1. 5-3-06: Nebraska’s Unemployment Rate 3.2% 3.2% –Down.2% IS THIS NECESSARILY A ‘GOOD’ NUMBER? IS THIS NECESSARILY A ‘GOOD’ NUMBER?

2. Summarize your investment strategy Read Bob Bennie’s letter on growth and value investing. WHICH STRATEGY ARE YOU USING?

3. Monetary Policy Chapter 14 How to “fix” a broken economy

4. Who is Ben Bernanke? 1953 – 1953 – Bachelor’s Degree Harvard / PhD from MIT Bachelor’s Degree Harvard / PhD from MIT Taught econ at Princeton Taught econ at Princeton Wrote textbooks, articles on econ issues Wrote textbooks, articles on econ issues Headed National Bureau of Econ Research. Headed National Bureau of Econ Research. –Collected data for government, industry and the Federal Reserve

5. How did Bernanke become the Fed Chairman? Short list for the President. Short list for the President. Nominated, interviewed by the Senate and voted on. Nominated, interviewed by the Senate and voted on. 7 year term 7 year term –TRIVIA: Ben Bernanke’s title is: –Chairman of the Board of Governors of the Federal Reserve

6. Federal Reserve Transition Problems?

7. Will there be transition problems for Bernanke?

8. Something to Remember! There are only TWO ways that government can influence the economy: There are only TWO ways that government can influence the economy: –FISCAL POLICY »What Congress / President can do –MONETARY POLICY »What Alan Greenspan did and now Ben Bernanke can do

9. Monetary Policy = The “Fed” Federal Reserve Bank Federal Reserve Bank –The government’s bank –Regulates all FDIC banks in the country –Controls the money supply for the country. »Watches for inflation »Keeps money available but valuable to people.

10. Federal Reserve Districts

11. Monetary Policy – 1 More and Controversial “Duty” ADVISE ADVISE –Presidents –Congress –The Stock Market –Advice is not always welcomed!

12. How does the Fed control the economy? Controls the money supply for the banks. Controls the money supply for the banks. INTEREST RATES INTEREST RATES

14. REVIEW: What are “INTEREST RATES”? What are “INTEREST RATES”? –How much money COSTS to get. »$3000 loan from a bank might have 10% interest. You pay $3,300 back to the bank. You pay $3,300 back to the bank. Profit for banks Profit for banks

15. So how did Ben Bernanke cause your stocks to go down?

16. Situation from April 28, 2006 Ben Bernanke had recently been reported saying: Ben Bernanke had recently been reported saying: –“The Fed is finished raising interest rates for the time being.” »15 increases since Spring 2004 were “enough.”

17. But on April 29, 2006 Speaking to a CNBC reporter, he said: Speaking to a CNBC reporter, he said: –“I think that the reporters misunderstood my position on interest rates for the foreseeable future.”

18. Result? May 1 and May 3 Bernacke’s comments were reported at 2:45 PM. By 3:15 the DOW fell 70 points. Bernacke’s comments were reported at 2:45 PM. By 3:15 the DOW fell 70 points. Wednesday’s down markets were supposed to be investor “jitters about the Fed.” Wednesday’s down markets were supposed to be investor “jitters about the Fed.”

19. Why would investors care what interest rates are going to be?

20. Why would the Fed keep increasing interest rates? Fears about inflation? Fears about inflation? –Demand-pull inflation? –Wage inflation? –Fears that there is too much velocity to the dollar?

21. Cramer’s Question: “Does the Fed want to create a RECESSION???” IF there is inflation in the economy – IF there is inflation in the economy – YES! The Fed could want to create a recession. YES! The Fed could want to create a recession.

22. REVIEW: What is a RECESSION? –People HAVE money, but don’t feel “safe” about spending it. »Creates unemployment »Bad econ data »Creates MORE unemployment. –2 or more business quarters where economic activity decreases. »OFFICIAL definition

23. How could raising interest rates cause a recession? If interest rates go UP –People spend less –People don’t take out loans –People SAVE their money –Money increases in value »PURCHASING POWER GOES UP! »Inflation “deflates”

24. Opportunity Costs of a Recession? Unemployment goes up. Wages go down. –More supply than demand for workers. –Less frictional unemployment. –Government collects less taxes and people want more aid.

25. So what does that mean for your stock portfolios?

26. DO NOT PANIC! The Fed has been gently “tapping the brakes” on the economy since Spring 2004 to slow us down enough that a recession may not happen. The Fed has been gently “tapping the brakes” on the economy since Spring 2004 to slow us down enough that a recession may not happen. –OR be very short and mild.

