Ben Bernanke as the new Fed Chairman
Business Week ( issue dated Nov 7th 2005 ) ran a pretty interesting article about Ben Bernanke. It can be accessed online with a subscription at http://www.businessweek.com.The article has a table comparing the economic situation in 1987 when Greenspan took over as Fed Chairman compared to 2005 which would be Greenspan's last year as fed chairman. It says that things are better now compared to what it was in 1987. The interesting stat is that real stock market value adjusted for inflation has more than doubled in this time frame. The real wages have gained only 6% compared to 1987.There is another article in page 30 with a theme that Fed's power has shrunk and it no longer is the force it used to be. The main points for this argument are that there is more international financial flow now compared to 87 and that the foreign stock markets are more mature giving investment alternatives for foreign cash.
The article does miss some key points though. First of all, the situation is no less challenging than it was in 87, in some cases it is more challenging than was the case then. The U.S is already importing goods and services close to 7% of GDP this year. The surplus dollars have to come home - sooner or later thus financing the current account deficit.
The fed still has plenty of power - the global economy is still largely dependent on the U.S consumer. Slow down in the U.S is going to impact all the industries in Canada/Mexico, Europe and Asia. Fed can raise short term interest rates and can cause cooling of the housing market and put breaks on the consumer. Long term rates are partly dependent on the short term rates.
The buttonwood column in the economist also talks of some of the risks to the U.S dollar and the downward trend to resume starting next year. The link to that article is in http://www.economist.com/agenda/displaystory.cfm?story_id=5078354. Given the expected rise of prices in FY06 where firms will start to pass the higher cost of raw materials to consumers, the fed chairman job is anything but easy. The unpredictable international capital flow makes the task of setting the all important interest rates even harder.
Business Week ( issue dated Nov 7th 2005 ) ran a pretty interesting article about Ben Bernanke. It can be accessed online with a subscription at http://www.businessweek.com.The article has a table comparing the economic situation in 1987 when Greenspan took over as Fed Chairman compared to 2005 which would be Greenspan's last year as fed chairman. It says that things are better now compared to what it was in 1987. The interesting stat is that real stock market value adjusted for inflation has more than doubled in this time frame. The real wages have gained only 6% compared to 1987.There is another article in page 30 with a theme that Fed's power has shrunk and it no longer is the force it used to be. The main points for this argument are that there is more international financial flow now compared to 87 and that the foreign stock markets are more mature giving investment alternatives for foreign cash.
The article does miss some key points though. First of all, the situation is no less challenging than it was in 87, in some cases it is more challenging than was the case then. The U.S is already importing goods and services close to 7% of GDP this year. The surplus dollars have to come home - sooner or later thus financing the current account deficit.
The fed still has plenty of power - the global economy is still largely dependent on the U.S consumer. Slow down in the U.S is going to impact all the industries in Canada/Mexico, Europe and Asia. Fed can raise short term interest rates and can cause cooling of the housing market and put breaks on the consumer. Long term rates are partly dependent on the short term rates.
The buttonwood column in the economist also talks of some of the risks to the U.S dollar and the downward trend to resume starting next year. The link to that article is in http://www.economist.com/agenda/displaystory.cfm?story_id=5078354. Given the expected rise of prices in FY06 where firms will start to pass the higher cost of raw materials to consumers, the fed chairman job is anything but easy. The unpredictable international capital flow makes the task of setting the all important interest rates even harder.
posted by stocktrader07 at 8:15 PM
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