Monday, June 9, 2008
Robert Plant & Alison Krauss
Back from the weekend.... The Robert Plant & Alison Krauss concert at the Borgata was very interesting. Part rock (yes Stairway to Heaven was played - amazing rendition with Alison participating), Part country (part revivalist gospel music) and in some parts just beautiful duets. Both singers have amazing voices. It was by far one of the most interesting concerts I have been to.
Thursday, June 5, 2008
Bigger Banks might fail
from www.reuters.com
Bigger U.S. bank failures may be coming - FDIC
Thu Jun 5, 2008 11:08am EDT
(Adds comments on FDIC planning to issue guidance, Basel II)
By John Poirier
WASHINGTON, June 5 (Reuters) - Future U.S. bank failures linked to the downturn in the real estate market may include "institutions of greater size" than in the recent past, Federal Deposit Insurance Corp Chairman Sheila Bair said on Thursday.
An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, Bair told a Senate Banking Committee hearing on the state of the banking industry.
"There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past," Bair said. "Uncertainties in today's economic environment continue to pose significant challenges for the banking industry, households, and bank regulators."
So far this year, four small U.S. banks with deposits insured by the FDIC have failed, up from three in 2007. The agency last week boosted its list of troubled banks to 90, which have a combined $26 billion in assets.
The FDIC, which has about $52.8 billion in its deposit insurance fund in the event of bank failures, has launched a review of its risk-assessment rates for larger banks to determine if they reflect current conditions, Bair said.
"The agency plans to examine, among other issues, whether changes in how long-term debt issuer ratings are used to determine premium rates can improve the assessment system's effectiveness in capturing risks posed by large institutions," she said.
The FDIC is also focusing on banks' liquidity risk management and investments in structured credit products.
"The FDIC expects to issue guidance to the institutions we supervise on liquidity risk and issues related to investments in structured credit products," Bair said. "Market stress over the past year made shortcomings evident in some institutions' risk management of these areas, and our guidance will address specific areas where risk management efforts should be improved."
Additionally, the FDIC is preparing guidance for banks that rely on third parties such as loan originators and mortgage brokers. The guidance will include due diligence in selecting a third party, contract structuring, and compensation arrangements to avoid encouraging third parties into steering customers to higher cost products, she said.
The FDIC chief also indicated regulators were open to the idea of allowing the biggest U.S. banks to use a simpler set of capital adequacy rules designed for smaller banks under the so-called Basel II international banking framework. The proposed rules for smaller U.S. banks, known as the "standardized approach," were submitted to the White House in April for review.
"The standardized approach introduces a more risk sensitive approach for residential mortgages that bases the capital charges on first and second liens on loan to value measures, and also better captures the risks on negative amortization loans," Bair said.
Previously, the biggest U.S. banks had been expected to use an "advanced approach" requiring complex computer models to understand their credit, operational and market risks.
The Swiss-based Basel committee for international bank supervision, which has been monitoring the deteriorating conditions at big global banks, is also "very close" to updating its practices for liqudity risk management and releasing them for public comment, she said. (Reporting by John Poirier; Editing by Chizu Nomiyama)
© Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.
Reuters journalists are subject to the Reuters Editorial Handbook which requires fair presentation and disclosure of relevant interests.
This is the first official indication that Large Banks might fail. The question then is how large is large?
Bigger U.S. bank failures may be coming - FDIC
Thu Jun 5, 2008 11:08am EDT
(Adds comments on FDIC planning to issue guidance, Basel II)
By John Poirier
WASHINGTON, June 5 (Reuters) - Future U.S. bank failures linked to the downturn in the real estate market may include "institutions of greater size" than in the recent past, Federal Deposit Insurance Corp Chairman Sheila Bair said on Thursday.
An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, Bair told a Senate Banking Committee hearing on the state of the banking industry.
"There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past," Bair said. "Uncertainties in today's economic environment continue to pose significant challenges for the banking industry, households, and bank regulators."
So far this year, four small U.S. banks with deposits insured by the FDIC have failed, up from three in 2007. The agency last week boosted its list of troubled banks to 90, which have a combined $26 billion in assets.
The FDIC, which has about $52.8 billion in its deposit insurance fund in the event of bank failures, has launched a review of its risk-assessment rates for larger banks to determine if they reflect current conditions, Bair said.
"The agency plans to examine, among other issues, whether changes in how long-term debt issuer ratings are used to determine premium rates can improve the assessment system's effectiveness in capturing risks posed by large institutions," she said.
The FDIC is also focusing on banks' liquidity risk management and investments in structured credit products.
"The FDIC expects to issue guidance to the institutions we supervise on liquidity risk and issues related to investments in structured credit products," Bair said. "Market stress over the past year made shortcomings evident in some institutions' risk management of these areas, and our guidance will address specific areas where risk management efforts should be improved."
Additionally, the FDIC is preparing guidance for banks that rely on third parties such as loan originators and mortgage brokers. The guidance will include due diligence in selecting a third party, contract structuring, and compensation arrangements to avoid encouraging third parties into steering customers to higher cost products, she said.
The FDIC chief also indicated regulators were open to the idea of allowing the biggest U.S. banks to use a simpler set of capital adequacy rules designed for smaller banks under the so-called Basel II international banking framework. The proposed rules for smaller U.S. banks, known as the "standardized approach," were submitted to the White House in April for review.
"The standardized approach introduces a more risk sensitive approach for residential mortgages that bases the capital charges on first and second liens on loan to value measures, and also better captures the risks on negative amortization loans," Bair said.
Previously, the biggest U.S. banks had been expected to use an "advanced approach" requiring complex computer models to understand their credit, operational and market risks.
The Swiss-based Basel committee for international bank supervision, which has been monitoring the deteriorating conditions at big global banks, is also "very close" to updating its practices for liqudity risk management and releasing them for public comment, she said. (Reporting by John Poirier; Editing by Chizu Nomiyama)
© Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.
Reuters journalists are subject to the Reuters Editorial Handbook which requires fair presentation and disclosure of relevant interests.
This is the first official indication that Large Banks might fail. The question then is how large is large?
Wednesday, June 4, 2008
Bernanke strikes again!
from http://www.federalreserve.com/
Chairman Ben S. Bernanke
Remarks on Class Day 2008
At Harvard University, Cambridge, Massachusetts
June 4, 2008
It seems to me, paradoxically, that both long ago and only yesterday I attended my own Class Day in 1975. I am pleased and honored to be invited back by the students of Harvard. Our speaker in 1975 was Dick Gregory, the social critic and comedian, who was inclined toward the sharp-edged and satiric. Central bankers don't do satire as a rule, so I am going to have to strive for "kind of interesting."
When I attended Class Day as a graduating senior, Gerald Ford was President, and an up-and-coming fellow named Alan Greenspan was his chief economic adviser. Just weeks earlier, the last Americans remaining in Saigon had been evacuated by helicopters. On a happier note, the Red Sox were on their way to winning the American League pennant. I skipped classes to attend a World Series game against the Cincinnati Reds. As was their wont in those days, the Sox came agonizingly close to a championship but ended up snatching defeat from the jaws of victory. On that score, as on others--disco music and Pet Rocks come to mind--many things are better today than they were then. In fact, that will be a theme of my remarks today.
Although 1975 was a pretty good year for the Red Sox, it was not a good one for the U.S. economy. Then as now, we were experiencing a serious oil price shock, sharply rising prices for food and other commodities, and subpar economic growth. But I see the differences between the economy of 1975 and the economy of 2008 as more telling than the similarities. Today's situation differs from that of 33 years ago in large part because our economy and society have become much more flexible and able to adapt to difficult situations and new challenges. Economic policymaking has improved as well, I believe, partly because we have learned well some of the hard lessons of the past. Of course, I do not want to minimize the challenges we currently face, and I will come back to a few of these. But I do think that our demonstrated ability to respond constructively and effectively to past economic problems provides a basis for optimism about the future.
I will focus my remarks today on two economic issues that challenged us in the 1970s and that still do so today--energy and productivity. These, obviously, are not the kind of topics chosen by many recent Class Day speakers--Will Farrell, Ali G, or Seth MacFarlane, to name a few. But, then, the Class Marshals presumably knew what they were getting when they invited an economist.
Because the members of today's graduating class--and some of your professors--were not yet born in 1975, let me begin by briefly surveying the economic landscape in the mid-1970s. The economy had just gone through a severe recession, during which output, income, and employment fell sharply and the unemployment rate rose to 9 percent. Meanwhile, consumer price inflation, which had been around 3 percent to 4 percent earlier in the decade, soared to more than 10 percent during my senior year.1
The oil price shock of the 1970s began in October 1973 when, in response to the Yom Kippur War, Arab oil producers imposed an embargo on exports. Before the embargo, in 1972, the price of imported oil was about $3.20 per barrel; by 1975, the average price was nearly $14 per barrel, more than four times greater. President Nixon had imposed economy-wide controls on wages and prices in 1971, including prices of petroleum products; in November 1973, in the wake of the embargo, the President placed additional controls on petroleum prices.2
As basic economics predicts, when a scarce resource cannot be allocated by market-determined prices, it will be allocated some other way--in this case, in what was to become an iconic symbol of the times, by long lines at gasoline stations. In 1974, in an attempt to overcome the unintended consequences of price controls, drivers in many places were permitted to buy gasoline only on odd or even days of the month, depending on the last digit of their license plate number. Moreover, with the controlled price of U.S. crude oil well below world prices, growth in domestic exploration slowed and production was curtailed--which, of course, only made things worse.
In addition to creating long lines at gasoline stations, the oil price shock exacerbated what was already an intensifying buildup of inflation and inflation expectations. In another echo of today, the inflationary situation was further worsened by rapidly rising prices of agricultural products and other commodities.
Economists generally agree that monetary policy performed poorly during this period. In part, this was because policymakers, in choosing what they believed to be the appropriate setting for monetary policy, overestimated the productive capacity of the economy. I'll have more to say about this shortly. Federal Reserve policymakers also underestimated both their own contributions to the inflationary problems of the time and their ability to curb that inflation. For example, on occasion they blamed inflation on so-called cost-push factors such as union wage pressures and price increases by large, market-dominating firms; however, the abilities of unions and firms to push through inflationary wage and price increases were symptoms of the problem, not the underlying cause. Several years passed before the Federal Reserve gained a new leadership that better understood the central bank's role in the inflation process and that sustained anti-inflationary monetary policies would actually work. Beginning in 1979, such policies were implemented successfully--although not without significant cost in terms of lost output and employment--under Fed Chairman Paul Volcker. For the Federal Reserve, two crucial lessons from this experience were, first, that high inflation can seriously destabilize the economy and, second, that the central bank must take responsibility for achieving price stability over the medium term.
