Thursday, July 17, 2008

The billionaire boys — and girls — club

How’s your life progressing? These young adults are among world’s richest

By Zack O'Malley Greenburg
updated 3:57 p.m. MT, Wed., March. 5, 2008

Whoever said youth was wasted on the young probably wasn't talking about the youngest members of our billionaires list.

Sure, a bunch of them were lucky enough to inherit their wealth. China's richest woman, Yang Huiyan, owes her $7.4 billion fortune to her generous father, Yeung Kwok Keung, the media-shy chief of real estate outfit Country Garden, who transferred all his shares to her in 2005, the same year she graduated from Ohio State University.

So too Hind Hariri, 24, the daughter of the late Lebanese Prime Minister Rafik Al-Hariri. A recent graduate of the Lebanese American University in Beirut, Hariri is a fashionista who frequents Paris shows and reportedly favors designer Chanel.

But many actually made their own fortunes. The Ukraine's youngest billionaire, Kostyantin Zhevago, was only 19 when he started out as a finance director at a bank. He later gained a majority stake in its holding company. Today the 34-year-old is worth $3.4 billion and is a deputy in Ukraine's parliament.

Then there is the Chinese billionaire nicknamed Light: Xiaofeng Peng, 33, who got into solar energy in 2005 and took his company, LDK Solar, which makes silicon wafers used in solar panels, public on NYSE Euronext two years later.

American John Arnold whizzed through Vanderbilt University in three years. He became an oil trader for Enron, supposedly earning the company $750 million in 2001. After the business collapsed, he started his own hedge fund, Centaurus Energy. He has done well enough to debut on Forbes' World's Billionaires list with a net worth of $1.5 billion.

The richest and most celebrated of this overachieving lot are Google co-founders Sergey Brin and Larry Page. The pair, who are both sons of professors, met at Stanford University while pursuing Ph.D.'s in computer science and dropped out together when they were just 25 to start Google. They debuted as billionaires at ages 30 and 31. Today they are worth $18.7 billion and $18.6 billion apiece.

Still, one hopes all these hardworking billionaires take the time to enjoy their fortunes while they are young. After all, how many people in this world are lucky enough to become so fabulously wealthy before crow's feet and cellulite settle in? Larry Page seemed to take that to heart when he asked British billionaire Richard Branson, an old geezer at 57, to let him borrow Branson's private Necker Island for his wedding festivities last year; the 600-person guest list was said to include Bono and the Clintons. Earlier last year, Brin got hitched on a sandbar in the Bahamas; rumor has it that the bachelor party involved kite surfing on the coast of Greenland.

The young billionaire brat pack could learn a thing or two from dashing 24-year-old German Prince Albert von Thurn und Taxis, who is truly living a near fairy-tale existence. A billionaire since he inherited a fortune at age 18, he lives in a castle, owns 75,000 acres of woodland and spends his spare time driving race cars. Not a bad life at any age, but particularly enviable for someone who hasn't even lived a quarter of a century.

Bill Gates drops to No. 3 on billionaire list

Buffett rises to top as Microsoft boss’ stock holdings are hit by Yahoo bid

By Matthew Miller

Warren Buffett is the richest man on the planet.

Riding the surging price of Berkshire Hathaway stock, America's most beloved investor has seen his fortune swell to an estimated $62 billion, up $10 billion from a year ago. That massive pile of scratch puts him ahead of Microsoft co-founder Bill Gates, who was the richest man in the world for 13 straight years.

Gates is now worth $58 billion and is ranked third in the world. He is up $2 billion from a year ago, but would have been perhaps as rich — or richer — than Buffett had Microsoft not made an unsolicited bid for Yahoo! at the beginning of February.

( is a joint venture of Microsoft and NBC Universal.)

Microsoft shares fell 15 percent between Jan. 31, the day before the company announced its bid for the search engine giant, and Feb. 11, the day we locked in stock prices for the 2008 World's Billionaires list. More than half of Gates' fortune is held outside of Microsoft shares.

Mexican telecom tycoon Carlos Slim HelĂș is the world's second-richest man, with an estimated net worth of $60 billion. His fortune has risen $11 billion since last March.

Buffett, whose fortune is estimated based on his stake in Berkshire Hathaway and assets he holds outside the company, refused to comment on his net worth.

The race for the title of World's Richest Man has been extremely competitive in recent months. Class A shares of Berkshire Hathaway soared 25 percent between the middle of July and the day we priced our list. The stock hit an all-time high of $150,000 a share in December. At that time Buffett was worth roughly $65 billion.

Berkshire Hathaway shares closed at $137,100 per share on Tuesday, down 2 percent since the announcement last Friday that the company’s net earnings fell 18 percent in the fourth quarter of last year.

Gates' fortune also swelled massively last fall. Shares of Microsoft jumped 30 percent between late October and early November to $37 a share, only to fall after the company announced its intentions to buy Yahoo! for $45 billion on Feb. 1.

Buffett top billionaire
March 6: CNBC’s Mary Thompson reports on this year’s Forbes list of the world’s richest, which saw investment guru Warren Buffett replace Microsoft’s Bill Gates at the top.


Slim's fortune has doubled in the past two years. Stock in his most significant holding, telecom outfit America Movil, has risen 120 percent since the beginning of 2006. HelĂș also owns stakes in Carso Global Telecom, Grupo Carso and Grupo Financiero Inbursa.

The son of a Nebraska politician, Buffett delivered newspapers as a boy. He filed his first tax return at age 13, claiming a $35 deduction for his bicycle. He moved on to study under value investing guru Benjamin Graham at Columbia University.

Buffett began buying shares in textile firm Berkshire Hathaway in 1962 and purchased a controlling stake in 1965. He began buying insurance companies and astutely investing those companies' cash reserves.

Today, Berkshire is invested in insurance (GEICO, General Re), jewelry (Borsheim's), utilities (MidAmerican Energy Holdings) and food (Dairy Queen, See's Candies). It also has noncontrolling stakes in Anheuser-Busch, Coca-Cola and Wells Fargo. Recently, the company disclosed it owns a significant stake in Kraft Foods.

In December, the company purchased a 60 percent stake in the Pritzker family's manufacturing and services group, Marmon Holdings, for $4.5 billion. The privately held Marmon owns businesses across wire and cable, transportation services and industrial products.

Between 1965 and 2006, Berkshire stock returned an average of 21.4 percent a year. Despite Buffett's meteoric rise, his days as the World's Richest Man are almost certainly numbered. He had long promised to give away his fortune posthumously. But in the summer of 2006 he irrevocably earmarked the majority of his Berkshire shares to charity, most going to the Bill & Melinda Gates Foundation.

At the time, the gift was valued at $31 billion. However, assuming that Berkshire shares continue to rise, the final amount of the donation will far exceed that sum. Buffett gives 5 percent of his shares to charity every July.

America braces itself for a second dip

By Krishna Guha

For Janet Yellen, president of the Federal Reserve Bank of San Francisco, the forces that began threatening the US economy nearly a year ago are “a bit like the opening of Macbeth, with the three ghastly witches brewing up trouble amid thunder and lightning”. She adds: “Only here, the three troublemakers are the housing market, the financial markets and commodity prices.”

Almost a year on, those three troublemakers are still very much at work. Financial markets remain in turmoil and the fate of the US economy once more hangs in the balance. Growth this quarter is shaping up to be quite strong. But the risk of a relapse into very weak growth or even recession has increased. The core dynamic of the credit squeeze – financial weakness and economic weakness feeding off each other – has intensified recently, reinforced by the shock from oil.

Yet the danger of high inflation becoming embedded in the US economy has also escalated, with rapid energy price increases pushing headline consumer price rises to 5 per cent year-on-year and driving up at least some measures of future inflation expectations.

The latest big intervention by the US authorities – the rescue plan for Fannie Mae and Freddie Mac – has secured the troubled mortgage giants’ access to funds and with it a continued flow of finance for the beleaguered housing sector. But it provoked little immediate reaction in the wider financial markets. Indeed, financial shares fell further in the days following the Fannie and Freddie rescue, before rebounding strongly in midweek, in a sharp reminder that neither stocks nor the US economy offer a one-way bet.

Economists and investors alike are left wondering where we are in the credit crisis: whether, to borrow from baseball, the US is in the eighth inning or the fourth inning of a nine-inning game. For a while it looked as though the Bear rescue marked the turning point of the credit crisis. Now it is clear that while it marked a turning point in the crisis, it did not mark the turning point. There is little reason to think that the Fannie and Freddie intervention will mark the ultimate turning point either.

Fannie’s and Freddie’s debt was always seen as implicitly backed by the government. Their rescue closes off one avenue to financial and economic disaster. But it does not greatly improve the situation of other financial groups. As terrifying as the possibility of a Fannie or Freddie default might be, it was only one factor in the contest of forces weighing on financial markets and the economy.

On the one hand, after a shaky start to the year, the US economy has proved remarkably resilient through the spring and early summer. Gross domestic product might have contracted in some individual months, but across the first half as a whole it expanded at a stronger than expected pace. The US has continued to benefit from global growth, with exports providing an essential support for economic activity. But consumer spending has also held up much better than many – including the Federal Reserve Board – had expected.

At their last meeting in June, Fed officials revised up their “central tendency” forecasts for growth this year to reflect the first-half performance. They now expect growth this year (on a fourth-quarter-to-fourth-quarter basis) to come in at 1-1.6 per cent, compared with their April expectation for 2008 of just 0.3-1.2 per cent.

On the other hand, the economy is in increasing danger of deteriorating again later this year. The forces at work are the same three “witches” that threatened the US from the outset of the crisis. While there have been occasional glimpses of hope on all three fronts, overall, these negative forces intensified over the past two months. As a result, a growing number of economists are predicting a “W-shaped” downturn, with some forecasting outright contraction around the turn of the year.

Depending on how economists ultimately classify the period of weakness at the start of this year, the year-end could mark the moment when the US finally falls into recession – or tips back into it. “I think there is a better than 50-50 chance that we see a double-dip recession,” says Richard Berner, chief US economist at Morgan Stanley. He says the consumer is being buffeted and the headwinds have only grown worse of late.

At the core of the threat to growth is the resumption of the basic dynamic of the credit crisis: a negative-feedback loop from a damaged financial sector to the real economy and back again. This is aggravated by the decline in house and stock prices that reduces the collateral available to support loans.

