Hospitals & Asylums    





Economic Report regarding the Shanghai of the DJIA HA-28-2-07




Anthony J. Sanders


1. HA is taking interest in Tuesday the 27th’s 416 point Shanghai of the Dow Jones Industrial Average (DJIA) out of a sense of responsibility for the depression that may have been induced by the fascist party spying on the completion of the third draft of the SMILE.  In review of the literature it would seem that the US war time budget deficit is leading beyond interdependence with China to a dependency upon Chinese foreign investment that panicked in regards to rumors of a new 20% capital gains tax that proved to be false.  Alternatively the new Gross Domestic Product (GDP) figures for 4th quarter 2006 of the Department of Commerce and Bureau of Economic Analysis (BEA) that agree on a 2.2% growth rate, could have led to a conservative federal recalculation as to how much money the federal government has the authority to print without devaluating, precipitating a withdrawal of illicitly invested government funds from the stock exchange.  The GDP figures come as a great relief to market watchers concerned with federal pillaging as the result of unrealistically optimistic economic projections by the Congressional Budget Office and the President that disregard the three quarter slump in economic growth of 2006, and were already so high that the entire GNI of the Americas could fit in this projection.  The new projections seem to have laid claim to the United Kingdom, as well.  The new projections still give rise to a fear of pillaging under GNI calculations from the $13,449.9 billion current dollar GDP however it can now be argued that the real GDP chained to 2000 dollars, is $11,506.5 billion.


2. The triggerman for the sell off was none other than former Federal Reserve Chairman Alan Greenspan, who warned in comments to a conference in Hong Kong on Monday, that a recession in the U.S. was "possible" later this year.  The stresses of the budget deficit and the housing bubble burst are the leading causes for such a prediction to come true.  First, the slump in the housing market seems to be getting worse and a Commerce Department report found new-home sales fell by 16.6 percent in January from the previous month, the largest drop in 13 years.  Second, the federal budget deficit is critical and the President’s proposal is reliant upon fraudulently rosy economic projections.  The deficit in the unified federal budget declined for a second year in fiscal year 2006, falling to $248 billion from $318 billion in fiscal 2005. So far in fiscal 2007, solid growth in receipts, especially in collections of personal and corporate income taxes, has held the deficit somewhat below year-earlier levels. The on-budget deficit, which differs from the unified budget deficit primarily in excluding receipts and payments of the Social Security system, was $434 billion, or 3.3 percent of GDP, in fiscal 2006.  The federal government is obviously creating market stresses as the result of their fuzzy mathematics that they seem to be enforcing to the detriment of the truth and the private economy that is being heavily taxed and defrauded. 


3. According to the liberal economic theory of Adam Smith in the Wealth of Nations of 1776, that our national economy is founded upon, the cause for the federal budget deficit is the war on terrorism whereas expenses to win wars do not benefit the economy.  The SMILE reinforces the Lobbying Activity Disclosure (LAD) that balances the budget and wins the war on terrorism by editing all gross cases of federal brainwashing that the administration is using to rob us in the name of the fobidden use of armed forces.  The federal government would function much more smoothly without the paranoid schizophrenia of a failed judicial system that is subverting the Executive and Congresss to futilely take disproportionate military action against foreign criminals who are probably in our pay or at least brainwahsing, to distract our limited dedication to freedom from our nation’s overflowing prisons.  To make effective use of this essay HA would like to now direct attention to the hypocrisy of the Federal Reserve in regards to the “baby boomers”.  The budgetary debate can be summed up as retiring the baby boomers, both the bomb droppers our Constitution would see impeached and the cohort of people with faith in the $2 trillion OASI savings who are currently at the height of their careers in both income and illiteracy.  Whereas the federal government is in no state to increase taxation the only solution to the federal budget deficit is a steady reduction in military spending to less than $365 billion this FY 2007 and liminting of OASDI spending to little more than cost.  The Federal Reserve is chastised for attacking the support order for the elderly and disabled when all economic and legal theory indicates that the military surplus is the source of all the economy’s woes. 


4. What is needed is for the government to get into the practice of purchasing the research of their citizens on a regular basis to develop intellectual resources with which to increase labor productivity and discover the right thing for non fascists to do.  HA is a prime example.  March is the month scheduled to update the world socio economic atlas with which we could settle our economic dispute that has put the US economy on alert.  However the counsel of the BEA is to discover business leaders in order to secure a grant through them.  It is also high time for a second draft of National Cemeteries.  HA began researching this today and it is interesting, necrophelia seems like a much better prospect for making money in the US than once again taking balancing the global economy.  There is absolutely no promise that saving the world economy is paid, in fact it is highly punished.  HA is therefore asking for the immediate settlement of the federal government as requested in the aforementioned LAD, or the power shall be turned off – National Cemeteries shall take precedence over the this economic battle with the Lord of Lies, the President of the United States.  Was Ohio capital a big seller?  For those dentists scratching below the surface of the SMILE the most likely suspect is the Department of Homeland Security as it needs to be repealed from the jurisdiction of the House Energy and Commerce Subcommittee on Health.  HA has made the same mistake before of accepting the high GDP indicators resulting in pillaging.  HA does not do this anymore.  Because we claim so much more than other countries low is more harmonious.  Our baritone is too scratchy from overdrinking with countries whose GNI we call GDP so we should probably go for the basic premise that our GNI is the GDP and we need a new, lower, GNI, that can be purchased from HA, for less than $2.5 trillion.


