triggering inflation. Leaps in productivity will raise wages in the long run, but not initially. This means that it is possible to have steady inflation at a lower unemployment rate. As a result in the short term increased productivity tends to lower the cost per unit of output and generally push prices down. Once wages begin to rise in response to increased productivity acceleration and if the unemployment rate remained low, inflation would begin to rise.
In the 90s, Greenspan feared an ever-tightening labor market and the possibility the market would ignite overheating and higher inflation and the fed recognized this possibility with new technologies and a new economy.
The economy seemed to be growing without high inflation. New technologies had the potential too be introduced into the market before it reached the top. Technology developments such as massive parallel computers, personal robotic, biotech, & communications).
Inflation was at 2 1/2 percent and would remain that way until 2005. Inflation had anchored. GDP shifted from manufacturing output to service output. Inflation violatility and output volitility standard deviations were low through out the world. The economy looked health and would recovered from shocks with a soft landing. Irrational exuberance seemed more speculative than real.
Market experts were not in consensus that technology had reached neither market output limits, nor that the consumer buying behavior had collapsed, or that growth was slowing.
Greenspan seemed to be talked about a potential risk management policy rather than a reality. Greenspan made a policy statement with his irrational exuberance remark shocked the market, suggesting the Fed would step in and increase interest rates. Was there really any rational reason not to believe productivity would not remain strong in the 90s? It is not irrational to invest in companies that will grow, position themselves in the market long term, and bring innovative products and services too market; this is the benefit of capitalism.
However, Greenspan thought he saw consensus that the market was over-hyped, speculation was overvaluing stocks, and the Venture Capitalist were dissatisfied with their investments. Greenspan characterized the era of growth as "irrational exuberance". Greenspan believed productivity would climb "higher" but never verbalized how high. Greenspan had limits. The market reacted negatively too Greenspan's remarks but reversed and marched to higher stock prices. The market continued to drive one of the longest bull markets in history. The bulls were running Wall Street.
Stevenson said, "There are limits. They may not be the old limits that disciplined policy in the past. But even if the limits are new, they must be respected. Overheating is a natural product of expansion that over-taxed these limits. Good policy must therefore balance regularities and possibilities."
Technology increases manufacturing productivity. In the 1990s productivity growth was at 3%. In the 1990s capital was deepening per employee and the capital and labor equated to quantifiable increases in productivity. The increases in employee productivity were long-term and permanent.
2002 through 2003 the growth of the economy reached 5%, the fastest in 40 years. The higher the GDP, the more improvement in labor conditions emerged. Productivity continued to climb through the recession of 2001, accompanied by a decline in inflation. The Fed wondered if rising productivity and declining unemployment would trigger inflation. The Fed wondered if power dis-inflationary effects created by higher productivity could be used as justification delaying tightening of money supply. The Fed wondered about the affect on real interest rates and the need to tighten money supply. The Fed's policy was positioned to slow the growth trend and avoid the possibility of overheating at the risk of causing a massive depression. During these two years, the DOW had risen 25% and the Nasdaq risen 50%. Productivity had stimulated the demand side of the economy. The fed was measuring productivity, aggregate demand, and employment. The reasoned the economy looked health, inflation was below the target and fed rate increases could be delayed. The Fed did not fear immediate deflation and it reasoned that if deflation was a result of positive supply shock then growth most likely would continue.
$890 billion of debt is the "irrational exuberance" and has become the nexus for the Fed raising rates. Government spending gain power and increased debt in historically unachieved amounts. However, Inflation and productivity arguments do not hold up for reasons for raising the Fed rate and slow down growth; it was the potential inflation of Taylors equation that cause the rate increases.
Reviews
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!
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