From its high in the middle of May, the S&P 500 financials index fell 37 per cent to its low on Tuesday before bouncing back in the past 48 hours to trade on Thursday at nearly 15 per cent below the low reached in March at the time of the Bear crisis.

Amazingly enough, banks still do not know the ultimate extent of their losses on complex new credit securities. Now, they are taking a second wave of losses caused by rising delinquencies on a wide range of loans that have been put under stress by economic weakness. There is nothing unusual about these losses – they are part of an old-fashioned credit cycle. The problem is that the banks are entering this phase with their capital already impaired by the previous wave of markdowns. At the same time, financial groups are desperately trying to reduce their leverage, in response to increased volatility and to a market demand for solid counterparties.

“Who is driving deleveraging? In short, all of us,” says Jan Loeys, strategist at JPMorgan Chase. “We as institutions: as banks, hedge funds and broker-dealers.” But “it is very hard for the overall system to deleverage”, he says.

Many analysts are concerned that there will be a rash of bank failures. But even if there were not, banks unable or unwilling to raise expensive equity could further cut back on lending, intensifying the credit squeeze in the economy. “In many cases banks are deleveraging or shrinking or are reluctant to raise the extra capital needed to take advantage of business opportunities,” Ben Bernanke, the Fed chairman, told Congress this week.

The difficulties in the financial sector are closely linked to uncertainty over the economic outlook – and, above all, the outlook for housing. House prices have a powerful effect on consumer spending through their impact on wealth and on access to credit. They also affect financial institutions through their influence on mortgage defaults and the value of mortgage-backed securities. According to the S&P Case-Shiller 10-cities index, house prices are down 19 per cent from their peak and, based on futures trading, are expected to fall 30 per cent in all before bottoming out. This measure, which captures only the main metropolitan areas, is seen as exaggerating the likely nationwide price decline. But as Fed policymakers observed in the minutes of their June policy meeting, the outlook for housing remains “bleak”.

While some affordability measures have improved, prices remain high relative to rents. Inventories of unsold homes are at elevated levels and the downward momentum in house prices shows no sign of abating.

There is a danger that house prices could undershoot fair value on the way down, just as they overshot it on the way up. More than 500,000 mortgages began the foreclosure process in the first quarter and in some localities there is evidence of “foreclosure spirals”, in which falling prices push up foreclosures, in turn driving prices still lower.

“The asset price deflation in housing makes it very difficult to stabilise the financial system’s balance sheets; it also accentuates the headwinds facing the real economy,” says Mohamed El-Erian, co-chief executive at Pimco, the bond fund manager.

Overlaid on the credit squeeze is the additional shock from oil, which may prove to be the decisive factor that tips the economy into recession. Most analysis focuses on the effect of oil on inflation. But the jump in petrol prices also imposes a big tax on US consumers. Since the start of the year, moreover, rapid increases in food and energy prices have essentially eaten up nominal wage growth, leaving no growth in real labour incomes to support consumption.

With the pressure from the credit squeeze, housing, oil and a softening jobs market, the wonder is that the US economy has been as resilient as it has to date. First-quarter growth was revised upward to 1 per cent. For the second quarter, growth could come in at 2 to 2.5 per cent – not far below the country’s long-term trend.

A large chunk of the first half’s strength will have come from net exports. But consumer spending has continued to grow, in part the result of $110bn (£55bn, €69bn) in tax rebates sent out from May onwards. These rebates appear to have had a strong immediate impact on spending, boosting consumption growth by perhaps 2 percentage points. But the stimulus is temporary and will fade in the second half of this year.

There may be another reason why spending is holding up for now, yet may fade as the second half unfolds. The time lag between the credit crisis in the financial sector and the peak of the credit squeeze in the real economy may simply be longer than initially anticipated.

At the onset of the credit crisis last August, banks had already committed large unused lines of credit to companies and to individuals (in the shape of home equity lines of credit, credit cards with generous lines of credit and the like). Since the start of this year, lenders have been cutting back on new credit lines and trying to pare back old ones. But cancelling existing lines is not easy and many borrowers have been able to draw on pre-authorised credit.

Moreover, coming into the crisis, companies were generating lots of cash. This self-generated cash provided a buffer against reduced credit. But it is gradually being eroded by a weak economy. Lawrence Summers, a Harvard professor and former Treasury secretary, says the peak impact of the credit squeeze on the real economy is probably still to come. “I would be surprised if it had peaked already,” he says.

Yet at the same time, the US faces a very serious inflation risk. The 5 per cent inflation reached in June is unlikely to be the peak. In essence, it is externally generated, driven up by record prices for globally traded oil and food. But the longer it persists, the greater the risk that it could become embedded in domestic prices. Some measures of inflation expectations are flashing an alert. Core inflation (excluding food and energy) crept higher last month.

There is clearly some chance that the economy, after turning out to be stronger than most economists expected in the first half, could sustain this momentum in the second six months of the year. Persistent growth could, moreover, also indicate that the US is less vulnerable to financial market dislocations than generally thought. If that is the case, growth could quickly return to normal levels or higher, fuelled by very low real interest rates and an expected stabilisation in home construction, particularly if financial strains ease again.

That could swiftly reduce the currently modest amount of economic slack – unemployment is still only 5.5 per cent – and greatly aggravate the risk that high inflation becomes embedded in domestic wage and price setting behaviour.

Even if growth does not turn out to be stronger than expected, there is still some risk that inflation expectations could take off despite a weak economy. In effect, workers might accept little or no increase in expected real wages but demand full compensation for higher prices – as they did in the 1970s.

If the Fed miscalculates, the US could have a serious inflation problem on its hands. But if it responds to inflation risk appropriately, the result will be to amplify the growth risk. At a minimum, unless the price of oil suddenly subsides or the economy enters a crater, the most the Fed will be able to do is to put off the day when it has to start raising rates again.

Moreover, if inflation expectations worsen further, the US central bank would have to abandon its balancing act and raise rates, in spite of the consequences for growth. This raises the question of what, if anything, the authorities could still do to reduce the growth risks without compounding the inflation risks.

While policymakers have been able to moderate the impact of the financial crisis and close off particular routes to economic Armageddon, they have not been able to break the underlying dynamic. With monetary policy at full stretch – given the threat from inflation – the bulk of any future policy response will have to come from the fiscal authority: the US government.

Hank Paulson, the Treasury secretary, has taken the view that the government should if necessary intervene to ensure the stability of the system as a whole but let individual institutions, companies and households work through their problems. The Bush administration argues that markets will naturally stabilise if left alone, as prices fall to levels that attract new buyers.

It could be right. The bounce-back in financial stocks this week demonstrates that at a certain price investors are willing to take on risks. At some stage house prices will reach an equilibrium point at which buyers return to match supply; then – if not before – the credit crisis will be over. Moreover, the task of balancing growth and inflation risks could become less difficult if the oil price subsides. The decline in crude prices this week raises the tantalising possibility that oil could be easing its grip on the economy.

But Mr El-Erian of Pimco says there may be “multiple unstable equilibria” for house prices, the financial sector and the economy. In other words, there could be a “good equilibrium” – higher house prices, recovering banks, a stronger economy – and a “bad equilibrium” – lower house prices, troubled banks and a weak economy. Or there could be other intermediate outcomes.

Mr Summers wants a second fiscal stimulus to prop up the economy while the housing market adjusts, reducing the risk that the jobs market could collapse, driving house prices still lower. Others think policymakers should focus on more targeted interventions to reduce the risk that house prices will undershoot fair value.

Martin Feldstein, a professor at Harvard, says: “The key is to take away the incentive for people to default on their mortgage when they have negative equity, because that will drive house prices down further.”

Whether the interventionists are right or not, if the feared economic weakness materialises, the next president of the US could take office in very difficult circumstances. Ambitions for foreign policy, tax cuts and domestic reform might have to take second place to figuring out a way to revitalise the economy.

A Funny Thing Happened
On the Way to the White House


Thanks to The New Yorker, the subject of humor has dominated this week in the presidential campaign. Often when people talk about humor, the discussion is decidedly unfunny. An excellent example is an article in called "McCain's Humor Often Backfires."

"To McCain's friends and supporters, the humor is a mark of his authenticity," writes Politico's Ben Smith. "To his detractors, some of the jokes are offensive and out of touch with contemporary mores":

What's undeniable, though, is that the humor, with its political risks and, to some, its charm, is intrinsic to John McCain. He is a man of a certain generation, with a machismo forged from his experience as a Navy pilot and an aviator, a candidate who is more comfortable in his own skin than with a teleprompter. . . .
Irreverence in the abstract is one thing. But McCain's specific jokes can be harder for some to stomach.

Example: In 1986 the Tucson Citizen reported that McCain had told the following joke:

"Did you hear the one about the woman who is attacked on the street by a gorilla, beaten senseless, raped repeatedly and left to die? When she finally regains consciousness and tries to speak, her doctor leans over to hear her sigh contently and to feebly ask, 'Where is that marvelous ape?' "
His spokeswoman said at the time he didn't recall telling the joke, something his current spokesman, Brian Rogers, reiterated to Politico.

Which reminds us of a joke. Two U.S. senators are sitting in a bar, and one of them says, "I drink to forget telling jokes."

"That's very sad," says the second senator.

"It could be sadder," the first senator replies.

"What could be sadder than drinking to forget?" asks the second senator.

"Forgetting to drink!"

Anyway, in McCain's defense, maybe you had to be there. At least one of McCain's jokes, however--in addition to being somewhat amusing, in our opinion--has yielded some useful information for foreign-policy makers:

McCain was also recently condemned by the government of Iran for suggesting that increasing U.S. cigarette sales to Iran could be "a way of killing 'em."
"We condemn such jokes and believe them to be inappropriate for a U.S. presidential candidate," said Iranian Foreign Ministry spokesman Mohammad Ali Hosseini. "It is most evident that jokes about genocide will not be tolerated by Iranians or Americans."

If Hosseini is on the level, Mahmoud Ahmadinejad's "joke" about wiping Israel off the map was nothing of the kind--a reason to support the candidate who favors a tougher line against the mad mullahs.

Obama's problem, meanwhile, is the opposite. He appears to be completely humorless. Not only that, but as we noted Tuesday, there has been very little humor about Obama, whose supporters tend to be very sensitive and angry. Now comes Andy Borowitz, with a (satirical) "list of official campaign-approved Barack Obama jokes." Example:

Barack Obama and a kangaroo pull up to a gas station. The gas station attendant takes one look at the kangaroo and says, "You know, we don't get many kangaroos here." Barack Obama replies, "At these prices, I'm not surprised. That's why we need to reduce our dependence on foreign oil."

