from www.nytimes.com
June 9, 2008
Inside Gate, India’s Good Life; Outside, the Servants’ Slums
By SOMINI SENGUPTA
GURGAON, India — When the scorch of summer hit this north Indian boomtown, and the municipal water supply worked only a few hours each day, inside a high-rise tower called Hamilton Court, Jaya Chand could turn on her kitchen tap around the clock, and water would gush out.
The same was true when the electricity went out in the city, which it did on average for 12 hours a day, something that once prompted residents elsewhere in Gurgaon to storm the local power office. All the while, the Chands’ flat screen television glowed, the air-conditioners hummed, and the elevators cruised up and down Hamilton Court’s 25 floors.
Hamilton Court — complete with a private school within its gates, groomed lawns and security guards — is just one of the exclusive gated communities that have blossomed across India in recent years. At least for the newly moneyed upper middle class, they offer at high prices what the government cannot, at least not to the liking of their residents.
These enclaves have emerged on the outskirts of prospering, overburdened cities, from this frontier town next to the capital to the edges of seam-splitting Bangalore. They allow their residents to buy their way out of the hardships that afflict vast multitudes in this country of more than one billion. And they reflect the desires of India’s small but growing ranks of wealthy professionals, giving them Western amenities along with Indian indulgences: an army of maids and chauffeurs live in a vast shantytown across the street.
“A kind of self-contained island” is how Mrs. Chand’s husband, Ashish, describes Hamilton Court.
India has always had its upper classes, as well as legions of the world’s very poor. But today a landscape dotted with Hamilton Courts, pressed up against the slums that serve them, has underscored more than ever the stark gulf between those worlds, raising uncomfortable questions for a democratically elected government about whether India can enable all its citizens to scale the golden ladders of the new economy.
“Things have gotten better for the lucky class,” Mrs. Chand, 36, said one day, as she fixed lunch in full view of Chakkarpur, the shantytown where one of her two maids, Shefali Das, lives. “Otherwise, it is still a fight.”
When the power goes out, the lights of Hamilton Court bathe Chakkarpur in a dusky glow. Under the open sky, across the street from the tower, Mrs. Das’s sons take cold bucket baths each day. The slum is as much a product of the new India as Hamilton Court, the opportunities of this new city drawing hundreds of thousands from the hungry hinterlands.
In China, the main Asian competitor to which India is often compared, the state managed early on to harness economic expansion for huge public works projects and then allow more and more Chinese to partake of the benefits. There, the poor are far less likely to be deprived of basic services, whether clean water or basic schooling.
In India, poverty has also dropped appreciably in the last 17 years of economic change, even as the gulf between the rich and poor has grown. More than a quarter of all Indians still live below the official poverty line (subsisting on roughly $1 a day); one in four city dwellers live on less than 50 cents a day; and nearly half of all Indian children are clinically malnourished.
At the same time, the ranks of dollar millionaires have swelled to 100,000, and the Indian middle class, though notoriously hard to define and still small, has by all indications expanded.
For those with the right skills, the good times have been very good. Mr. Chand, 34, a business school graduate who runs the regional operations for an American manufacturing firm, has seen his salary grow eightfold in the last five years, which is not unusual for upper class Indians like him.
The Chands are typical of Hamilton Court residents: Well-traveled young professionals, some returnees to India after years abroad, grateful for the conveniences. Some of them are also the first in their families to live so comfortably.
Mr. Chand attended an elite but government-financed school. His father was in the military. Mrs. Chand’s father was a civil servant; her mother, a teacher. Some of their expenses, Mr. Chand said, their elders consider lavish.
Gurgaon, a largely privately developed city and a metonym for Indian ambition, has seen a building frenzy to satisfy people like the Chands. The city’s population has nearly doubled in the last six years, to 1.5 million. The skyline is dotted with scaffolds. Glass towers house companies like American Express and Accenture. Not far from Hamilton Court, Burberry and BMW have set up shop.
State services, meanwhile, have barely kept pace. The city has neither enough water nor electricity for the population. There is no sewage treatment plant yet; construction is scheduled to begin this year.
India has long lived with such inequities, and though a Maoist rebellion is building in the countryside, the nation has for the most part skirted social upheaval through a critical safety valve: giving the poor their chance to vent at the ballot box. Indeed, four years ago, voters threw out the incumbent government, with its “India Shining” slogan, because it was perceived to have neglected the poor.
It is little wonder then that the current administration has seized on “inclusive growth” as its mantra, and as elections approach in less than a year, it is spending heavily on education, widely acknowledged as a key barrier to upward mobility for the poor.
That the bottom of the pyramid votes became obvious to the Chands when they last went to the polls. “I didn’t see too many people like us,” Mr. Chand recalled.
