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I Was a Teenage Gramlich

I can’t say I ever intended from a young age to spend my eighteenth year mastering Washington Consensus–era monetary policy to recite in stuttering, rote cliché before a panel of mildly curious economic policymakers who filled out the payroll at Alan Greenspan’s Randian fiefdom.

I didn’t play football, or soccer, or any of the other exhausting things; my fourth-grade rendition of “Hot Cross Buns” on the recorder didn’t give way to more ambitious musical pursuits; and the school newspaper already had a core stable of scribes to file the biweekly “Christina Aguilera vs. Britney Spears: Who’s Hotter?” trend pieces and listicles. What top-tier private university would continue reading a student’s application after noting that he’d failed to deliver such scholastic contribution? So let’s settle on the market-friendly explanation: I was incentivized to take a spot on my high school’s Federal Reserve competition team that senior year, for lack of much else to do.

And somehow, over a few months, I became fluent in the tongue of historically resolved, tightly synthesized neoclassical bullshit.

The United States was insulated from any fundamental economic problems, the think-tank consensus maintained during my 2002–2003 school year, but my generation would still be charged with resolving one or two pesky loose ends. In ten or twenty years, once the Treasury had funneled enough of its ever-expanding annual surpluses into paying off the country’s entire public debt, who would stop it from malinvesting excess funds into private markets and causing “distortions”? Who would liberate the oppressed Social Security surplus from its lifelong imprisonment in low-yielding Treasury bills, sending it safely into the cozy trenches of speculative finance? Who would marry the next wave of Andrea Mitchells, play Sunday footsies with the unworthy heirs to Tim Russert, and Irish the Bethesda dinner party coffees of future George Wills as they retrofitted Fed anecdotes from the House of Plantagenet to shed light on current transportation policy?

Why, the Fed Challenge kids would.

And so that’s why I became a teenage supplicant at the enormous, glossy table that dominates the Board Room of the Federal Reserve one muggy Washington afternoon that April 2003. Depending on how you remember it, this was either a few days before our president announced the successful resolution of hostilities in Iraq, or a few days after you and your neighbors took out your first second mortgages.

Until recently, I’d never watched tapes of the competition or bothered to look back at how well our presentation—crafted explicitly upon what various personalities at the Fed were saying at the time—held up. I can say now that we were accurately depicting what policymakers, ranging all the way from center-left to center-right, were saying. Had my long-term planning that year not been exclusively devoted to persuading one particular sophomore girl to date me, I might have noticed that the Fed was grooming types like me to carry the torch of efficient, market-allocated human welfare into the second generation of the Great Moderation, fully untethered from the stubborn demands of history and the clutches of modest inflation.

But not everything went according to plan. Fed Challenge is, in the words of our gracious and still active economics teacher at Severn School in Severna Park, Maryland, Mr. Bodley, “a national economics competition that encourages a better understanding of our nation’s central bank.” Mr. Bodley—as his former high school student, I can’t possibly refer to him any other way—wrote this in a 1998–1999 edition of the Federal Reserve Bank of Richmond’s PR publication, Equilibria. Here is how he laid out the basic Challenge procedure:

A team of five students prepares and presents a 15-minute analysis of the U.S. economy, recommends a course of action with respect to interest rates, and then withstands a 10-minute question-and-answer period from a panel of Federal Reserve economists. To prepare for the competition, students look at the same economic indicators and the same forces influencing the economy that our nation’s economic leaders examine.

And to lend extra verisimilitude to the whole proceeding, competitors are also advised, as we were, to act out the parts of real members of the Federal Open Market Committee.

The idea at its simplest, at least when I was competing, was to imbue the next generation of American leaders with a grasp of the complexities of macroeconomic management—measuring the threat of inflation against the jobs outlook, taking stock of the curious twists and turns of consumer demand, the credit market, and this strange, robust creature known as the housing boom.

This was a tricky, moderately worrisome moment for the American economy. The 2000–2001 tech bubble recession was safely in the rearview, but the country’s economic performance remained sluggish. Corporations had recapitalized and labor productivity was high, but the unemployment rate was stuck near 6 percent—not bad by historical standards, but weak by the expectations that had built up over the nineties boom.

That’s why Federal Reserve Chairman Alan Greenspan, the revered free-market galoot who had come personally to assume most of Washington’s economic policy-making power over the previous decades with frighteningly little complaint from the quislings in Congress, was still keeping the Fed funds rate at 1.25 percent, a forty-year low, several years after the economy had stopped receding. The rate couldn’t stay so low for much longer—unless, that is, the dynamic maestro Greenspan decided on the flip of a coin, without consulting anyone else, that it could.