Fast-forward now to 2003. In that year, crude oil cost a little more than $30 per barrel.3 Since then, crude oil prices have increased more than fourfold, proportionally about as much as in the 1970s. Now, as in 1975, adjusting to such high prices for crude oil has been painful. Gas prices around $4 a gallon are a huge burden for many households, as well as for truckers, manufacturers, farmers, and others. But, in many other ways, the economic consequences have been quite different from those of the 1970s. One obvious difference is what you don't see: drivers lining up on odd or even days to buy gasoline because of price controls or signs at gas stations that say "No gas." And until the recent slowdown--which is more the result of conditions in the residential housing market and in financial markets than of higher oil prices--economic growth was solid and unemployment remained low, unlike what we saw following oil price increases in the '70s.
For a central banker, a particularly critical difference between then and now is what has happened to inflation and inflation expectations. The overall inflation rate has averaged about 3-1/2 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s and then again in 1980. Moreover, the increase in inflation has been milder this time--on the order of 1 percentage point over the past year as compared with the 6 percentage point jump that followed the 1973 oil price shock.4 From the perspective of monetary policy, just as important as the behavior of actual inflation is what households and businesses expect to happen to inflation in the future, particularly over the longer term. If people expect an increase in inflation to be temporary and do not build it into their longer-term plans for setting wages and prices, then the inflation created by a shock to oil prices will tend to fade relatively quickly. Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve. We will need to monitor that situation closely. However, changes in long-term inflation expectations have been measured in tenths of a percentage point this time around rather than in whole percentage points, as appeared to be the case in the mid-1970s. Importantly, we see little indication today of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward.
A good deal of economic research has looked at the question of why the inflation response to the oil shock has been relatively muted in the current instance.5 One factor, which illustrates my point about the adaptability and flexibility of the U.S. economy, is the pronounced decline in the energy intensity of the economy since the 1970s. Since 1975, the energy required to produce a given amount of output in the United States has fallen by about half.6 This great improvement in energy efficiency was less the result of government programs than of steps taken by households and businesses in response to higher energy prices, including substantial investments in more energy-efficient equipment and means of transportation. This improvement in energy efficiency is one of the reasons why a given increase in crude oil prices does less damage to the U.S. economy today than it did in the 1970s.
Another reason is the performance of monetary policy. The Federal Reserve and other central banks have learned the lessons of the 1970s. Because monetary policy works with a lag, the short-term inflationary effects of a sharp increase in oil prices can generally not be fully offset. However, since Paul Volcker's time, the Federal Reserve has been firmly committed to maintaining a low and stable rate of inflation over the longer term. And we recognize that keeping longer-term inflation expectations well anchored is essential to achieving the goal of low and stable inflation. Maintaining confidence in the Fed's commitment to price stability remains a top priority as the central bank navigates the current complex situation.
Although our economy has thus far dealt with the current oil price shock comparatively well, the United States and the rest of the world still face significant challenges in dealing with the rising global demand for energy, especially if continued demand growth and constrained supplies maintain intense pressure on prices. The silver lining of high energy prices is that they provide a powerful incentive for action--for conservation, including investment in energy-saving technologies; for the investment needed to bring new oil supplies to market; and for the development of alternative conventional and nonconventional energy sources. The government, in addition to the market, can usefully address energy concerns, for example, by supporting basic research and adopting well-designed regulatory policies to promote important social objectives such as protecting the environment. As we saw after the oil price shock of the 1970s, given some time, the economy can become much more energy-efficient even as it continues to grow and living standards improve.
Let me turn now to the other economic challenge that I want to highlight today--the productivity performance of our economy. At this point you may be saying to yourself, "Is it too late to book Ali G?" However, anyone who stayed awake through EC 10 understands why this issue is so important.7 As Adam Smith pointed out in 1776, in the long run, more than any other factor, the productivity of the workforce determines a nation's standard of living.
The decades following the end of World War II were remarkable for their industrial innovation and creativity. From 1948 to 1973, output per hour of work grew by nearly 3 percent per year, on average.8 But then, for the next 20 years or so, productivity growth averaged only about 1-1/2 percent per year, barely half its previous rate. Predictably, the rate of increase in the standard of living slowed as well, and to about the same extent. The difference between 3 percent and 1-1/2 percent may sound small. But at 3 percent per year, the standard of living would double about every 23 years, or once every generation; by contrast, at 1-1/2 percent, a doubling would occur only roughly every 47 years, or once every other generation.
Among the many consequences of the productivity slowdown was a further complication for the monetary policy makers of the 1970s. Detecting shifts in economic trends is difficult in real time, and most economists and policymakers did not fully appreciate the extent of the productivity slowdown until the late 1970s. This further influenced the policymakers of the time toward running a monetary policy that was too accommodative. The resulting overheating of the economy probably exacerbated the inflation problem of that decade.9
Productivity growth revived in the mid-1990s, as I mentioned, illustrating once again the resilience of the American economy.10 Since 1995, productivity has increased at about a 2-1/2 percent annual rate. A great deal of intellectual effort has been expended in trying to explain the recent performance and to forecast the future evolution of productivity. Much very good work has been conducted here at Harvard by Dale Jorgenson (my senior thesis adviser in 1975, by the way) and his colleagues, and other important research in the area has been done at the Federal Reserve Board.11 One key finding of that research is that, to have an economic impact, technological innovations must be translated into successful commercial applications. This country's competitive, market-based system, its flexible capital and labor markets, its tradition of entrepreneurship, and its technological strengths--to which Harvard and other universities make a critical contribution--help ensure that that happens on an ongoing basis.
While private-sector initiative was the key ingredient in generating the pickup in productivity growth, government policy was constructive, in part through support of basic research but also to a substantial degree by promoting economic competition. Beginning in the late 1970s, the federal government deregulated a number of key industries, including air travel, trucking, telecommunications, and energy. The resulting increase in competition promoted cost reductions and innovation, leading in turn to new products and industries. It is difficult to imagine that we would have online retailing today if the transportation and telecommunications industries had not been deregulated. In addition, the lowering of trade barriers promoted productivity gains by increasing competition, expanding markets, and increasing the pace of technology transfer.12
Finally, as a central banker, I would be remiss if I failed to mention the contribution of monetary policy to the improved productivity performance. By damping business cycles and by keeping inflation under control, a sound monetary policy improves the ability of households and firms to plan and increases their willingness to undertake the investments in skills, research, and physical capital needed to support continuing gains in productivity.
Just as the productivity slowdown was associated with a slower growth of real per capita income, the productivity resurgence since the mid-1990s has been accompanied by a pickup in real income growth. One measure of average living standards, real consumption per capita, is nearly 35 percent higher today than in 1995. In addition, the flood of innovation that helped spur the productivity resurgence has created many new job opportunities, and more than a few fortunes. But changing technology has also reduced job opportunities for some others--bank tellers and assembly-line workers, for example. And that is the crux of a whole new set of challenges.
Even though average economic well-being has increased considerably over time, the degree of inequality in economic outcomes over the past three decades has increased as well. Economists continue to grapple with the reasons for this trend. But as best we can tell, the increase in inequality probably is due to a number of factors, notably including technological change that seems to have favored higher-skilled workers more than lower-skilled ones. In addition, some economists point to increased international trade and the declining role of labor unions as other, probably lesser contributing factors.
What should we do about rising economic inequality? Answering this question inevitably involves difficult value judgments and tradeoffs. But approaches that inhibit the dynamism of our economy would clearly be a step in the wrong direction. To be sure, new technologies and increased international trade can lead to painful dislocations as some workers lose their jobs or see the demand for their particular skills decline. However, hindering the adoption of new technologies or inhibiting trade flows would do far more harm than good over the longer haul. In the short term, the better approach is to adopt policies that help those who are displaced by economic change. By doing so, we not only provide assistance to those who need it but help to secure public support for the economic flexibility that is essential for prosperity.
In the long term, however, the best way by far to improve economic opportunity and to reduce inequality is to increase the educational attainment and skills of American workers. The productivity surge in the decades after World War II corresponded to a period in which educational attainment was increasing rapidly; in recent decades, progress on that front has been far slower. Moreover, inequalities in education and in access to education remain high. As we think about improving education and skills, we should also look beyond the traditional K-12 and 4-year-college system--as important as it is--to recognize that education should be lifelong and can come in many forms. Early childhood education, community colleges, vocational schools, on-the-job training, online courses, adult education--all of these are vehicles of demonstrated value in increasing skills and lifetime earning power. The use of a wide range of methods to address the pressing problems of inadequate skills and economic inequality would be entirely consistent with the themes of economic adaptability and flexibility that I have emphasized in my remarks.
I will close by shifting from the topic of education in general to your education specifically. Through effort, talent, and doubtless some luck, you have succeeded in acquiring an excellent education. Your education--more precisely, your ability to think critically and creatively--is your greatest asset. And unlike many assets, the more you draw on it, the faster it grows. Put it to good use.
The poor forecasting record of economists is legendary, but I will make a forecast in which I am very confident: Whatever you expect your life and work to be like 10, 20, or 30 years from now, the reality will be quite different. In looking over the 30th anniversary report on my own class, I was struck by the great diversity of vocations and avocations that have engaged my classmates. To be sure, the volume was full of attorneys and physicians and professors as well as architects, engineers, editors, bankers, and even a few economists. Many listed the title "vice president," and, not a few, "president." But the class of 1975 also includes those who listed their occupations as composer, environmental advocate, musician, playwright, rabbi, conflict resolution coach, painter, community organizer, and essayist. And even for those of us with the more conventional job descriptions, the nature of our daily work and its relationship to the economy and society is, I am sure, very different from what we might have guessed in 1975. My point is only that you cannot predict your path. You can only try to be as prepared as possible for the opportunities, as well as the disappointments, that will come your way. For people, as for economies, adaptability and flexibility count for a great deal.
Wherever your path leads, I hope you use your considerable talents and energy in endeavors that engage and excite you and benefit not only yourselves, but also in some measure your country and your world. Today, I wish you and your families a day of joyous celebration. Congratulations.
He is right to focus on energy and productivity. An economy's affluence is directly co-related to increase in energy efficiency, increase in energy availability and increase in worker productivity. In the last couple of days he has made it amply clear that his focus (and therefore the Fed's) is now on Inflation regardless of a slowing economic environment. This is the right approach as the Fed should really be hiking rates at this point to stop inflation eating away at people's wages. However, with a strike on Iran on the cards by Israel before the end of the Bush presidency likely, the resulting oil spike if not controlled quickly would lead to massive global stagflation and a likely severe global recession.
Chairman Ben S. Bernanke
Remarks on Class Day 2008
At Harvard University, Cambridge, Massachusetts
June 4, 2008
It seems to me, paradoxically, that both long ago and only yesterday I attended my own Class Day in 1975. I am pleased and honored to be invited back by the students of Harvard. Our speaker in 1975 was Dick Gregory, the social critic and comedian, who was inclined toward the sharp-edged and satiric. Central bankers don't do satire as a rule, so I am going to have to strive for "kind of interesting."