27. History of Recessions in the US

28. Description for 2006’s Economy? Strong Strong Outperforming Outperforming BUT BUT –Soft patches –Inflationary pressures and expectations

29. So, what can the Fed do to keep the economy going, but not have inflation? Keep interest rates the same? Keep interest rates the same? Raise interest rates another.25%? Raise interest rates another.25%? –6% Raise interest rates.5%? Raise interest rates.5%? –6.25% »MOAIRH! Mother Of All Interest Rate Hikes Mother Of All Interest Rate Hikes

30. The Goals of the Federal Reserve Regulating the money supply Regulating the money supply Serving as the government’s bank Serving as the government’s bank Bank for banks Bank for banks Supervising FDIC banks. Supervising FDIC banks. –Clearing checks –loans

31. The Money Supply: Types of Money M1: Money that is readily made into cash or is cash. M2: M1 + savings CDs, money markets, savings deposits. M3 and L: M1 + M2 + large CDs, short term treasury bonds and other “near money.”

32. The Federal Reserve tries to affect DEMAND for money, goods, and services Specifically – AGGREGATE demand Specifically – AGGREGATE demand –Aggregate Demand = TOTAL demand »EVERYTHING that is consumed in the economy.

33. How does the Fed affect aggregate demand? IF things cost more, does that affect how much we DEMAND? IF things cost more, does that affect how much we DEMAND? If things cost less – do we tend to demand more? If things cost less – do we tend to demand more? It all demands on the COST, or the purchasing power of our dollar. It all demands on the COST, or the purchasing power of our dollar.

34. How does the Fed affect aggregate demand? The Fed changes the price of money to affect: The Fed changes the price of money to affect: –Consumer demand –Investor demand –How much money government will want / get –The value of American exports compared to imports

35. IF the Fed wants to help unemployment or a slow economy: Recession EASY MONEY POLICY: (Loose Money Policy) EASY MONEY POLICY: (Loose Money Policy) –Interest rates go DOWN – money is CHEAP! –Consumers spend! –Investors spend! –American exports are cheaper than imports!

36. Easy Money Policy Employment goes up! Employment goes up! GDP goes UP! GDP goes UP! Economic Recovery or Peak in the business cycle. Economic Recovery or Peak in the business cycle.

37. BUT: If the economic engine is running “too hot” and inflation is happening? TIGHT MONEY POLICY: TIGHT MONEY POLICY: –SLOW the economy down. –RAISE the interest rates so money costs MORE

38. If Interest Rates Go UP? Consumer goods cost MORE Consumer goods cost MORE Loans cost MORE Loans cost MORE –People don’t buy on credit –People don’t take out loans –Businesses don’t take out loans –Imports cost less than American made goods

39. Tight Money Policy Unemployment goes up. Unemployment goes up. People save more. People save more. Wages go down Wages go down Prices go down. Prices go down.

40. 2006: The Fed is engaged in Tight Money Policy - kinda Have 15 “tiny” increases in the price of money been enough to affect behavior? What does the Fed want out of us?

41. So, what can the Fed do to keep the economy going, but not have inflation? Keep interest rates the same? Keep interest rates the same? Raise interest rates another.25%? Raise interest rates another.25%? –6% Raise interest rates.5%? Raise interest rates.5%? –6.25% »MOAIRH! Mother Of All Interest Rate Hikes Mother Of All Interest Rate Hikes

42. Concerns about the future: Inversion of the Yield Curve

43. Yield Curve Inversion: A signal of recession? USUALLY: The longer you put money into a CD / Bond – the more money you should get more interest. Right? USUALLY: The longer you put money into a CD / Bond – the more money you should get more interest. Right? With the present curve the answer is WRONG! With the present curve the answer is WRONG! –What does this mean?? »WE DON”T KNOW!

44. Ben Bernanke’s Tools for the Economy Open Market Operations. Discount Rate Prime rate Reserve Requirements

45. Open Market Operations If Bernanke wants to get more money into the economy he BUYS government bonds from banks. If Bernanke wants to get more money into the economy he BUYS government bonds from banks. –Banks have more money to loan to customers. –People then have more money to consume and invest. –A way to quickly “inject” money or take it out of the economy.

46. Reserve Requirement Money that must be held by banks in their vaults or at the Fed. Money that must be held by banks in their vaults or at the Fed. -Raise the reserve requirements on a bank. They have LESS money to loan to customers. Less money is available – it makes the price of money (the interest rate) go up. SCARCITY. Makes C and I go down.

47. FOMC Meetings: Where the Fed gives people a “peek” at what they are doing

48. KEY INTEREST RATES DISCOUNT RATE: DISCOUNT RATE: –What it costs for banks to borrow from the Fed. »5.75% PRIME RATE: PRIME RATE: –Rate for best customers! FED FUNDS RATE: FED FUNDS RATE: –What it costs for banks to loan money to each other. »Currently: 4.75%

49. Problems with Monetary Policy? Economic forecasting might not be quite correct. Economic forecasting might not be quite correct. Greenspan’s priorities might not be the publics. Greenspan’s priorities might not be the publics. Lack of coordination with fiscal policies. Lack of coordination with fiscal policies.

50. Remember: The FED is not YOUR bank It is the government’s bank It is the government’s bank It is the bank for banks It is the bank for banks They won’t open an account for you! They won’t open an account for you!