There were, to be sure, some encouraging countervailing trends. The Iraq war was in the process of being “successfully resolved,” as a significant number of economists and trusted newspaper pundits were arguing. And since the Iraqi endgame had lurched placidly into gear without blowing up the price of oil, rapid growth more consistent with historic recovery patterns seemed set to launch.

Market uncertainty over Iraq—maybe that was the big hang-up all along. Right? It sounded just savvy enough to be true, in Washington, and so my team adopted this bold case as the main determinant for monetary policy moving forward.

Our judges that muggy April day inside the Marriner S. Eccles Federal Reserve building were three marquee economic sages who took time out of their busy schedules to feign interest in our presentation: Federal Reserve board governors Ben Bernanke and Ed Gramlich and Dallas bank president Bob McTeer.

The room went quiet and tense for a few seconds after our scripted performance, as we waited for the barrage of questions that we’d overprepared for. We’d guessed that Bernanke, the rising star on the board and rumored successor-in-waiting to Greenspan, would be the one to cut into us with exotic volleys about, say, indirect inflation targeting. But Gramlich turned out to be the governor who unsettled us with the most aggressive naysaying. He saw, among other things, capacity utilization figures lingering in the basement, and didn’t see a silver bullet in the “resolution of geopolitical tensions.”

Gramlich was a regulator by trade, and by heart. He’d spent much of the previous decade studying, in apparent isolation, the new crops of Wall Street–backed financial products being hawked with vigor in hastily constructed banks, thrifts, and temporary office trailers on what seemed like every urban neighborhood corner where once there stood, say, a small business with employees who sold real products. And he didn’t see a silver bullet, either, where Greenspan and Bernanke did: sharply rising home values, flexibly designed and unusually accessible mortgage and mortgage refinancing options, new home construction, and so on—in short, our economy’s coordinated encircling of everything associated with residential real estate, made possible in part by stupidly low long-term interest rates.

Is extracting equity from one’s house an increase in wealth? Gramlich asked the panel. Does any of this make individual persons, or the country, wealthier?

Good questions, all. But how were we really supposed to know? We just wanted to mimic what they would have said, and then to win, and then to return to drinking in our basements.

For all our carefully rehearsed, soaring talk of long-term economic trends, something more immediate was at stake for Team Severn: school honor.

By the time I was a senior in 2003, Mr. Bodley had cemented his and Severn’s reputation as perennially successful Fed Challenge contenders. Two of Severn’s teams in the late nineties had advanced to the national finals. The first of these was the slate of contenders from the class of 1998; we watched the videos from that year’s competition several dozen times to study the performance of a “model team.” And they were a hot ticket, to be sure. Mr. Bodley recently told me that one member is now getting his economics PhD from Georgetown, a second has already gotten his from Columbia, and a third is currently getting his from Columbia, while being taught by the second. But even these whizzes couldn’t beat 1998’s devastating team from the Dallas district, which included dead-on student portrayals of former Fed Vice Chair Alice Rivlin and Fed Governor Laurence Meyer. The Dallas student portraying Meyer all but sealed victory with a string of eerily convincing yet profoundly lame jokes.

Meanwhile, as nerd lore had it at Severn, the school’s strong team from the last competition, in 2002, had been robbed at the district finals in Richmond, after prevailing in two regional rounds at the Fed’s Baltimore branch. I can’t remember why they were robbed, but they were. It was a fact. And so, come 2003, my team—assembled just a few weeks after we all learned, vaguely, what the Federal Reserve was—had no intention of letting those Richmond arrivistes steal glory from Severn’s clutches for a second year running.

As with any interschool competition, teamwork was essential in advancing. So here’s a rundown of the Severn players:

Peter anchored the lineup with his portrayal of Alan Greenspan, whose reputation was still nearly flawless in those days. One of the first things our team did collaboratively was read Bob Woodward’s Maestro, then regarded as the definitive account of Greenspan’s high-riding Fed tenure. Each chapter was about an episode in recent economic history—the 1987 stock market crash, the “Asian Tigers” stall-out, Russia’s debt default, the Long-Term Capital Management collapse, etc.—that Greenspan had perfectly managed by using his . . . magic? The argument of Woodward’s book seemed to boil down to Alan Greenspan saving everything via his conjuring powers. And Peter’s dry, deliberate, and obfuscating delivery made him an obvious choice for a character with such “gravitas,” as we’d put it. “International trade is not a zero-sum game,” Peter would say in rehearsals, to our giggles.

