"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else." - John Maynard Keynes.
Bob Woodward set for himself a rather difficult task. In his book, Maestro, he attempts to paint a heroic portrait of a purposefully ambiguous Federal Reserve Board Chairman Alan Greenspan. Although Woodward does a competent job of explaining some of the more Byzantine aspects of the operations of the Federal Reserve, his effort falls too often into hagiography. Even if one accepts the portrayal of Greenspan as a maestro beautifully and skillfully conducting the orchestra of the economy, one has to be concerned about any system so critically dependent upon having a rare expert.
The primary obligation of the Federal Reserve Board seems straight forward enough: Increase the money supply at the same rate that wealth is created in the economy. Create too much money and too many dollars will chase too few goods and inflation results. Inflation adds noise to economic transactions and calculations making the economy less efficient. In the long run, inflation suppresses real economic growth. Miscalculate on the other side and the country experiences deflation and possible recession.
Unfortunately, measuring the money supply is problematic. With various monetary instruments from currency, to bank deposits, to deposits in mutual funds, defining and quantifying the monetary supply has become more and more difficult.
The Federal Reserve Board also relies on indirect measures to divine the present and future states of the economy. If prices start to increase, or growth appears to be unsustainably fast, or unemployment becomes low enough to increase rapidly wage rates, then the Board may indirectly infer that the money supply has grown too large and raise interest rates. The entire effort is complicated by the fact that the actions to increase or decrease the money supply can take months to affect the economy. Therefore, the Federal Reserve Board must attempt to anticipate the future and act proactively.
Greenspan has been the Federal Reserve Chairman since 1987. He was appointed by President Ronald Reagan to replace Paul Volcker. Volcker was not a very popular character. He had the unenviable task of driving interest rates to 19% in a painful but successful effort to wring double-digit inflation and inflationary expectations from the economy.
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