A. The Shanghai of the DJIA


1. Wall Street rebounded from a worldwide sell off triggered by the Shanghai Composite Index, today, Wednesday, from the Tuesday session's 9%, 416-point plunge in the Dow industrials.  The plunge triggered losses worldwide, with Wall Street seeing its most dismal trading day since the Sept. 11, 2001, terrorist attacks.  On 14 April 2000 the DJIA was ended down 617 points, a record at the time

.  The Dow Jones industrial average lost 416.02, or 3.3 percent, to 12,216.24.  Key European exchanges also fell about 3 percent on Tuesday. In early afternoon trading, the Dow Jones industrials were up 103.82, or 0.85 percent, at 12,320.06. In midafternoon trading, the Dow Jones industrials were up 60.64, or 0.50 percent, at 12,276.88 after being up more than 100 points earlier in the session.  The Standard & Poor's 500 index was up 8.95, or 0.64 percent, at 1,407.99, and the Nasdaq composite index was up 12.63, or 0.52 percent, at 2,420.99.  A 3.9% recovery in China's Shanghai Composite Index to 2,881.07 , which had fallen nearly 9 percent Tuesday, also helped boost U.S. stocks, although other Asian markets and European exchanges saw declines of more than 1 percent.  The Shanghai Composite Index dropped 8.8 percent to close at 2.771.79, its largest decline since it fell 8.9 percent on Feb. 18, 1997, at the time of the death of Communist Party elder Deng Xiaoping.  


2. There seem to be several causes for this sell.  Some analysts blamed profit taking following recent gains: the market had hit a fresh record high on Monday, with the Shanghai Composite Index closing above 3,000 for the first time.  There were rumours that the Chinese government was going to levy a 20% capital gains tax that they denied, the Shanghai Securities News report cited officials saying that the government had little need to impose such a measure now, given that tax revenues soared by 22 percent last year..  Share prices more than doubled last year, as millions of retail investors began shifting their bank savings into the markets in search of higher returns. There is a persisting expectation that China might impose further austerity measures, such as an interest rate hike, to cool torrid growth. China's economy grew 10.7 percent last year - the fastest rise since 1995 - and a recent central bank report forecast it would expand 9.8 this year.  Stocks have shown unusual volatility this year, with the Shanghai index notching one-day drops of 4.9 percent and 3.7 percent already this year - before recovering to hit new records.  Others pointed to comments by former Federal Reserve Chairman Alan Greenspan, who warned in comments to a conference in Hong Kong that a recession in the U.S. was "possible" later this year.  There is little doubt that the sell off was triggered by Chinese investors.  China still limits foreigners' purchases of the yuan-denminated stocks that make up the biggest share of the markets, though that is gradually changing as regulators allow increasing participation by so-called qualified foreign institutional investors.  Having intellectually pitched in with China, the leading foreign owner of US public debt, the US stock exchanges are particularly vulnerable to fluctuations in the Chinese market.


3. The most realistic reason for the slump seems to have been a technical glitch in the DJIA computer system.  The publisher of the Dow industrials said that a system problem starting at 1:50 p.m. ET on Tuesday amid unusually heavy trading volume caused a 70-minute lag during which the value of the Dow Jones industrial average was lagging behind the declines in the underlying stocks. The subsequent downward spike in the Dow occurred when the problem was corrected as the company switched to its backup system at around 3 p.m. Just before the switch, the Dow was showing about a 160-point drop. But then the blue-chip barometer appeared to tumble some 200 points in the blink of an eye as the newly available data was correctly reflected in the Dow average. That drop then sparked nervousness among traders and the Dow fell another 100 points or so, eventually ending down 416, its seventh biggest point decline.  


4. "It's typical that you get a bounceback the next day," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. "Now we're essentially flat on the year. Can we go up from here or down? That sorting-out process will continue now."  "I thought on Monday and I think even more today that the stock market offers good value and that it will move higher for the year," said Ed Keon, chief investment strategist at Prudential Equity Group.  Bonds fell as stocks tried to recoup some losses. The yield on the benchmark 10-year Treasury note rose to 4.56 percent from its low for the year of 4.47 percent late Tuesday.  The dollar was mixed against other major currencies, while gold prices fell.  Light, sweet crude rose 44 cents at $61.90 on the New York Mercantile Exchange as investors brushed off concerns about demand.  Valuations were lowered by Tuesday's drop, which erased $632 billion in shareholder equity, according to Standard & Poor's.  Overseas, Japan's Nikkei stock average fell 2.85 percent, while Hong Kong's Heng Seng index ended down 2.46 percent. The benchmark Shanghai Composite Index rose 3.94 percent. Britain's FTSE 100 closed down 1.82 percent, Germany's DAX index finished down 1.53 percent, and France's CAC-40 was down 1.29 percent.  Most sectors saw investors buying back in on Wednesday, but homebuilders saw additional selling, due in large part to the Commerce Department report that new-home sales plunged in January by the largest amount in 13 years.  Broader stock indicators were also higher. The Standard & Poor's 500 index was up 13.22, or 0.94 percent, at 1,412.26, and the Nasdaq composite index was up 17.74, or 0.74 percent, at 2,425.60. 


