March, 2006 Domestic #1:
Are American business leaders confident in Ben Bernanke’s leadership of the Federal Reserve Board?
How Will Ben Bernanke Affect Your Returns?
by Jeremy Siegel, Ph.D.
Friday, November 4, 2005
We know that Ben Bernanke is smart. He received a 1380 on his SATs, and he graduated summa cum laude from Harvard. We also know he has a great memory, as he went to the finals of the National Spelling Bee. But will he make a good Chairman of the Fed, the world's most powerful economic institution?
There is no doubt he will be confirmed as the next Chairman of the Board of the Federal Reserve System. And, if he is reappointed by future presidents, he could become the longest serving Chairman in history. He can legally serve as chairman for 28 years -- 10 years more than Greenspan -- in which case he would retire at 79, the same age that his lionized predecessor stepped down. However long he serves, his leadership will most certainly impact the future for investors.
Difficult Period of Transition
Bernanke will not be taking over the helm of the economy at an easy time. The Greenspan Fed has been steadily increasing interest rates for more than a year. This course of action was straightforward; facing a strong economy and rising inflation, the Fed's decision to raise rates from their low of 1 percent was really a no-brainer.
But now that the Fed has increased the funds rate 12 consecutive times to 4 percent, all indications show we are very near the end of the tightening cycle. The futures markets expect an increase in December and perhaps on January 31, which is Greenspan's last day of tenure at the Fed. Thereafter, the Fed's future course of action will be up to the new chairman.
Bernanke will likely be stepping in as Chairman when the short-term rate will be nearly as high as long-term rates are today. Historically, when the yield curve is this flat, it's a warning sign of dismal times ahead and a signal for the Fed to stop hiking rates.
Navigating these risks successfully will be challenging for the new chairman. To stop raising rates may make the market question Bernanke's anti-inflationary bona fides. Greenspan can smooth the transition by stopping the rate increases in January, so that Bernanke will not take all the heat. In any case, the market will not give him much time to make his mark. He must show anti-inflation resolve quickly or risk weakening the image of the Fed chairman.
Bernanke's abilities will be tested in areas in which he is not yet well versed. Although he is extraordinarily intelligent and well-trained, Bernanke is not Alan Greenspan. Greenspan thrived on economic data and was a successful economic forecaster well before he joined the Fed. Last January, at the American Economic Association meetings held in Philadelphia, Bernanke admitted that his academic training did not prepare him for what he termed "current analysis," the ability to tease a forecast out of the mounds of statistics that the economy spews forth. Clearly he will have to get up to speed on these issues quickly.
Inflation Targets
Where will Bernanke take the Fed in the long run? The primary purpose of the central bank is to maintain a low and stable rate of inflation. Bernanke champions the idea of the Fed setting "inflation targets", a policy Greenspan shied away from. In March of 2003, Bernanke stated the Fed is currently in a good and historically rare situation of having the full confidence of the capital markets. "We would be smart to try to lock in this consensus a bit more by making our current procedures more explicit and less mysterious to the public," he stated.
But what inflation targets will the new governor set? At remarks he made at the Federal Reserve Bank of St. Louis on October 17, 2003, he claimed that a rate of "about 2 percent would be the optimal long run rate of inflation." This implies, although he did not state this explicitly, that a range of 1 percent to 3 percent would be an appropriate target zone for inflation. This is exactly the current range of the Bank of England, but higher than the zero to 2 percent range set by the European Central Bank.
Bernanke comes to 2 percent, because if inflation is lower there is a greater chance that short-term interest rates can hit zero, a situation which famed economist John Maynard Keynes labeled a "Liquidity Trap." The liquidity trap makes it difficult for the central bank to stimulate the economy because once short-term rates hit zero, they cannot be lowered further. At this point, interest rates can no longer be used as a stimulus to the economy. The last time short-term rates hit zero in the U.S. was the Great Depression.
Bernanke has extensively studied the destructive effects of deflation, and he concluded that by keeping the inflation rate comfortably above zero, but not at level that is harmful to the economy, policymakers can minimize the probability the economy faces the deflationary dilemma.
An inflation range with an upper bound of 3 percent sends chills down the spine of inflation hawks, who want the Fed to clamp down on any inflation rates over 2 percent. Yet, the banks of New Zealand, Canada, Sweden, Israel, and the U.K. all target inflation rates of exactly that 1 percent to 3 percent range.
Inflation hawks do not find these comparisons comforting. Most of these countries historically experienced much higher inflation than the U.S. did, so a 1 percent to 3 percent range is not a very ambitious goal. More to the point, Bernanke will be asked how the U.S. can have a higher inflation target than the European Central Bank which is supposed to begin anti-inflationary policy when inflation hits 2 percent.