We came up with a few on our own:

A guy asks Barack Obama, "Who was that lady I saw you with last night?" Obama replies, "I think people should lay off my wife. The notion that you can attack my family--that's not what America is all about. It's too easy to get caught up in these distractions."

Why did the chicken cross the road? To get away from the so-called leaders of the Christian right, who have been all too eager to exploit what divides us.

And then there's the one about the definition of audacity: when a guy throws his grandparents under the bus, then pleads for mercy because his parents are orphans (or would have been had they not predeceased their own parents).

Army Fatigued
The gold standard* of political humor, of course, is a joke told by another former presidential nominee back in 2006:

You know, education--if you make the most of it, you study hard, you do your homework, and you make an effort to be smart, uh, you can do well. If you don't, you get stuck in Iraq.

This was side-splitting enough at the time, but an Associated Press report shows that it is funny on a whole new level:

Spc. Grover Gebhart has spent nine months at a small post on a Sunni-Shiite fault line in western Baghdad. But the 21-year-old soldier on his first tour in Iraq feels he's missing the real war--in Afghanistan, where his brother is fighting the Taliban.
With violence in Iraq at its lowest level in four years and the war in Afghanistan at a peak, the soldiers serving at patrol station Maverick say Gebhart's view is increasingly common, especially among younger soldiers looking to prove themselves in battle. . . .
That soldiers are looking elsewhere for a battle is a testament to how much Iraq has changed from a year ago, when violence was at its height. Now it's the lowest in four years, thanks to the U.S. troop surge, the turn by former Sunni insurgents against al-Qaida in Iraq, and Iraqi government crackdowns on Shiite militias.

The aforementioned erstwhile candidate came of age in the Vietnam era, when conscription was the law. Because thousands of men were forced into military service who did not want to go into that line of work, somehow the stereotype has persisted that the work of a soldier is undesirable. In fact, the work of war is very attractive to some people, and one of the glories of a free economy is that it is the best possible means for sorting people into jobs they find fulfilling.

If service in Iraq is now less desirable because success has made it boring, the joke is on those who fail to grasp that the dangerous work of defending America is, to some men, also supremely rewarding.

* This is an example of a form of humor known as "sarcasm."

Triumph of the 'Will'
Agence France-Presse experiments with a new form of journalism:

Barack Obama will flash Kennedy-style charisma but face a stern test as a novice on the world stage in the Middle East and Europe next week, on a trip rich in both risk and potential rewards. . . .
Obama will get a receptive audience, in Europe at least, where his prospects are feverishly followed and he boasts approval ratings that are the envy of some of his battered hosts, British Prime Minister Gordon Brown, for example. . . .
Obama will begin his visit to Europe in Berlin, a city rebuilt with American money after World War II, with its very unity a living symbol of shared US and European endeavor in the Cold War.
His visit will draw comparisons to the fabled visit to Berlin in 1963 of president John F. Kennedy, to whom Obama is often compared by supporters who see him also as a leader at the intersection of hope and history.

Most news organizations tell us what happened. AFP tells us what will happen. Unfortunately, this story doesn't tell us what we really want to know, namely who will win the election. We guess we're just going to have to wait till October to find out.

Jeers for Hezbollah
The Jerusalem Post reports that not everyone in the Arab world is applauding Hezbollah for inducing Israel to release Samir Kuntar, who heroically bashed a 4-year-old girl's skull in with a rifle butt:

A leading Arab paper ridiculed the perceived "victory."
"The Radwan deal," the headline of the London-based A-Sharq Alawsat newspaper on Thursday cynically ran, "cost Hizbullah over $7 billion, more than 1,200 dead and 4,500 wounded Lebanese citizens."
The paper referred to the exchange by the name given to it by the guerilla group. Radwan was the nom de guerre of Imad Mughniyeh, Hizbullah's terror mastermind who was killed several months ago. While Hizbullah blamed Israel for the assassination, Israel maintains it was not involved.
The Saudi paper Al Watan pointed out that Hizbullah has yet to disarm and that UN Resolution 1701, which ended the war, has not been implemented.
In Lebanon, Al Anwar carried an editorial piece which said it was "shameful to see members of the government in Beirut join the celebrations of Hizbullah."

But one newspaper is hewing to the Hezbollah line. See if you can guess which one:

The [Lebanese] government declared a national day of celebration, closing all government offices and banks, and many private businesses closed as well. The president, the prime minister and others tried to present the swap as a triumph for Lebanon, not just Hezbollah, which is considered a terrorist group by the United States. But there was no disguising the fact that, in the eyes of its followers and many others, Hezbollah had scored a historic victory.

Give up? It's the New York Times.

Life Imitates 'Seinfeld'

Izzy: "How 'bout that, huh? The World's Greatest Dad. My son made it for me." Jerry: "That's very nice." Izzy: "The best in the world. [pointing to himself] Which means I'm better than just No. 1." Jerry: "Well, I don't know how official any of these rankings really are."--dialogue from "The English Patient," originally aired March 13, 1997

" 'World's Greatest Dad' Charged in Online Child-Sex Sting"--headline, USA Today Web site, July 16, 2008

Have They Tried Binary Fusion?
"Report: US Is Behind in Doubling Science Grads"--headline, Associated Press, July 15

They're 10 for a Buck at the Dollar Store
"SWTC to Buy Hanger From City for $1 Million"--headline, Altus (Okla.) Times, July 16

Somebody Untie It!
"Air Force Academy Bound"--headline, Powell (Wyo.) Tribune, July 14

Help Wanted
"Police Seek Two for C&W Network Robbery"--headline,, July 17

Everything Seemingly Is Spinning Out of Control

"Second Troy Cat Death Raises Alarm"--headline, Times Union (Albany, N.Y.), July 16

"Hispanic Service Agency Faces Bleak Future"--headline, Day (New London, Conn.), July 17

"Art Auctions on Cruise Ships Lead to Anger, Accusations and Lawsuits"--headline, New York Times, July 16

"Your Neighbor Could Be Next to Lose Electricity"--headline, Denver Post, July 16

"Hippie Town's Homeless Attack Portends Trend"--headline, Associated Press, July 17

"Energy Crisis Threatens U.S. Survival, Gore Says"--headline,, July 17

"Robots Take Over University"--headline, WEAU-TV Web site (Eau Claire, Wis.), July 16

Breaking News From 1948
"Moscow Remains Overtly Contentious"--headline, Washington Post, July 16

News of the Tautological
"Low-Cost Flights a Hit With Budget Travelers"--headline, Kyiv (Ukraine) Post, July 16

News You Can Use

"Wanted: Urine Samples to Design Space Toilet"--headline,, July 16

"Trust Me, Toe Injuries Can Be Annoying"--headline, Kentucky Standard (Bardstown), July 16

"Don't Become the Victim of a Surgical Error"--headline,, July 17

Bottom Stories of the Day

"British Physicist Stephen Hawking Won't Be Moving to Waterloo, Ont."--headline, Canadian Press, July 16

"Utah NAACP President Still Opposes Vouchers"--headline, Associated Press, July 16

"Canada Won't Seek Return of Gitmo Detainee"--headline, Associated Press, July 16

"Rapper Has Defiant Words for New Album"--headline,, July 16

"List of 101 Things Defining Canada Adds Aboriginals After 1st Poll Overlooks Them"--headline, Canadian Press, July 16

[The World's Smallest Violin]

The World's Smallest Violin
Addison Herron-Wheeler is "a rising freshman at Virginia Commonwealth University," according to the author's bio at the end of his column in the Fredericksbug Free Lance-Star. To judge by his current employment, there's no way to go but up:

It never fails: Murphy's Law. When applying for jobs, the one place you do not want to call you back inevitably will. I encountered this annoying fact applying for jobs in Richmond, when I landed one at the local Subway.
Of all the interesting, vibrant-looking places in my area that I could have worked, this was definitely my last choice. But the only other places I had wanted to work told me it would be a few weeks or months, and I had to have something ASAP so that I could pay the rent.

Trouble is, he "failed to take into account" his "inability to function in this kind of a situation" and his "disdain for the restrictions that come with employment at any fast-food restaurant":

First of all, some of my co-workers whom I met later are not exactly savory. They are much older than me and don't seem to respect me at all, even though I am doing my best to comply with their every wish and to be the best employee I can be. The management also demands that I remove my lip rings while working--which is ridiculous considering how many people with piercings I serve every day. This makes things a bit difficult due to the fact that I don't have the extra money right now to go out and buy spacers to put in the holes while I'm at work.

He also loathes "all the evil that I see in the fast-food industry," which he complains is "wasteful and goes against even the most basic environmental practices." There's too much packaging, and workers aren't allowed to take home spoiled food. "In short, it is all about the profit and not about the overall good of society."

On the other hand, it strikes us that it's awfully generous of Subway to let such a malcontent keep working there, especially when he badmouths the company to the vast readership of the Free Lance-Star. Incidentally, if he does find a job in an establishment that allows him to wear his lip rings by serving food, we hope he writes another column about it, so we'll know to avoid the place.

Run on Washington

Washington's biggest names – from President Bush to Ben Bernanke to Nancy Pelosi – have all trotted out publicly this week to declare their profound concern about the American economy. Alas, our leaders are promising to do everything except what might really do some good: Abandon what they've been doing for the past year.

When the financial market turmoil hit last August, the U.S. economy was growing, albeit slowly, with moderate inflation. Washington has since embarked on a stampede of easy money from the Federal Reserve, nonstimulating tax rebates from Congress, and a crisis-driven, haphazard approach to credit market triage.

[Run on Washington]

The result a year later: The overall economy is still expanding, albeit slowly, but with inflation roaring and the dollar hitting historic lows. Soaring oil and commodity prices – the byproduct of a weak dollar – have tanked the airlines, the car companies and trucking firms, cattlemen and hog farmers, among many others. Meanwhile, the financial mess rolls ahead, having spread from Wall Street to the midsized banks, and engulfing even the government-chartered companies that Washington only weeks ago declared were our saviors, Fannie Mae and Freddie Mac.