Tim played Ben Bernanke, the rising-star Princeton economist and Fed governor whom many were pegging—correctly, as it turned out—as Greenspan’s eventual successor. Bernanke had been making waves at the time as the most intellectually creative member of the board—meaning, he basically believed everything Greenspan said, but would occasionally pay lip service to new ideas like establishing semi-official inflation targets. Tim was the smartest member of our team and had put in deliberately for the part of Bernanke. He even got into the habit of quoting Bernanke’s own lines from speeches during the question-and-answer segment—a tic that the judges would later take uneasy note of in toting up our scores.

Josh played our sole district bank president, Al Broaddus of Richmond. Josh was an ambitious young man who had mysteriously been racking up bank internships at places like Legg Mason during his high school summers, while I was cleaning crap off movie theatre floors. He had an explicit plan to become president of the United States by some point in his late thirties or early forties, which largely went like this: get into Wharton, make a lot of money in finance, quit, and work up the political ladder to the Oval Office. But in his role as Broaddus, Josh’s duty for our team was simply to cover the “local stuff” while the rest of us prattled on about national macroeconomics. His speaking parts would usually start with “In my district, for example . . .” or “According to the most recent Beige Book projections . . . ” Josh was solid.

Danelle played Roger Ferguson, then the vice chair of the Federal Reserve, because, well . . . someone should play the vice chair, right? Danelle had been an alternate for most of the time leading up to the competition and had to play catch-up after the original teammate, Reenie, was hospitalized following a terrible car accident during that winter’s heavy snowfalls.

And the last member was me, playing Ed Gramlich, mostly because Tim told me I should play him.

We made our way up the learning curve by reading contemporary Fed speeches, Greg Ip’s Wall Street Journal articles, a few well-maintained economic data websites, and anything else that Maestro didn’t cover. Severna Park, Maryland, a comfortable town just across the Severn River from Annapolis, could have provided us with more firsthand, on-the-ground economic reports, if we’d bothered looking. New high-end developments—meaning garishly large boxes for three households constructed out of cheap synthetic crap—were springing up in nearly every piece of tractable land you could view from a highway or once-quaint back road. Each fly-by-night colony bore a ludicrous title like “The Preserve,” each house was constructed approximately three feet from the next, and the value of each house is now down at least $100,000 from its peak. But the Severna Park–Annapolis region will recover. The two major cities on either side, Baltimore and Washington (mostly the latter) will always need their bedroom communities—a core pool of demand that will effectively insulate the area’s flirtations with reckless sprawl from the threat of becoming a ghost town. That’s still not to say, of course, that it takes any special effort these days to find a real estate fire sale auction around town on any given weekend.

Our team spent the winter preparing, and by early spring, we’d advanced through two regional rounds in Baltimore and the district finals in Richmond, avenging the honor of our scorned schoolmates from the previous year. Richmond was a close call. This one defiantly Southern judge nearly quashed our bid, calling us “cocky” and telling us to stop being so “New York”—an odd criticism of a group of teens from suburban Annapolis. But Tim and I were able to identify this as anti-Semitic code, based on one recent episode of The West Wing. (For the record, we were both inactive Protestants.) It was close, but we carried the day in the end. We headed to the Marriner S. Eccles Federal Reserve Building for the national finals.

We were ungodly nervous on the day of the final four. In the first round of the national finals, which we’d barely escaped the day before, the judges made a quick study of Danelle’s alternate selection and relative lack of preparation. They chose to target this vulnerability, and Danelle had to sit silently when pressed and wait for Peter to chime in on her behalf. To be fair, this was more like how the FOMC operated in real life: Greenspan would mute all the other board members and do whatever he wanted.

On top of that, Peter and I had been struggling for weeks with the problem of giggling—giggling!—in the middle of our presentation whenever we made eye contact. This giddy attack of the nerves hadn’t disappeared even by the time we were preparing in the Federal Reserve cafeteria, leading Josh at one point to grab Peter by the lapels, hold him against a wall, and say, “YOU BETTER NOT RUIN THIS.” In fairness, we could appreciate his alarm—this was a small but significant step along his path to the U.S. presidency. No one giggled when George W. Bush made the case for extended tax cuts for the wealthy, after all—and it would certainly strain all sorts of credulity to have our judges imagine our respective real-life models, Alan Greenspan and Ed Gramlich, adjourning Open Market Committee meetings amid uncontrollable bursts of hysterical laughter.

