Stocks Fall on Bernanke Comments 

MADLEN READ AP 18jan2007

[Full Text of Chairman Ben S. Bernanke Before the Committee on the Budget U.S. Senate 18jan2007]

NEW YORK — Wall Street turned lower Thursday after U.S. Federal Reserve Chairman Ben Bernanke worried investors by warning that the U.S. fiscal house is in disarray and could lead to economic weakness.

Bernanke's morning testimony to the Senate Budget Committee called for fiscal responsibility and a revamping of Social Security and Medicare. Without changes, the economy could be in danger, he said.

"If early and meaningful action is not taken, the U.S. economy could be seriously weakened," Bernanke said in his prepared comments.

The urgent tone of Bernanke's speech was in contrast to positive economic data released Thursday by the Labor Department, which showed consumer prices rising at a slow pace, jobless claims at an 11-month low, and an increase in housing construction.

Bernanke's comments largely overshadowed Thursday's earnings reports, which showed strength in financial services and potential weakness in technology.

In midmorning trading, the Dow Jones industrial average fell 20.75, or 0.16 percent, to 12,556.40.

Broader stock indicators were mixed. The Standard & Poor's 500 index was down 3.67, or 0.26 percent, to 1,426.95, and the Nasdaq composite index was down 25.70, or 1.04 percent, to 2,453.72.

Bonds fell, with the yield on the benchmark 10-year Treasury note rising to 4.80 percent from 4.78 percent late Wednesday. The dollar was mixed against other major currencies, while gold prices rose.

Crude oil prices fell 29 cents to $51.95 on the New York Mercantile Exchange, as energy traders positioned themselves ahead of the U.S. Energy Department's weekly inventory report, which is expected to show increases in gasoline and heating oil stocks.

Blue chip stocks rose after Merrill Lynch & Co., the nation's largest brokerage, reported fourth-quarter profit that surpassed Wall Street expectations _ just as rival JPMorgan Chase & Co. did on Wednesday.

Merrill Lynch rose $1.45, or 1.5 percent, to $98.26.

Banks and brokerages have been performing well generally, on a surge in fund investment over the past year. The Bank of New York Co., one of the nation's largest trust banks, also beat analyst forecasts Thursday with its fourth-quarter financials. Its stock rose 55 cents, or 1.37 percent, to $40.80.

Meanwhile, technology stocks fell after Apple Inc.'s forecast for this quarter came in below estimates, leading investors to reconsider their high hopes for computer and electronics sales this year. The news came a day after Intel Corp. said its fourth-quarter profit plunged 39 percent.

Apple fell $3.49, or 3.6 percent, to $91.47. Though the company said its profit surged last quarter, its outlook for the current quarter fell below the market's expectations.

The Russell 2000 index of smaller companies was down 1.93, or 0.24 percent, 786.84.

Advancing issues outnumbered decliners by about 7 to 5 on the New York Stock Exchange, where volume came to 178.44 million shares.

Overseas, Japan's Nikkei stock average rose 0.63 percent. In afternoon trading, Britain's FTSE 100 was up 0.42 percent, Germany's DAX index was up 0.27 percent, and France's CAC-40 was up 0.04 percent.

Bernanke:
Fiscal Action Needed as America Ages 

MARK FELSENTHAL / Reuters 18jan2007

WASHINGTON — Federal Reserve Chairman Ben Bernanke warned the U.S. Congress on Thursday that failure to take action soon to deal with the budgetary strains posed by an aging U.S. population could lead to serious economic harm.

"Unfortunately, economic growth alone is unlikely to solve the nation's impending fiscal problems," Bernanke told the Senate Budget Committee.

Bernanke acknowledged that official projections suggest the U.S. budget deficit could stabilize or shrink in the next few years, but cautioned: "We are experiencing what seems likely to be the calm before the storm."

Left unchecked, the costs of so-called entitlement programs, such as Social Security and Medicare, are set to soar as increasing numbers of the baby boom generation retire.

"Dealing with the resulting fiscal strains will pose difficult choices for the Congress, the administration, and the American people," Bernanke said.

"However, if early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost," he added.

Bernanke cited projections by the Congressional Budget Office that showed spending on entitlement program would reach about 15 percent of U.S. gross domestic product by 2030.