5. In corporate news, Merck & Co. regained some ground after the drugmaker issued a first-quarter profit forecast that surpassed estimates of Wall Street analysts and raised its profit target for the year. The company rose $1.21, or 2.8 percent, to $44.39.  Most U.S.-listed Chinese companies recovered at least some of their huge losses from Tuesday. Internet company Inc. rose $1.19 to $105.95, while Shanda Interactive Entertainment Ltd., which develops online games, rose 99 cents, or 4.4 percent, to $23.61. China Mobile Ltd. advanced $2.24, or 5.1 percent, to $46.40.  Sprint Nextel Corp. rose $1.22, or 6.6 percent, to $19.67 after the nation's third largest wireless carrier said fourth-quarter profit rose 33 percent on stronger revenue.  In other economic news, the National Association of Purchasing Management-Chicago index of business conditions in the Midwest showed a weaker-than-expected reading. The February figure fell to 47.9 from 48.8 in January. The report is often viewed as a bellwether for the Institute for Supply Management's index of manufacturing activity for February, which is due Thursday. Also, a Commerce Department report found new-home sales fell by 16.6 percent in January from the previous month, the largest drop in 13 years.

B. Mitigating the Gross Domestic Pillaging


1. The market took some solace from a Commerce Department report that the U.S. economy grew at an annual rate of 2.2 percent in the fourth quarter. The gross domestic product reading was slightly below expectations, but didn't come in as low as some investors feared. The reading, 2.2%, was more than a percentage point below the initial estimate of 3.5% made a month ago. Bernanke's comments and the GDP report helped depressed stock prices look a little more attractive.  Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.2 percent in the fourth quarter of 2006, according to preliminary estimates. In the advance estimates, the increase in real GDP was 3.5 percent.  The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, state and local government spending, and federal government spending that were partly offset by negative contributions from private inventory investment and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, decreased. BEA Gross Domestic Product: Fourth Quarter 2006 (Preliminary) BEA-07-06. 28 February 2007.

a. Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 3.9 percent, or $127.3 billion, 
in the fourth quarter to a level of $13,449.9 billion.  In the third quarter, current-dollar GDP increased 3.8 percent, or $125.3 billion. 
b. Real GDP, using chained 200 dollars, increased 3.3 percent in 2006 (that is, from the 2005 annual level to the 2006 annual level), 
compared with an increase of 3.2 percent in 2005.  Real GDP increased $63 billion to $11,506.5 billion in fourth quarter 2006.  
There is still a cover up in regards to these figures.  In the beginning of the month a nice three tier GDP brought the low figure within 
reason however this information was hacked off to cover up the high GNI when it was released a few days later.


2. The long-term budget outlook and will draw on the most recent set of long-term budget projections from the Congressional Budget Office (CBO), issued in December 2005. The CBO constructed its projections based on the assumptions that real gross domestic product (GDP) would rise about 3-1/2 percent per year in 2005 and 2006 and at a rate of 2.9 per cent per annum from 2007 through 2015. The growth projections through 2015 were in turn based on the assumptions that trend labor force growth will average 0.8 percent per year and that trend labor productivity growth in the non-farm business sector will average 2.4 percent per year. The CBO has since updated those assumptions for the purposes of other analyses, but the revisions were not large enough to materially alter the broad contours of the fiscal outlook.  As for the longer-term outlook, the CBO assumed that the growth rate of real GDP will average about 2 percent per year starting around 2020.  An economy in which the government budget is balanced but in which government spending equals 20 percent of GDP is very different from one in which the government's budget is balanced but its spending is 40 percent of GDP, as the latter economy has both higher tax rates and a greater role for the government.  Excluding the operations of both Social Security and Medicare Part A, the budget deficit in fiscal year 2006 was $459 billion, or 3.5 percent of GDP. Like Social Security, Medicare Part A pays benefits out of, and receives a dedicated stream of revenues into, a trust fund.