It's not exaggerating to say that the world is fleeing the dollar in what amounts to a global run on Washington itself – from Capitol Hill to the White House to the Federal Reserve. The world's investors are saying they lack confidence in U.S. leadership.

* * *

That's certainly true of the Fed, where Mr. Bernanke looks increasingly like a professor shocked to find that the world has rejected his academic theories. Yesterday's dreadful inflation numbers are as stark a repudiation of Fed policy as you could imagine: up 1.1% in June alone, 5% for the last 12 months, the highest in 17 years. Energy and food prices led the way, as every American consumer already understands. But the report showed that inflationary expectations are also creeping through more of the economy, including services and transportation.

Mr. Bernanke stated the obvious when he told Congress Wednesday that inflation "is too high." And markets rallied even on the hint of a tougher line, with oil and gold both falling as the dollar rose. Yet Mr. Bernanke, Vice Chairman Donald Kohn and Governor Frederic Mishkin – the Fed's three intellectual amigos – continue to pursue a reckless policy of negative real interest rates with no change on the horizon. For months, they have overestimated the risks of recession while underestimating the dangers of inflation. They have been too attentive to the pleas of Wall Street and Capitol Hill, and not enough to the American middle class.

Meanwhile, Congress wants to double down on its failures, with Speaker Pelosi proposing a second round of "stimulus" spending. Someone should ask what happened to the first. Just as critics predicted, the rebate checks gave consumer spending a short-term fillip without changing longer-term incentives. The checks did, however, add $168 billion or so to the federal deficit. And now the Speaker wants to add $50 billion more – all as a prelude to next year when she'll claim we need to raise taxes to reduce . . . the deficit.

While Barack Obama campaigns on "change," the irony is that for the past year Washington has been pursuing his economic policy mix. The tax rebates and spending were his idea of "stimulus," too, while he's said nary a discouraging word about the Fed or the dollar. The left's leading economic gurus – Larry Summers, Robert Rubin – have also urged the Fed on. With the huge tax increases he's proposed for next year, Mr. Obama's policies are another source of the global run on Washington.

As for the Bush Administration, the best one can say is that it looks tapped out. By agreeing without a fight to January's tax rebates, Mr. Bush gave up his last chance to shape this year's economic debate. He might not have won in Congress, but he would at least have had an argument. Instead, he told the American people that the rebates would spur growth, and now that they haven't he's undermined the popular appeal of tax cuts more broadly.

The President could still play a role in crisis financial management, such as reforming Fannie and Freddie. But he seems to have abandoned that field to Mr. Bernanke and his Treasury Secretary. Hank Paulson has been an expert at media relations, and the Members love him on Capitol Hill. He and the Fed have done some creative work on emergency financing through the Fed's discount window. But Mr. Paulson has also invited the dollar's fall as a way to boost exports, despite the resulting oil spike and collateral damage to Detroit and American consumers.

The Treasury chief is also still behind the curve in cleaning up the financial system. The Fannie Mae debacle caught him by surprise, and he still hasn't triggered the Federal Deposit Insurance Corporation Improvement Act to prepare for the inevitable bank failures. With more IndyMacs on the way, this is the kind of advance financial plumbing that would help restore confidence.

* * *

For all of this blundering, the miracle is that the U.S. economy has so far avoided a recession. Housing prices will find a bottom eventually – all the faster if Congress doesn't pass its current housing bailout. Parts of the economy are showing remarkable strength, as Intel's earnings showed this week.

The main problem is political, and intellectual. Washington has spent the last year running from the stable dollar and pro-growth tax policies that have marked most of the past 25 years. In its waning days, the Bush Administration has lost its will and bent to Congress's agenda while staying silent as the Fed has encouraged a damaging inflation.

There's an opportunity here for John McCain, if he has the wit to seize it. He could describe how Washington has lost its Reaganite moorings on the dollar, taxes, spending, and the corporate socialism of Fannie Mae. He still may not win the election. But educating voters about this collective Washington failure, and then separating himself from it by pointing in a new direction, may be his only chance.

Judges Are No Reason to Vote for McCain


The judiciary is becoming an important election issue. John McCain is warning conservatives that control of today's finely balanced Supreme Court depends on his election. Unfortunately, his jurisprudence is likely to be anything but conservative.

The idea of a "living Constitution" long has been popular on the political left. Conservatives routinely dismiss such result-oriented justice, denouncing "judicial activism" and proclaiming their fidelity to "original intent." However, many Republicans, like Mr. McCain, are just as result-oriented as their Democratic opponents. They only disagree over the result desired.

Judge-made rights are wrong because there is no constitutional warrant behind them. The Constitution leaves most decisions up to the normal political process.

However, the Constitution sometimes requires decisions or action by judges – "judicial activism," if you will – to ensure the country's fundamental law is followed. Thus, for example, if government improperly restricts free speech – think the McCain-Feingold law's ban on issue ads – the courts have an obligation to void the law. The same goes for efforts by government to ban firearms ownership, as the Court ruled this term in striking down the District of Columbia gun ban.

Yet even as Republicans support and defend the Second Amendment, they ignore the Constitution when it says that only Congress can suspend habeas corpus, and then only in event of an invasion or rebellion. And if a president says we are "at war," Republicans believe he can ignore laws passed by Congress.

Mr. McCain is a convenient convert to the cause of sound judicial appointments. He has never paid much attention to judicial philosophy, backing both Clinton Supreme Court nominees – Stephen Breyer and Ruth Bader Ginsburg. He also participated in the so-called "Gang of 14," which favored centrist over conservative nominees as part of a compromise between President George W. Bush and Senate Democrats.

What's more, Republican Court appointments have often turned liberal. Earl Warren, William Brennan and Harry Blackmun were GOP appointees to the high court. So are "liberals" John Paul Stevens and David Souter, as well as centrists Anthony Kennedy and former Justice Sandra Day O'Connor. There is no reason to believe that a President McCain, once freed from the need to seek conservative support, would support more philosophically sound candidates. Even if he did, he would not likely prevail against a Democratic Senate majority.

Nor is it obvious that Barack Obama would attempt to pack the court with left-wing ideologues. He shocked some of his supporters by endorsing the ruling that the Second Amendment protects an individual right to own firearms, and criticizing the recent decision overturning the death penalty for a child rapist. With the three members most likely to leave the Supreme Court in the near future occupying the more liberal side of the bench, the next appointments probably won't much change the Court's balance.

But even if a President McCain were to influence the court, it would not likely be in a genuinely conservative direction. His jurisprudence is not conservative.

For instance, most conservatives believe that the First Amendment safeguards political speech. Mr. McCain does not. Indeed, it is the liberal bloc which upheld McCain-Feingold's restrictions on ads criticizing incumbent politicians, while the conservative members, led by Chief Justice Roberts and Justice Samuel Alito, forged a more recent majority overturning parts of McCain-Feingold.

In his May 2008 speech on judges at Wake Forest University, Mr. McCain talked about the importance of "the constitutional restraint on power," but in practice he recognizes no limits on government or executive-branch authority. In fact, if Mr. McCain nominated someone in his own image, the appointee would disagree with not only the doctrine of enumerated powers, which limits the federal government to only those tasks explicitly authorized by the Constitution, but also the Constitution's system of checks and balances, and even its explicit grant of the law-making power to Congress.

Mr. McCain has endorsed, in action if not rhetoric, the theory of the "unitary executive," which leaves the president unconstrained by Congress or the courts. Republicans like Mr. McCain believe the president as commander in chief of the military can do almost anything, including deny Americans arrested in America protection of the Constitution and access to the courts.

It is important to choose judicial nominees carefully. But that is no reason for conservatives to vote for Mr. McCain. He has demonstrated no more interest in "conserving" the Constitution, and its principles of limited government and individual liberty, than has Mr. Obama.

The best way to get better judges is to expand candidate choice beyond the Republicans and Democrats. Supporting the political status quo guarantees more jurisprudence based on political convenience, not constitutional principle.

Mr. Barr is the Libertarian Party's candidate for president.

Inflation and the Bush Legacy


Federal Reserve Chairman Ben Bernanke clings to an easy money policy while assuring us that he is keeping an eye on inflation. Glendora Rider, a pensioner in New Smyrna Beach, Fla., also has an eye on inflation.

Glendora, a onetime newspaper colleague of mine, sees this phenomenon from ground level, not the commanding heights occupied by the Federal Reserve Board:

[Inflation and the Bush Legacy]
Martin Kozlowski

"Two years ago, I nearly emptied my billfold pulling out $15 for six gallons of gas. Six gallons of gas at $4 a gallon (many places more than that) now cleans me out of $24, and that's not filling the tank. Consumers are now advised to gas up in the early morning before the heat expands the gas and you get less for your money. Most stations are adding 10% ethanol to the mix and this makes my 2001 Chevy truck limp along in a state of depression and attrition leading eventually to a high-priced mechanic.

"In the grocery store recently, a fellow shopper turned to me and said, 'I can't believe I would ever pay $2.87 for a pound of tomatoes.' We glumly compared prices: milk, $4 a gallon; bread, $2.89 a loaf – ad nauseam. This was in a store where shopping is supposed to be a pleasure. The $20 spent in 2006 for a quick restocking of staples now relieves me of $40.

"For lunch I stop at my favorite drugstore for the noon special and pay $5 for a hamburger. Add French fries and a drink, and it's $7, what I would have paid for a dinner special two years ago. How much does a hamburger cost at a theme park? Never mind, we can't afford to drive to the 'attractions' and pay a $70 per-person admission price plus $12 to park the car.

"The lawn guy comes and charges $30, instead of $25, the price in 2006, and before that $20. A six weeks' haircut at the salon is $30. Two years ago it was $20, and not that long ago it was $12. The bills for monthly services, utilities, insurance, cable, telephone keep inching up due to fees and taxes while the service is the same or cut down."

Glendora and I aren't in harmony on public policy – she seems to want more government and I want a lot less. But we agree on one thing. Inflation, even at what the Fed assures us is a modest 5% rate, is a destroyer. It lowers the living standards of the unrich, erodes capital, spurs labor unrest and ultimately dilapidates both public and private infrastructure. It gets worse if untreated, as we learned in the 1970s.

In the November election, unhappy voters like Glendora will mostly blame the Republicans, if opinion polls are any guide. Both President Bush and the Republicans who ran the Congress up until the 2006 elections deserve opprobrium. It will do them little good to claim that the Democrats will behave even more irresponsibly, despite the support for such a claim in the campaign promises of Barack Obama and the track record of the Pelosi-Reid Congress. When voters look for someone to punish, the president is their first choice.

