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BEING STREET SMART 

by Sy Harding

FED TRANSPARENCY IS DANGEROUS! February 15, 2008.  

Okay, so we have a slowing economy, probably already in recession, global stock markets already down 20% to 30%, past the threshold of bear market parameters, a stock market in the U.S. that has been down 16%. We have nervous consumers, nervous investors, and frightened banks no longer willing to make loans.

In response, we have a Federal Reserve, White House, and Congress, that were very late in recognizing the seriousness of the situation, but have finally come rushing in with major efforts to show consumers and investors they are on the job. They assure us the problems will be minimized by the aggressive interest-rate cuts, huge stimulus package, agreements by financial institutions to work with troubled home-owners, etc. etc.

Maybe those assurances have already had a positive psychological effect. That would be a good start. Retail sales unexpectedly rose in January, and unemployment claims have been dropping for several weeks.

We also had a stock market that was nervously trying to rally, up three days in a row.

And on Thursday we had a Congressional committee interviewing Fed Chairman Bernanke and Treasury Secretary Paulson on TV regarding the economy and financial markets. What an opportunity. Wouldn't you think all the participants would want to boost the chances of their rescue plans by using that televised event to provide consumers and investors with as much positive bias and promise as possible?

But no, we had Congressmen competing with each other to get Bernanke and Paulson to reveal even more of the negative and gloomy side of the picture. We had Bernanke cooperating by warning the economy faces still more pressure from the housing collapse, worsening labor markets, a credit crunch that has still more shoes to drop, and that the Fed is also now worried about inflation again. 

Brilliant! Spend big money on the stimulus plans, and then undermine the effort to encourage calm and confidence by stressing the negatives.

Former Chairman Greenspan's method looks smarter all the time, of revealing nothing about what the Fed was thinking, befuddling Congress with his 'FedSpeak', which left Congressional committees and analysts asking afterwards "Wha'd he say?"

Bernanke's more transparent Fed is not working. Markets seem to plunge every time he speaks. And this time was no exception. The additional gloom from the Congressional hearing had the stock market declining from the moment the first Congressman began speaking. And we wound up with an ugly day, the Dow closing down 175 points, ending the market’s fragile three-day rally.

Meanwhile, there was a lot of criticism this week over Congressional hearings to determine if baseball player Roger Clemons used steroids. Critics seem to think that is a question and problem for those running baseball to solve. Congress should be getting involved in more important issues.

Please, no. Let Congress concentrate on baseball. The Roger Clemons hearings had no impact at all on the country, revealed nothing that anyone cared a whit about. But the impact of Congress reminding the country of the economic problems, digging in to try to find more, threw the fear of the devil into investors, and probably consumers. Headlines from the hearings like ‘No Reason for Optimism’; ‘Bernanke Says Economic Outlook Is Worse’ have a way of doing that to already fragile confidence.

The Bernanke Fed wants its thinking to be more ‘transparent’, encourages individual Fed Governors to speak out with their own thoughts regarding the economy, inflation, and the Fed’s goals.

Former Fed Chairman Greenspan’s tactic of providing no Fed transparency got the economy through a lot of problems during his 20 years in office. We only found out long afterward how worried the Fed had been at various times, knowledge that would no doubt have resulted in several panics had the Fed been transparent with its concerns at the time.

So, let’s have more Congressional hearings on baseball, not fewer. And if that doesn’t keep them busy maybe they could branch out into worrying about the ranking system in tennis, or the scoring system in Nascar. More lobbyist-paid junkets to exotic resorts would be good. Get them out of town.

Meanwhile, more than $168 billion in tax-payer money is being spent on the financial stimulus efforts. Let’s at least give them some chance of succeeding, by calling a moratorium on speeches by Ben Bernanke, and Congressional hearings into the nation’s economic and financial situation. They apparently know not what they do.

Sy Harding is President of Asset Management Research Corp., and publisher of the financial website www.StreetSmartReport.com, and the free blog www.SyHardingblog.com. He also authored the timely 1999 book Riding the Bear - How to Prosper in the Coming Bear Market, and 2007's Beating the Market the Easy Way - Seasonal Strategies that Double the Market!

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