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Today's Commentary: 04.03.06
Transparency:
A Look at Economic Modeling

We hear a lot of talk these days about transparency. Defined, it simply means free of pretense, absent of deceit, readily understood. And now we hear it used when the new Federal Reserve Board chairman Ben Bernanke addresses us in clearer diction than his predecessor. But is clarity really transparency?

The use of forecasts based on economic modeling, a science that in its purist form explains the nature of reaction, is supposedly the new hallmark for this Fed. Led by Mr. Bernanke's former academic background and his former position as a Fed governor, these forecast are now front and center in the quest for this see-through decision making.

During Mr. Greenspan's tenure, the "green book" a compilation of these forecast that Mr. Bernanke once contributed to, was largely left out of the statements that came from the FOMC. There may have been good reason for this.

Transparency involves a certain amount of democracy when it comes to decision making and although Greenspan was clearly the head of this august body and the one who would ultimately take the credit or the blame for any Fed action, he considered the economic modeling present in this book to be of less importance; more of a part of the sum.

The Fed under Greenspan was noted for its circular logical and general obtuseness, often times leaving those who felt as though the decisions by these bankers with no real idea of how the decision was arrived at or why. With the direction of the economy in his hands, many felt as though a peek inside his thinking would provide them with a sense of direction.

And while the clarity Bernanke seeks, defined as an intelligible, low jargon approach to documentation that integrates a certain and reasonable logic or rational, I am hard pressed to see that this is occurring. Bernanke seems fixated on inflation and we are all aware that determining how much inflation in an economy is difficult. Many factors enter into the equation including price.

Bernanke uses this data driven desire to make rate decisions as the opportunity to forecast where the economy will be a year from now. Can economic modeling do this? Possibly but his approach seem to be autarchic.

The markets have already take several things into consideration without using any academic modeling. They know that employment might be considered full even if there are still suggestions that there might be as much as three percent difference to the upside in the Labor Departmentıs number. They know that real wages are not really increasing at the same rate as prices. They know that the Fed will continue to raise rates even as the market consensus suggests that rate hikes of a year ago are just now finding their way into the economy.

The markets also know that corporations are not spending. Merger and Acquisition activity does not constitute an atmosphere if vibrancy. Each time a company buys another instead of using capital to purchase equipment, something is lost. That something lost is jobs ­ no M&A ever had the net effect of creating employment. Also lost is the chance to borrow at relatively inexpensive rates ­ sure, not as cheap as fifteen rate hikes ago, but still a good buy historically, and additionally, profit sharing suffers ­ each time a company spends money on growing itself laterally rather than vertically, shareholders lose that piece of the pie permanently.

So if GDP is beginning to moderate itself in the face of higher energy prices, real wages are not high enough to spur the kind of consumer spending that we had in a low interest rate environment, and the Fed continues with their upbeat assessment of the economy, where is this inflation that Bernanke worries so much going to come from? Better yet, why raise rates to control it when economic modeling suggests that money supply might be a better alternative to controlling prices?

BlueMoney Report

The Blue Money Report
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