On The Spot

Alan GREENSPAN DOES HIS BEST thinking in the tub at 5:30 a.m.a time when, the Federal Reserve chairman has told friends, his,,"IQ is about 20 points high&er. Engrossed, his thick eyeglasses steaming, Greenspan pores over reams of data each day. It was during such a water-soaked reverie in the last few months that, like Archimedes of old, the world's most influential economist may have had his "eureka" moment. There was no escaping the facts, no other way to explain the central conundrum of the U.S. economy: why inflation isn't picking up and profit margins aren't shrinking this late in the business cycle. Something was wrong-and it probably had to be the government's own productivity numbers. They were low. Far too low. After a two-decade wait, America was finally getting a return on its investment in new technology; thanks to computers, voice mail and other automation, workers were cranking out more and more per hour, swelling profits without inflating prices. That in turn meant full speed ahead for the economy in the foreseeable future, and few worries about inflation.

That, at least, is the way many on an increasingly edgy Wall Street would like to imagine Greenspan's daily ruminations in the tub. The chairman himself has never made clear exactly how serious a believer in the "New Economy" he really is. Nonetheless, evidence is growing that he has come closer than ever to shaking off his nagging worry that the long-running economic recovery and even longer-running bull market are a bubble ripe for the bursting. But the faith of any true believer in the New Economy was sorely tested last week. First, the government's own figures continued to belie the idea that the economy has entered a golden age. Data released on Tuesday showed that productivity grew at a tepid-and typical-seven tenths of a percent over the last 12 months. Those figures helped accelerate a market slide that, by the weekend, left the Dow down 565 points, or 7 percent, from its record high of 8,259 on Aug. 6. Last Friday's 247-point plunge had many wondering whether the long-awaited bear market was finally at hand. But many Fed-watchers still think Greenspan is ready to run at least part of the way with the bulls who believe that the business cycle has been tamed.

If so, he may be risking his glittering reputation. As he observed his 10th anniversary as Fed chairman on Aug. 11, the 71-year-old Greenspan could bask in the kind of success that few of Washington's big players enjoy any longer. He and his predecessor Paul Volcker have all but ended a nearly 40-year-long era of inflation. "If he retired right now he would be the greatest Fed chairman in history," says economist Bruce Steinberg of Merrill Lynch. Greenspan may be the only truly mythic figure left in Washington. At his recent Humphrey-Hawkins testimony, Rep. Michael Castle, chair of the House subcommittee, compared the chairman to a Roman general at a triumph, and the committee to the servant holding a laurel wreath above his head and whispering in his ear, "Remember, you are only human."

It's not just that, as the nation roars into its seventh year of expansion, Greenspan has managed, remarkably, to gradually lower inflation even as the economy has expanded. He has helped to fundamentally alter the economic culture in America by calming the inflation expectations of businesses and consumers. "Alan Greenspan, more than anyone else, has created today's [economic boom] with a decade of brilliant monetary policy," says Wayne Angell, a former Fed governor.

But today, the big question is whether a dangerous complacency has emerged in Greenspan and the markets alike. There's a growing battle of wills between those who think we're dropping our guard-both against the inflation dragon and the threat of a crash, and those who think something new is happening in the economy that will keep growth strong and jobs plentiful without driving up prices for years to come.

In the past, Greenspan always sided with the conservatives, the ridiculers of "new" thinking. But for the first time in years, people are beginning to doubt Greenspan's orthodoxy. Why are they worried? To listen to his recent speeches, the man who made his reputation with "pre-emptive strikes"raising rates before inflation shows up in the data- seems to think he can wait. Thanks to efficiency improvements like shorter lead times in production, the Fed's interest-rate moves are felt more quickly in the economy. "The Fed can be less tight than in the past," says Robert DiClemente, the chief U.S. economist for Salomon Brothers.

Even so, Greenspan hasn't created much confidence by suggesting that neither he-nor any economist-really understands the new U.S. economy any longer. He has a poet. World markets are so complex they make tracking global weather patterns look like simple arithmetic. Then there are all the other fresh variables: Relentless down-sizing. A blizzard of new technologies. Ever-cheaper and more-pervasive information in an information economy.

Fed chairmen always leave themselves plenty of wiggle room, and by playing up his perplexity, Greenspan has gone out of his way to leave some doubts that he fully accepts the New Economy thesis. Last month, for instance, he warned of a rate hike "at some point." Most observers don't believe that point will be this week's meeting of Fed policymakers--especially in light of the stock market's jitters. A severe sell-off, if it is at hand, would help make Greenspan's point that capital markets have grown so powerful-and self-correct-ing-that even the Fed thinks it must stand out of their way.

Still, all eyes remain on the nation's inflation czar- especially his serenity level after those morning soaks. While the old question about the Fed chief used to be "Will he or won't he [raise rates, that is]?" the new one is "Does he really believe, or doesn't he?" Remember, though, that the last time Greenspan sounded this bullish was in October 1987. A few weeks later, the market plunged by 28 percent.