Bob Woodward has been the creator and co-creator of many fascinating books that have dealt with members of Washington’s power elite. There are few writers who have a more “inside” view of Washington than he has in terms of access to contacts and sources and Woodward is, in my opinion, a balanced and fair- minded individual who avoids reaching conclusions based upon a priori, ideological-driven biases. His book, Maestro, is about the current chairman of the Federal Reserve (FED), Alan Greenspan, and about the process by which FED policy is created. There are many interesting things in this book, but the most interesting of them—and, I think, the most valuable—is the picture the book gives of the role politics plays in FED policy formation. One comes away from a reading of this book with the understanding that in the “real world” policy is formed not simply in a linear way—as a rational response to econometric data—but rather, policy is the product of a complex of political, ideological, and social forces. This is a valuable thing, I think, for economists to keep in mind. Bismarck said two things about politics: 1] that it is “the art of the possible;” 2] that it is not “an exact science.” The same things might well be said about monetary policy.
But this book, in my opinion, contains many, many flaws and these flaws are a function of the very strength discussed above. One derives from this book, as I have said, a sense of the complexity of FED policymaking, a sense of its dependence upon both economic and extra-economic factors. For example: there is a discussion of Bill McDonough’s work—McDonough was Chairman of the NY FED and Vice-Chairman of the FED’s Open Market Committee (FOMC) in 1998—in dealing with the problems posed by Long Term Capital Management’s (LTCM) instability. Woodward’s discussion shows us McDonough scrambling to cobble together a deal that would shore up the failing hedge fund and thus avert a possible worldwide collapse of markets. We are also told about Greenspan’s dissatisfaction with McDonough’s use of the FED as a “matchmaker” in setting up a deal to save LTCM . And surely, no economics textbook presenting a treatment of how the FED is supposed to work would contain episodes like this one!