Alan Greenspan, in his memoir "The Age of Turbulence," tells of a lunch he had in the 1970s with Jack Kemp, the Republican wunderkind of that era. According to Mr. Greenspan, Rep. Kemp lamented that the Democrats had historically won elections by giving away goodies and the Republicans were then elected to clean up the mess. The Fed chairman was appalled when Mr. Kemp suggested that the Republicans should reverse that process.

Well they did. As Mr. Greenspan notes, the Republicans, after seizing both the White House and Congress in 2000, went on a spending spree. Instead of trying to discipline his fellow Republicans – something a congressional party always requires – Mr. Bush signed everything that came his way.

Mr. Greenspan is himself taking flak for having left the monetary spigots open too long after the 2001 dot-com recession. It is natural that he might want to shift the blame for today's swooning dollar and its inflationary consequences. But he has on his side some very respectable economists, Milton Friedman for example, who have argued that the primary source of inflation is overspending by Congress.

Federal deficits have to be financed, and the debts of Congress, combined with those of state and local governments, business corporations and consumers, have taxed the investment powers of even trading partners like Japan and China, who hold huge dollar surpluses. The weak dollar, and inflation, particularly affecting the price of oil, is the end result.

Latter-day critics of the Iraq invasion like to argue that the war caused the problem, but as Mr. Greenspan points out, the war's cost was a relatively modest contributor to the spending spree. Moreover, not many of those critics objected in the immediate aftermath of the 2001 attack on the U.S. when the president and most other Americans felt that clearing the Middle East of terrorism sponsors, including Saddam Hussein, deserved high priority.

Mr. Bernanke currently is in the Fed hot seat. But it can be said in at least partial exculpation that Fed chairmen are often asked to do the impossible. They are under constant pressure from Congress and Wall Street to keep interest rates low.

A tough Paul Volcker backed by another tough guy, Ronald Reagan, resisted those demands and killed inflation, albeit at some short-term cost. But Mr. Bernanke isn't getting much political help from any source. If he acts unilaterally he will carry the cat for whatever economic slowdown occurs in this election year. Meanwhile, measured inflation tops 5% and forecasts say it will go higher. Glendora Rider's diminishing savings tell her that it already is plenty high enough.

George W. Bush has a creditable economic policy record on many fronts, and would have done even better if congressional Republicans had followed his leadership on such matters as immigration and Social Security reform. The best thing he could do for his party and the country, as he finishes out his term, would be to publicly give his full backing to measures that would reverse inflation.

That might sound counterintuitive in political terms, because of possible temporary economic repercussions. But it would help John McCain – one of the more responsible members of his party during the Republican spending spree – persuade voters that Republicans still are a responsible party, willing to do penance for the pocketbook pain they have caused Glendora Rider and millions of other Americans.

Voters Want Economic Leadership


Elections are often reshaped by unexpected and fast-moving events, and when this happens a candidate who quickly takes the lead on the new issue can bolster his chances to win. There is such an opportunity now for Barack Obama and John McCain with the crisis facing Fannie Mae and Freddie Mac.

The mortgage giants touch tens of millions of people because their core business is to buy, insure and securitize home loans. But they act like huge hedge funds with their portfolios worth hundreds of billions. As government sponsored enterprises (GSEs), they have an implicit federal guarantee that allows them to borrow money more cheaply than competitors. They have used that advantage to make ever-larger bets in their portfolios, generating big profits when home prices were rising, but big losses when housing weakened.

[Voters Want Economic Leadership]

Congress ignored an early warning sign when Fannie and Freddie failed to produce accurate accounting statements in 2002. That should have spurred Congress to pass reforms proposed by the administration the next year to clean up the GSEs. It didn't.

Now with Fannie and Freddie at greater risk, Messrs. McCain and Obama need to think like would-be presidents instead of senators. That starts with ignoring former Fannie CEO Franklin Raines, who says reform isn't needed – this from a CEO who couldn't produce accurate accounting statements. The goal has to be to force the GSEs into a position where they can no longer put taxpayer dollars at risk.

Serious reforms must include immediate measures to prevent Fannie and Freddie from collapsing, and long-term changes to protect taxpayers. That means jettisoning the implied federal financial backstop and shrinking Fannie and Freddie.

The candidate who makes such proposals will likely gain on the issue of "who's better to handle the economy." Mr. Obama leads on this in the latest Time magazine poll, at 44%-37%. But Republicans often win if they are within six points on this issue. The economy is still a jump ball.

That makes reining in the cost of a bailout that much more important. Making the stockholders and creditors of the GSEs bear most of the financial burden will appeal to voters suspicious of government getting too cozy with business.

A wag once said that Fannie and Freddie were political organizations masquerading as mortgage providers. They donate heavily to politicians who can shield them from regulation. This election the GSEs have given more than $800,000 to congressmen and senators who oversee legislation that affects them. They have also snapped up dozens of retiring lawmakers and staff as lobbyists and pay them lucrative salaries. Not bad for part-time, indoor work.

Over the past decade, the GSEs spent at least $171 million on lobbying, which combined would make Fannie and Freddie the third-biggest lobby. This has fostered a network of co-conspirators, including the liberal low-income advocacy group Acorn, big-city mayors and some lenders. Any reform must avoid creating more slush funds for the GSEs to reward political allies at taxpayer expense, and prevent them from investing in "jumbo" mortgages on expensive houses. After all, these GSEs were created to help lower- and middle-income homebuyers, not the rich and famous.

Leading on the economy's biggest problems – housing and the credit crisis – would allow Messrs. McCain or Obama to run as an outside-the-Beltway reformer, willing to take on insider deals that Middle America hates and add to (or foster) a reputation for decisive action. It would also help in battleground states. Denver, Detroit, Cleveland, Las Vegas and Miami metro areas are all in the top 10 in foreclosure rates.

Both candidates have challenges in taking up this cause. Each has received money from Fannie and Freddie employees this election: $82,299 to Mr. Obama and $14,400 to Mr. McCain. Mr. McCain isn't as strong in talking about the economy as he is about national security. Mr. Obama, on the other hand, is steeped in the Fannie/Freddie culture. He briefly tapped a former Fannie CEO to head his vice presidential search and he once worked for Acorn. And his campaign depends on Acorn's activists for voter registration drives. He may be too obligated to act against their allies.

But both candidates should remember past elections. For example, Republican William McKinley won in 1896 in part by embracing hard money after William Jennings Bryan's "Cross of Gold" speech at the Democratic convention. And in 1992, Bill Clinton won in part by promising tax cuts for the middle class to deal with a slowing economy. In both elections, nimbleness helped bring victory. What worked before can work today. An opportunity awaits Messrs. McCain and Obama. Will either man seize it?

Mr. Rove is a former senior adviser and deputy chief of staff to President George W. Bush.

America's economy

Boxed-in Ben

For Ben Bernanke, the Federal Reserve chief, even good news turns out to be bad

JITTERY investors and anxious politicians have often relied on Federal Reserve chairmen to conjure up something to steady their nerves. But when Ben Bernanke gave his twice-yearly monetary testimony to Congress this week he had little to offer but unvarnished and uncomfortable truths. There were “significant downside risks” to the economy’s outlook, he said, and the chances that high inflation would persist had “intensified”. Mr Bernanke did not specify which was the bigger threat: recession or inflation. This lack of a clear policy bias invited the conclusion that, for the time being at least, the Fed thinks it cannot safely move interest rates in either direction.

With financial markets buffeted by renewed fears about the credit drought and a deepening housing slump, Mr Bernanke could hardly boast of the economy’s soundness. To make matters worse, figures released on Wednesday July 16th showed that year-on-year inflation rose in June to 5.0% (see chart), the highest rate since 1991. Paltry pay rises, as well as job losses, mean employment income is probably growing by less than 3%, well below the inflation rate. Falling real income, slumping share and house prices and tighter credit all cast a cloud over consumer spending. Firms worried about future demand will be more cautious too about shelling out for costly capital projects, even if they could raise the finance.

Despite these unsettling prospects, the Fed’s rate-setters bumped up their forecasts for GDP growth in 2008, to 1.0-1.6%, prompted by stronger data on consumer and business spending between April and June. Private-sector analysts are revising up their forecasts too. The first estimate of second-quarter GDP, to be released on July 31st, is likely to show that the economy grew at an annualised rate of around 2%, twice as fast as in the first quarter.

The Fed’s trouble is that, although the economy has avoided recession so far, it may not do so for much longer. Indeed Mr Bernanke acknowledged that some of the demand that the Fed had hoped for later this year may have already come and gone. So the economy’s first-half resilience may be of more concern than comfort.

The performance of companies and consumers shows why. Businesses received some extra tax relief as part of February’s fiscal-stimulus package, which may have helped a little to stave off recession. There was also a spurt in the construction of offices, hotels and other business structures in the spring. However, this burst of activity may have been just the fag-end of the commercial-property boom. Now conditions have deteriorated.

Consumer spending seems likely to flag too. A jump in retail sales in April and May owed something to the tax rebates first sent out at the end of April. But a slim rise in retail sales in June is a hint that the effects of this one-off stimulus may already be fading. Another crutch for consumers has been the home-equity loan. Borrowing from this source rose by 3.8% between March and June, despite a big fall in overall bank credit. This increase came about partly because access is blocked to other forms of borrowing, such as mortgage refinancing. It may also be a sign of distress borrowing, as consumers battle with rising living costs. That battle will become harder if, as anecdotal evidence suggests, banks are cutting pre-arranged credit lines.

The brightest hope for America’s economy is its foreign sales. Net trade added more than one percentage point to GDP growth in the year to the first quarter. The weak dollar is still helping American firms to take advantage of the strong demand in other parts of the world. But even here, the future is looking bleaker. Rising global inflation, spurred in part by countries with dollar pegs mimicking the Fed’s rate cuts, is now prompting central banks in many emerging economies to tighten monetary policy. That will curb demand for imports. America’s richer trading partners are struggling too.

There is little that central banks can do to support the economy when inflation is rising dangerously high. The Fed’s hands are tied by its concern that today’s inflation may lead to higher wages. The Fed chief has to sound hawkish to show that he has not lost sight of inflation. But equally he cannot set out a plan for interest-rate increases when the financial system is so wobbly.