As things turned out, our scripted presentation before judges Bernanke, McTeer, and Gramlich went off well; we delivered an accurate depiction of some of the conflicts on the board at the time. Our recommendation was to keep the Fed funds rate steady at 1.25 percent, although my Gramlich character—who in earlier rounds had dissented and recommended a further round of rate reduction—voted along with everyone else but with a “bias towards easing.” Here’s how part of the dispute played out in the transcript, via an exchange between my Gramlich and Tim’s Bernanke:

Gramlich: Much of the effect of the fiscal stimulus package will be negligible in the short term, especially the reduction in dividend taxes. And even that part which takes effect immediately will be largely negated by cutbacks in state budgets. Other forces could restrain household spending as well. The job market is weakening, with the four-week moving average of initial jobless claims hovering in the 400,000 region, generally a sign of stagnation. In addition, non-farm payrolls declined by 308,000 in the month of February, the largest decline since the immediate aftermath of September 11. Significant increases in unemployment could likely lead to a retrenchment in consumer spending. Uncertainty over the labor market has contributed to the lowest level of consumer confidence in a decade, foreboding less than steady sailing ahead. Rising energy costs, with oil looming near forty dollars per barrel, are also dragging consumption expenditures downward. Household debt has risen to high levels, due primarily to families taking on new mortgages. These mortgages have proven to be too much for some homeowners, as mortgage delinquency rates have increased.

Bernanke: But if you dig beneath the surface, household debt numbers aren’t as gloomy as you suggest. In fact, the consumer has taken advantage of the unusual opportunity offered by low interest rates to do some balance sheet restructuring. Probably about 25 percent of equity extraction has been used to pay off more expensive nondeductible consumer credit, e.g. credit and auto loans. This restructuring has not come at the cost of a substantial increase in leverage. Loan-to-value ratios for home mortgages have barely changed in recent years, and the great bulk of cashed-out equity has been taken out by long tenure homeowners who have retained substantial equity after their extraction. The apparent recent increase in the household-sectors debt burden has actually resulted in households realizing a more tax-efficient and collateralized form of debt, resulting in lower leverage and payments, not the reverse.

You can see why the real Ed Gramlich went on to question Tim, the fake Ben Bernanke, so aggressively in the question-and-answer portion. Gramlich had chaired the Fed’s Committee on Consumer and Community Affairs for most of his tenure on the board and had become an early expert in the growth in subprime lending. In early 2003, no federal regulator of any consequence had sized up the truly unsustainable trajectory of these loans, so that all the home-equity “collateral” that Bernanke (or Tim as Bernanke, in this case) was hailing as tax-efficient and safe was still years away from plummeting to, say, 50 percent of its value.

But Gramlich had a feeling even then that while playing around with mortgages might prove stimulative in the short term, such measures would come at the cost of a substantial increase in household leverage; loan-to-value ratio standards would worsen; balance sheets would “restructure” mostly by drowning underwater. He also sensed, with painful acuity, that very little of this would have a healthy long-term effect on labor markets, economic security, or wealth creation.

In the real-life Fed, Gramlich had brought some of his subprime concerns to Alan Greenspan around 2000. He urged the chairman to mobilize the Fed’s regulatory apparatus to use, according to a 2007 Wall Street Journal article, “its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.” This is something he said to Alan Greenspan, a guy who doesn’t even think fraud should be illegal, as former Commodity Futures Trading Commission Chair Brooksley Born—a Clinton-era derivatives regulator whom Greenspan silenced—remembers him saying over a lunch date. So it was a hardly a shock when Greenspan dismissed Gramlich’s concerns. And Gramlich, not willing to push further against Greenspan’s final word, decided not to bring his recommendations to the Fed staff.

This revelation came out shortly before Gramlich’s death from leukemia in the summer of 2007, just as the subprime crisis was beginning to destroy the entire global economy. But three years later, when Greenspan was testifying before the Financial Crisis Inquiry Commission, the old man was polite enough to, let’s say, “commemorate” Gramlich’s 2000 warnings. He recommended that the panel examine the causes of the financial crisis that Gramlich had “chosen not to bring” to the Fed’s board, according to a New York Times report on the hearing titled “Greenspan Criticized for Characterization of Colleague.” There are plenty of rival episodes to choose from, but it’s hard to find a more illuminating example of Alan Greenspan’s enduring pettiness than this. Long after the fact, he tried to depict himself as the reasonable adult by recommending the Fed look into Gramlich’s regulatory ideas, while also slyly insinuating that his dead colleague was the bad actor in this drama because he never brought those recommendations to the Fed staff.