He said a worrisome implication of such projections would be the much larger national debt and related higher payments to bondholders.

"Thus, a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits," Bernanke said.

The Fed chief said that whatever decisions were taken to prepare for the budgetary pressures presented by an aging population, tax rates would need to achieve a balance between spending needs and necessary revenues.

Bernanke said advocates of lower taxes would have to accept lower spending on entitlement programs. Likewise, proponents of more-expansive government programs must recognize the need for higher taxes brought about by higher spending, he added.

source:  18jan2007

Bernanke Warns About Deficit, Higher Entitlement Spending 

BRIAN BLACKSTONE & HENRY J. PULIZZI 
Wall Street Journal 18jan2007

WASHINGTON — Federal Reserve Chairman Ben Bernanke on Thursday warned that the recent improvement in the U.S. budget deficit is simply "the calm before the storm" and that higher entitlement spending could cripple the economy if action isn't taken soon.

"If early and meaningful action is not taken" in reforming programs like Social Security and Medicare, then "the U.S. economy could be seriously weakened, with future generations bearing much of the cost," Mr. Bernanke said in prepared testimony to the Senate Budget Committee. His prepared remarks didn't address the monetary policy outlook or current economic conditions.

Mr. Bernanke warned of a "vicious cycle" as the roughly 80 million Baby Boomers start retiring and drawing Social Security and Medicare benefits. That spending will significantly widen the budget deficit, leading to higher debt payments on those deficits.

Mr. Bernanke has in the past stressed that the effects of Baby Boom retirement aren't confined to fiscal policy but are a major economic issue as well. In an October speech, Mr. Bernanke said that upcoming declines in labor force participation "will reduce per capita real (gross domestic product) and thus per capita consumption relative to what they would have been without population aging."

In a paper released Tuesday, Fed economists estimated that if entitlement reform is put off another 20 years, then consumer spending would have to fall by 13.7% to adjust for the demographic change. That decline could be limited, or even reversed, if action is taken soon and if the retirement age is lifted, the economists said.

Without a fix, Social Security is on schedule to go bankrupt by 2040, when the number of retirees swamps the system's ability to pay benefits. The fiscal crunch will begin far sooner however, as the amount of Social Security benefits eclipses the amount of revenues the government collects in the next decade.

President George W. Bush, whose past attempts to shore up the nation's ailing entitlement system stumbled when lawmakers shied away from personal investment accounts, has charged Treasury Secretary Henry Paulson with leading another effort to reform Social Security.

The White House says it's willing to listen to all ideas on entitlement reform, but Mr. Bush remains resistant to lifting Social Security taxes, a stance that could doom any potential bipartisan reform deal. Mr. Paulson's closed-door talks with lawmakers have triggered speculation that the White House may consider raising the $97,500 cap on income subject to the Social Security payroll tax in exchange for Congress's acceptance of personal retirement accounts. Democrats have shown no willingness to accept retirement accounts though, particularly if they are funded by payroll taxes.

Budget experts say Medicare poses an even bigger problem since health-care cost increases are greater and less predictable that expected gains in Social Security benefits. Mr. Bernanke said Thursday that economic growth can help mitigate budgetary pressures, but alone won't cure the long-term fiscal problems the U.S. faces.

Higher tax receipts, fueled by a healthy economy, have spurred improvement in the deficit in recent years. The budget deficit fell to $248 billion in fiscal 2006 from $319 billion the prior year, largely the result of stronger-than-expected federal revenues. Earlier this month, Mr. Bush vowed to craft a budget request that eliminates federal deficits by 2012, a goal shared by Democrats.

He also encouraged policy makers to find ways "to make the labor market as accommodating as possible to older people who wish to continue working."

In a separate question and answer session, Mr. Bernanke said Thursday that consumer price index figures overstate annual inflation by up to one percentage point. "We do think...that standard CPI does overstate true inflation — if we could measure true inflation — by some amount between one-half and one percentage point," Mr. Bernanke said. The government said Thursday that the CPI rose 0.5% in December, capping a 2.5% rise for all of 2006. Excluding food and energy, the CPI rose 0.2% on the month and 2.6% for the year.

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