The good news in the first half may even make the Fed’s job harder. If consumers have already used up much of their tax rebates and credit lines, spending is likely to flag soon. A first-half recession followed by a sluggish recovery—the standard forecast until recently—could well have enabled the Fed to raise rates in the autumn. But with the worst news on the economy yet to come, Mr Bernanke can only keep his fingers crossed that inflation does not become ingrained.

Pity the Poor People Who Have to Fly Coach Class: Michael Lewis

Commentary by Michael Lewis

July 17 (Bloomberg) -- Memo To: The Non-Rich From: A Concerned Hedge-Fund Manager Re: Your Air Travel

Being a private person, I can't imagine flying any way but privately.

It's true that I airdrop into Bloomberg every now and again to offer the public a rare glimpse of the mind of a seriously rich (over $100 million net worth) and consistently successful hedge-fund manager (more than $1 billion under management). But mainly I try to keep to myself, and to that end have long avoided boarding an airplane owned by someone else.

So you can think of me as an outside consultant. With no direct experience of your predicament -- the growing misery of life inside a commercial airplane -- I am unusually positioned to understand it.

I can give you the view from 30,000 feet; I can tell you how your traveling future looks to me from the window of my Gulfstream G5. And from where I sit I can see three big trends. They are:

Trend One: The service on your airplanes, bad as it may be, is going to get much worse.

AMR Corp.'s American Airlines is now charging $15 a bag, U.S. Airways Group Inc. is taking away the in-flight movies and demanding two bucks for a can of Coke, and various airline chief executive officers are contemplating weighing the passengers and charging them by the pound. And you just know that once one of these airlines starts weighing people, all of them will, or risk being crushed by fat people looking for a deal.

``They have already begun to think exotically,'' a spokesman for the airline industry told Bloomberg News, apropos of these airline CEOs. ``Nothing is not under the microscope.''

There's a reason for this, and it's not just the price of oil. It's the price of you.

You still expect to be treated like a rich person when you have demonstrated, by flying commercial, that you are a poor person. (Poor being defined as an inability to afford at least a share of a NetJet.) And nothing demoralizes a service-industry professional so quickly as the sight of a high concentration of poor people.

Take flight attendants, for example. Once upon a time these straight ladies and gay men sought to please fliers; now they treat fliers like criminals. Ask a stew and she'll probably blame it all on terrorism. She'll go on about how after 9/11 she stopped being a camp counselor and became a cop. But that's just an excuse.

Little in Return

What's really happened is that she's come to realize that however happy she makes her passengers they can give her back only so much in return -- so why bother?

If even one of the passengers was a seriously rich person -- Jack Welch, for instance, or even little Dickie Grasso -- these same stews might think twice before abandoning service for law enforcement. They might actually want to be charming. Instead, they gaze upon a first class filled with people who paid with frequent-flyer miles and a coach class of seriously desperate people and instinctively reach for their whips and chains. And really, can you blame them?

Trend Two: Your time will be treated as ever-less valuable. You think it's an outrage that planes are now flying more slowly to save fuel? Wait until you find yourself en route from New York to Los Angeles, and stop unexpectedly in Denver until the headwind slows.

You will wonder: How long can it take to fly across America? And you will discover: As long as they want it to take! They know you are poor; they know from their experience that, given the choice, you will always save money rather than time. And so they don't fear that if they slow down you will get off.

If your time was that valuable, they will think to themselves, you wouldn't be flying on their planes in the first place.

And they are right!

Trend Three: Your planes will be ever-more likely to have an accident.

After all, these people who run the airlines have every expense under their microscope; how long can it be before they're examining the value of your coach-class head?

Of course, no major airline would ever consciously set out to kill you. But their planes will age, their spending on safety will decline, and they will increase, at your peril, the likelihood of catastrophe. The only question is when they try to sell you your own parachute will there be some free smoked almonds inside?

Giving Hope

Studying these trends a pessimist would probably conclude that poor people must one day simply cease to travel. Come vacation time the rich will still pop over to Paris and eat at the finest restaurants; the poor will find something else to entertain themselves. Perhaps a camp site near their quaint little home, where they can forage in the wild for free snacks.

But I am not a pessimist. Like Barack Obama, I believe in giving people hope. And the hope, for you, is to lure actual rich people back onto commercial airlines.

For example, in exchange for paying, say, two-thirds of what it would cost to fly private, and thus covering the bulk of the cost of any flight, rich people might be given special cabins in the front of each commercial plane, decked out very much like their G5s once were.

Obviously, no rich person would agree to fly commercial -- essentially paying for a great deal more than his share of the cost -- unless he was granted the other comforts of flying private. And, of course, he and he alone would need to decide when the plane took off and where it landed -- but as rich people usually go to really desirable places, this shouldn't be a problem.

Getting to Topeka

Each night poor people in say, Detroit, who were hoping to travel to, say, London, could go online and see where the local rich people planned to go. They'd surf around and find...Bill Ford is planning to fly to London tomorrow morning! And as many of the local poor who might fit could click on a link and acquire a cheap seat in the back of Bill Ford's flight.

There are some tiny problems with this plan, of course. There won't be many direct flights to Topeka, Kansas, or a lot of other places that the rich seldom go. Indeed, poor people trying to get anywhere near Topeka will probably experience frustration, as their airplanes fly back and forth over it, without so much as a pause.

But these problems are small compared with the benefits. Once again poor people will be free to fly, at speed and even in comfort, just like us regular folk.

U.S. Economy: Single-Family Home Construction Hits 17-Year Low

July 17 (Bloomberg) -- Builders started work in June on the fewest single-family U.S. homes since 1991 and manufacturing in the Philadelphia region contracted for an eighth straight month, signaling the economic slowdown is worsening.

Construction starts fell to an annual pace of 647,000, the Commerce Department said today in Washington. A change in New York City building codes spurred total starts, which include condominiums and apartment buildings, to a four-month high.

The figures underscore the housing recession was already deepening before the financial turmoil this month at Fannie Mae and Freddie Mac threatened to further curb mortgage financing. Today's drop in the Philadelphia Federal Reserve's factory gauge showed manufacturers cut orders and employment in July as confidence in the economic outlook deteriorated.

``Hopes for a bottom'' this year in home construction ``are rapidly fading,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. The housing recession ``has been spilling over to manufacturing for months,'' contributing to ``recessionary conditions,'' he said.

Housing starts in the Northeast, which includes New York, soared 242 percent in June. The city's new construction codes tightened safety and environmental standards and stem from the Sept. 11, 2001, terrorist attacks. Examples include requiring interconnected smoke alarms and so-called ``white roofs'' to reflect heat.

``Anyone planning to build had a strong incentive to get started before the deadline,'' Lindsey Piegza, a market analyst at FTN Financial in New York, wrote in a note to clients.

Stocks, Treasuries

Stocks advanced and Treasuries dropped after JPMorgan Chase & Co. joined Wells Fargo & Co. in reporting higher-than-forecast earnings. The Standard & Poor's 500 Stock Index rose 0.4 percent to 1,250.3 at 11:54 a.m. in New York. Ten-year notes yielded 3.97 percent from 3.94 percent late yesterday.

The Philadelphia Fed's general economic index was minus 16.3 in July, lower than forecast, compared with minus 17.1 in June. Negative readings signal a decline, and the measure averaged 5.1 last year. The index of prices paid climbed to 75.6, the highest level since 1980, from 69.3.

``As manufacturers see the final demand for their products go down and inventories go up, they have to slow production and that means less employment,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York in an interview with Bloomberg Television. ``The pricing numbers are important too because it indicates that we're in a period of stagflation.''

Total Starts

Total housing starts rose 9.1 percent to a 1.066 million pace from a revised 977,000 rate in May. Economists forecast a 960,000 reading in June, from a previously reported 975,000 for May, according to the median on 76 projections in a Bloomberg News survey.

A separate government report showed initial claims for unemployment benefits rose less than forecast last week. Claims increased to 366,000 from 348,000 the prior week, the Labor Department said.

Building permits rose 11.6 percent to a 1.091 million rate in June. Excluding multi-family applications in the Northeast, permits would have risen 0.7 percent.

Work on single-family homes decreased 5.3 percent, bringing it to the lowest level since January 1991, Commerce said. Construction of multifamily homes, such as townhouses and apartment buildings, jumped 43 percent to an annual rate of 419,000 in June, led by a 242 percent surge in the Northeast.

Starts fell in two of four regions, led by an 11 percent drop in the Midwest.

Influence on Growth

Declines in construction probably will limit economic growth, even as tax rebates boost consumer spending. Residential building dropped at a 24.6 percent pace in the first quarter and subtracted 1.1 percentage points from growth.

Fed Chairman Ben S. Bernanke this week abandoned his June assessment that the threat of an economic downturn had diminished. During testimony before U.S. lawmakers in Washington, he also said that ``upside risks to the inflation outlook have intensified.''

After stabilizing over the last nine months, builders' confidence slumped again in July. The National Association of Home Builders/Wells Fargo sentiment index dropped to 16, the lowest level since records began in 1985, from 18 in June, the group said yesterday.

As property values have fallen, some homeowners are stuck with mortgages they can't afford, and that is leading to an increase in foreclosures. Bank seizures increased a record 171 percent from a year ago and foreclosure filings rose 53 percent in June, RealtyTrac Inc., a seller of default data, said last week in a statement.

One in 500

The Irvine, California-based company began collecting statistics on default notices, warnings of scheduled auction and repossessions in January 2005. One in every 500 U.S. households entered a stage of the foreclosure process, RealtyTrac said.

Concern over the ability of Fannie Mae and Freddie Mac, the largest U.S. purchasers of mortgages, to withstand the subprime lending meltdown has also heightened the credit crisis and may further limit access to loans.

M/I Homes inc., a homebuilder concentrating in the Midwest, Florida and the Mid-Atlantic states, said July 10 it delivered 478 homes in the second quarter, down from 755 in the same period in 2007. The Columbus, Ohio-based company said the number of new contracts fell to 530, from 688.

The slump in housing has caused job losses in construction as well as in manufacturing. Payrolls at builders declined by 43,000 in June after a drop of 37,000 the prior month, the Labor Department said this month. The total loss of construction jobs since September 2006 has swelled to 528,000.

