SECRETS AND TRUTH

SYNOPSIS: Greenspan has no special knowledge, only special power over the Economy. And isn't that enough?

What do you get when you cross a godfather with a Federal Reserve chairman? Someone who makes you an offer you can't understand.

Sorry; an old joke, and one that's somewhat unfair to Alan Greenspan. Still, the Fed chairman does talk in a code that, while usually easy to decipher, bears only a distant resemblance to English. Moreover, he has a weakness for Delphic statements, seeming to imply that he knows more than he chooses to say clearly.

So Mr. Greenspan may bear some of the blame for the current rash of conspiracy theories surrounding the Fed's recent decision to cut interest rates. There isn't any real mystery about why the Fed acted; but those who insist that there must be more there than meets the eye have gained some undeserved credibility from the Fed's tradition of inscrutability.

When the Fed cut interest rates by half a percentage point on Jan. 3, jumping the gun on its scheduled meeting later this month, it surprised everyone. But we shouldn't have been that surprised; indeed, I was kicking myself for not having guessed that such a move was about to happen. All the ingredients were there: new signs of weakness in the economy, and evidence of an incipient panic in the financial markets. The Fed has always believed in the occasional usefulness of "slap in the face" interventions, dramatic moves that pull investors up short. So there was nothing particularly strange about that sudden rate cut.

But there are many people who won't accept the obvious explanation, who insist that the Fed acted on secret information about a looming recession or financial crisis so many that last week Roger Ferguson, the Fed's vice chairman, went out of his way to deny those rumors.

Why would commentators want to invent elaborate and unnecessary stories about hidden Fed knowledge? One reason is political: ardent tax- cutters, who hope to use recession fears to stampede Congress into giving them what they want, are eager to put as much negative spin on the economy as possible.

Another reason is personal: those who were skeptical about the glories of the "new economy" have spent the last few years in the doghouse. Now that some economic clouds have finally appeared, they don't want the sun to shine on their parade.

Finally, there's the CNBC effect. Providing business news has itself become a big business. But all-news channels, which struggle to stay interesting while covering the same material hour after hour, often find themselves emphasizing entertainment values over the usually prosaic truth. Even the Weather Channel has fallen into the habit of hyping each storm as if it were soon to be a major motion picture. And now that CNBC can no longer run breathless tales about the economic boom, it has started to feature equally breathless (and potentially self-fulfilling) speculations about economic crisis.

The result has been to put Mr. Greenspan himself in a no-win situation. If he doesn't cut rates as fast as Wall Street wants, analysts fret that he has gotten behind the curve. But if he does cut rates aggressively, rumors fly about the dark secrets that prompted his action.

So it was certainly a good idea for someone from the Fed to ask, as Mr. Ferguson did, the rhetorical question "What does the Fed know that we don't know?" and answer, truthfully, "Very little, if anything."

The real "secret of the temple" is that the Fed, Mr. Greenspan included, basically has no more knowledge about what is going on than any economic analyst equipped with a telephone and a modem. What the Fed has that the rest of us don't is not knowledge but power.

Ironically, the belief that the Fed has special knowledge actually reduces the institution's power: rumors that Mr. Greenspan cut rates because he knows something we don't diminished what would otherwise have been a salutary effect on market psychology. Still, despite all that, the Fed's move has already made a noticeable difference, stemming the rout in the Nasdaq and producing a striking recovery in the corporate bond market. Another few shots in the arm like that and talk of recession might well evaporate.

The key thing to realize is that Alan Greenspan is just a man, no wiser or better informed than many others. But he controls the money supply and that's enough.

Originally published in The New York Times, 1.17.01