By A. Raymond Randall

rayrandall[at]echievements.com

"Twas brillig, and the slithy toves Did gyre and gimble in the wabe; All mimsy were the borogoves, And the mome raths outgrabe." Reading silently or aloud creates rhythmic nonsense, you might think. Humpty Dumpty explains, defines, and clarifies for Alice. Soon Alice sees meaning. As she does, the upside downs become the right side ups.

Alan Greenspan often sounds like the Jabberwocky as much as Humpty Dumpty seems senatorial. Mr Greenspan's econoblab explains a lot without telling much. His Federal Reserve messages provide detailed economic data with vague nuanced economic outlook. Most of us avoid muddling through the Chairman's comments even though the Chairman's influence may be second only to the President. Given
such import, Alan Greenspan once retorted, "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said."

Many Federal Reserve watchers hope Mr. Bernanke (Alan Greenspan's successor) tells all so that senatorial Humpty Dumpty's shun economic explanations "...that haven't been invented just yet." When the Federal Reserve Chairman presents the "Semiannual Monetary Policy Report to the Congress", it is called the Chairman's testimony. His job is to explain the Fed's economic assertions about employment, inflation, and interest rates. Monetary policy statements should be lucid and transparent embracing what Steven D. Levitt (Freakonomics) calls, "the raw power of information."

According to a CNN Money.com poll, most respondents consider Ben Bernanke's testimony (or shall we spell it "testimoney"?) the "Same as Alan Greenspan". If transparency and clarity mean something, it is time for Mr. Bernanke to be different from Mr. Greenspan.

* The new Fed Chairman used these phrases: "The U.S. economy performed impressively in 2005."
* "...Energy prices rose substantially yet again."
* "The Gulf Coast region suffered through severe hurricanes that inflicted a terrible loss of life"
* "Inflation pressures increased in 2005"

Anyone could surmise that these statements are keenly observant as government and citizens should expect. I want the Chairman's prognostications to serve consumer and business. The actions of the Federal Reserve should measure business and consumer trends with a readiness to manage unexpected consequences for the U.S. economy. The Chairman should report accordingly. Since 1913, when the Federal Reserve Bank was founded, the Federal Reserve Bank Board of Governors attempts the coordination of US economic goals with those of the global economy, particularly as it pertains to inflation.

Just the same, is it possible for the Fed to protect consumer and business from economic shake ups? Does growth come from business cycles that ebb and flow? Or does stabilized growth come from Fed bankers deciding on interest rates and inflation targets? When adjusting interest rates, does the Fed create the "irrational exuberance" Greenspan maligned? Do contractors over build speculatively? Do
mortgage companies pitch "interest only" mortgages because the Fed lowered rates? Did landlords get stuck with empty apartments and broken leases when interest rates dropped to historical lows? Did many of those landlords convert apartments to condominiums squeezing rental rates higher forcing families out of urban areas or into smaller spaces?

We should expect more from Federal Reserve Bankers. Investors need to know the long-term effects of Fed actions. Ratcheting interest rates slows the housing market (Greenspan mentioned this "bubble"), increases the cost of debt as credit card companies and mortgage companies leverage rates, and sends equity and bond markets into an economic whirlpool. If the consumer's spine is the backbone of the economy, does rate manipulation provide benefits?

A New Haven, Connecticut contractor told me, "During the 50's and 60's, you could predict the housing market. There would be a surge for three years, slow down during years four and five with little or no activity year six. During the seventh year, you would plan for the next building cycle. The cycle lasted 7 years; it was predictable, and the Government did not interfere."

Consumers account for 70 percent of economic activity. After 14 rate increases the consumer scuttles and hides. When interest rates are low, debt grows. When interest rates are high, the economy slows. Excessive debt management due to manipulating rates to historical lows creates economic burdens; the consumer accepts debt that limits spending when rates are increased. This prods the economy into a recession or a bubbling boom.

Residents of econoland, known as economists, worry that the Fed will overdo their inflation concerns. Some Fed observers complain that the Fed has managed inflation poorly since World War II. The Federal Reserve Bank Governors act on the most extensive economic data available. Setting monetary policy from this bank of information is the art of Fed action. Greenspan acknowledges this by saying, "The
Fact that our economical models at The Fed, the best in the world, have been wrong for fourteen straight quarters, does not mean they will not be right in the fifteenth quarter." Hard to have confidence that the Fed Governors know the consequence of their policy decisions.

Within all markets an "invisible hand" works its "self-interest". Adam Smith coined these terms in 1776. Smith considered the self-correcting nature of market pricing (simple supply and demand paradigms) inherent to all markets. This leads to a "natural price" for the product or service. Smith's conclusions recognize the affect of self-interest in all market transactions. One party or the other will have the predominant benefit of self-interest during some market cycles. Smith warns
against the role of government in economics. "Whenever the legislature attempts to regulate the differences between masters and their workmen, its counselors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters." (Book 1, Chapter 10)

What effect does Fed action have on market moves? Only as a current event reported within a news cycle. The effect changes when oil prices go up, earnings go down, or housing starts collapse. U.S. economic diversity means that one sector will boom as another goes bust. As Greenspan has said, "The more flexible an economy, the greater its ability to self-correct in response to inevitable, often
unanticipated, disturbances and thus to contain the size and consequences of cyclical imbalances." An economy driven by consumer spending and entrepreneurial instinct should expect "disturbances", and "consequences of cyclical imbalances". The Federal Reserve Governors presumptive actions tilt the effects hazardously. Essentially, Fed watchers (this means all of us) should expect the Fed to comply
with monitoring and reporting monetary policy about employment, inflation and interest rates. We should not expect economic manipulation by the Federal Reserve Bank's Board of Governors.

The markets go up sometimes and down others. Humpty Dumpty, would you make the upside downs become the right side ups?

Ray Randall serves clients as a registered investment advisor with his firm, Ethos Advisory Services, Essex, Massachusetts Ethos Advisory Services. He has wide experience within the financial services industry, writes a weekly newsletter for http://www.ethosadvisory.com Ethos Advisory Services, and coordinates the developments at http://www.echievements.com Echievements.com. Ray holds a Masters Degree from Gordon-Conwell Theological Seminary, Hamilton, MA. You may call Ray (617-275-5565). Copyright 2006

Published - March 2006