Paulson Lobbies to Get Fannie-Freddie Rescue Approved (Update2)

July 17 (Bloomberg) -- Treasury Secretary Henry Paulson tried to rally support yesterday for his plan to rescue Fannie Mae and Freddie Mac and said he is confident Congress will pass it by next week.

A growing number of lawmakers from both parties agree with his assessment, even if they don't back the legislation. House Minority Leader John Boehner, an Ohio Republican, said there's no question ``that this will become law and become law very soon.'' Senator Christopher Dodd, a Connecticut Democrat who is chairman of the Senate Banking Committee, expects a vote on the measure next week.

``I am optimistic that this is going to be done quickly,'' Paulson said yesterday.

Paulson asked Congress on July 13 to approve a three-part plan that would allow the Treasury to increase the credit lines of the two mortgage companies, buy shares in the firms if necessary and give the Federal Reserve what he called a ``consultative role'' in overseeing their capital requirements. The proposals are meant to restore confidence in the government- chartered companies which together own or guarantee more than half of the $12 trillion of U.S. home loans outstanding.

Boehner was among Republicans who on July 15 urged Democrats to hold hearings on the measure so they could get a better idea of how it would work. He said after meeting with Paulson yesterday that he hasn't decided whether to support the bill.

Market Stability

Anthony Ryan, Treasury's acting under secretary for domestic finance, said the proposals are ``wholly consistent'' with a focus on capital-market stability.

``We don't see the need for them to have to access additional liquidity or capital, but if they did, it certainly would send a strong signal to the marketplace that they have the resources to do so,'' Ryan said in an interview today on CNBC.

Fannie Mae shares jumped $1.87, or 20 percent, to $11.12 at 10:43 a.m. today in New York. Freddie Mac rose $1.28, or 19 percent, to $8.11 a share.

Paulson also met yesterday with Dodd and Alabama Senator Richard Shelby, the top Republican on the banking panel, to try to address concerns that Treasury would have too much power under the plan. Paulson declined to comment upon leaving that meeting.

``We had a very positive meeting, and think it's going in the right direction,'' Shelby said after the session. ``We're trying to do it right.''

Systemic Risk

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac have lost more than 80 percent of their stock market values this year on concern they don't have enough capital to survive the biggest housing slump since the Great Depression.

Lawmakers from both parties raised questions about how much authority Treasury should have.

``I want to make darn sure that, if we do this, that the American taxpayer is going to be protected,'' Dodd said earlier yesterday.

Paulson said he emphasized with lawmakers that Treasury's authority would be temporary.

This issue is ``tough,'' Paulson said. ``There's never unanimity, but I'm feeling very good as a result'' of meetings today, he said.

Representative Jeff Flake, an Arizona Republican, said Paulson received a ``mixed'' reception from lawmakers.

``Everybody knows something has to be done. It's just a question of what are we willing to accept,'' Flake said.

Globally Held Debt

Congress created Fannie Mae and Freddie Mac to expand homeownership by increasing mortgage financing and to provide market stability. The shareholder-owned companies make money by holding mortgage assets and on guarantees of mortgage-backed securities they create out of loans bought from lenders.

Debt from the government-sponsored enterprises ``is globally held in extensive amounts so we want to reassure that market that we understand the importance of this,'' Dodd said. ``And simultaneously, we need to reassure the American taxpayer that they're not going to be exposed to a massive bill at the end of the day. So striking that balance is what I'm trying to achieve.''

House Financial Services Committee Chairman Barney Frank has suggested prohibiting the companies from paying dividends if they tap a proposed increased line of credit with the Treasury. He also said regulators should be required to approve the compensation for top executives of Fannie Mae and Freddie Mac.

Housing Bill

House Democrats postponed a vote on the rescue plan until early next week. Paulson had initially pushed for a vote this week.

``I think we're going to have it all done by the end of next week,'' Frank told reporters yesterday. Senate Minority Leader Mitch McConnell, a Kentucky Republican, said he doesn't expect the bill to get ``bogged down'' in the Senate.

Lawmakers plan to graft the rescue plan onto a pending housing bill that would allow thousands of Americans struggling with subprime loans to refinance into fixed-rate mortgages backed by the government. The measure would also install tougher regulators for Fannie Mae and Freddie Mac.

Frank said July 15 that Democrats may retain provisions opposed by the Bush administration to send $4 billion to communities to buy up foreclosed properties. The White House has threatened to veto the bill over those plans because administration officials say they would benefit lenders who own the vacated properties, not homeowners.

Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, who also met with Paulson yesterday, said he preferred a stand-alone Fannie-Freddie bill.

``We don't need to deal with 40 different issues,'' he said. ``We need a clean bill.''

Fannie Mae dropped 27 percent July 15, its biggest slump since at least July 1980, while Freddie Mac declined 26 percent.

Fannie Mae rebounded yesterday, rising 31 percent to $9.25 in New York, while Freddie Mac climbed 30 percent to $6.83.

JPMorgan Net Beats Analysts' Estimates; Shares Rise (Update1)

July 17 (Bloomberg) -- JPMorgan Chase & Co., the largest U.S. bank by market value, reported second-quarter earnings that exceeded analysts' estimates, helped by higher investment banking fees and revenue from the consumer business.

JPMorgan rose as much as 14 percent, sparking a rally in financial stocks, as the company followed Wells Fargo & Co. in posting a smaller drop in profits than investors were expecting. Second-quarter net income fell 53 percent to $2 billion, or 54 cents a share. Analysts were predicting 44 cents.

Chief Executive Officer Jamie Dimon said in a statement that while a weakening economy means financial markets will remain ``under stress,'' the New York-based company's capital position is strong. JPMorgan has posted more than $12 billion of writedowns, losses and credit provisions on mortgage-tainted assets through the second quarter, a fraction of the $43 billion at Citigroup Inc., which reports earnings tomorrow.

``JPMorgan is like a raging bull prize fighter punching their way through the credit crisis,'' David Hendler, an analyst at CreditSights Inc. in New York, said in a Bloomberg Television interview. The bank ``has a fortress-like balance sheet and that really helps them absorb these punches,'' he said.

Shares of the company rose $3.77 to $39.71 in composite trading on the New York Stock Exchange at 11:33 a.m.

Bear Stearns

Second-quarter earnings were cut by $540 million of costs from the takeover of Bears Stearns Cos., which JPMorgan agreed to buy in March as the fifth-largest U.S. securities firm faced bankruptcy. The bank won't record any gain on the purchase, which it previously thought would add $1 billion. JPMorgan said it will keep 7,000 of Bear Stearns's 14,000 employees.

JPMorgan increased credit reserves by $1.3 billion to cover bad loans in the quarter, and wrote down the value of leveraged loans and mortgage-related assets by $1.1 billion.

Revenue fell 3 percent to $18.4 billion in the quarter, beating the average estimate of $16.6 billion among analysts surveyed by Bloomberg. Return on equity, a gauge of how effectively the company reinvests earnings, was 6 percent, down from 14 percent a year earlier.

The investment banking unit had a second-quarter profit of $394 million, versus earnings of $1.2 billion a year earlier. The division reported its second-highest quarter for fees, pulling in $1.7 billion. Revenue for the business fell 6 percent partly on weaker equity trading.

Return on equity for the investment bank was 7 percent in the second quarter. That compares with 12.3 percent for New York- based Morgan Stanley and 20.4 percent for Goldman Sachs Group Inc., also based in New York.

Consumer Banking

Consumer banking earned $606 million, a 23 percent drop from a year earlier as JPMorgan set aside more money to cover bad loans. Revenue in the retail bank was $5 billion, up 15 percent.

Chief Financial Officer Michael Cavanagh said on a conference call with reporters that mortgages had ``deteriorated'' with higher late payments and losses.

The problems extended to the bank's so-called prime mortgages, given to customers with the best credit quality, Dimon said on a call with analysts. Prime mortgage losses could climb to $300 million a quarter by 2009.

JPMorgan's decision in 2007 to expand in mortgages was ``wrong,'' Dimon said. ``Prime looks terrible. We're sorry.''

Home-equity losses could reach $700 million by the fourth quarter, less than the previous forecast of $900 million, Cavanagh said.

``It's too early to declare victory on that,'' he said. ``The trend of deterioration may be slowing a bit here.''

Card Business

The credit-card division's profit fell to $250 million, or 67 percent below last year's results. Net charge-offs rose to 5 percent in the quarter.

JPMorgan fell 28 percent during the past 12 months, compared with the 69 percent drop of Citigroup and the 54 percent decline of Bank of America Corp.

``It was clearly a very good report,'' Peter Sorrentino, who helps oversee $16.7 billion at Cincinnati-based Huntington Asset Management, including 3.6 million JPMorgan shares, said in a Bloomberg Radio interview. ``The telling thing for me was the number of business categories where they had very positive revenue comparisons with the same quarter last year.''

Swap Prices

Credit-default swaps on JPMorgan fell 9 basis points to 116 in New York, according to CMA Datavision.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

``We remain somewhat cautious about calms before storms, as consumer and commercial losses will likely increase into early 2009, if not longer,'' David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote in a research note today. He rates the stock ``in-line.''

Dimon also repeated that he would consider buying another bank. He said he has no plans to increase the dividend while credit quality continues to decline.

U.S. Stocks Advance as JPMorgan Leads Two-Day Financial Rally

July 17 (Bloomberg) -- U.S. stocks advanced for a second day, led by banking shares, after JPMorgan Chase & Co. reported earnings that topped analysts' estimates.

JPMorgan, the largest U.S. bank by market value, rose to the highest level in five weeks after its profit beat estimates by 22 percent. Huntington Bancshares Inc., BlackRock Inc. and Comerica Inc. also climbed after earnings exceeded projections, extending yesterday's record rally in financial companies sparked by higher-than-forecasts results at Wells Fargo & Co. Consumer shares fell after Coca-Cola Co. reported a drop in earnings.

The Standard & Poor's 500 Index added 4.94 points, or 0.4 percent, to 1,250.3 at 11:53 a.m. in New York. The Dow Jones Industrial Average gained 69.54, or 0.6 percent, to 11,308.82. The Nasdaq Composite Index rose 4.97 to 2,289.82. About five stocks climbed for every four that fell on the New York Stock Exchange.

``I wouldn't get too ahead of ourselves, and there are more financial companies to report, but it's good that we've got a couple of surprisingly good reports'' from JPMorgan and Wells Fargo, Joseph Keating, who helps manage $3 billion as chief investment officer of RBC Bank in Birmingham, Alabama, told Bloomberg Television. ``For the economy to grow, we need a viable banking system.''