Hamilton Court, meanwhile, is rarely courted at election time. Inside its gates, the Chands have everything they might need: the coveted Sri Ram School, a private health clinic and clubhouse next door, security guards to keep out unwanted strangers and well-groomed lawns and paths for power walks and cricket games.
“Women and children are not encouraged to go outside,” said Madan Mohan Bhalla, president of the Hamilton Court Resident Welfare Association. “If they want to have a walk, they can walk inside. It’s a different world outside the gate.”
For the Chands, the school was one of the building’s main draws. They bought their apartment just after the birth of their eldest, Aditya, who is now in first grade. Next year, they hope to enroll their youngest, Madhav.
The school recently hosted a classical music concert. The business school guru C.K. Prahalad gave a lecture the following week. Mr. Chand called Hamilton Court a community of “like-minded people.”
Some 600 domestic staff members work at Hamilton Court, an average of 2.26 per apartment. The building employs its own plumbers and electricians. At any one time, 22 security guards and 32 surveillance cameras are at work.
“We can’t rely on the police,” Mr. Bhalla said. Gurgaon has one policeman for every 1,000 residents — lower than the national average — and a surfeit of what Mr. Bhalla calls official apathy. “We have to save ourselves,” he said.
The guards at the gate are instructed not to let nannies take children outside, and men delivering pizza or okra are allowed in only with permission. Once, Mr. Bhalla recalled proudly, a servant caught spitting on the lawn was beaten up by the building staff.
Recently, Mr. Bhalla’s association cut a path from the main gate to the private club next door, so residents no longer have to share the public sidewalk with servants and the occasional cow.
The Gurgaon police chief, Mohinder Lal, said the city’s new residents had unrealistic expectations of the Indian police. If a police officer does not arrive quickly, Mr. Lal rued, the residents complain. “They say, ‘You’re late. Come back tomorrow.’ ”
He, too, said that the police could not cope with the disorder of Gurgaon’s growth. “Development comes, mess comes, then police come and infrastructure,” he said.
Gurgaon’s security guards, most of whom live in Mrs. Das’s slum, likewise have little love for law enforcement. They accuse the police of raiding their shanty, hauling men to the local stations and forcing them to clean and cook before releasing them back to their hovels, often without a single charge. The police say migrant workers are a source of crime.
One afternoon, Mrs. Das returned from her duties at Hamilton Court, cleaned up the lunch plates that her sons had left on the floor and took her plastic water jugs to stand in line under the acacia tree, only to discover that there was a power failure, which meant the water pump could not be turned on. Next to the water line, workers were ironing a pile of orange janitors’ uniforms from a neighborhood mall; the laundry service is one of Chakkarpur’s many thriving private enterprises.
Mrs. Das already had two of her sons in a charity-run school nearby, but much to her shame, she missed the registration deadline for her youngest, now 6, who will now be a year behind his peers.
Her biggest regret is being unable to check her sons’ homework. Mrs. Das has worked in other people’s homes since she was 7. She cannot read. “If they are educated,” she said of her boys, “at least they can do something when they grow up.”
Next door to Mrs. Das’s brick-and-tin room, a 2-year-old lay on a cot outside, flies dancing on his face. His mother, Sunita, 18, said the child had not been immunized because she had no idea where to take him, and no public health workers had come, as they are supposed to. The baby is weak, Sunita reckoned, because she cannot produce breast milk.
During repeated visits in recent months, a government-financed childhood nutrition center was closed. The nearest government hospital was empty.
Mrs. Chand, a doctor who decided to stay home to raise her children, trained in a government hospital. Her other maid told her recently that her own daughter had given birth at home, down there in the slum.
Sometimes, Mrs. Chand said, she thinks of opening a clinic there. But she also said she understood that there was little that she, or anyone, could do. “Two worlds,” she observed, “just across the street.”
India is undoubtedly beginning to prosper. Imagine a country with 3 times the population of the USA but only one third the land mass. Yet a country that is driven not just by exports (like China primarily seems to be) but by its own energy and drive. It is really, really hard to visit India and not come away a different person than when you went there. It WILL change you.
Monday, June 9, 2008
iPhone 2.0
From www.nytimes.com
June 10, 2008
Apple Unveils a Faster, Cheaper iPhone
By JOHN MARKOFF
SAN FRANCISCO — Steven P. Jobs, Apple’s chief executive, announced a new version of the company’s popular iPhone on Monday with a raft of new programs, more powerful wireless Internet connections and a sharply reduced price.
The phone, available in the United States through AT&T and Apple’s own stores, will sell for $200 for 8-gigabyte model and $300 for a 16-gigabyte model. It will go on sale July 11 at a uniform price around the world.
As widely anticipated, the phone will run on so-called 3G wireless networks, allowing much faster Internet connections than the original iPhone introduced last year — speeds that Mr. Jobs, at an Apple conference here Monday, called “amazingly zippy.”