3. The deficit in the unified federal budget declined for a second year in fiscal year 2006, falling to $248 billion from $318 billion in fiscal 2005. So far in fiscal 2007, solid growth in receipts, especially in collections of personal and corporate income taxes, has held the deficit somewhat below year-earlier levels. Of course, a good deal of uncertainty still surrounds the budget outcome for the year as a whole. Federal government outlays in fiscal 2006 were 20.3 percent of nominal gross domestic product (GDP), receipts were 18.4 percent of GDP, and the deficit (equal to the difference of the two) was 1.9 percent of GDP. These percentages are close to their averages since 1960. The on-budget deficit, which differs from the unified budget deficit primarily in excluding receipts and payments of the Social Security system, was $434 billion, or 3.3 percent of GDP, in fiscal 2006. As of the end of fiscal 2006, federal government debt held by the public, which includes holdings by the Federal Reserve but excludes those by the Social Security and other trust funds, amounted to 37 percent of one year's GDP.  In fiscal 2006, federal spending for Social Security, Medicare, and Medicaid together totaled about 40 percent of federal expenditures, or 8-1/2 percent of GDP.  In the medium-term projections released by the CBO in January, these outlays increase to 10-3/4 percent of GDP by 2017, an increase of about 2 percentage points of GDP in little more than a decade, and they will likely continue to rise sharply relative to GDP in the years after that. As I will discuss, these rising entitlement obligations will put enormous pressure on the federal budget in coming years.


4. The CBO has developed projections for a variety of alternative scenarios, based on different assumptions about the evolution of spending and taxes. The scenarios produce a wide range of possible budget outcomes, reflecting the substantial uncertainty that attends long-range budget projections.  However, the outcomes that appear most likely, in the absence of policy changes, involve rising budget deficits and increases in the amount of federal debt outstanding to unprecedented levels. For example, one plausible scenario is based on the assumptions that (1) federal retirement and health spending will follow the CBO's intermediate projection; (2) defense spending will drift down over time as a percentage of GDP; (3) other non-interest spending will grow roughly in line with GDP; and (4) federal revenues will remain close to their historical share of GDP--that is, about where they are today.  Under these assumptions, the CBO calculates that, by 2030, the federal budget deficit will approach 9 percent of GDP--more than four times greater as a share of GDP than the deficit in fiscal year 2006.


5. According to the CBO projection that I have been discussing, interest payments on the government's debt will reach 4-1/2 percent of GDP in 2030, nearly three times their current size relative to national output. Under this scenario, the ratio of federal debt held by the public to GDP would climb from 37 percent currently to roughly 100 percent in 2030 and would continue to grow exponentially after that. The only time in U.S. history that the debt-to-GDP ratio has been in the neighborhood of 100 percent was during World War II. People at that time understood the situation to be temporary and expected deficits and the debt-to-GDP ratio to fall rapidly after the war, as in fact they did. In contrast, under the scenario I have been discussing, the debt-to-GDP ratio would rise far into the future at an accelerating rate.  Minor details aside, the federal debt held by the public increases each year by the amount of that year's unified deficit.  If government debt and deficits were actually to grow at the pace envisioned by the CBO's scenario, the effects on the U.S. economy would be severe. High rates of government borrowing would drain funds away from private capital formation and thus slow the growth of real incomes and living standards over time.


C. Retiring the Bomb Droppers not the Baby Boomers


1. The large projected increases in future entitlement spending have two principal sources. First, like many other industrial countries, the United States has entered what is likely to be a long period of demographic transition, the result both of the reduction in fertility that followed the post-World War II baby boom and of ongoing increases in life expectancy. Longer life expectancies are certainly to be welcomed. But they are likely to lead to longer periods of retirement in the future, even as the growth rate of the workforce declines. As a consequence of the demographic trends, the number of people of retirement age will grow relative both to the population as a whole and to the number of potential workers. Currently, people 65 years and older make up about 12 percent of the U.S. population, and there are about five people between the ages of 20 and 64 for each person 65 and older. According to the intermediate projections of the Social Security Trustees, in 2030 Americans 65 and older will constitute about 19 percent of the U.S. population, and the ratio of those between the ages of 20 and 64 to those 65 and older will have fallen to about 3.  The second cause of rising entitlement spending is the expected continued increase in medical costs per beneficiary. Projections of future medical costs are fraught with uncertainty, but history suggests that--without significant changes in policy--these costs are likely to continue to rise more quickly than incomes, at least for the foreseeable future. Together with the aging of the population, ongoing increases in medical costs will lead to a rapid expansion of Medicare and Medicaid expenditures.


2. The United States is at the front edge of a massive and important shift in the demographic composition of the population.  The main demographic story is in exhibit 1, which shows that around 2003, the population of those aged 62 and older began growing as a share of the population aged 16 and older. Age 62 is important as the time at which individuals become eligible for Social Security retirement benefits under current law. According to projections from the Bureau of the Census, shown in the shaded area of exhibit 1, the upward trend in aging will steepen noticeably in the next few years. The share of the adult population that is aged 62 and older, now at about 19 percent, is projected to rise to more than 22 percent by 2015.  A subset of the adult population is the labor force--that is, those who are either actively looking for work or have a job.