When I attended Class Day as a graduating senior, Gerald Ford was President, and an up-and-coming fellow named Alan Greenspan was his chief economic adviser. Just weeks earlier, the last Americans remaining in Saigon had been evacuated by helicopters. On a happier note, the Red Sox were on their way to winning the American League pennant. I skipped classes to attend a World Series game against the Cincinnati Reds. As was their wont in those days, the Sox came agonizingly close to a championship but ended up snatching defeat from the jaws of victory. On that score, as on others--disco music and Pet Rocks come to mind--many things are better today than they were then. In fact, that will be a theme of my remarks today.
Although 1975 was a pretty good year for the Red Sox, it was not a good one for the U.S. economy. Then as now, we were experiencing a serious oil price shock, sharply rising prices for food and other commodities, and subpar economic growth. But I see the differences between the economy of 1975 and the economy of 2008 as more telling than the similarities. Today's situation differs from that of 33 years ago in large part because our economy and society have become much more flexible and able to adapt to difficult situations and new challenges. Economic policymaking has improved as well, I believe, partly because we have learned well some of the hard lessons of the past. Of course, I do not want to minimize the challenges we currently face, and I will come back to a few of these. But I do think that our demonstrated ability to respond constructively and effectively to past economic problems provides a basis for optimism about the future.
I will focus my remarks today on two economic issues that challenged us in the 1970s and that still do so today--energy and productivity. These, obviously, are not the kind of topics chosen by many recent Class Day speakers--Will Farrell, Ali G, or Seth MacFarlane, to name a few. But, then, the Class Marshals presumably knew what they were getting when they invited an economist.
Because the members of today's graduating class--and some of your professors--were not yet born in 1975, let me begin by briefly surveying the economic landscape in the mid-1970s. The economy had just gone through a severe recession, during which output, income, and employment fell sharply and the unemployment rate rose to 9 percent. Meanwhile, consumer price inflation, which had been around 3 percent to 4 percent earlier in the decade, soared to more than 10 percent during my senior year.1
The oil price shock of the 1970s began in October 1973 when, in response to the Yom Kippur War, Arab oil producers imposed an embargo on exports. Before the embargo, in 1972, the price of imported oil was about $3.20 per barrel; by 1975, the average price was nearly $14 per barrel, more than four times greater. President Nixon had imposed economy-wide controls on wages and prices in 1971, including prices of petroleum products; in November 1973, in the wake of the embargo, the President placed additional controls on petroleum prices.2
As basic economics predicts, when a scarce resource cannot be allocated by market-determined prices, it will be allocated some other way--in this case, in what was to become an iconic symbol of the times, by long lines at gasoline stations. In 1974, in an attempt to overcome the unintended consequences of price controls, drivers in many places were permitted to buy gasoline only on odd or even days of the month, depending on the last digit of their license plate number. Moreover, with the controlled price of U.S. crude oil well below world prices, growth in domestic exploration slowed and production was curtailed--which, of course, only made things worse.
In addition to creating long lines at gasoline stations, the oil price shock exacerbated what was already an intensifying buildup of inflation and inflation expectations. In another echo of today, the inflationary situation was further worsened by rapidly rising prices of agricultural products and other commodities.
Economists generally agree that monetary policy performed poorly during this period. In part, this was because policymakers, in choosing what they believed to be the appropriate setting for monetary policy, overestimated the productive capacity of the economy. I'll have more to say about this shortly. Federal Reserve policymakers also underestimated both their own contributions to the inflationary problems of the time and their ability to curb that inflation. For example, on occasion they blamed inflation on so-called cost-push factors such as union wage pressures and price increases by large, market-dominating firms; however, the abilities of unions and firms to push through inflationary wage and price increases were symptoms of the problem, not the underlying cause. Several years passed before the Federal Reserve gained a new leadership that better understood the central bank's role in the inflation process and that sustained anti-inflationary monetary policies would actually work. Beginning in 1979, such policies were implemented successfully--although not without significant cost in terms of lost output and employment--under Fed Chairman Paul Volcker. For the Federal Reserve, two crucial lessons from this experience were, first, that high inflation can seriously destabilize the economy and, second, that the central bank must take responsibility for achieving price stability over the medium term.
Fast-forward now to 2003. In that year, crude oil cost a little more than $30 per barrel.3 Since then, crude oil prices have increased more than fourfold, proportionally about as much as in the 1970s. Now, as in 1975, adjusting to such high prices for crude oil has been painful. Gas prices around $4 a gallon are a huge burden for many households, as well as for truckers, manufacturers, farmers, and others. But, in many other ways, the economic consequences have been quite different from those of the 1970s. One obvious difference is what you don't see: drivers lining up on odd or even days to buy gasoline because of price controls or signs at gas stations that say "No gas." And until the recent slowdown--which is more the result of conditions in the residential housing market and in financial markets than of higher oil prices--economic growth was solid and unemployment remained low, unlike what we saw following oil price increases in the '70s.
For a central banker, a particularly critical difference between then and now is what has happened to inflation and inflation expectations. The overall inflation rate has averaged about 3-1/2 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s and then again in 1980. Moreover, the increase in inflation has been milder this time--on the order of 1 percentage point over the past year as compared with the 6 percentage point jump that followed the 1973 oil price shock.4 From the perspective of monetary policy, just as important as the behavior of actual inflation is what households and businesses expect to happen to inflation in the future, particularly over the longer term. If people expect an increase in inflation to be temporary and do not build it into their longer-term plans for setting wages and prices, then the inflation created by a shock to oil prices will tend to fade relatively quickly. Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve. We will need to monitor that situation closely. However, changes in long-term inflation expectations have been measured in tenths of a percentage point this time around rather than in whole percentage points, as appeared to be the case in the mid-1970s. Importantly, we see little indication today of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward.
A good deal of economic research has looked at the question of why the inflation response to the oil shock has been relatively muted in the current instance.5 One factor, which illustrates my point about the adaptability and flexibility of the U.S. economy, is the pronounced decline in the energy intensity of the economy since the 1970s. Since 1975, the energy required to produce a given amount of output in the United States has fallen by about half.6 This great improvement in energy efficiency was less the result of government programs than of steps taken by households and businesses in response to higher energy prices, including substantial investments in more energy-efficient equipment and means of transportation. This improvement in energy efficiency is one of the reasons why a given increase in crude oil prices does less damage to the U.S. economy today than it did in the 1970s.
Another reason is the performance of monetary policy. The Federal Reserve and other central banks have learned the lessons of the 1970s. Because monetary policy works with a lag, the short-term inflationary effects of a sharp increase in oil prices can generally not be fully offset. However, since Paul Volcker's time, the Federal Reserve has been firmly committed to maintaining a low and stable rate of inflation over the longer term. And we recognize that keeping longer-term inflation expectations well anchored is essential to achieving the goal of low and stable inflation. Maintaining confidence in the Fed's commitment to price stability remains a top priority as the central bank navigates the current complex situation.
Although our economy has thus far dealt with the current oil price shock comparatively well, the United States and the rest of the world still face significant challenges in dealing with the rising global demand for energy, especially if continued demand growth and constrained supplies maintain intense pressure on prices. The silver lining of high energy prices is that they provide a powerful incentive for action--for conservation, including investment in energy-saving technologies; for the investment needed to bring new oil supplies to market; and for the development of alternative conventional and nonconventional energy sources. The government, in addition to the market, can usefully address energy concerns, for example, by supporting basic research and adopting well-designed regulatory policies to promote important social objectives such as protecting the environment. As we saw after the oil price shock of the 1970s, given some time, the economy can become much more energy-efficient even as it continues to grow and living standards improve.
Let me turn now to the other economic challenge that I want to highlight today--the productivity performance of our economy. At this point you may be saying to yourself, "Is it too late to book Ali G?" However, anyone who stayed awake through EC 10 understands why this issue is so important.7 As Adam Smith pointed out in 1776, in the long run, more than any other factor, the productivity of the workforce determines a nation's standard of living.
The decades following the end of World War II were remarkable for their industrial innovation and creativity. From 1948 to 1973, output per hour of work grew by nearly 3 percent per year, on average.8 But then, for the next 20 years or so, productivity growth averaged only about 1-1/2 percent per year, barely half its previous rate. Predictably, the rate of increase in the standard of living slowed as well, and to about the same extent. The difference between 3 percent and 1-1/2 percent may sound small. But at 3 percent per year, the standard of living would double about every 23 years, or once every generation; by contrast, at 1-1/2 percent, a doubling would occur only roughly every 47 years, or once every other generation.
Among the many consequences of the productivity slowdown was a further complication for the monetary policy makers of the 1970s. Detecting shifts in economic trends is difficult in real time, and most economists and policymakers did not fully appreciate the extent of the productivity slowdown until the late 1970s. This further influenced the policymakers of the time toward running a monetary policy that was too accommodative. The resulting overheating of the economy probably exacerbated the inflation problem of that decade.9
Productivity growth revived in the mid-1990s, as I mentioned, illustrating once again the resilience of the American economy.10 Since 1995, productivity has increased at about a 2-1/2 percent annual rate. A great deal of intellectual effort has been expended in trying to explain the recent performance and to forecast the future evolution of productivity. Much very good work has been conducted here at Harvard by Dale Jorgenson (my senior thesis adviser in 1975, by the way) and his colleagues, and other important research in the area has been done at the Federal Reserve Board.11 One key finding of that research is that, to have an economic impact, technological innovations must be translated into successful commercial applications. This country's competitive, market-based system, its flexible capital and labor markets, its tradition of entrepreneurship, and its technological strengths--to which Harvard and other universities make a critical contribution--help ensure that that happens on an ongoing basis.
While private-sector initiative was the key ingredient in generating the pickup in productivity growth, government policy was constructive, in part through support of basic research but also to a substantial degree by promoting economic competition. Beginning in the late 1970s, the federal government deregulated a number of key industries, including air travel, trucking, telecommunications, and energy. The resulting increase in competition promoted cost reductions and innovation, leading in turn to new products and industries. It is difficult to imagine that we would have online retailing today if the transportation and telecommunications industries had not been deregulated. In addition, the lowering of trade barriers promoted productivity gains by increasing competition, expanding markets, and increasing the pace of technology transfer.12
Finally, as a central banker, I would be remiss if I failed to mention the contribution of monetary policy to the improved productivity performance. By damping business cycles and by keeping inflation under control, a sound monetary policy improves the ability of households and firms to plan and increases their willingness to undertake the investments in skills, research, and physical capital needed to support continuing gains in productivity.
