Why the Fed Isn’t a Vaunted Superpower : Economy: The overstated but colorful differences between Alan Greenspan and Paul Volcker hide the board’s relative powerlessness.

Arecent poll of New York money managers showed that 75% hoped that Alan Greenspan would be reappointed chairman of the Federal Reserve Board when his four-year term expires this summer. Their second choice was Greenspan’s predecessor, Paul A. Volcker, who ruled the financial world with an iron hand from 1979-1987.

The broad consensus in Greenspan’s favor is surprising in light of his recent problems in maintaining authority over the other board governors. In the past year, a majority of Fed governors have resisted Greenspan’s efforts to push down interest rates at the pace he and the Bush Administration would have preferred.

Chairmen of central banks the world over are theoretically only first among equals--with the same voting power as other board members. In practice, they run their boards autocratically, and the financial community likes it that way. It’s much easier to divine the mind of a single man than to sniff out the shifting policy preferences of a 12-person board.

The struggle between Greenspan and his board is one between bankers and an economist. Bankers and economists have different genes. Bankers are skeptical and suspicious, deeply aware of the depravity of their fellow men. Economists are optimistic magpies, gabblers and meddlers, chattering endlessly about creating a better world. Volcker was first and foremost a banker, glowering and grim, worried about solidity, stability, confidence. Greenspan is an economist, eager to work with the Administration, trying to fine-tune the economy and pilot it through the recession at minimum cost.

The Fed’s main policy tool is its “open-market operations.” Over the years, the Fed has amassed a huge stock of government bonds, so huge that it can manipulate the amount of money in circulation simply by buying and selling the bonds. When the Fed starts selling bonds on a big scale, the public draws money out of banks to pay for them. In financial jargon, the Fed is “draining reserves.” As bank deposits shrink, banks curtail their lending, interest rates rise and business and consumers cut spending.

Conversely, if the Fed wants to inject some life into a faltering economy, it buys bonds from the public. Since all money is just an I.O.U. from the Federal Reserve, the Fed can write as many checks as it pleases. And when those checks are deposited in banks, bank reserves rise, and banks start competing to make loans. Interest rates therefore drop, and the economy chugs briskly ahead once more--or at least so theory would have it.

There is little hard evidence for the Fed’s detailed powers over the economy. It is true that increases in the money supply tend to precede economic upturns. But that doesn’t mean they cause them. Businesses and consumers necessarily use more credit at the start of a recovery, and the credit data show up first in the statistics. But, in this view, it is the recovery that is causing the money-supply increase, not the other way round.

Bankers, on the other hand, believe increased credit in a slack economy just increases prices. As inflation goes up, so will interest rates--lenders will fear for the value of their loans. Foreign confidence in the dollar will drop and foreign capital will take flight. Something like this happened in the 1970s, when a long period of accommodative policies at the Fed ended with stagflation at home and a plummeting dollar abroad.

Volcker at the helm of the Fed was the archetype of the banker--a scourge, a Calvinist divine striking out in every direction against easy money, slack standards and limp-jawed subservience to politicians. Bankers wriggled with masochistic glee in 1981-1982, when Volcker strangled the credit system and plunged the world into a brutal recession.

It is the suspicion that Greenspan’s economist genes will overrule his bankerly responsibilities that is at the root of the unrest at the Fed. Ever since he took over as Fed chairman, Greenspan has made it clear that he thinks avoiding a recession is part of his job. Bankers--true bankers that is, not the businessmen-impostors that created the savings-and-loan and junk-bond lending scandals--aren’t at all sure that avoiding, or even mitigating, a recession is such a good thing. The financial excesses of the late 1980s proved the lessons from the start of the decade have not burned themselves into the nation’s neurons. A dose of divine wrath may help ensure that a recovery is on the kind of footing that only fear of punishment can bring.

The actual differences between Greenspan and the restive bankers on his board are almost trivial. A quarter-point cut in lending rates, as Greenspan quite reasonably points out, probably makes no difference one way or the other; economic statistics are not nearly precise enough even to track its effect. To suggest that tiny changes in Fed policy are the difference between recovery and recession, as many commentators have, is silly.

Most observers give Greenspan fairly high marks for his performance to date. He has managed to hew a generally steady path between excesses of tightness and looseness, with enough of a tilt toward tight money to keep inflation well in check. As the money managers’ poll shows, his reappointment, which now seems nearly certain, will be welcomed.

But Greenspan’s bankerly colleagues have now forcibly reminded him that the Administration is only one of his audiences. The Fed’s vaunted powers are more mythical than real, despite the obsessive Fed-watching on Wall Street. It can, surely, club the economy to a stand-still--as Volcker did a decade ago; or ignite runaway inflation as the Nixon-Carter Fed did a decade before that. Between those extremes, its powers are mostly psychological, and no one will trust the Fed chairman who lets himself appear an Administration cat’s-paw.