Technology Investor || Harry Newton's In Search of the Perfect Investment

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8:30 AM Friday, July 1, 2005: The Federal Reserve raised its target for the federal-funds rate charged on overnight loans between banks, to 3.25% from 3%. Yesterday's increase came exactly one year after the Fed began to lift rates from a very low level. In that time, long-term interest rates, which are determined by market forces and are the benchmark for mortgages and corporate loans, have actually declined.

The Wall Street Journal wrote this morning that the decline has fueled a debate over whether the Fed is going too far or hasn't gone far enough. Some say the Fed should pause in its rate increases because the decline, together with a downdraft in stock and commodity prices, foreshadows slower economic growth. Others say short-term rates should keep rising because low long-term rates have given an extra boost to the economy -- in particular housing.

For now, the Fed is in the latter camp. In its typically short statement accompanying its decision, the Fed said,

In other words, the Fed is likely to raise its rates again later this year. Whenever the Fed uses the word measured, it means a quarter percentage point increase per meeting.

The Fed funds rate has risen from 1% to 3.25% in the last year, but at the same time, the 30-year fixed rate mortgage has fallen to 5.6% from 6.3% while the one-year adjustable rate mortgage has edged up only to 4.2% from 4.1%.

As they did with stocks in the 1990s, Fed officials disavow any responsibility for reining in the real-estate bubble -- if that's what it is. The Fed sees its main job as containing inflation. The Fed believes housing is fueling economic growth, adding to inflation pressures, all of which are reasons to keep tightening. Fed officials have also warned the banks they regulate against lax mortgage lending -- but the warnings have gone widely unheeded.

I talked with a bank president yesterday. He said times in the banking industry were "the toughest" he'd seen in his 30 years in the business. He was lamenting that his competitors were lending "on anything" and were charging so little it was impossible for them (or him) to make a profit. He and I believe some of the looser banks will soon face serious financial problems. We both predict that some of the looser-lending banks will go bust in coming years -- especially if the rate of price increases in real estate begin to ebb and interest-only loans to deadbeats go sour.

Banks are not the place to be invested in at present. One bank specially not to be invested in is Bank of America. I was a happy customer of Fleet Bank before Bank of America bought it. I am now an unhappy customer of Bank of America. I have watched with fascination as Bank of America has progressively destroyed everything that was great about Fleet -- from its people to its policies. I no longer have any money with them. But I keep a tiny account simply to watch the idiocy unfold. What stupid thing could they do next? and they do it.

This weekend is July 4. As I left Australia 39 years ago, my Australian boss said, "You'll love the Americans. Just like you, they substitute enthusiasm for intelligence." It was not an insult. It was the profoundest compliment he could pay America. It is America's endearing quality. We never say No. We never say it's not possible. We never say we can't do it because of the color of our skin, the school we went to, the family we were born into, the language we speak or the faith we believe in.

I landed on America's shores penniless. I was a young man who spoke funny (Australian). I suffered terrible over-enthusiasm. (I still do.) My excitement was technology. When I waxed excitedly, Australians yawned. Europeans yawned. Americans listened and got excited.

What makes us so different? What makes us plumb the oceans? What makes us reach for the sky?

In 1776, a few ordinary men gathered in Philadelphia. They no longer wanted to be an abused colony of Great Britain. They wrote a Declaration of Independence. It was the ultimate "You can do it!" -- to declare independence from a country of overwhelming military and economic strength. It was ultimate faith, ultimate enthusiasm. Many paid for it with their lives in the horrible war that followed.

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness..."

This weekend at our friends' July 4 party, I will suffer my guests to my story. How the poor boy with the funny accent made it in America. I will read from the Declaration of Independence (click here) and I will tell them, with unbridled enthusiasm, why I love this country.

Several years ago, I was in a New York cab. The cab was owned jointly by a Palestinian and an Israeli.

"This is strange?" I asked.

"Yes", the Palestinian answered, "In our country we'd be shooting at each other. But this is America. Here we have a wife, children and," he said with a sigh, "a mortgage. Here we work. We have no time for shooting."

Only in America.

In the National Archives Building in Washington, D.C. there's a new theater. It's the William G. McGowan Theater. I first met Uncle Bill in 1969. He became my mentor. He turned me onto technology in general and telecommunications in particular. Uncle Bill helped found MCI and grew it until his death in 1992. Later MCI was taken over by Bernie Ebbers and destroyed. The tail of two men -- McGowan whose foundation has left many enduring benefits for the country he loved and Bernie Ebbers who's committed fraud and is going to jail.

The Fourth of July celebrates the founding of the world's greatest and most enduring democracy. Be proud to be an American. I am.

The kids are home for this holiday weekend. Michael from his private equity fund job in New York. Claire from her law school in Boston.

Wimbledon today is semi-finals: Here's the remaining TV schedule.

This weekend: Hug the spouse, the kids, the grandkids, the family and the neighbors. Read the Declaration of Independence (click here). Tell them what a great country we have. Talk about the history of July 4. I played historian and wrote some words on the history of July 4th, click here.


	Incorporating Technology Investor