Just as the productivity slowdown was associated with a slower growth of real per capita income, the productivity resurgence since the mid-1990s has been accompanied by a pickup in real income growth. One measure of average living standards, real consumption per capita, is nearly 35 percent higher today than in 1995. In addition, the flood of innovation that helped spur the productivity resurgence has created many new job opportunities, and more than a few fortunes. But changing technology has also reduced job opportunities for some others--bank tellers and assembly-line workers, for example. And that is the crux of a whole new set of challenges.
Even though average economic well-being has increased considerably over time, the degree of inequality in economic outcomes over the past three decades has increased as well. Economists continue to grapple with the reasons for this trend. But as best we can tell, the increase in inequality probably is due to a number of factors, notably including technological change that seems to have favored higher-skilled workers more than lower-skilled ones. In addition, some economists point to increased international trade and the declining role of labor unions as other, probably lesser contributing factors.
What should we do about rising economic inequality? Answering this question inevitably involves difficult value judgments and tradeoffs. But approaches that inhibit the dynamism of our economy would clearly be a step in the wrong direction. To be sure, new technologies and increased international trade can lead to painful dislocations as some workers lose their jobs or see the demand for their particular skills decline. However, hindering the adoption of new technologies or inhibiting trade flows would do far more harm than good over the longer haul. In the short term, the better approach is to adopt policies that help those who are displaced by economic change. By doing so, we not only provide assistance to those who need it but help to secure public support for the economic flexibility that is essential for prosperity.
In the long term, however, the best way by far to improve economic opportunity and to reduce inequality is to increase the educational attainment and skills of American workers. The productivity surge in the decades after World War II corresponded to a period in which educational attainment was increasing rapidly; in recent decades, progress on that front has been far slower. Moreover, inequalities in education and in access to education remain high. As we think about improving education and skills, we should also look beyond the traditional K-12 and 4-year-college system--as important as it is--to recognize that education should be lifelong and can come in many forms. Early childhood education, community colleges, vocational schools, on-the-job training, online courses, adult education--all of these are vehicles of demonstrated value in increasing skills and lifetime earning power. The use of a wide range of methods to address the pressing problems of inadequate skills and economic inequality would be entirely consistent with the themes of economic adaptability and flexibility that I have emphasized in my remarks.
I will close by shifting from the topic of education in general to your education specifically. Through effort, talent, and doubtless some luck, you have succeeded in acquiring an excellent education. Your education--more precisely, your ability to think critically and creatively--is your greatest asset. And unlike many assets, the more you draw on it, the faster it grows. Put it to good use.
The poor forecasting record of economists is legendary, but I will make a forecast in which I am very confident: Whatever you expect your life and work to be like 10, 20, or 30 years from now, the reality will be quite different. In looking over the 30th anniversary report on my own class, I was struck by the great diversity of vocations and avocations that have engaged my classmates. To be sure, the volume was full of attorneys and physicians and professors as well as architects, engineers, editors, bankers, and even a few economists. Many listed the title "vice president," and, not a few, "president." But the class of 1975 also includes those who listed their occupations as composer, environmental advocate, musician, playwright, rabbi, conflict resolution coach, painter, community organizer, and essayist. And even for those of us with the more conventional job descriptions, the nature of our daily work and its relationship to the economy and society is, I am sure, very different from what we might have guessed in 1975. My point is only that you cannot predict your path. You can only try to be as prepared as possible for the opportunities, as well as the disappointments, that will come your way. For people, as for economies, adaptability and flexibility count for a great deal.
Wherever your path leads, I hope you use your considerable talents and energy in endeavors that engage and excite you and benefit not only yourselves, but also in some measure your country and your world. Today, I wish you and your families a day of joyous celebration. Congratulations.
He is right to focus on energy and productivity. An economy's affluence is directly co-related to increase in energy efficiency, increase in energy availability and increase in worker productivity. In the last couple of days he has made it amply clear that his focus (and therefore the Fed's) is now on Inflation regardless of a slowing economic environment. This is the right approach as the Fed should really be hiking rates at this point to stop inflation eating away at people's wages. However, with a strike on Iran on the cards by Israel before the end of the Bush presidency likely, the resulting oil spike if not controlled quickly would lead to massive global stagflation and a likely severe global recession.
Tuesday, June 3, 2008
Bernanke breaks silence
from www.federalreserve.gov
Chairman Ben S. Bernanke
Remarks on the economic outlook
At the International Monetary Conference, Barcelona, Spain (via satellite)
June 3, 2008
As you know, financial markets in the United States and in a number of other industrialized countries have been under considerable strain since late last summer. Financial market conditions have in turn affected economic prospects, most notably by affecting the cost and availability of new credit.
Much discussion of the turmoil has focused on problems that have arisen with respect to specific financial markets and financial instruments. Understanding these institutional details is, of course, essential to the task of restoring more normal functioning to the financial system. Stepping back, however, one can see--at least in retrospect--that the turmoil has been some time in the making and reflects the combined influence of several powerful, longer-term developments.
Today, I will briefly discuss some longer-term factors that underlie recent developments; trace how these factors, individually and in combination, have affected both the financial markets and the economy; and describe how the Federal Reserve has responded to the challenges we face.
The Sources of the Financial Turmoil: A Longer-Term PerspectiveAlthough the severity of the financial stresses became apparent only in August, several longer-term developments served as prologue for the recent turmoil and helped bring us to the current situation.
The first of these was the U.S. housing boom, which began in the mid-1990s and picked up steam around 2000. Between 1996 and 2005, house prices nationwide increased about 90 percent. During the years from 2000 to 2005 alone, house prices increased by roughly 60 percent--far outstripping the increases in incomes and general prices--and single-family home construction increased by about 40 percent. But, as you know, starting in 2006, the boom turned to bust. Over the past two years, building activity has fallen by more than half and now is well below where it was in 2000. House prices have shown significant declines in many areas of the country.
A second critical development was an even broader credit boom, in which lenders and investors aggressively sought out new opportunities to take credit risk even as market risk premiums contracted. Aspects of the credit boom included rapid growth in the volumes of private equity deals and leveraged lending and the increased use of complex and often opaque investment vehicles, including structured credit products. The explosive growth of subprime mortgage lending in recent years was yet another facet of the broader credit boom. Expanding access to homeownership is an important social goal, and responsible subprime lending is beneficial for both borrowers and lenders. But, clearly, much of the subprime lending that took place during the latter stages of the credit boom in 2005 and 2006 was done very poorly.
A third longer-term factor contributing to recent financial and economic developments is the unprecedented growth in developing and emerging market economies. From the U.S. perspective, this growth has been a double-edged sword. On the one hand, low-cost imports from emerging markets for many years increased U.S. living standards and made the Fed's job of managing inflation easier. Moreover, currently, the demand for U.S. exports arising from strong global growth has been an important offset to the factors restraining domestic demand, including housing and tight credit. On the other hand, the rapid growth in the emerging markets and the associated sharp rise in their demand for raw materials have been--together with a variety of constraints on supply--a major cause of the escalation in the relative prices of oil and other commodities, which has placed intense economic pressure on many U.S. households and businesses.
In the financial sphere, the three longer-term developments I have identified are linked by the fact that a substantial increase in the net supply of saving in emerging market economies contributed to both the U.S. housing boom and the broader credit boom.1 The sources of this increase in net saving included rapid growth in high-saving East Asian countries and, outside of China, reduced investment rates in that region; large buildups in foreign exchange reserves in a number of emerging markets; and the enormous increases in the revenues received by exporters of oil and other commodities. The pressure of these net savings flows led to lower long-term real interest rates around the world, stimulated asset prices (including house prices), and pushed current accounts toward deficit in the industrial countries--notably the United States--that received these flows.
To be sure, the large inflows of savings and low global interest rates presented a valuable opportunity to the recipient countries, provided they invested the inflows wisely. Unfortunately, this did not always occur, as an increased appetite for risk-taking--a "reaching for yield"--stimulated some financial innovations and lending practices that proved imprudent or otherwise questionable. Regulators identified some of these issues in real time; for example, federal banking regulators issued new guidance on nontraditional mortgage lending and on commercial real estate lending. The Federal Reserve, in cooperation with the other supervisors, encouraged improvements in market infrastructure and conducted a series of targeted reviews designed to improve risk-management practice with respect to derivatives, exposures to hedge funds, leveraged lending, and other areas. And, in preparation for the new Basel II capital regulations, supervisors required more-demanding standards for the measurement and management of risk. Despite these efforts, however, the risk-management systems of many financial institutions proved inadequate in the face of a major housing downturn and substantial disruptions in market liquidity.
The current economic and financial situation reflects, in significant part, the unwinding of two of these longer-term developments--the housing boom and the credit boom--and the continuation of the pressure of global demand on commodity prices.
The housing boom came to an end because rising prices made housing increasingly unaffordable. The end of rapid house price increases in turn undermined a basic premise of many adjustable-rate subprime loans--that home price appreciation alone would always generate enough equity to permit the borrower to refinance and thereby avoid ever having to pay the fully-indexed interest rate. When that premise was shown to be false and defaults on subprime mortgages rose sharply, investors quickly backpedaled from mortgage-related securities. The reduced availability of mortgage credit caused housing to weaken further.
The losses from subprime mortgages have been significant in themselves, but their greater impact was to trigger the end of the broader credit boom. Notably, as subprime losses forced the credit rating agencies to downgrade what had been highly rated mortgage-backed securities, investors also came to doubt the reliability of ratings that had been awarded to other highly complex securities. As a result, investors became much more cautious and reversed their aggressive risk-taking of the credit boom period. The resulting pullback affected a much broader range of securities, including leveraged and syndicated loans, asset-backed commercial paper, commercial mortgage-backed securities, and a variety of structured credit products. Large financial institutions, especially in the United States and Europe, were particularly affected by these events, having reported a total of roughly $300 billion in writedowns and credit losses. These institutions have also been forced to bring onto their balance sheets the assets of sponsored investment vehicles that can no longer be financed on a standalone basis. Fortunately, most financial institutions entered this episode with strong capital positions, and many have raised substantial amounts of new capital. Still, balance sheet pressures and the relatively high cost of new bank capital have reduced the willingness and ability of these institutions to make markets and extend new credit. Prospectively, financial conditions seem likely to be closely tied to both domestic and global economic developments, including the course of the prices of oil and other commodities.
This brief overview makes clear that both global and domestic factors have played important roles in recent developments in the United States. The housing and credit booms were driven to some extent by global savings flows, but they also reflected domestic factors, such as weaknesses in risk measurement and management and lax standards in subprime lending. Higher commodity prices are for the most part a global phenomenon, but U.S. dependence on oil imports makes this country quite vulnerable on that score.
The OutlookWith this broader perspective as background, I turn now to a brief discussion of the current situation and outlook. Broadly speaking, the functioning of financial markets has improved of late, but conditions remain strained and some key funding and securitization markets have shown only tentative signs of recovery. Some borrowers, such as highly-rated corporations, retain good access to credit, but credit conditions generally remain restrictive in areas related to residential or commercial real estate.