We neophyte high schoolers could never hope to aspire to this level of Machiavellian chicanery—it’s no doubt covered in advanced seminars in macroeconomic policy, or perhaps in the Objectivist texts that Greenspan has lovingly studied throughout his life. On another level, though, Greenspan’s harried blaming-the-dead-guy line of rhetorical defense underlined just how close the worlds of high school and macroeconomic policymaking are, at least in behavioral terms. The only difference in this case would be that a high-school-age scofflaw would be more likely to invent a dead relative to blow off a homework assignment than to attribute a major policy oversight to a dead colleague.

I should mention that while Gramlich is dead, the Maestro Alan Greenspan can still regularly be heard spouting unquestionable economic wisdom during hushed, reverentially staged appearances on Meet the Press with David Gregory, the prince of Washington press quislings.

Whatever we said, and God knows I didn’t understand much of what I was saying back then, it was good enough to win the national championship—Mr. Bodley’s first of two. Ben Bernanke made the announcement before an anxious crowd of students, teachers, family members, and Federal Reserve economists, after noting how “scary” it was to hear certain students (Tim) repeating whole sentences of his speeches back to him. It all felt incredible, as did the $5,000 checks for “education” that Citibank presented each of us with; I mostly spent it on CDs and booze during the Atlantic post–high school debauch known as “Beach Week.” (More than once it’s occurred to me that Citibank, the recently merged mortgage giant that required successive bailouts in the wake of the 2008 meltdown, would probably have liked to have the paltry $25,000 in Fed Challenge prize money back in its battered coffers—but it’s easy to make the case that I had put my winnings to use in a fashion that had an undeniably stimulative effect on my local economy.)

My video review of our performance largely jibes with my memory of our spirited finals performance. Danelle came back strongly after a rough semifinal, and was able to silence judge Bernanke with this line of lines: “Liquidity is the oil in the engine of capitalism.” Peter was able to say, “International trade is not a zero-sum game” during our question-and-answer session. It’s unclear if this had any effect on our victory, but Peter’s cool delivery gave the impression that this declaration, this single line could answer any question you ever had about economics.

But another of his solid answers that I’d forgotten about turns out to have been remarkably prescient. Bernanke had posed a fundamental policy dilemma to Peter: Since low long-term interest rates provided such a stimulative effect—even though the Fed’s primary stimulative tool was in setting overnight, short-term interbank loan rates—how would Fed policy makers keep long-term rates low?

In his reply, Peter noted that if it had to, the Fed could buy “vast quantities of long-term securities” and keep them on its balance sheet. The popular term for this action nowadays is quantitative easing, and Ben Bernanke has recently completed his second round of it in a desperate bid to jump-start growth in an economy ravaged by the collapse of the Potemkin housing boom.

Josh said something smart-sounding about money market funds and real interest rates. Any high schooler saying “money market funds” is good enough, no matter the context. Maybe Josh will be president.

Tim took his lumps from Gramlich (the real one, that is) in the question-and-answer round, sure, but still gave the best and most frequent answers of any team member. Tim is now a graduate student in history, and a Marxist.

And me? I noted that state budget cuts had a contracting effect on economic growth, and threw in a few other mediocre answers about the Taylor rule, the Non-Accelerating Inflation Rate of Unemployment, and other textbook terms that probably have no real place in Federal Open Market Committee conversations.

Most important, Peter and I didn’t succumb to a single giggling fit.

It’s true that in the harsh light of my young adulthood I’ve been pretty hard on some of the Fed policies that we were largely rehashing to the judges in the balmier days of 2003. But joining the Fed Challenge team was the best extra-curricular decision I made in high school. I developed a better-than-average knowledge of all the macroeconomic policies that I shouldn’t subscribe to as an adult. The Alan Greenspan Fed taught me about the importance of teamwork and collective, rational decision making, and how easily they can be discarded when a single Randian ideologue is intent on destroying the world as part of a high-stakes social science experiment of his own devising. And I learned that adolescence not only never needs to end, but can lead to a top-notch appointment in the civil service, so long as you mute your private alarm over the sustainability of the latest get-rich-quick scheme, or the American economic system at large.

And nothing makes me prouder than the memory of my eighty-nine-year-old grandfather trekking to Washington to watch the finals and to get his picture taken in Alan Greenspan’s chair. He was born in 1914, one year after the Fed’s creation. He served in the Army, became a public school teacher and a principal, and made wise, studied investments in the stock market at a young age, providing him with the security to retire in his fifties and own a second summer vacation home. He was a great role model, an American role model, and his good fortune never ran out: he died in 2005, at the peak of the housing boom.