A RARE GLIMPSE INSIDE THE FED Former governor Robert Heller contrasts the Volcker years with the Greenspan regime. He comes away convinced that the nation's central bank can tame inflation without a recession.
By H. Robert Heller Robert E. Norton REPORTER ASSOCIATE Jennifer Reese

(FORTUNE Magazine) – AS POWERFULLY AS the moon affects the tides, the Federal Reserve System influences American finance and business. Like the moon, the Fed is mysterious, unseen most of the time, and only partly illuminated the rest. H. Robert Heller, 49, appointed a Fed governor in 1986, witnessed the last year of Chairman Paul Volcker's reign and the dawn of the Alan Greenspan era. Heller resigned in July to become executive vice president of Visa International. He came to the U.S. from his native Germany as an undergraduate to study American politics and economics. By the time he neared completion of his doctorate at the University of California at Berkeley, he had realized he could become a professor in the U.S. at 25, instead of at 40 in Germany. He had also begun to dream in English. Heller taught economics, became a U.S. citizen, worked for the International Monetary Fund, and was director of international economic research at Bank of America before going to the Fed. He discusses his years at the Fed and his views on the economy and banking with FORTUNE's Robert E. Norton:

''I do not share the concerns of some critics of the Fed who think a recession is imminent. Clearly we are in a period where economic growth is less than exuberant. But I don't see a recession on the horizon, certainly not an inevitable recession. Some economists argue that a mild recession might be an acceptable trade-off for further progress against inflation. But I think you can make progress against inflation without having a recession, mild or otherwise. Neither should we try to aim for a soft landing because as every traveler knows, once the plane lands, everyone goes home. Instead, we should keep on flying. For me that means continued growth within the framework of financial and price stability. A recession that merits the term, a real recession, would make things worse. First, the budget deficit would worsen -- that would exacerbate one of our major problems. A true recession would also play havoc with the financial / sector, where you already have plenty of trouble with the S&Ls, Third World debt, and LBOs. You could easily get into a situation in which the Federal Reserve might overreact, Congress might start throwing money at problems, and inflation might get a lot worse. The current level of inflation is not something to be proud of, but look at it in relation to where it's been -- the double-digit rates of the early Eighties. Overall we have been able to contain inflation, and I think over the past three years we have reduced the potential for future inflation, by holding monetary growth down. ONE OF THE MOST breathtaking moments in my life was the first time I walked into a meeting of the Federal Open Market Committee. Volcker had administered the oath of office to me at 8:55 A.M. on August 19, 1986. Then the door to the boardroom, which adjoins his office, opened, and we walked into an FOMC meeting, which began at nine o'clock. ((The FOMC is made up of the seven Fed governors and five of the 12 Federal Reserve Bank presidents.)) Everybody was already seated at the table, and they all rose. It was sort of like being inducted into the College of Cardinals. Then the discussion started. I was trying to keep track of the various positions. There was a broad range of views, with some advocating a little easier monetary policy, some a little tighter. And I thought, 'My God, what if I'm the swing vote?' Cold sweat started running down my back. Finally, when it came to the roll call, to my enormous surprise almost everybody agreed to ease monetary policy slightly. I began to realize that the Federal Open Market Committee is an enormous consensus builder. That makes it very different from the Supreme Court. Five- to-four decisions are the rule there. What we tend to see here is either 12-to-0 or 11-to-1 decisions. Though people walk into the meeting with somewhat divergent views, the sharp edges are worn off in discussion. Eventually a consensus emerges and is formulated by the chairman. Following further discussion and possible modification of the chairman's proposal, it is put to a vote. You think: Can I associate myself sufficiently with the consensus to vote yes, or am I so opposed that I must say, 'This policy would be unacceptable.' I never dissented, and I'm proud of that, because I believe I helped to build that consensus. Greenspan is a very good consensus builder. He is open to all kinds of different views, and absolutely amazing in his encyclopedic knowledge of the economy. Volcker is a different person, more of a policymaker than a consensus seeker. Maybe he knew what he wanted and then managed to build a consensus around it. What the Fed did in the early Eighties when Volcker was chairman produced very sharp changes in interest rates and monetary growth. It stepped on the brakes or stepped on the accelerator. In the Greenspan period everything has been done very gradually. Both approaches got you to your target. You had two different helmsmen, and maybe each was appropriate for his time. Except for that, I don't see an enormous change in the way the Fed runs. The place is like an aircraft carrier: The momentum of the institution is so enormous that even if a new helmsman tries to set a different course, the changes are imperceptible. You'll probably have to wait until the end of the Greenspan era to say what was really different from the Volcker years. My most satisfying votes were on the milestone decisions on bank deregulation. The first, in April 1987, gave limited securities-underwriti ng powers to J.P. Morgan, Citicorp, and Bankers Trust. At that time it was still a fairly close vote. Another decision I felt strongly about: giving U.S. banks permission to accept foreign currency deposits. That hasn't gotten much attention yet, but it will become effective January 1. People in Europe have enjoyed this freedom for a long time. I don't see why American citizens should not have the same right. Citibank, the largest U.S. commercial bank, now ranks only No. 24 in the world. That's mainly because American banks are constrained in two areas: They are not allowed to offer a full spectrum of banking services to their customers, and the system is fragmented geographically. If somebody ever suggested that auto dealers in Virginia could sell only cars built in Virginia, people would think him foolish. But that's how the banking system works. Forty-five states now permit some kind of interstate banking, but the laws are by no means uniform. Many restrict competition by limiting entry to banks from other states. With the gradual breakdown of these barriers, we're moving in the right direction. But we still need full-scale congressional action. Look at the Europeans: They say that by 1992 they will have an integrated banking system, period. They have the momentum to pull together the entire Continent across 12 sovereign nations. Here we have been hesitant to integrate our own 50 states, in spite of the fact that we use the same currency and have a perfectly integrated economy in all other areas. We have all these segmentations not only in this country but in the world as a whole. That's one of the aspects I find fascinating about my new job, because Visa is a truly global payments system that integrates all the various national markets. It is the closest thing to a common currency available to consumers today. Monetary policymaking, if you do it right and if you do it successfully, is actually fairly uneventful if not outright boring. If you do it right! On the other hand, if you make a mistake, then holy hell will break loose very quickly. Fortunately, the past three years have been a period of singular successes. We have had very gradual monetary growth, and we have avoided extreme swings in interest rates. I think we succeeded in providing a rather stable financial environment for the U.S. economy.''