The Bottom Line for Investors
Bernanke is clearly aware that being perceived as being soft of inflation would be deadly for a new Fed chairman. Loss of confidence in his anti-inflationary resolve would cause long-term interest rates to rise. As a result, Bernanke may have to compromise on his stated targets and settle for a range "not more than 2 percent."
Nonetheless the new chairman's predilections will be to err on the side of additional stimulus if the economy falters. His steadfast resolve to avoid deflation should make bonds far less attractive to investors. One of the reasons bond yields are so low today is that investors want to hold government and high-grade bonds in case the U.S. spins into a Japanese-style deflation. With Bernanke at the helm this outcome is virtually precluded.
On the other hand, stocks should benefit from a slightly easier monetary policy. Deflation is death for stocks since falling output prices reduce profits and debt payments become far more burdensome. Deflation smashed worldwide stock markets in the 1930s and the Japanese stock market in the 1990s. Bernanke will be willing to risk a tad more inflation to ensure these grim outcomes never happen again. The bottom line: Stock investors should be all smiles with President Bush's new choice of Fed governor.
March, 2006 Domestic #1:
Are American business leaders confident in Ben Bernanke’s leadership of the Federal Reserve Board?
Bernanke Leaves Door Open for Rate Hikes
Federal Reserve Chairman Ben Bernanke, delivering his first economic report to Congress, declared Wednesday that the economy has snapped smartly out of an end-of-year lull, although inflation and other risks remain. He left the door open to higher interest rates in the future.
Recent economic barometers on jobs, production, retail sales and other business activity in January "suggests that the economic expansion remains on track," Bernanke told the House Financial Services Committee. The expansion, he said, does have "a lot of staying power."
The economy in the final quarter of last year hit a rough patch, growing by an anemic rate of just 1.1 percent, the slowest in three years, as lingering fallout from Gulf Coast hurricanes and the toll of high energy prices led to belt tightening by consumers and businesses. Most private economists are expecting good growth in the current January-to-March quarter.
High energy prices, a strengthening labor market where unemployment dipped to a 4 1/2-year low, and a solidly growing economy could fan inflation pressures - forces that the Fed will need to keep a close eye on, Bernanke said.
Bernanke, whose first day on the job was Feb. 1, said he agreed with Fed policy-makers' assessment at their Jan. 31 meeting that interest rates may need to move higher. "The Fed judged that some further firming of monetary policy may be necessary, an assessment with which I concur," he said.
At the January meeting, then-Fed chairman Alan Greenspan's last piece of business was to boost a key interest rate to 4.50 percent, the highest in nearly five years to fend off inflation. It marked the 14th increase since the Fed began to tighten credit in June 2004.
Before Bernanke became Fed chief, Fed policy-makers had differed on how much higher interest rates need to go but still signaled that the nearly two-year rate-raising campaign would probably be drawing to a close this year.
Decisions on the future course of interest rates will depend more heavily on what upcoming reports say about economic activity and inflation, Bernanke said.
"In coming quarters, the (Fed) will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data," Bernanke said.
His first meeting as Fed chairman to decide interest rates will be March 27-28.
Economists viewed Bernanke's comments as a sign that rates will go up by another quarter percentage point at the March meeting. "He agrees that another ... rate hike at the March 28 (meeting) will be needed," said Stuart Hoffman, chief economist at PNC Financial Services.
Bernanke made clear that fighting inflation is a crucial Fed mission. "Stable prices promote long-term economic growth by allowing households and firms to make economic decisions," he said. A stable price climate also nurtures employment growth, he said.
While energy prices raise one risk for the economy, another is posed by the future direction of the housing market, Bernanke said.
Although higher energy prices down the road could feed inflation fears, a slowing housing market raises the prospects of crimping consumer spending, which has been an important ingredient to the country's economic health. How these uncertainties play out will be closely watched by the Fed, Bernanke said.
Still, at this point, Bernanke suggested he was hopeful the highflying housing market would make a safe landing by gradually losing altitude.
"A leveling out or a modest softening of housing activity seems more likely than a sharp contraction, although uncertainty attends the outlook for home prices and construction," Bernanke said. "Prices and construction could decelerate more rapidly than currently seems likely."
Other challenges to the economy are posed by swollen budget deficits and the massive strain on government resources from a big wave of retiring baby boomers as they draw Social Security and Medicare benefits. "We have a very serious long-term fiscal problem," Bernanke said, refusing to weigh in on specific spending and tax proposals in Congress.
The yawning trade deficit is another concern, though Bernanke said he believed that shortfall could be curbed without damaging the economy.
As part of his testimony, Bernanke also said that the Fed expects the economy to grow at a healthy pace this year of around 3.50 percent, as measured from the fourth quarter of last year to the fourth quarter of this year. Next year, the economy should grow by around 3 percent to 3.50 percent.