3. Because the participation of men and women in the labor force declines sharply after age 55, as shown in exhibit 2, the rising share of older individuals has important implications for the nation’s labor supply. In particular, the aging of the population will put significant downward pressure on the total labor force participation rate in coming years, provided the basic pattern of participation over the lifecycle is maintained.  Changes in labor force behavior within age groups also have the potential to add to the downward trend in labor force participation.


4. Exhibit 3 shows that by the time men born in 1935 reached age 30, about 97 percent of them were in the labor force. In contrast, only about 92 percent of 30-year-old men born in 1976 were in the labor force. Although not shown in the exhibit, a roughly similar pattern exists for men older than 30, and, all else equal, the gradual reduction in labor force participation of men has put downward pressure on the overall participation rate.  Exhibit 3 also shows that, until recently, the decline in the labor force participation rate of successive generations of men had been more than offset by a steady increase in the participation rates for each new generation of women. Women born in the 1920s and 1930s had low participation rates at age 30, but three-fourths of 30-year-olds born in 1960 were in the labor force. However, participation rates for more recent generations of 30-year-old women have not risen any further. 


5. Economists at the Federal Reserve have developed a model that combines information on the decline in labor force participation at older ages, shown in exhibit 2, with information on the changes in labor force participation across generations, shown in exhibit 3. Exhibit 4 shows the actual participation rate, the model’s estimate of the underlying trend in the total participation rate between 1995 and 2006, and--under a specific set of assumptions--a projection of the trend out to 2015.  The estimated labor participation trend has been declining since about 2002 and is projected by the model to fall substantially further, from about 65-1/2 percent today to about 62-1/2 percent by 2015.  The forecast proceeds under the assumption that (1) participation rates among the elderly will rise gradually, (2) the average participation rate for men aged 25-61 will continue to edge down, and (3) participation rates for women in the same age group will not increase further. Of course, these assumptions may not be borne out.


6. As outlined in exhibit 5, several factors may work toward raising the labor force participation rate.  In particular, increasing longevity and improvements in health may induce many more individuals to remain in the workforce well past age 65. For their part, employers, upon facing slower growth in the labor force, may look for ways to attract workers into the labor market. Paying higher wages is one obvious approach. But they could also create flexible work schedules, increase the availability of part-time work, encourage telecommuting, increase training for older workers, and provide additional health care coverage as a way to retain and attract older workers. Such changes might also boost the labor force participation of other age groups.  Government policies can also influence the attractiveness of remaining in the workforce.  Most directly, if future immigration rates exceed those assumed by the Census Bureau, the population, and hence the labor force, would grow faster than the Census Bureau currently projects. In addition, because new immigrants tend to be younger and are more likely to participate in the labor force than are native-born individuals, higher immigration would also lead to a higher overall participation rate.


7. As shown in exhibit 6, the labor force participation rate of individuals aged 62 and older had been trending down since the late 1970s but has been rising markedly since 1995.


8. A projection from the Congressional Budget Office is shown in exhibit 7. The CBO foresees the pace of trend labor force growth slowing to 1/2 percent per year by 2015, a smaller deceleration than projected by the model developed by Board staff but still a significant slowing.


9. Increasing labor force participation would help reduce these effects, but is unlikely to completely offset them. Thus, without an offsetting increase in productivity growth, the aging of the population likely means that output per person will have to be lower than it would have been in the absence of population aging. Accordingly, a critical question is how that burden will be distributed across generations. If we do nothing, it will, by default, fall entirely on future generations.


D. Defensive Financial Risk Management Measures


1. Just a few years ago, the terrible events of 9/11 alerted us to the importance of operational resiliency in a dangerous world. But other forces have also led central banks and other financial supervisors around the world to increase their emphasis on financial stability. Perhaps most important, the financial system, once essentially bank-centered, has become more market-centered. Of course, banks continue to be core participants in the financial system and to provide an indispensable window on market activities. But the development of a relatively market-oriented system has been accompanied by a large number of new participants, many with global reach, and a much larger array of financial instruments.  In today's global economy, very settled financial market conditions--narrow risk spreads and low expected market volatility--coexist with unprecedented current account imbalances among nations and interest rates that are low by historical standards. U.S. financial markets have proved to be notably robust during some significant recent shocks, such as the sharp decline in equity prices beginning in 2000 and the failure of some large firms, including Enron and Amaranth.


2. New computing and telecommunications technologies, along with the removal of legal and regulatory barriers to entry have heightened competition among a wider variety of institutions and made the allocation of funds from savers to investors more efficient.  In every step we take to deter or manage financial crises, it is important that we recognize that we impose costs, and that our efforts can be most effective if we both enhance and are supported by market discipline. Institutions and investors must be allowed to take risks and must be prepared to accept the consequences of their actions. For its part, the government should limit its intervention to those circumstances that could lead to placing the system in serious danger and could spill over to the economy. Otherwise, even the most well-intentioned government intervention can actually weaken the system by undermining the incentives for market participants to limit the risks they undertake.