The phone, sleeker than the original, will also have built-in Global Positioning System capability to allow location-based services. It will also have a longer battery life and a 3.5-inch display.
Mr. Jobs also directly challenged Microsoft with a mobile Web service call Me.com intended to permit a user to integrate phone, calendar and contact information on multiple devices. The service, which will cost $99 a year and comes with 20 gigabytes of data storage, is similar to a service offered by Microsoft, but it comes with Apple’s consumer flair for Web design and seamless integration.
The announcements came on the opening day of Apple’s Worldwide Developers Conference, at which the company also introduced a raft of new applications for the phone, many free.
Wall Street seemed less than overwhelmed by the announcement, however. During the Apple presentation, the company’s shares were off nearly $10 at one point before rebounding. At 2:45 p.m., shortly after the session ended, the stock was at $182.44, down $3.20, or 1.7 percent.
Apple entered the smartphone market last June and has made the iPhone second only to Research in Motion’s BlackBerry phones in the category. Apple, based in Cupertino, Calif., had shipped about 5.5 million phones by the end of March, the most recent figures it has released. The iPhone has settled down to a less-than-spectacular sales pace: roughly 600,000 units a month, according to the company.
Analysts reported shortages in May as the company appeared to work down inventories for the introduction of a new phone.
Although AT&T stores still have phones in stock, according to a company spokesman, the supply has largely dried up in Apple’s retail outlets, and the phones are no longer available through the company’s online store.
Mr. Jobs has stated that his goal is to sell 10 million iPhones in 2008. Apple has been signing a series of deals with cellphone network providers around the world. It recently said it would offer the iPhone in Japan, Spain, Sweden, Norway and Denmark.
The only major countries without an iPhone distribution agreement are Russia and China.
Both Mr. Jobs and Randall L. Stephenson, the chief executive of Apple’s partner AT&T, have promised a new iPhone model this year that would run on a high-speed wireless data network. AT&T is building such a network, which uses technology known as 3G and is intended to support a range of new applications, including mobile digital video.
Damon Darlin contributed reporting.
June 10, 2008
Apple Unveils a Faster, Cheaper iPhone
By JOHN MARKOFF
SAN FRANCISCO — Steven P. Jobs, Apple’s chief executive, announced a new version of the company’s popular iPhone on Monday with a raft of new programs, more powerful wireless Internet connections and a sharply reduced price.
The phone, available in the United States through AT&T and Apple’s own stores, will sell for $200 for 8-gigabyte model and $300 for a 16-gigabyte model. It will go on sale July 11 at a uniform price around the world.
As widely anticipated, the phone will run on so-called 3G wireless networks, allowing much faster Internet connections than the original iPhone introduced last year — speeds that Mr. Jobs, at an Apple conference here Monday, called “amazingly zippy.”
The phone, sleeker than the original, will also have built-in Global Positioning System capability to allow location-based services. It will also have a longer battery life and a 3.5-inch display.
Mr. Jobs also directly challenged Microsoft with a mobile Web service call Me.com intended to permit a user to integrate phone, calendar and contact information on multiple devices. The service, which will cost $99 a year and comes with 20 gigabytes of data storage, is similar to a service offered by Microsoft, but it comes with Apple’s consumer flair for Web design and seamless integration.
The announcements came on the opening day of Apple’s Worldwide Developers Conference, at which the company also introduced a raft of new applications for the phone, many free.
Wall Street seemed less than overwhelmed by the announcement, however. During the Apple presentation, the company’s shares were off nearly $10 at one point before rebounding. At 2:45 p.m., shortly after the session ended, the stock was at $182.44, down $3.20, or 1.7 percent.
Apple entered the smartphone market last June and has made the iPhone second only to Research in Motion’s BlackBerry phones in the category. Apple, based in Cupertino, Calif., had shipped about 5.5 million phones by the end of March, the most recent figures it has released. The iPhone has settled down to a less-than-spectacular sales pace: roughly 600,000 units a month, according to the company.
Analysts reported shortages in May as the company appeared to work down inventories for the introduction of a new phone.
Although AT&T stores still have phones in stock, according to a company spokesman, the supply has largely dried up in Apple’s retail outlets, and the phones are no longer available through the company’s online store.
Mr. Jobs has stated that his goal is to sell 10 million iPhones in 2008. Apple has been signing a series of deals with cellphone network providers around the world. It recently said it would offer the iPhone in Japan, Spain, Sweden, Norway and Denmark.
The only major countries without an iPhone distribution agreement are Russia and China.
Both Mr. Jobs and Randall L. Stephenson, the chief executive of Apple’s partner AT&T, have promised a new iPhone model this year that would run on a high-speed wireless data network. AT&T is building such a network, which uses technology known as 3G and is intended to support a range of new applications, including mobile digital video.
Damon Darlin contributed reporting.
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
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