Stocks also gained today following reports showing an unexpected gain in housing starts and a smaller-than-forecast increase in jobless claims. The S&P 500 rallied the most since April yesterday, rebounding from the lowest level since 2005, after Wells Fargo sparked a 12 percent gain in the S&P 500 Financials Index and oil extended a two-day tumble to more than $10 a barrel.

Shares in Europe and Asia rose today, sending the MSCI World Index to its biggest two-day gain since April.

Earnings Watch

Earnings have surpassed analysts' estimates by an average of 6.7 percent for the 51 companies in the S&P 500 that have released second-quarter results so far, data compiled by Bloomberg show. The entire index trailed estimates by an average of 3.6 percent in the first quarter, a period in which the benchmark gauge of American equities slumped 9.9 percent.

Analysts as of July 11 had forecast an average 14 percent decline in profits for S&P 500 companies, led by a 69 percent tumble in earnings at financial companies. So far, the group's earnings have slipped 4.9 percent, with financial profits declining 32 percent, Bloomberg data show.

Wednesday, July 16, 2008

U.S. Consumer Prices Climb by the Most Since 2005 (Update1)

July 16 (Bloomberg) -- Prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food, intensifying the pressure on households struggling with falling home prices and the credit crunch.

The cost of living soared 1.1 percent, more than forecast, after a 0.6 percent gain the prior month, the Labor Department said today in Washington. Excluding food and energy, so-called core prices climbed 0.3 percent, also more than anticipated.

The figures underscore why Federal Reserve Chairman Ben S. Bernanke yesterday said inflation risks had ``intensified.'' The surge in energy costs has also trimmed consumer and business spending, hurting growth and making it less likely policy makers will boost interest rates to stem even bigger price increases.

``This is a problem for the economy; it's even worse for the Fed,'' said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. ``Inflation numbers are high enough that under different circumstances the Fed would be hiking rates. But given the state of the economy,'' it can't, he said.

Treasuries dropped after the report, with yields on benchmark 10-year notes rising to 3.87 percent at 9:41 a.m. in New York, from 3.82 percent late yesterday.

A separate report showed industrial production rose 0.5 percent in June from the previous month, more than forecast, after falling 0.2 percent in May. The increase was led by utilities, as manufacturing advanced just 0.2 percent.

Economists' Forecasts

Consumer prices were forecast to rise 0.7 percent, according to the median forecast of 79 economists in a Bloomberg News survey. Estimates ranged from gains of 0.2 percent to 1.1 percent. Costs excluding food and energy were forecast to rise 0.2 percent, the survey showed.

Prices increased 5 percent in the 12 months to June, the most since May 1991. They were forecast to climb 4.5 percent from a year earlier, according to the survey median.

The core rate increased 2.4 percent from June 2007, also more than forecast.

Energy expenses jumped 6.6 percent. Gasoline prices soared 10.1 and fuel oil jumped 10.4 percent.

The cost of fuel will continue stoking price pressures. Crude oil futures reached a record $147.27 a barrel on July 11 and have risen almost 90 percent in the past year. Regular gasoline, which topped $4 a gallon for the first time in June, kept rising this month, AAA figures show.

The consumer price index is Labor's broadest gauge of costs. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

Wholesale Costs

Wholesale prices rose 1.8 percent in June, the most in seven months, the Labor Department reported yesterday. From a year ago, prices climbed 9.2 percent, the biggest surge since 1981.

Food prices, which account for about a fifth of the CPI, increased 0.8 percent, driven by a gain in the cost of vegetables.

The report showed that food and fuel weren't the only items on the rise. Costs for airline fares jumped 4.5 percent. Prices for all commodities increased 1.9 percent.

Rents which, make up almost 40 percent of the core CPI, also accelerated. A category designed to track rental prices rose 0.3 percent after a 0.1 percent gain in May.

Today's figures also showed wages decreased 0.9 percent in June after adjusting for inflation, and were down 2.4 percent over the last 12 months. The drop in buying power is one reason economists forecast consumer spending will slow.

Impact on Spending

Americans trimmed purchases of automobiles, furniture and restaurant meals last month as the cost of gasoline soared, a Commerce Department report showed yesterday. Retail sales rose 0.1 percent, less than forecast, a sign the boost from the tax rebate checks is already fading.

Bernanke, testifying before Congress yesterday as part of his semi-annual report on the economy, cited ``significant downside risks to the outlook for growth'' in addition to the heightened threat of inflation.

Consumer spending is ``likely to be restrained over coming quarters,'' and businesses are ``likely to be cautious with their spending in the second half of the year,'' Bernanke said.

Companies, unable to fully recover ballooning raw-material costs by raising prices, have cut staff and reduced equipment purchases as profits shrink.

Kimberly-Clark Corp., the maker of Huggies diapers and Scott paper towels, said earnings for this year will trail its previous forecast as expenses rise more than twice as fast as predicted, In May, the company said it would raise prices for a second time this year to counter higher costs for materials such as oil, natural gas and pulp.

Pressure on Costs

``Inflation has outpaced our ability to offset higher costs in the near term through price increases, cost reductions and other measures,'' Thomas Falk, the Dallas-based company's chief executive officer, said this week in a statement.

Procter & Gamble Co., the maker of Tide detergent and Head & Shoulders shampoo, last week said it'll raise prices as much as 16 percent due to higher costs for plastic, energy and paper. The increases start in September and are the Cincinnati-based company's steepest in at least 18 months.

The consumer-price and wholesale-price reports reflect differences in timing. In calculating wholesale prices, the government asks survey participants to report costs as of the Tuesday of the week that includes the 13th. Consumer prices are based on average costs over the entire month.

U.S. Stocks Gain After Wells Fargo Beats Estimates, Oil Drops

July 16 (Bloomberg) -- U.S. stocks rose, helping the Standard & Poor's 500 Index rebound from the lowest level since 2005, after profit at Wells Fargo & Co. topped analysts' estimates and oil dropped for a second day.

Wells Fargo, the U.S. West Coast bank that lost almost a third of its value this year, rallied the most since at least 1980 after boosting its dividend 10 percent. United Parcel Service Inc. and Target Corp. climbed as the two-day retreat in crude prices overshadowed a government report showing the biggest gain in consumer prices since 2005.

The S&P 500 added 10.39 points, or 0.9 percent, to 1,225.3 at 10:42 a.m. in New York. The Dow Jones Industrial Average climbed 106.58, or 1 percent, to 11,069.12, while the Nasdaq Composite Index increased 27.89, or 1.3 percent, to 2,243.6. About two stocks rose for each that fell on the New York Stock Exchange.

``This quarter was fairly good'' for earnings, said Eric Green, Cherry Hill, New Jersey-based director of research and senior money manager at Penn Capital Management, which oversees about $4.5 billion. ``This is a buying opportunity if you have a 12-month time horizon.''

Profits have slipped only 0.8 percent on average for the 26 companies in the S&P 500 that have reported second-quarter results so far, according to data compiled by Bloomberg. Earnings for all companies in the index are forecast to drop 14 percent on average, according to an analyst survey published July 11. The quarter is expected to cap a full year of declining earnings, the longest profit slump in six years.

Wells Fargo, UPS

Wells Fargo rallied $3.32, or 16 percent, to $23.83 for the steepest gain in the S&P 500. Gains in credit card fees and insurance revenue softened the blow from bad home loans. Net income slumped 23 percent to $1.75 billion, or 53 cents a share. That beat the 50-cent average estimate of 21 analysts surveyed by Bloomberg. Revenue rose 16 percent to a record $11.5 billion.

UPS, the largest package delivery company, climbed 1 percent to $57.03, helping the S&P 500 Transportation Index rise 1.9 percent as all 10 companies in the group advanced.

Target, the second-biggest U.S. discount chain, added 17 cents to $43.85. Retailers in the S&P 500 climbed 0.6 percent as a group.

Crude oil for August delivery declined $6.24, or 4.5 percent, to $132.50 a barrel in New York after retreating $6.44 yesterday.

Wells Fargo led financial shares to their first advance in six days. The S&P 500 Financials Index climbed 4.8 percent as 82 of its 89 companies increased.

Schwab Rallies

Charles Schwab Corp. had the biggest gain in three months, climbing 6.9 percent to $20.54. The largest U.S. online brokerage reported quarterly profit from continuing operations above the average analyst estimate as an influx of customer assets helped buoy revenue amid a decline in equity markets.

Fannie Mae and Freddie Mac rebounded more than 13 percent each. Fannie Mae tumbled 27 percent yesterday for its steepest slump since at least July 1980 and Freddie Mac tumbled 26 percent as investors lost confidence in the government's plan to rescue the largest U.S. mortgage-finance company.

About $14 trillion has been wiped off the value of global equities since October, with the S&P 500 falling into a bear market last week, as $417 billion in credit-related losses prolong the global economy's slump and rising commodity prices stoke inflation.

Among the 23 industrialized nations in the MSCI World Index, only Canada averted a bear-market decline of 20 percent. Financial institutions and consumer companies dependent on discretionary spending led the world's retreat in 2008, losing 31 percent and 22 percent.

Bearish Sentiment

The global bear market in equities will deepen from New York to London to Tokyo in the next six months as credit losses prolong the economy's slump and inflation erodes profits, a survey of Bloomberg users showed.

The S&P 500, the U.K.'s FTSE 100 Index, Japan's Nikkei 225 Stock Average, Spain's IBEX 35 Index, the Swiss Market Index, France's CAC 40 Index, Italy's S&P/MIB Index and Germany's DAX Index will decline, according to the Bloomberg Professional Global Confidence Survey of 4,232 users taken July 7 to 11. In Brazil, the only market where investors predict gains, optimism dropped to a five-month low, the survey showed.

The S&P 500 has slumped 22 percent since its Oct. 9 record. Financial shares in the measure capped the steepest-ever five-day decline yesterday, with Citigroup Inc., the biggest U.S. bank, plunging to the lowest level since it was created through a merger in October 1998.

The S&P 500 now trades for 20.1 times the reported earnings of companies in the index, while the MSCI World Index, excluding the U.S., is valued at 11.8 times profit. When the gap between their price-to-earnings ratios widened to 9.89 in May, the rest of the world hadn't been that much cheaper than the U.S. since 2002.