Crisis Brings Fed Chairman Closer to Bush : Economy: Greenspan must negotiate a minefield of war, recession and bank failures. His style is low key but effective.

Along the hushed, marble corridors of the Federal Reserve Board’s graceful old headquarters building here, fears of war and recession seem far away--except inside the second-floor office occupied by Alan Greenspan.

In his private lair, the chairman of the Federal Reserve Board is decidedly on a wartime footing.

With his television set tuned to the Cable News Network, a phone line open to the White House and an aide poised by his elbow to provide the latest economic statistics, Greenspan is playing the role of wartime Washington policy-maker to the hilt.

Indeed, unlike his predecessor, the prickly and standoffish Paul A. Volcker, Greenspan has developed close ties to the White House and has quietly become a key economic adviser to President Bush over the past several months.

Greenspan’s influence over White House economic policy became clear during President Bush’s State of the Union address Tuesday, when Bush announced that he was tapping Greenspan to lead a new commission to study a controversial proposal to cut the tax rate for capital gains.

The appointment will plunge Greenspan--himself a strong supporter of a cut in capital gains tax rates--directly into the middle of a raging political debate between the President and Congress over tax policy.

By any standard, Fed-watchers say Greenspan is taking on a role that is almost unprecedented in modern times. Most say they cannot recall any time that the Fed chief has been asked to step so directly into the middle of such a political controversy.

“Whenever there are major economic decisions to be made, (Greenspan) is in on them,” a delighted Fed official says. “His voice is listened to.”

But even before his new capital gains study gets going, it is clear that Greenspan has chosen to side with the Administration in the battle over fiscal policy. Soon after the war began, the Fed chairman signaled he planned to cut interest rates further in order to ease the credit crunch that seems to be prolonging the economic slump.

On Friday, he moved decisively, chopping the Fed’s key discount rate to 6% from 6.5%. It was the second time in six weeks that Greenspan had turned to this key anti-recession weapon, the heaviest in the Fed’s arsenal.

While such actions may be justified on economic grounds, they also conveniently dovetail with what the Administration wants from the Fed. Treasury Secretary Nicholas F. Brady, who frequently criticized Greenspan last year for not moving quickly enough, has been noticeably silent on Fed policy.

Greenspan’s responsiveness on interest rates, his apparent eagerness to join the Administration’s fight for capital gains and Bush’s decision to place the capital gains issue in his hands show just how close Greenspan’s relations with the White House have become.

It also may signal that Greenspan, who will turn 65 in March, is almost certain to be reappointed as Fed chairman when his current term expires next summer.

“It is a sign that Bush feels he can work with Greenspan,” says Alan Levenson, an economist and Fed-watcher at the WEFA Group, an economic forecasting firm in Bala Cynwyd, Pa. “The Administration trusts him.”

Indeed, Fed-watchers say the only parallel in history to Greenspan’s close relations with the White House came in the days of another wartime central banker, Mariner S. Eccles, the Fed chairman who stood beside President Franklin D. Roosevelt during World War II.

“I think Bush is turning more and more to him for economic advice,” says Lawrence Kudlow, an economist and senior managing director at Bear Stearns in New York. “There seems to be a real interesting power shift going on, with Greenspan becoming more and more influential.”

It wasn’t always that way. During most of Bush’s first two years in office, the Administration and the Fed chairman were virtually in a state of war.

Brady and White House Chief of Staff John H. Sununu criticized him repeatedly for refusing to push interest rates down--a move that Greenspan insisted might send interest rates even higher by making financial markets fearful that the Fed was abandoning the inflation fight.

There were even some hints that Bush had decided not to reappoint Greenspan to the Fed chairmanship. Some close to the President reported that he had all but announced that to intimates in mid-1990.

Yet now, with the war under way at a time when the recession has yet to abate, Greenspan finds himself trying to perform an increasingly difficult balancing act.

At the same time that he is he seeking to be a player in setting White House policy, he also must guide the Fed through an economic minefield--the booby-traps of war, recession, bank failures, soaring budget deficits and crashing consumer confidence.

Clearly, Greenspan, a longtime Washington insider with good political instincts, hopes to keep economic policy in sync with the nation’s military strategy--hoping to calm both the financial markets and the public in order to help keep the wartime economy stable.

But critics are cautious about charging that Greenspan is politicizing the Fed in any way.

“It is hard to know whether he is accommodating the White House, or if this is just the sensible thing to do,” says Allan Meltzer, an economist at Carnegie-Mellon University in Pittsburgh and a longtime Fed-watcher.

Moreover, even if he wants to please the White House, Greenspan still can’t appear overly eager to loosen the Fed’s reins completely. He must still appease the hard-liners within the Fed who remain concerned about inflation.

With the federal budget deficit likely to soar even higher because of the war, Greenspan must avoid any appearance of becoming so willing to appease the White House that he will finance the war by printing more money--a move that would certainly spur more inflation.

As a result, critics have noticed gleefully that Greenspan--uncharacteristically, Fed-watchers say--has made some seemingly conflicting statements on the direction of interest rates and monetary policy in recent weeks.

“I’ve noticed a real change in the message from one day to the next,” Meltzer says.

Still, most analysts believe that, despite the confusing message, Greenspan is now solidly in favor of easing interest rates further--a position that clearly has made him more welcome at the White House.

In recent weeks, Greenspan and Michael J. Boskin, chairman of the President’s Council of Economic Advisers, have forged an increasingly close personal relationship, pushing Greenspan into the role of a key White House consultant.

“Alan has been invited to the kind of White House planning sessions (with Boskin) that Volcker was never asked to come to,” says Murray Weidenbaum, who was President Reagan’s chief economic adviser during a portion of Volcker’s tenure at the Fed.

“Volcker was treated much more formally, kind of like a visiting head of state,” Weidenbaum says.

Observers note that Greenspan, who ran his own economic consulting firm before coming to the Fed to replace Volcker in 1987, is ideally suited to the role of gray eminence--of senior, behind-the-scenes adviser.

In fact, he played such a role on a more official basis during the Gerald R. Ford Administration, when he served in Boskin’s current post as the President’s chief economic adviser.

It was during the Ford Administration in the mid-1970s that Greenspan first came to know Bush, who served in a series of posts under Ford, including director of the Central Intelligence Agency.

“That’s really his forte, providing one-on-one advice,” says Robert Kavesh, an economics professor at New York University and a Greenspan friend since they were college classmates at New York University in the late 1940s.

“He’s a low-key guy who is at his best in a private situation where he can quietly exchange views. And I think Bush is someone who is open to that kind of advice.”