3. The first line of defense against financial crises is to try to prevent them. A number of our current efforts to encourage sound risk-taking practices and to enhance market discipline are a continuation of the response to the banking and thrift institution crises of the 1980s and early 1990s. In 1989, more than 500 banks and thrifts failed, and it was not until 1993 that the annual number of bank failures dropped well below 100. One of the most important reforms produced in reaction to this crisis was a tightened focus on bank capital. This tightening began with Basel I, the international capital accord of 1988, which emphasized the importance of connecting bank capital and bank supervision to bank risk. Supervisory efforts today to develop a more advanced set of international capital standards, in Basel II, are in large part aimed at strongly reinforcing that connection. Moral hazard refers to the heightened incentive to take risk that can be created by an insurance system. Private insurance companies attempt to control moral hazard by, for example, charging risk-based premiums and imposing deductibles. In the public sector, things are often more complicated. However, the Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, took major steps toward reducing moral hazard in the banking system and limiting taxpayer losses by reinforcing the importance of strong capital.


4. Clearly, when it comes to a financial crisis, as with so many other potential risks, an ounce of prevention is worth many pounds of cure. But experience tells us that, despite our best efforts at deterrence, true financial crises will occur from time to time. Prudently managing these tail events is no easy task. A large part of the difficulty arises from the fact that some policy responses may have important costs that need to be balanced against their possible benefits in reducing or ameliorating the adverse effects of a crisis. In particular, intervening in the market process can increase moral hazard by weakening market discipline if private parties come to believe that policy actions will relieve them of some of the costs of their own poor decisions or even just bad luck.  When managing a crisis, prudent decisionmaking depends on the best possible information acquired in the shortest possible period of time.


5. Banking is a business in which banks take and manage risks. Bankers implicitly accept risk when providing financial services to customers and also take explicit risk positions that offer profitable returns relative to their risk appetites. One of the most important jobs of bank supervisors is to ensure that banks maintain an adequate capital cushion against losses, especially during times of financial instability or stress. Minimum regulatory capital requirements are an integral part of ensuring that banks have an adequate cushion. When developing minimum capital requirements, supervisors should continue to promote approaches that both minimize the negative consequences of risk taking by financial institutions and encourage improved risk-management practices, particularly at those institutions that could affect global financial stability.  The Federal Reserve's main reason for pursuing Basel II is the growing inadequacy of current Basel I regulatory capital rules for the large, internationally active banks that are offering ever more complex and sophisticated products and services.  Basel II would promote risk-measurement and risk-management enhancements and improve market discipline, while giving supervisors a more conceptually consistent and more transparent framework for evaluating systemic risk, particularly through credit cycles.


6. For similar reasons, U.S. supervisors support the 2005 Basel/International Organization of Securities Commissions (IOSCO) revisions to the 1996 Market Risk Amendment (MRA). Since adoption of the MRA, banks' trading activities have become more sophisticated and have given rise to a wider range of risks that are not easily captured in the existing value-at-risk (VaR) models used in many banks. For example, banks are now including more products related to credit risk, such as credit-default swaps and tranches of collateralized debt obligations, in their trading books. These products can create default risks that are not captured well by the methodologies required under the current MRA rule--which specifies a ten-day holding period and a 99 percent confidence interval--thereby creating potential arbitrage opportunities between the banking book and the trading book. There have been two important recent events related to Basel II implementation in the United States, both of which occurred on February 15. The first was the release of a report by the Government Accountability Office (GAO) on U.S. implementation of Basel II. The second was issuance of proposed Basel II supervisory guidance by the U.S. banking agencies.  On balance, the Federal Reserve believes that an appropriately conservative approach to capital adequacy serves the United States' interest in maintaining the safety, soundness, and resiliency of our banking system. However, we also recognize the impact that differences among countries can have and that it is worthwhile to minimize them whenever possible.


E. Intellectual Equality


1. A bedrock American principle is the idea that all individuals should have the opportunity to succeed on the basis of their own effort, skill, and ingenuity. Equality of economic opportunity appeals to our sense of fairness, certainly, but it also strengthens our economy. If each person is free to develop and apply his or her talents to the greatest extent possible, then both the individual and the economy benefit.  Although we Americans strive to provide equality of economic opportunity, we do not guarantee equality of economic outcomes.  We do believe that no one should be allowed to slip too far down the economic ladder, especially for reasons beyond his or her control. Like equality of opportunity, this general principle is grounded in economic practicality as well as our sense of fairness. To a significant extent, American economic success has resulted from the flexibility and adaptability of our dynamic market economy.  Indeed, the ability of our labor and capital markets to accommodate and adapt to economic change has helped make possible the strong productivity performance of the U.S. economy over the post-World War II era, including the past decade.