Residential construction continues to contract, and the overhang of unsold new homes remains large, although it has declined some in absolute terms. Consumer spending has thus far held up a bit better than expected, but households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit, and higher energy prices, and consumer sentiment has declined sharply since the fall. Businesses are also facing challenges, including rapidly escalating costs of raw materials and weaker domestic demand. However, the strength of foreign demand for U.S. goods and services has offset, to some extent, the slowing of domestic sales.
Overall economic growth was quite slow but apparently positive in both the fourth quarter of 2007 and the first quarter of this year. Activity during the current quarter is also likely to be relatively weak. We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad. This baseline forecast is consistent with our recently released projections, which also see growth picking up further in 2009. However, until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside. Recent increases in oil prices pose additional downside risks to growth.
Inflation has remained high, largely reflecting continued sharp increases in the prices of globally traded commodities. Thus far, the pass-through of high raw materials costs to domestic labor costs and the prices of most other products has been limited, in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and will bear close attention. Futures markets continue to predict--albeit with a great range of uncertainty--that commodity prices will level out, a forecast consistent with our expectation of some overall slowing in the global economy and thus in the demand for raw materials. A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of Federal Reserve governors and Reserve Bank presidents for 2009 and 2010. Unfortunately, the prices of a number of commodities, most notably oil, have continued upward recently, even as expectations of future policy rates and the foreign exchange value of the dollar have remained generally stable in the past few months. The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming.
The Federal Reserve's Policy ResponseThe Federal Reserve's mandate is to foster maximum sustainable employment and price stability. To achieve these goals, we must also support the return of financial markets to more normal functioning.
The Federal Reserve is pursuing its objectives through several means. First, we have eased monetary policy substantially and proactively to address the sharp deterioration in financial conditions and to forestall some of the potential adverse effects on the broader economy. Our decisive policy actions were premised on the view that a more gradual reduction in short-term rates could well have failed to contain the financial and economic problems confronting us. For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate.
In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations. Over time, the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy--including flexible markets and robust innovation and productivity--will be key factors ensuring that the dollar remains a strong and stable currency.
Second, to improve market liquidity and functioning, we have taken a range of measures to ensure that financial institutions have adequate access to central bank liquidity.2 The resulting reductions in funding pressures, together with the increased confidence created by the assurance that backstop liquidity is available to eligible institutions, should help to promote an orderly resolution of current market dislocations. In recognition of the global nature of financial markets, we have also cooperated with other major central banks to ensure that central bank liquidity is deployed where needed.
Finally, we are taking action in our role as regulators. We have worked with lenders and servicers to encourage appropriate modifications of distressed mortgage loans, and we have proposed new rules to improve disclosure and to ban unfair or deceptive acts and practices in mortgage lending. We are also collaborating with other regulators, both domestically and abroad, to put in place changes that will help make the financial system less vulnerable in the future. Among the changes we expect to see are strengthening of capital and liquidity rules, greater disclosure requirements, an increased emphasis on the measurement and management of firmwide risks, and further steps to increase the transparency and resilience of the financial infrastructure. Our goal is to emerge from this difficult period with a financial system that will be more stable without being less innovative, with a more effective balance between market discipline and regulation.
ReferencesBernanke, Ben S. (2005). "The Global Saving Glut and the U.S. Current Account Deficit," speech delivered at the Homer Jones Lecture, Federal Reserve Bank of St. Louis, St. Louis, Mo., April 14.
Bernanke, Ben S. (2008). "Liquidity Provision by the Federal Reserve," speech delivered at the Federal Reserve Bank of Atlanta Financial Markets Conference, Sea Island, Ga., May 13.
Interesting analysis. He lays the blame of the rise in commodity prices at the door of Chindia. The problem ofcourse is more complicated. Chindia only partially contributed to the current crisis. It is the Fed's own actions (cutting rates under CPI while non-core and supposedly variable commodities like food and oil BOOMED) that have contributed to the rise in the prices of commodities. The Fed is only getting concerned about the dollar NOW? Where were they in the last 5 years? The US has had officially been in a low dollar policy (orderly decline in USD) for some time. Does this signal and end to the low dollar policy? I doubt it.
Chairman Ben S. Bernanke
Remarks on the economic outlook
At the International Monetary Conference, Barcelona, Spain (via satellite)
June 3, 2008
As you know, financial markets in the United States and in a number of other industrialized countries have been under considerable strain since late last summer. Financial market conditions have in turn affected economic prospects, most notably by affecting the cost and availability of new credit.
Much discussion of the turmoil has focused on problems that have arisen with respect to specific financial markets and financial instruments. Understanding these institutional details is, of course, essential to the task of restoring more normal functioning to the financial system. Stepping back, however, one can see--at least in retrospect--that the turmoil has been some time in the making and reflects the combined influence of several powerful, longer-term developments.
Today, I will briefly discuss some longer-term factors that underlie recent developments; trace how these factors, individually and in combination, have affected both the financial markets and the economy; and describe how the Federal Reserve has responded to the challenges we face.
The Sources of the Financial Turmoil: A Longer-Term PerspectiveAlthough the severity of the financial stresses became apparent only in August, several longer-term developments served as prologue for the recent turmoil and helped bring us to the current situation.
The first of these was the U.S. housing boom, which began in the mid-1990s and picked up steam around 2000. Between 1996 and 2005, house prices nationwide increased about 90 percent. During the years from 2000 to 2005 alone, house prices increased by roughly 60 percent--far outstripping the increases in incomes and general prices--and single-family home construction increased by about 40 percent. But, as you know, starting in 2006, the boom turned to bust. Over the past two years, building activity has fallen by more than half and now is well below where it was in 2000. House prices have shown significant declines in many areas of the country.
A second critical development was an even broader credit boom, in which lenders and investors aggressively sought out new opportunities to take credit risk even as market risk premiums contracted. Aspects of the credit boom included rapid growth in the volumes of private equity deals and leveraged lending and the increased use of complex and often opaque investment vehicles, including structured credit products. The explosive growth of subprime mortgage lending in recent years was yet another facet of the broader credit boom. Expanding access to homeownership is an important social goal, and responsible subprime lending is beneficial for both borrowers and lenders. But, clearly, much of the subprime lending that took place during the latter stages of the credit boom in 2005 and 2006 was done very poorly.
A third longer-term factor contributing to recent financial and economic developments is the unprecedented growth in developing and emerging market economies. From the U.S. perspective, this growth has been a double-edged sword. On the one hand, low-cost imports from emerging markets for many years increased U.S. living standards and made the Fed's job of managing inflation easier. Moreover, currently, the demand for U.S. exports arising from strong global growth has been an important offset to the factors restraining domestic demand, including housing and tight credit. On the other hand, the rapid growth in the emerging markets and the associated sharp rise in their demand for raw materials have been--together with a variety of constraints on supply--a major cause of the escalation in the relative prices of oil and other commodities, which has placed intense economic pressure on many U.S. households and businesses.
In the financial sphere, the three longer-term developments I have identified are linked by the fact that a substantial increase in the net supply of saving in emerging market economies contributed to both the U.S. housing boom and the broader credit boom.1 The sources of this increase in net saving included rapid growth in high-saving East Asian countries and, outside of China, reduced investment rates in that region; large buildups in foreign exchange reserves in a number of emerging markets; and the enormous increases in the revenues received by exporters of oil and other commodities. The pressure of these net savings flows led to lower long-term real interest rates around the world, stimulated asset prices (including house prices), and pushed current accounts toward deficit in the industrial countries--notably the United States--that received these flows.
To be sure, the large inflows of savings and low global interest rates presented a valuable opportunity to the recipient countries, provided they invested the inflows wisely. Unfortunately, this did not always occur, as an increased appetite for risk-taking--a "reaching for yield"--stimulated some financial innovations and lending practices that proved imprudent or otherwise questionable. Regulators identified some of these issues in real time; for example, federal banking regulators issued new guidance on nontraditional mortgage lending and on commercial real estate lending. The Federal Reserve, in cooperation with the other supervisors, encouraged improvements in market infrastructure and conducted a series of targeted reviews designed to improve risk-management practice with respect to derivatives, exposures to hedge funds, leveraged lending, and other areas. And, in preparation for the new Basel II capital regulations, supervisors required more-demanding standards for the measurement and management of risk. Despite these efforts, however, the risk-management systems of many financial institutions proved inadequate in the face of a major housing downturn and substantial disruptions in market liquidity.
The current economic and financial situation reflects, in significant part, the unwinding of two of these longer-term developments--the housing boom and the credit boom--and the continuation of the pressure of global demand on commodity prices.
The housing boom came to an end because rising prices made housing increasingly unaffordable. The end of rapid house price increases in turn undermined a basic premise of many adjustable-rate subprime loans--that home price appreciation alone would always generate enough equity to permit the borrower to refinance and thereby avoid ever having to pay the fully-indexed interest rate. When that premise was shown to be false and defaults on subprime mortgages rose sharply, investors quickly backpedaled from mortgage-related securities. The reduced availability of mortgage credit caused housing to weaken further.
The losses from subprime mortgages have been significant in themselves, but their greater impact was to trigger the end of the broader credit boom. Notably, as subprime losses forced the credit rating agencies to downgrade what had been highly rated mortgage-backed securities, investors also came to doubt the reliability of ratings that had been awarded to other highly complex securities. As a result, investors became much more cautious and reversed their aggressive risk-taking of the credit boom period. The resulting pullback affected a much broader range of securities, including leveraged and syndicated loans, asset-backed commercial paper, commercial mortgage-backed securities, and a variety of structured credit products. Large financial institutions, especially in the United States and Europe, were particularly affected by these events, having reported a total of roughly $300 billion in writedowns and credit losses. These institutions have also been forced to bring onto their balance sheets the assets of sponsored investment vehicles that can no longer be financed on a standalone basis. Fortunately, most financial institutions entered this episode with strong capital positions, and many have raised substantial amounts of new capital. Still, balance sheet pressures and the relatively high cost of new bank capital have reduced the willingness and ability of these institutions to make markets and extend new credit. Prospectively, financial conditions seem likely to be closely tied to both domestic and global economic developments, including the course of the prices of oil and other commodities.
This brief overview makes clear that both global and domestic factors have played important roles in recent developments in the United States. The housing and credit booms were driven to some extent by global savings flows, but they also reflected domestic factors, such as weaknesses in risk measurement and management and lax standards in subprime lending. Higher commodity prices are for the most part a global phenomenon, but U.S. dependence on oil imports makes this country quite vulnerable on that score.
The OutlookWith this broader perspective as background, I turn now to a brief discussion of the current situation and outlook. Broadly speaking, the functioning of financial markets has improved of late, but conditions remain strained and some key funding and securitization markets have shown only tentative signs of recovery. Some borrowers, such as highly-rated corporations, retain good access to credit, but credit conditions generally remain restrictive in areas related to residential or commercial real estate.
