The Man Who Wants To Hurt Your Business

lfrederick@cahners.com

Quite a few people who have nothing to do with your store make decisions affecting your financial health, directly or indirectly. Martin Rapaport, Nicky Oppenheimer, and William Boyajian come to mind. But the man who wields the most influence over your prosperity sits in Washington and has never been part of the jewelry industry, and I don?t mean President Clinton. I?m talking about Alan Greenspan, chairman of the Federal Reserve, the nation?s central bank.

Greenspan may know less about fine jewelry than Mike Tyson does, but he can knock the wind out of your sails by making consumers reluctant to enter your store. That awesome power?not only over jewelers but also over every retailer in the country?stems from his ability to raise or lower interest rates. Higher rates force businesses to cut back on their borrowing and thus their expansion. This curbs consumer spending by making debt more burdensome and undermining confidence about the future course of the economy.

Right now Greenspan and his fellow governors at the Federal Reserve, who follow his lead like a dog does its master, fear the economy is overheating?that times are just too good. Yet the economy is growing by roughly 4% (after inflation) and the cost of living is rising less than 3%?not high enough in either case to set off alarm bells. Nevertheless, the Fed has raised interest rates five times over the past year, and it?s probably far from finished. So what?s made Greenspan so determined to spoil our party? Look no farther than Wall Street.

That?s right. The Fed is focusing not on business activity or actual inflation, as it traditionally has, but on how much stock prices are rising. As stocks climb, Greenspan says, something called the ?wealth effect? is unleashed. While that doesn?t sound like such a bad thing to most of us, to Greenspan it?s like a communicable social disease. It makes people feel so pathologically optimistic that they become irrational free-spending consumers. In other words, they?re buying too much of everything, jewelry included. So Greenspan has set out to raise interest rates until stocks stop climbing or, even better, go into a tailspin.

My reading of the evidence doesn?t support this disturbing strategy. The long, sustained growth of the economy over the past few years, which has generated those unprecedented gains on Wall Street and created millions of millionaire households to boot, has coincided with a long period of tame inflation. In fact, before oil prices started rising last year, there was worried talk about disinflation: lower prices. As Michael Baxdarich of CBS MarketWatch has written, ?There is no theoretical basis for the Fed?s precept that rising wealth is inflationary, and it?s hard to see how a surging stock market damages the economy.?

Even if the wealth effect silently stokes inflationary fever, Greenspan?s approach is too broad. The bull market has largely been a NASDAQ phenomenon. If he wants to focus on the stocks creating wealth, he?ll find most of them traded on NASDAQ. Yet raising interest rates has a bigger effect on the already-depressed Old Economy stocks like autos and retailers, while largely sparing New Economy technology and dot-com stocks that have little need for debt financing, given these firms? ability to sell additional equity to fund expansion. Microsoft and Cisco, for example, the two largest NASDAQ stocks, have no long-term debt and sizable cash balances. Indeed, the tech leaders have proved largely immune to the Federal Reserve?s rate hikes because investors view their fundamentals as so strong that it doesn?t matter whether short-term rates are 5% or 6% or 7%.

Though Greenspan and his fellow governors are insulated from voters?they?re appointed by the president to 14-year terms?the Fed, like all government institutions, is ultimately a political body. That means it responds to public opinion. If enough Americans let Washington know they don?t want a Fed-induced stock market crash, we might deflect Greenspan from his reckless course. When Congress oversteps its bounds, the Supreme Court steps in. When the Fed goes too far, the other Supreme Court?we, the voters?should step in. Our continued prosperity may depend on it.