roughly stable, hovering between about 4. 3 and 5. 0. then, beginning in 1994, the ratio of household wealth to income surged, peaking at more than 6. 0 in 2000. in the past three years or so, however, the ratio of wealth to income has fallen back to about the 1994 level, at just under 5. 0. as you might guess, almost all of this large swing is attributable to the recent boom and bust in the stock market. the aggregate value of u. s. equities, which approximately equaled household disposable income at the end of 1994, reached 2. 5 times disposable income at the beginning of 2000, but then it fell back to 1. 3 times disposable income by the end of 2002. most of us have heard the wry joke that our 401 ( k ) s are now 201 ( k ) s! although in dollar terms, stockholdings remain concentrated in the upper income brackets, the pain of falling stock prices during the past three years has been widely shared : more than half of all u. s. households now own at least some equities, either directly or indirectly through such vehicles as mutual funds, pension plans, variable annuities, and personal trusts ( aizcorbe, kennickell, and moore, 2003 ). for some households at least, losses in stock portfolios have been mitigated by significant increases in the value of residential real estate. these rises in house prices have led some to worry about the possibility of a " bubble " in housing prices and the associated risks of further losses in household wealth, should this putative bubble pop. let me digress for a moment to address this issue. although bubbles in any asset are notoriously hard to spot in advance ( if they were obvious to the naked eye, they would not arise in the first place ), in my judgment there is today little evidence of serious or systematic overvaluation in the u. s. residential housing market. in particular, for the nation as a whole, the rise in house prices appears to have closely tracked economic fundamentals - including rising household incomes, high rates of household formation, and historically low mortgage interest rates. also, the u. s. housing market is not a single market but many markets that are highly dispersed geographically across dozens of disparate standard metropolitan statistical areas, or smsas. experience suggests that house prices across smsas are rather

looks far less unusual. though less evident than the headline statistics about earnings and stock prices, there is also a positive financial story to tell about corporate america over the past couple of years. specifically, as in the case of households, the recent low - interest - rate environment has allowed firm managers to restructure their balance sheets in ways that have made them financially better prepared to expand their businesses when they judge that the time is right. first, by borrowing at lower rates and refinancing old loans, firms have been able to significantly reduce their current interest charges. the ratio of interest expenses to outstanding debt for nonfinancial firms indicates that the average interest rate has fallen about 1 - 1 / 4 percentage points from its recent high at year - end 2000, to under 6 percent on average. with lower interest rates and higher profits, the average ratio of firms'interest expense to cash flow improved considerably in 2002, to about 18 percent ( compared with a peak of 27 percent in 1991 ). second, firms have also restructured by substituting long - term debt for short - term obligations, resulting in a sharp decline in the average ratio of current debt to assets. average liquidity also improved markedly in 2002, reflecting declines in short - term liabilities, higher cash flows, and reduced payouts to shareholders. finally, on net, firms took on little new debt last year. the bottom line from this restructuring activity is healthier balance sheets for many firms. so, are firms financially able to fund new investment and new hiring, if and when they decide that expansion is justified by the fundamentals? i think that, for the most part, the answer is " yes. " most firms have ample cash and liquid assets to fund investment internally, and they have access to the capital markets as needed to fund investment externally. though risk premiums remain elevated and lenders are selective, both the corporate bond markets and bank lending windows are " open " to additionally, many firms will be required to change accounting assumptions about expected rates of return in their pension plans, which may raise future contributions further. reasonably sound borrowers. indeed, over the past year gross issuance - even of speculative - grade bonds - continued at a moderate pace. the possible exceptions to the presumption that funds are available are the weakest firms in the most troubled sectors. these firms are generally also the ones with the poorest earnings prospects and the most severe problems of excess capacity, and hence they are likely the