Inflation, excluding food and energy prices, should rise by about 2 percent this year and wouldn't exceed that upper bound next year.
The unemployment rate this year and next should be around 4.75 percent to 5 percent, in line with last year's performance.
Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee, said he was confident Bernanke, 52, will be as successful in his new job as his predecessor, Greenspan, 79, who retired on Jan. 31 after nearly 19 years at the helm.
Democrats, while welcoming Bernanke, expressed concern about the economy's bloated budget and trade deficits and the struggles of working-class families amid high energy prices and health care costs.
On other matters, Bernanke:
_ Expressed concern about a regulatory loophole that lets companies own a certain breed of banks, including a bank that Wal-Mart Stores Inc. wants to operate in Utah. He supported a House bill that would close the loophole on these banks called industrial loan companies.
_ Said a situation seen recently in U.S. markets, where long-term investments fetched lower interest rates for a while than short-term ones, is "not signaling a slowdown" in the economy. The phenomenon, called an "inverted yield curve," has in the past often preceded a recession.
Typically, longer-term instruments carry higher interest rates than shorter-term ones to compensate investors for tying up their money over a longer time frame.
_ Expressed reservations on the merits of raising the minimum wage.
Copyright 2005 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed
March, 2006 Domestic #2:
Are America’s armed forces too costly?
Study: Airline defense too costly
By Mike Ahlers, CNN producer
WASHINGTON (CNN) -- It would cost $11 billion to install anti-missile systems on America's 6,800 commercial airliners, and billions more to maintain the unproven systems, a study said Tuesday.
According to the RAND study, the U.S. government should postpone a decision on installing the devices until they are more economical and reliable.
The study said operating costs alone for the missile countermeasures would consume $2.1 billion a year -- almost half of the money spent annually on all transportation security.
"When you look at those figures, we think it is too expensive," said report co-author James Chow. But, he added, the investment could be justified if the costs decrease, or if the budget for transportation security grows significantly.
The RAND report comes as government and airline officials tussle with the best way to protect airliners from what could be their biggest threat -- shoulder-fired missiles, or MANPADS.
While no U.S. airliner has been brought down by MANPADS (man-portable air defense systems), the weapons are cheap, plentiful and have been used successfully overseas. In November 2003, a DHL cargo plane was damaged shortly after take-off from Baghdad International Airport.
The RAND report says the shoulder-fired missiles are likely to become more attractive to terrorists, especially as the government tightens other airplane and airport security measures.
The report attempts to weigh the cost of protecting airliners against the cost of a successful attack.
RAND calculates that it would cost about $40 billion over 20 years to develop, procure and operate anti-missile systems.
The cost of a successful missile attack would also be significant. The United States would incur "direct" costs of approximately $1 billion for every aircraft downed, the report says.
Indirect economic damage would be far greater. If air travel was shut down for a week, the loss would amount to roughly $3 billion during the shutdown, with a long-range impact that could increase the loss to $15 billion.
But the report suggests it would be wasteful to rush into a counter-MANPADS program, saying terrorists could devise tactics to defeat whatever countermeasures have been installed.
Given the costs and uncertainties, "we believe a decision to install such systems aboard commercial airliners should be postponed until the technologies can be developed," the report says. "This development effort should proceed as rapidly as possible."
It says the current Department of Homeland Security strategy of research and development is a prudent step.
Choices The government is currently looking at three main types of missile thwarting systems: flares, laser jammers and high-energy lasers (HELs). The first two aim to confuse the seeker of an infrared missile while the HEL aims to destroy the missile regardless of how it is guided.
Some military aircraft already have anti-missile systems. And Israel's El Al airline announced late last year it would begin installing an Israeli-made system on its aircraft, beginning with a Boeing jet. In November 2002, terrorists unsuccessfully attacked an Israeli airliner in Kenya.
In the United States, officials are attacking the issue from numerous angles. Some U.S. airports have stepped up patrols around airport perimeters to fend off possible attacks on jets, which are most vulnerable on take-off.
DHS Undersecretary Asa Hutchinson said the department also has trained thousands of border inspectors to detect MANPADS components being smuggled into the country.
Chow said the government also should study which aircraft are most susceptible to missile attack, so that anti-MANPADS systems can be placed on the most vulnerable aircraft, and find ways to improve airliners' ability to survive MANPADS strikes.
And the government should work to stem the proliferation of MANPADS, and buy back weapons on the world's arms markets, particularly newer, more sophisticated MANPADS that can thwart counter-measures.
RAND says a multilayered approach is important "because no single countermeasure technology can defeat all possible MANPADS attacks with high confidence."
No, I was never banned. Sorry for making this topic, by the way, but I needed to be able to access that information at school, and my e-mail is blocked/floopy drive is broken, so this was the only way I could do it. Go ahead and lock it, though.
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Mar 2nd, 2006 02:51 PM