Residential construction continues to contract, and the overhang of unsold new homes remains large, although it has declined some in absolute terms. Consumer spending has thus far held up a bit better than expected, but households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit, and higher energy prices, and consumer sentiment has declined sharply since the fall. Businesses are also facing challenges, including rapidly escalating costs of raw materials and weaker domestic demand. However, the strength of foreign demand for U.S. goods and services has offset, to some extent, the slowing of domestic sales.
Overall economic growth was quite slow but apparently positive in both the fourth quarter of 2007 and the first quarter of this year. Activity during the current quarter is also likely to be relatively weak. We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad. This baseline forecast is consistent with our recently released projections, which also see growth picking up further in 2009. However, until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside. Recent increases in oil prices pose additional downside risks to growth.
Inflation has remained high, largely reflecting continued sharp increases in the prices of globally traded commodities. Thus far, the pass-through of high raw materials costs to domestic labor costs and the prices of most other products has been limited, in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and will bear close attention. Futures markets continue to predict--albeit with a great range of uncertainty--that commodity prices will level out, a forecast consistent with our expectation of some overall slowing in the global economy and thus in the demand for raw materials. A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of Federal Reserve governors and Reserve Bank presidents for 2009 and 2010. Unfortunately, the prices of a number of commodities, most notably oil, have continued upward recently, even as expectations of future policy rates and the foreign exchange value of the dollar have remained generally stable in the past few months. The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming.
The Federal Reserve's Policy ResponseThe Federal Reserve's mandate is to foster maximum sustainable employment and price stability. To achieve these goals, we must also support the return of financial markets to more normal functioning.
The Federal Reserve is pursuing its objectives through several means. First, we have eased monetary policy substantially and proactively to address the sharp deterioration in financial conditions and to forestall some of the potential adverse effects on the broader economy. Our decisive policy actions were premised on the view that a more gradual reduction in short-term rates could well have failed to contain the financial and economic problems confronting us. For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate.
In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations. Over time, the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy--including flexible markets and robust innovation and productivity--will be key factors ensuring that the dollar remains a strong and stable currency.
Second, to improve market liquidity and functioning, we have taken a range of measures to ensure that financial institutions have adequate access to central bank liquidity.2 The resulting reductions in funding pressures, together with the increased confidence created by the assurance that backstop liquidity is available to eligible institutions, should help to promote an orderly resolution of current market dislocations. In recognition of the global nature of financial markets, we have also cooperated with other major central banks to ensure that central bank liquidity is deployed where needed.
Finally, we are taking action in our role as regulators. We have worked with lenders and servicers to encourage appropriate modifications of distressed mortgage loans, and we have proposed new rules to improve disclosure and to ban unfair or deceptive acts and practices in mortgage lending. We are also collaborating with other regulators, both domestically and abroad, to put in place changes that will help make the financial system less vulnerable in the future. Among the changes we expect to see are strengthening of capital and liquidity rules, greater disclosure requirements, an increased emphasis on the measurement and management of firmwide risks, and further steps to increase the transparency and resilience of the financial infrastructure. Our goal is to emerge from this difficult period with a financial system that will be more stable without being less innovative, with a more effective balance between market discipline and regulation.
ReferencesBernanke, Ben S. (2005). "The Global Saving Glut and the U.S. Current Account Deficit," speech delivered at the Homer Jones Lecture, Federal Reserve Bank of St. Louis, St. Louis, Mo., April 14.
Bernanke, Ben S. (2008). "Liquidity Provision by the Federal Reserve," speech delivered at the Federal Reserve Bank of Atlanta Financial Markets Conference, Sea Island, Ga., May 13.
Interesting analysis. He lays the blame of the rise in commodity prices at the door of Chindia. The problem ofcourse is more complicated. Chindia only partially contributed to the current crisis. It is the Fed's own actions (cutting rates under CPI while non-core and supposedly variable commodities like food and oil BOOMED) that have contributed to the rise in the prices of commodities. The Fed is only getting concerned about the dollar NOW? Where were they in the last 5 years? The US has had officially been in a low dollar policy (orderly decline in USD) for some time. Does this signal and end to the low dollar policy? I doubt it.
They still dont get it
June 4, 2008
G.M. Closing 4 Plants in Shift From Trucks Toward Cars
By BILL VLASIC
Responding to a consumer shift to more fuel-efficient vehicles, General Motors said Tuesday that it would stop making pickup trucks and big S.U.V.s at four North American assembly plants and would consider selling its Hummer brand.
The moves, announced Tuesday by the company chairman G. Richard Wagoner Jr., will slash 500,000 units from the automaker’s overall production, and pave the way for increased investment in smaller cars and passenger vehicles.
Mr. Wagoner said that rising gasoline prices had forced a “structural shift” by American consumers away from truck-based vehicles built by G.M.
“These prices are changing consumer behavior and changing it rapidly,” Mr. Wagoner said at a briefing before G.M.’s annual meeting in Wilmington, Del. “We don’t believe it’s a spike or a temporary shift. We believe it is, by and large, permanent.”
In what he called “difficult” decisions, Mr. Wagoner said that G.M. would close plants in Janesville, Wisc.; Moraine, Ohio; Oshawa, Ontario; and Toluca, Mexico by or before 2010.
The actions follow previous moves to cut shifts at two truck plants in Michigan.
Mr. Wagoner said it was “unlikely” that the plants would re-open at any point with new products, but declined to provide details about relocating workers to other facilities.
Both Detroit automakers have been hit hard by rising fuel costs that have dramatically curtailed demand for pickups and full-sized S.U.V.s like the Chevrolet Tahoe. The shift toward smaller and lighter vehicles with better mileage is a problem for Detroit automakers because they offer fewer such models than Asian carmakers like Toyota and Honda.
G.M. had been expected to slash its truck production after similar moves were announced by the Ford. Ford recently eliminated a shift at each of four truck plants in Michigan, Wisconsin and Ontario and extended the summer shutdown at several truck plants to reduce inventories. The company also announced last week that it would build its new subcompact car, the Fiesta, at a Mexican factory that assembles full-size pickup trucks.
While G.M.’s production cuts were deeper than anticipated by industry analysts, the decision on the Hummer brand underscored the painful reality G.M. is facing.
Once considered an iconic brand with global market potential, the Hummer has become a symbol of the decline of the large, gas-guzzling sport utility vehicle.
Mr. Wagoner said that G.M.’s directors had approved a “strategic review” of Hummer that could include “a partial or complete sale of the brand.”
Overall, G.M. will reduce its North American production to 3.7 million vehicles from 4.2 million. The moves should add $1 billion in cost savings to an existing target of reducing costs by $5 billion by 2011.
Besides slashing truck and S.U.V. production, G.M. will place a bigger bet on its passenger cars and lighter-weight crossover vehicles.
Mr. Wagoner said G.M. will add third shifts to its plants in Lordstown, Ohio, and Orion Township, Michigan, to increase their output of Chevrolet and Pontiac cars.
He said the G.M. board also approved next-generation versions of two small Chevrolet passenger cars, as well as a new fuel-efficient, 1.4-liter turbocharged engine.
The automaker also set a firm schedule for production of the extended-range, electric-powered Chevrolet Volt. Mr. Wagoner said the Volt, which is powered by batteries augmented by a small gasoline engine, will be available for sale no later than the end of 2010.
“In other words, the Chevy Volt is a go,” he said. “We believe this is the biggest step yet in our industry’s move away from our historic, virtually complete reliance on petroleum to power vehicles.”
“From the start of our North American turnaround plan in 2005, I’ve said that our goal is not just to return G.M. to profitability, but to structure G.M. globally for sustained profitability and growth,” the chief executive, Rick Wagoner, said in a statement announcing the restructuring.
“Since the first of this year, however, U.S. economic and market conditions have become significantly more difficult,” he said. “Higher gasoline prices are changing consumer behavior, and they are significantly affecting the U.S. auto industry sales mix.”
G.M. shares rose 2.7 percent in early trading.
Tuesday’s announcement comes a few days after G.M. said said that 19,000 hourly workers — a quarter of a unionized work force that already has been drastically pared down — have accepted buyouts.
While Toyota is shooting 100 miles / gallon on the next generation Prius, GM is stuck at boasting about how they're increasing gas efficiency by 9 miles / gallon. 9 miles!!!! from what? 20? Its interesting to me that they see the problem - they have been seeing this for atleast 5 years and they havent developed a single new lineup that can claim what the Prius can. If GM had a Prius equivalent - I bet they wouldnt be suffering right now. The could have shut off the trucks and SUV productions and made up money on the REAL hybrid. Innovation is an AMERICAN sport (think Apple, Google). We are now distinctly following Japan. If I was a GM stock holder I would be extremely unhappy with the leadership's vision and execution
G.M. Closing 4 Plants in Shift From Trucks Toward Cars
By BILL VLASIC
Responding to a consumer shift to more fuel-efficient vehicles, General Motors said Tuesday that it would stop making pickup trucks and big S.U.V.s at four North American assembly plants and would consider selling its Hummer brand.
The moves, announced Tuesday by the company chairman G. Richard Wagoner Jr., will slash 500,000 units from the automaker’s overall production, and pave the way for increased investment in smaller cars and passenger vehicles.
Mr. Wagoner said that rising gasoline prices had forced a “structural shift” by American consumers away from truck-based vehicles built by G.M.
“These prices are changing consumer behavior and changing it rapidly,” Mr. Wagoner said at a briefing before G.M.’s annual meeting in Wilmington, Del. “We don’t believe it’s a spike or a temporary shift. We believe it is, by and large, permanent.”
In what he called “difficult” decisions, Mr. Wagoner said that G.M. would close plants in Janesville, Wisc.; Moraine, Ohio; Oshawa, Ontario; and Toluca, Mexico by or before 2010.
The actions follow previous moves to cut shifts at two truck plants in Michigan.
Mr. Wagoner said it was “unlikely” that the plants would re-open at any point with new products, but declined to provide details about relocating workers to other facilities.
Both Detroit automakers have been hit hard by rising fuel costs that have dramatically curtailed demand for pickups and full-sized S.U.V.s like the Chevrolet Tahoe. The shift toward smaller and lighter vehicles with better mileage is a problem for Detroit automakers because they offer fewer such models than Asian carmakers like Toyota and Honda.
G.M. had been expected to slash its truck production after similar moves were announced by the Ford. Ford recently eliminated a shift at each of four truck plants in Michigan, Wisconsin and Ontario and extended the summer shutdown at several truck plants to reduce inventories. The company also announced last week that it would build its new subcompact car, the Fiesta, at a Mexican factory that assembles full-size pickup trucks.
While G.M.’s production cuts were deeper than anticipated by industry analysts, the decision on the Hummer brand underscored the painful reality G.M. is facing.
