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--Paul Baerman |
Baerman M.B.A. '90 is director of administration for the Durham-based software startup company Easy Access.
By Steven K. Beckner '74. New York: John Wiley and Sons, 1996. 452 pages. $29.95.his is a book about the actions of a particular committee and its chairman, and the subject lends considerable importance to the treatment. This is no ordinary voting body but the seven governors of the Federal Reserve System, based in Washington, D.C., plus the chairman of the Fed and five presidents of the twelve district Federal Reserve Banks, who serve on a rotating basis. The voting members of the Federal Open Market Committee (FOMC) determine interest rates and thereby affect our lives quite directly. The Federal Reserve System, or Fed, is the nation's central bank. Not only does it have power to set interest rates but it also has regulatory authority over the nation's many commercial banks. It is widely accepted that the Fed should so control the growth of "money" as to facilitate healthy economic growth, but without any inflationary buildup. If the FOMC determines that inflationary forces are gathering strength, it may elect to tighten credit. This it does by reducing the volume of reserve funds in the banking system and by raising the rate at which it is prepared to meet the emergency reserve needs of member banks caught in the squeeze. All of us with variable rate debt obligations or a need to borrow quickly feel the impact: Credit card accommodation costs more, as do mortgages, perhaps auto loans, and so on. The pain thus inflicted to deal a blow to present inflation, or to get rid of potential inflation in pre-emptive fashion, may be severe, and there is always some risk that a recession may be precipitated. This pain and risk must be weighed against the costs of letting inflation go uncurbed. Inflation has painful consequences of its own; these, moreover, express themselves far more insidiously than do restrictive moves by the Fed. They also have somewhat arbitrary distorting effects on incentives and the distribution of purchasing power: Wage earners tend to suffer, as do those on fixed incomes; debtors (including the federal government) are advantaged while savers are penalized; and investments tend to become biased in favor of quick returns. We have experienced all this in relatively mild form and for short periods in the late Sixties, the late Seventies, and the late Eighties. Ordinary Russians, Brazilians, residents of Zaire, and others have suffered more dramatically from bouts of hyper-inflation in the recent past. Despite the importance to us of these matters of fact, they are frequently deemed too arcane to master. Steven Beckner '74 deals a blow to that prejudice; he has a talent for making the workings of the Fed palatable and understandable, without cutting corners. His expertise on monetary policymaking, and his expository skills, are widely appreciated by professionals in the financial markets and by listeners of National Public Radio. In Back from the Brink, his focus is on the decisions taken by the FOMC over the decade starting in 1987. A reason for this concentration is Beckner's own abhorrence of inflation. For much of the period the FOMC's decisions were directed at beating back inflation, and slaying the inflation dragon is thus the real theme of this book. Even the title reflects the author's conviction that the fight might easily have been lost or meekly conceded, with consequences as mentioned above, or possibly even worse. The FOMC's chairman, and the head of the whole Federal Reserve System during the decade covered, was Alan Greenspan. Greenspan has made it his personal mission to eliminate inflationary tendencies from the economy, no enviable task at a time when budget deficits forced the Fed to fight with one hand tied. Members of the FOMC have not always shared Greenspan's single-minded commitment to ridding the economy of inflationary tendencies, nor have they all always agreed with his insistence on rooting out inflationary expectations before inflation itself shows up in the statistics. Various administrations have shared his general philosophy but dissented on the timing and strength of anti-inflation moves, U.S. presidents generally preferring to inflict no immediate harm. The same present-mindedness is dominant in Congress, while the business community and financial markets generally find higher interest rates distasteful. Hence, Greenspan has had to persuade colleagues, presidents (Bush and Clinton), members of the business and financial communities, and large numbers in Congress, time and again, that higher interest rates now are necessary for the continued economic health of the nation. Some of the most interesting sub-themes in this book are those elaborating upon these tensions. Though not a biography, the book also contains fascinating glimpses into the personal accommodations chairman Greenspan has had to make, as he undertook interventions to guard against downside risk to the world financial system--interventions at odds with his libertarian principles. The immediate story line, however, is the discount-rate decisions taken by the FOMC. The author's method is to identify the persons most involved and the positions most relevant, whether these were espoused inside or outside the Fed itself. The result is a very detailed, close-up account, replete with contemporary and retrospective commentary by those who made the running at the time. This approach creates a sense of immediacy and works particularly well for crises, and there are elegant and revealing discussions of the October 1987 stock market plunge(s), the savings and loan crisis, and the Mexican peso crisis of 1994-95. It also works well where the narrator pauses briefly to explore some particular source of dissensźion: whether there was or was not a "credit crunch" in late 1989 and early 1990; the extent to which the Fed can and should take account of currency volatility and the strength of the dollar in pursuing its primary domestic goals; whether the Fed should be forced into public disclosure of the minutes and notes made during FOMC meetings. Concerning the inflation fight in general, successive rounds of which are described throughout the book, I found myself wishing that some historical charts had been included. My own preference in any case is to isolate and connect particular themes or episodes. I did not take full advantage of the author's chronological rendering, and I paid a penalty, since Beckner makes no concession to the non-sequential reader: There is only an occasional reminder as to which year one is in. Whether read sequentially, however, or dipped into for one's own particular reasons, the book is a marvelous resource. Beckner has assembled details, but his very special strength is in refraining from introducing or attempting to explain technicalities out of context.
De Marchi, an economics professor at Duke, currently writes on the history of art and stock markets.
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