The Man Who Knew: The Life and Times of Alan Greenspan — Nineteen: MAESTRO

1. 1. Greenspan advised President-elect Clinton that deficit reduction would lower long-term interest rates by reducing inflation expectations, creating a virtuous circle of economic growth.
2. 2. Clinton's economic team debated whether to seek a quid pro quo from the Fed before committing to deficit cuts, but Treasury Secretary Bentsen and Bob Rubin refrained from pressuring Greenspan on interest rates.
3. 3. Greenspan publicly endorsed Clinton's $145 billion deficit reduction plan during Senate testimony, stating it would reduce long-term interest rates by two percentage points or more.
4. 4. Greenspan's claim that deficit reduction drove down long-term rates was contradicted by Fed staff research showing that low short-term rates, not inflation expectations, were the primary driver.
5. 5. Greenspan refused to raise interest rates to pop the bond bubble in 1993, despite warnings from governors Lindsey and Syron, arguing that bubbles were uncertain and the Fed could handle the aftermath.
6. 6. The bond market crash of 1994 was triggered by the Fed's rate hike and the unwinding of leveraged hedge fund positions, causing long-term rates to spike despite the absence of inflation.
7. 7. Greenspan admitted on an FOMC call that the Fed's modest rate hike had pricked both an equity and a bond bubble, contradicting his later stance that monetary policy cannot effectively target asset prices.
8. 8. Clinton refrained from criticizing the Fed after the bond market turmoil, demonstrating a discipline that Greenspan valued and that contrasted with his predecessor George H. W. Bush.
9. 9. The 1994 bond crash had little lasting impact on the real economy, reinforcing Greenspan's inclination to take risks with financial stability in later years.