Once considered an iconic brand with global market potential, the Hummer has become a symbol of the decline of the large, gas-guzzling sport utility vehicle.
Mr. Wagoner said that G.M.’s directors had approved a “strategic review” of Hummer that could include “a partial or complete sale of the brand.”
Overall, G.M. will reduce its North American production to 3.7 million vehicles from 4.2 million. The moves should add $1 billion in cost savings to an existing target of reducing costs by $5 billion by 2011.
Besides slashing truck and S.U.V. production, G.M. will place a bigger bet on its passenger cars and lighter-weight crossover vehicles.
Mr. Wagoner said G.M. will add third shifts to its plants in Lordstown, Ohio, and Orion Township, Michigan, to increase their output of Chevrolet and Pontiac cars.
He said the G.M. board also approved next-generation versions of two small Chevrolet passenger cars, as well as a new fuel-efficient, 1.4-liter turbocharged engine.
The automaker also set a firm schedule for production of the extended-range, electric-powered Chevrolet Volt. Mr. Wagoner said the Volt, which is powered by batteries augmented by a small gasoline engine, will be available for sale no later than the end of 2010.
“In other words, the Chevy Volt is a go,” he said. “We believe this is the biggest step yet in our industry’s move away from our historic, virtually complete reliance on petroleum to power vehicles.”
“From the start of our North American turnaround plan in 2005, I’ve said that our goal is not just to return G.M. to profitability, but to structure G.M. globally for sustained profitability and growth,” the chief executive, Rick Wagoner, said in a statement announcing the restructuring.
“Since the first of this year, however, U.S. economic and market conditions have become significantly more difficult,” he said. “Higher gasoline prices are changing consumer behavior, and they are significantly affecting the U.S. auto industry sales mix.”
G.M. shares rose 2.7 percent in early trading.
Tuesday’s announcement comes a few days after G.M. said said that 19,000 hourly workers — a quarter of a unionized work force that already has been drastically pared down — have accepted buyouts.
While Toyota is shooting 100 miles / gallon on the next generation Prius, GM is stuck at boasting about how they're increasing gas efficiency by 9 miles / gallon. 9 miles!!!! from what? 20? Its interesting to me that they see the problem - they have been seeing this for atleast 5 years and they havent developed a single new lineup that can claim what the Prius can. If GM had a Prius equivalent - I bet they wouldnt be suffering right now. The could have shut off the trucks and SUV productions and made up money on the REAL hybrid. Innovation is an AMERICAN sport (think Apple, Google). We are now distinctly following Japan. If I was a GM stock holder I would be extremely unhappy with the leadership's vision and execution
Tuesday, May 27, 2008
Mindful Meditation
From nytimes.com
May 27, 2008
Lotus Therapy
By BENEDICT CAREY
The patient sat with his eyes closed, submerged in the rhythm of his own breathing, and after a while noticed that he was thinking about his troubled relationship with his father.
“I was able to be there, present for the pain,” he said, when the meditation session ended. “To just let it be what it was, without thinking it through.”
The therapist nodded.
“Acceptance is what it was,” he continued. “Just letting it be. Not trying to change anything.”
“That’s it,” the therapist said. “That’s it, and that’s big.”
This exercise in focused awareness and mental catch-and-release of emotions has become perhaps the most popular new psychotherapy technique of the past decade. Mindfulness meditation, as it is called, is rooted in the teachings of a fifth-century B.C. Indian prince, Siddhartha Gautama, later known as the Buddha. It is catching the attention of talk therapists of all stripes, including academic researchers, Freudian analysts in private practice and skeptics who see all the hallmarks of another fad.
For years, psychotherapists have worked to relieve suffering by reframing the content of patients’ thoughts, directly altering behavior or helping people gain insight into the subconscious sources of their despair and anxiety. The promise of mindfulness meditation is that it can help patients endure flash floods of emotion during the therapeutic process — and ultimately alter reactions to daily experience at a level that words cannot reach. “The interest in this has just taken off,” said Zindel Segal, a psychologist at the Center of Addiction and Mental Health in Toronto, where the above group therapy session was taped. “And I think a big part of it is that more and more therapists are practicing some form of contemplation themselves and want to bring that into therapy.”
At workshops and conferences across the country, students, counselors and psychologists in private practice throng lectures on mindfulness. The National Institutes of Health is financing more than 50 studies testing mindfulness techniques, up from 3 in 2000, to help relieve stress, soothe addictive cravings, improve attention, lift despair and reduce hot flashes.
Some proponents say Buddha’s arrival in psychotherapy signals a broader opening in the culture at large — a way to access deeper healing, a hidden path revealed.
Yet so far, the evidence that mindfulness meditation helps relieve psychiatric symptoms is thin, and in some cases, it may make people worse, some studies suggest. Many researchers now worry that the enthusiasm for Buddhist practice will run so far ahead of the science that this promising psychological tool could turn into another fad.
“I’m very open to the possibility that this approach could be effective, and it certainly should be studied,” said Scott Lilienfeld, a psychology professor at Emory. “What concerns me is the hype, the talk about changing the world, this allure of the guru that the field of psychotherapy has a tendency to cultivate.”
Buddhist meditation came to psychotherapy from mainstream academic medicine. In the 1970s, a graduate student in molecular biology, Jon Kabat-Zinn, intrigued by Buddhist ideas, adapted a version of its meditative practice that could be easily learned and studied. It was by design a secular version, extracted like a gemstone from the many-layered foundation of Buddhist teaching, which has sprouted a wide variety of sects and spiritual practices and attracted 350 million adherents worldwide.
In transcendental meditation and other types of meditation, practitioners seek to transcend or “lose” themselves. The goal of mindfulness meditation was different, to foster an awareness of every sensation as it unfolds in the moment.
Dr. Kabat-Zinn taught the practice to people suffering from chronic pain at the University of Massachusetts medical school. In the 1980s he published a series of studies demonstrating that two-hour courses, given once a week for eight weeks, reduced chronic pain more effectively than treatment as usual.
Word spread, discreetly at first. “I think that back then, other researchers had to be very careful when they talked about this, because they didn’t want to be seen as New Age weirdos,” Dr. Kabat-Zinn, now a professor emeritus of medicine at the University of Massachusetts, said in an interview. “So they didn’t call it mindfulness or meditation. “After a while, we put enough studies out there that people became more comfortable with it.”
One person who noticed early on was Marsha Linehan, a psychologist at the University of Washington who was trying to treat deeply troubled patients with histories of suicidal behavior. “Trying to treat these patients with some change-based behavior therapy just made them worse, not better,” Dr. Linehan said in an interview. “With the really hard stuff, you need something else, something that allows people to tolerate these very strong emotions.”
In the 1990s, Dr. Linehan published a series of studies finding that a therapy that incorporated Zen Buddhist mindfulness, “radical acceptance,” practiced by therapist and patient significantly cut the risk of hospitalization and suicide attempts in the high-risk patients.
Finally, in 2000, a group of researchers including Dr. Segal in Toronto, J. Mark G. Williams at the University of Wales and John D. Teasdale at the Medical Research Council in England published a study that found that eight weekly sessions of mindfulness halved the rate of relapse in people with three or more episodes of depression.
With Dr. Kabat-Zinn, they wrote a popular book, “The Mindful Way Through Depression.” Psychotherapists’ curiosity about mindfulness, once tentative, turned into “this feeding frenzy, of sorts, that we have going on now,” Dr. Kabat-Zinn said.
Mindfulness meditation is easy to describe. Sit in a comfortable position, eyes closed, preferably with the back upright and unsupported. Relax and take note of body sensations, sounds and moods. Notice them without judgment. Let the mind settle into the rhythm of breathing. If it wanders (and it will), gently redirect attention to the breath. Stay with it for at least 10 minutes.
After mastering control of attention, some therapists say, a person can turn, mentally, to face a threatening or troubling thought — about, say, a strained relationship with a parent — and learn simply to endure the anger or sadness and let it pass, without lapsing into rumination or trying to change the feeling, a move that often backfires.
One woman, a doctor who had been in therapy for years to manage bouts of disabling anxiety, recently began seeing Gaea Logan, a therapist in Austin, Tex., who incorporates mindfulness meditation into her practice. This patient had plenty to worry about, including a mentally ill child, a divorce and what she described as a “harsh internal voice,” Ms. Logan said.
After practicing mindfulness meditation, she continued to feel anxious at times but told Ms. Logan, “I can stop and observe my feelings and thoughts and have compassion for myself.”
Steven Hayes, a psychologist at the University of Nevada at Reno, has developed a talk therapy called Acceptance Commitment Therapy, or ACT, based on a similar, Buddha-like effort to move beyond language to change fundamental psychological processes.
“It’s a shift from having our mental health defined by the content of our thoughts,” Dr. Hayes said, “to having it defined by our relationship to that content — and changing that relationship by sitting with, noticing and becoming disentangled from our definition of ourselves.”
For all these hopeful signs, the science behind mindfulness is in its infancy. The Agency for Healthcare Research and Quality, which researches health practices, last year published a comprehensive review of meditation studies, including T.M., Zen and mindfulness practice, for a wide variety of physical and mental problems. The study found that over all, the research was too sketchy to draw conclusions.
A recent review by Canadian researchers, focusing specifically on mindfulness meditation, concluded that it did “not have a reliable effect on depression and anxiety.”
Therapists who incorporate mindfulness practices do not agree when the meditation is most useful, either. Some say Buddhist meditation is most useful for patients with moderate emotional problems. Others, like Dr. Linehan, insist that patients in severe mental distress are the best candidates for mindfulness.
A case in point is mindfulness-based therapy to prevent a relapse into depression. The treatment significantly reduced the risk of relapse in people who have had three or more episodes of depression. But it may have had the opposite effect on people who had one or two previous episodes, two studies suggest.
The mindfulness treatment “may be contraindicated for this group of patients,” S. Helen Ma and Dr. Teasdale of the Medical Research Council concluded in a 2004 study of the therapy.
Since mindfulness meditation may have different effects on different mental struggles, the challenge for its proponents will be to specify where it is most effective — and soon, given how popular the practice is becoming.
The question, said Linda Barnes, an associate professor of family medicine and pediatrics at the Boston University School of Medicine, is not whether mindfulness meditation will become a sophisticated therapeutic technique or lapse into self-help cliché.
“The answer to that question is yes to both,” Dr. Barnes said.
The real issue, most researchers agree, is whether the science will keep pace and help people distinguish the mindful variety from the mindless.
A variety of meditative practices have been studied by Western researchers for their effects on mental and physical health.
Tai Chi
An active exercise, sometimes called moving meditation, involving extremely slow, continuous movement and extreme concentration. The movements are to balance the vital energy of the body but have no religious significance.
Studies are mixed, some finding it can reduce blood pressure in patients, and others finding no effect. There is some evidence that it can help elderly people improve balance.