2. Thus, these three principles seem to be broadly accepted in our society: that economic opportunity should be as widely distributed and as equal as possible; that economic outcomes need not be equal but should be linked to the contributions each person makes to the economy; and that people should receive some insurance against the most adverse economic outcomes, especially those arising from events largely outside the person's control. Even when we accept these principles, however, important questions remain. For example, what is meant in practice by equality of economic opportunity? Some might limit the concept to the absence of overt discrimination against particular individuals or groups, while others might extend the term to encompass universal access to adequate housing, education, and health care. Another difficult question is how to balance the need for maintaining strong market-based incentives, which support economic growth and efficiency but may be associated with greater inequality of results, against the goal of insuring individuals against the most adverse outcomes, which may reduce inequality but also tends to diminish the strength of incentives. No objective means of answering these questions exists. One can only try to understand the various issues and tradeoffs involved and then come to a normative judgment based on that understanding.


3. On average, and by almost any measure, Americans have gained ground economically over time. For example, since 1947, the real (that is, inflation adjusted) hourly compensation of workers in the U.S. nonfarm business sector (a measure that includes both earnings and benefits) has increased more than 200 percent. In other words, the real reward for an hour of work has more than tripled over the past sixty years. Over the same period, real disposable income per capita has increased almost 270 percent, real consumption per capita has increased almost 280 percent, and real wealth per capita has risen 310 percent. We have also seen significant gains in other indicators of living standards, such as health and educational attainment. Thus, in absolute terms, the well-being of most Americans compares quite favorably with that of earlier generations and, indeed, with the well-being of most people in the world today.  Although average economic well-being has increased considerably over time, the degree of inequality in economic outcomes has increased as well. Importantly, rising inequality is not a recent development but has been evident for at least three decades, if not longer.  The data on the real weekly earnings of full-time wage and salary workers illustrate this pattern. In real terms, the earnings at the 50th percentile of the distribution (which I will refer to as the median wage) rose about 11-1/2 percent between 1979 and 2006. Over the same period, the wage at the 10th percentile, near the bottom of the wage distribution, rose just 4 percent, while the wage at the 90th percentile, close to the top of the distribution, rose 34 percent.  In 1979, a full-time worker at the 90th percentile of the wage distribution earned about 3.7 times as much as a full-time worker at the 10th percentile. Reflecting the relatively faster growth of wages of higher-paid workers, that ratio is 4.7 today. The gap between the 90th and 10th percentiles of the wage distribution rose particularly rapidly through most of the 1980s; since then, it has continued to trend up, albeit at a slower pace and with occasional reversals.


4. The long-term trend toward greater inequality seen in real wages is also evident in broader measures of financial well-being, such as real household income. For example, the share of income received by households in the top fifth of the income distribution, after taxes have been paid and government transfers have been received, rose from 42 percent in 1979 to 50 percent in 2004, while the share of income received by those in the bottom fifth of the distribution declined from 7 percent to 5 percent. The share of after-tax income garnered by the households in the top 1 percent of the income distribution increased from 8 percent in 1979 to 14 percent in 2004. Even within the top 1 percent, the distribution of income has widened during recent decades.  Understanding the sources of the long-term tendency toward greater inequality remains a major challenge for economists and policymakers. A key observation is that, over the past few decades, the real wages of workers with more years of formal education have increased more quickly than those of workers with fewer years of formal education. For example, in 1979, median weekly earnings for workers with a bachelor's (or higher) degree were 38 percent more than those of high-school graduates with no college experience; last year, that differential was 75 percent. Similarly, over the same period, the gap in median earnings between those completing high school and those with less than a high-school education increased from 19 percent to 42 percent. To a significant extent, to explain increasing inequality we must explain why the economic return to education and to the development of skills more generally has continued to rise.


5. A typical finding is that an increase of 10 percent in the share of immigrants in a city reduces the wages of lower-skilled natives 1 percent or less. This somewhat muted effect of low-skilled immigration on local markets may reflect the adaptability of U.S. labor and product markets, which has allowed native workers and firms to adjust with relatively little displacement (Card, 2005; Card and Lewis, 2005; and Lewis, 2004, 2005). However, studies that examine national data tend to find somewhat larger effects, with a 10 percent increase in the share of immigrants in the total population reducing the wages of low-skilled natives 3 percent to 5 percent.  Declines in the real value of the minimum wage, brought about by the combination of inflation and the fact that minimum wages are usually set in dollar terms, also affect the labor market. Some research suggests that this factor contributed to the relative decline in the wages of the least-skilled workers during the 1980s. Economists have also pointed out that, although higher minimum wages increase the wages of those who remain employed, they may also lead to reduced employment of low-skilled workers. Thus, the net influence of the minimum wage on earnings and income inequality, as opposed to the inequality of observed hourly wages, is ambiguous. In any case, the real value of the minimum wage, adjusted to include state minimum wages that are above the federal level, has been fairly flat in recent years, and so has the proportion of the labor force that is unionized. This suggests that these institutional factors have been less important sources of increasing wage inequality recently than they were in the 1970s and 1980s.