Transcendental Meditation
Meditators sit comfortably, eyes closed, and breathe naturally. They repeat and concentrate on the mantra, a word or sound chosen by the instructor to achieve state of deep, transcendent absorption. Practitioners “lose” themselves, untouched by day-to-day concerns. Studies suggest it can reduce blood pressure in some patients.
Mindfulness Meditation
Practitioners find a comfortable position, close the eyes and focus first on breathing, passively observing it. If a stray thought or emotion enters the mind, they allow it to pass and return attention to the breath. The aim is to achieve focused awareness on what is happening moment to moment.
Studies find that it can help manage chronic pain. The findings are mixed on substance abuse. Two trials suggest that it can cut the rate of relapse in people who have had three or more bouts of depression.
Yoga
Enhanced awareness through breathing techniques and specific postures. Schools vary widely, aiming to achieve total absorption in the present and a release from ordinary thoughts. Studies are mixed, but evidence shows it can reduce stress.
Am constantly amazed by how much old traditions from India are becoming the rage. The momentum towards a more antiwar, more vegan, more conscious (no pun intended), more spiritual yet less religious (organized religion) society continues apace. I have come to believe that this is the course of human evolution. Or deja vu evolution because Indians once practiced these things and many still do.
May 27, 2008
Lotus Therapy
By BENEDICT CAREY
The patient sat with his eyes closed, submerged in the rhythm of his own breathing, and after a while noticed that he was thinking about his troubled relationship with his father.
“I was able to be there, present for the pain,” he said, when the meditation session ended. “To just let it be what it was, without thinking it through.”
The therapist nodded.
“Acceptance is what it was,” he continued. “Just letting it be. Not trying to change anything.”
“That’s it,” the therapist said. “That’s it, and that’s big.”
This exercise in focused awareness and mental catch-and-release of emotions has become perhaps the most popular new psychotherapy technique of the past decade. Mindfulness meditation, as it is called, is rooted in the teachings of a fifth-century B.C. Indian prince, Siddhartha Gautama, later known as the Buddha. It is catching the attention of talk therapists of all stripes, including academic researchers, Freudian analysts in private practice and skeptics who see all the hallmarks of another fad.
For years, psychotherapists have worked to relieve suffering by reframing the content of patients’ thoughts, directly altering behavior or helping people gain insight into the subconscious sources of their despair and anxiety. The promise of mindfulness meditation is that it can help patients endure flash floods of emotion during the therapeutic process — and ultimately alter reactions to daily experience at a level that words cannot reach. “The interest in this has just taken off,” said Zindel Segal, a psychologist at the Center of Addiction and Mental Health in Toronto, where the above group therapy session was taped. “And I think a big part of it is that more and more therapists are practicing some form of contemplation themselves and want to bring that into therapy.”
At workshops and conferences across the country, students, counselors and psychologists in private practice throng lectures on mindfulness. The National Institutes of Health is financing more than 50 studies testing mindfulness techniques, up from 3 in 2000, to help relieve stress, soothe addictive cravings, improve attention, lift despair and reduce hot flashes.
Some proponents say Buddha’s arrival in psychotherapy signals a broader opening in the culture at large — a way to access deeper healing, a hidden path revealed.
Yet so far, the evidence that mindfulness meditation helps relieve psychiatric symptoms is thin, and in some cases, it may make people worse, some studies suggest. Many researchers now worry that the enthusiasm for Buddhist practice will run so far ahead of the science that this promising psychological tool could turn into another fad.
“I’m very open to the possibility that this approach could be effective, and it certainly should be studied,” said Scott Lilienfeld, a psychology professor at Emory. “What concerns me is the hype, the talk about changing the world, this allure of the guru that the field of psychotherapy has a tendency to cultivate.”
Buddhist meditation came to psychotherapy from mainstream academic medicine. In the 1970s, a graduate student in molecular biology, Jon Kabat-Zinn, intrigued by Buddhist ideas, adapted a version of its meditative practice that could be easily learned and studied. It was by design a secular version, extracted like a gemstone from the many-layered foundation of Buddhist teaching, which has sprouted a wide variety of sects and spiritual practices and attracted 350 million adherents worldwide.
In transcendental meditation and other types of meditation, practitioners seek to transcend or “lose” themselves. The goal of mindfulness meditation was different, to foster an awareness of every sensation as it unfolds in the moment.
Dr. Kabat-Zinn taught the practice to people suffering from chronic pain at the University of Massachusetts medical school. In the 1980s he published a series of studies demonstrating that two-hour courses, given once a week for eight weeks, reduced chronic pain more effectively than treatment as usual.
Word spread, discreetly at first. “I think that back then, other researchers had to be very careful when they talked about this, because they didn’t want to be seen as New Age weirdos,” Dr. Kabat-Zinn, now a professor emeritus of medicine at the University of Massachusetts, said in an interview. “So they didn’t call it mindfulness or meditation. “After a while, we put enough studies out there that people became more comfortable with it.”
One person who noticed early on was Marsha Linehan, a psychologist at the University of Washington who was trying to treat deeply troubled patients with histories of suicidal behavior. “Trying to treat these patients with some change-based behavior therapy just made them worse, not better,” Dr. Linehan said in an interview. “With the really hard stuff, you need something else, something that allows people to tolerate these very strong emotions.”
In the 1990s, Dr. Linehan published a series of studies finding that a therapy that incorporated Zen Buddhist mindfulness, “radical acceptance,” practiced by therapist and patient significantly cut the risk of hospitalization and suicide attempts in the high-risk patients.
Finally, in 2000, a group of researchers including Dr. Segal in Toronto, J. Mark G. Williams at the University of Wales and John D. Teasdale at the Medical Research Council in England published a study that found that eight weekly sessions of mindfulness halved the rate of relapse in people with three or more episodes of depression.
With Dr. Kabat-Zinn, they wrote a popular book, “The Mindful Way Through Depression.” Psychotherapists’ curiosity about mindfulness, once tentative, turned into “this feeding frenzy, of sorts, that we have going on now,” Dr. Kabat-Zinn said.
Mindfulness meditation is easy to describe. Sit in a comfortable position, eyes closed, preferably with the back upright and unsupported. Relax and take note of body sensations, sounds and moods. Notice them without judgment. Let the mind settle into the rhythm of breathing. If it wanders (and it will), gently redirect attention to the breath. Stay with it for at least 10 minutes.
After mastering control of attention, some therapists say, a person can turn, mentally, to face a threatening or troubling thought — about, say, a strained relationship with a parent — and learn simply to endure the anger or sadness and let it pass, without lapsing into rumination or trying to change the feeling, a move that often backfires.
One woman, a doctor who had been in therapy for years to manage bouts of disabling anxiety, recently began seeing Gaea Logan, a therapist in Austin, Tex., who incorporates mindfulness meditation into her practice. This patient had plenty to worry about, including a mentally ill child, a divorce and what she described as a “harsh internal voice,” Ms. Logan said.
After practicing mindfulness meditation, she continued to feel anxious at times but told Ms. Logan, “I can stop and observe my feelings and thoughts and have compassion for myself.”
Steven Hayes, a psychologist at the University of Nevada at Reno, has developed a talk therapy called Acceptance Commitment Therapy, or ACT, based on a similar, Buddha-like effort to move beyond language to change fundamental psychological processes.
“It’s a shift from having our mental health defined by the content of our thoughts,” Dr. Hayes said, “to having it defined by our relationship to that content — and changing that relationship by sitting with, noticing and becoming disentangled from our definition of ourselves.”
For all these hopeful signs, the science behind mindfulness is in its infancy. The Agency for Healthcare Research and Quality, which researches health practices, last year published a comprehensive review of meditation studies, including T.M., Zen and mindfulness practice, for a wide variety of physical and mental problems. The study found that over all, the research was too sketchy to draw conclusions.
A recent review by Canadian researchers, focusing specifically on mindfulness meditation, concluded that it did “not have a reliable effect on depression and anxiety.”
Therapists who incorporate mindfulness practices do not agree when the meditation is most useful, either. Some say Buddhist meditation is most useful for patients with moderate emotional problems. Others, like Dr. Linehan, insist that patients in severe mental distress are the best candidates for mindfulness.
A case in point is mindfulness-based therapy to prevent a relapse into depression. The treatment significantly reduced the risk of relapse in people who have had three or more episodes of depression. But it may have had the opposite effect on people who had one or two previous episodes, two studies suggest.
The mindfulness treatment “may be contraindicated for this group of patients,” S. Helen Ma and Dr. Teasdale of the Medical Research Council concluded in a 2004 study of the therapy.
Since mindfulness meditation may have different effects on different mental struggles, the challenge for its proponents will be to specify where it is most effective — and soon, given how popular the practice is becoming.
The question, said Linda Barnes, an associate professor of family medicine and pediatrics at the Boston University School of Medicine, is not whether mindfulness meditation will become a sophisticated therapeutic technique or lapse into self-help cliché.
“The answer to that question is yes to both,” Dr. Barnes said.
The real issue, most researchers agree, is whether the science will keep pace and help people distinguish the mindful variety from the mindless.
A variety of meditative practices have been studied by Western researchers for their effects on mental and physical health.
Tai Chi
An active exercise, sometimes called moving meditation, involving extremely slow, continuous movement and extreme concentration. The movements are to balance the vital energy of the body but have no religious significance.
Studies are mixed, some finding it can reduce blood pressure in patients, and others finding no effect. There is some evidence that it can help elderly people improve balance.
Transcendental Meditation
Meditators sit comfortably, eyes closed, and breathe naturally. They repeat and concentrate on the mantra, a word or sound chosen by the instructor to achieve state of deep, transcendent absorption. Practitioners “lose” themselves, untouched by day-to-day concerns. Studies suggest it can reduce blood pressure in some patients.
Mindfulness Meditation
Practitioners find a comfortable position, close the eyes and focus first on breathing, passively observing it. If a stray thought or emotion enters the mind, they allow it to pass and return attention to the breath. The aim is to achieve focused awareness on what is happening moment to moment.
Studies find that it can help manage chronic pain. The findings are mixed on substance abuse. Two trials suggest that it can cut the rate of relapse in people who have had three or more bouts of depression.
Yoga
Enhanced awareness through breathing techniques and specific postures. Schools vary widely, aiming to achieve total absorption in the present and a release from ordinary thoughts. Studies are mixed, but evidence shows it can reduce stress.
Am constantly amazed by how much old traditions from India are becoming the rage. The momentum towards a more antiwar, more vegan, more conscious (no pun intended), more spiritual yet less religious (organized religion) society continues apace. I have come to believe that this is the course of human evolution. Or deja vu evolution because Indians once practiced these things and many still do.
Coming back
Just returned from a trip to beautiful St. Thomas in the US Virgin Islands. Sapphire Beach - gorgeous view and fantastic snorkeling.
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