6. As we know from the Federal Reserve's triennial Survey of Consumer Finances, wealth is distributed far more unequally than income, with about 33 percent of aggregate household net worth being held by the top 1 percent of families and with just 2-1/4 percent of wealth being held by the bottom half. Recently, the Red Sox paid $51 million simply for the right to negotiate with the Japanese pitcher Daisuke Matsuzaka; they later signed Matsuzaka for an additional $52 million over six years. Illustrating some of the effects of globalization on baseball economics, the city of Boston anticipates that increased interest by Japanese tourists will bring in some $75 million, aside from what the Red Sox will earn from signing Matsuzaka.  The Director General of WIPO, Dr. Kamil Idris “I am very pleased at the outcome of the discussions on a development agenda for WIPO and I hope this spirit of compromise and mutual understanding will persist in forthcoming discussions.  I congratulate negotiators on showing the necessary political will to move these discussions forward in a meaningful way,” said Dr. Idris.  “I am certain that it is the collective will of members of this Organization and the secretariat to ensure that international efforts to build the intellectual property system are balanced and responsive to the needs and interests of all countries – developed and developing.  Intellectual property protection is not an end in itself, but should serve a wider social and economic interest. The rights of inventors and creators have to be balanced by wider considerations of the good of society,” the Director General added.


7. What is obviously happening is that with the increase in prison slavery and war, intellectuals are getting paid less, or none at all.  The Director General of WIPO, Dr. Kamil Idris said, “I am very pleased at the outcome of the discussions on a development agenda for WIPO and I hope this spirit of compromise and mutual understanding will persist in forthcoming discussions.  I congratulate negotiators on showing the necessary political will to move these discussions forward in a meaningful way.  I am certain that it is the collective will of members of this Organization and the secretariat to ensure that international efforts to build the intellectual property system are balanced and responsive to the needs and interests of all countries – developed and developing.  Intellectual property protection is not an end in itself, but should serve a wider social and economic interest. The rights of inventors and creators (not to mention writers) have to be balanced by wider considerations of the good of society.”  The issue for the conclusion of this article is that HA has not been paid for the $33 billion settlement of the Madrid Conference Iraq Reconstruction Fund, that HA drafted and demanded $1 million but took out the reminder, so as not to obstruct settlement.  Furthermore, the budget deficit of FY 2006 of only $250 billion seems to be attributed to the last minute negotiations of HA in the Balanced Account Deficit (BAD) that led to the return of funds from the war reserve.  The Federal Reserve must continue to liberate funds from the defense in which case the plaintiffs, SSA, will go to a cost based approach.  The BRAC Commission can help to determine what is real, what is illusion and what can be regulated and will be put on trial by HA on Memorial Day for that purpose. 


8. The issue at hand is are the US economists wise enough to purchase the balanced budget in the LAD so that the status quo of the nation would be that the government has bought a balanced budget for a reasonable fee and are not merely hot air purchased with loans?  $100 shares can purchase credits to the copyright of the second draft of the Balanced Official Development Atlas of the States of the United Nations (SUN) that will reconcile these statistical disputes and keep the US humble to eliminate stresses resulting from excessively valuing of worthless jails and arms that are cutting into the joy of working in our great nation that needs to subsidize politically acceptable research with cash.  Particularly of such dedicated subscribers.



1. BEA. Gross Domestic Product: Fourth Quarter 2006 (Preliminary) BEA-07-06. 28 February 2007


2. Blogging Stocks. 500 point drop in DJIA not a big deal. 27 February 2007


3. Kurtenback, Elaine. China Has Not Plans to Tax Gains. AP. 28 February 2007


4. Remarks by Chairman Ben S. Bernanke. The Level and Distribution of Economic Well-Being. Before the Greater Omaha Chamber of Commerce, Omaha, Nebraska February 6, 2007


5. Remarks by Chairman Ben S. Bernanke. The Coming Demographic Transition: Will We Treat Future Generations Fairly? Before the Washington Economic Club October 4, 2006


6. Remarks by Governor Susan Schmidt Bies. An Update on Basel II Implementation in the United States.At the Global Association of Risk Professionals Basel II Summit, New York, New York
February 26, 2007


7. Remarks by Vice Chairman Donald L. Kohn. Financial Stability: Preventing and Managing Crises.At the Exchequer Club Luncheon, Washington, D.C. February 21, 2007


8. Paradis, Tim. Stocks Stabilize After Dow's Wild Ride. Bernanke Reassures Day After 400-Point Drop. AP. 28 February 2007


9. Paradis, Tim. Stocks Bounce Back After Big Selloff. AOL Money and Finance. 28 February 2007

10. Testimony of Chairman Ben S. Bernanke. Long-term fiscal challenges and the economy. Before the Committee on the Budget, U.S. House of Representatives. February 28, 2007


11. Testimony of Chairman Ben S. Bernanke. Semiannual Monetary Policy Report to the Congress. Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
February 14, 2007


12. Testimony of Vice Chairman Donald L. Kohn. The aging workforce. Before the Special Committee on Aging, U.S. Senate. February 28, 2007