might be so. any research that you can bring forth on this issue would be very beneficial. a third issue on my mind is valuations in equity markets, the role they should play in policy making, and whether old relationships have changed. many observers have asked if i think that the federal reserve can or should have a fixed view on the proper level of equity markets. for me the answer is that the fed cannot target specific levels in equity markets. equity prices are set by the give and take of supply and demand, with participants buying and selling based on their own information. investors can and should be influenced by several factors, including expectations of corporate earnings, attractiveness of alternative investments, both domestic and international, differing valuations of underlying assets, and differing appetite for “ ownership ” risk as opposed to “ creditor ” risk. i believe that the federal reserve ’ s tools, primarily short - term interest rates, are too blunt to attempt to achieve specific levels of stock market valuations. nor do i believe that policy makers should necessarily attempt to put their judgments of correct values above those of the market. – 4 – however, equity markets send important signals to policy makers and have spillover effects into the real economy. as you know, economists often speak of the “ wealth effect, ” and econometric modeling indicates that consumers ultimately tend to spend about 2 - to - 4 percent of incremental wealth. in addition, consumer sentiment is tied to feelings of financial well being. through both of these channels, the so - called wealth effect and the more general impact on consumer sentiment, equity valuations can and do have an impact on consumption and on macroeconomic performance. additionally, equity markets are an important source of investment capital, and valuations in the stock market are one determinant of the cost of capital for businesses. therefore, equity prices have an impact on business fixed investment, a major driver of our economy. finally, equity markets are of interest to policy makers because we have a responsibility for macro - stability. we have seen in other economies that bubbles and busts in financial markets can create unsettled conditions that affect real economic activity. therefore, maintaining healthy market conditions are of concern to policy makers. the questions i have with respect to equity markets go to the issue of valuation and the wealth effect. economists propose numerous approaches to determining the “ correct ” level of equity prices. one such approach compares equity market valuations ( namely earnings / price ratios ) to the return on fixed

decline steeply in the relatively near term. i say could rather than will because i realize that prediction has been made many times before and has always proved wrong. i guess like so many others i am just struck by the absurdity of moving so many little pieces of paper around the country when the messages could be sent so much more efficiently by electronic means. every time i visit a reserve bank and watch those high speed sorters working so hard and the trucks coming in and out to the airplanes, i think, “ this is a really impressive, fast and cost - effective way of moving paper, but why are we moving paper? ” the “ we, ” of course, is not just the federal reserve, but all those banks and clearing houses and other participants in the system. and the answer to why we are all moving all this paper is that customers want us to move it and are willing to pay to have it done. but the answer still doesn ’ t make a whole lot of sense. there are several interrelated reasons why change could be expected to accelerate in the retail payments arena in the near future. • first, of course, is the rapidity with which technology is evolving and costs are dropping in computing and telecommunications. many types of information, including payments information, can be transmitted much faster and cheaper than was possible even a year or two ago, and there seems to be no end to the process in sight. but the avalanche of technological progress may actually be holding up a great leap forward in the efficiency of retail payments. because the network effect is important and the players who have to commit to a new technology to make it viable are quite numerous, change may come slowly at first. potential players may be confused by the multiplicity of options and reluctant to commit if they think it likely that something faster, cheaper and more convenient may come along soon. it ’ s like hanging on to your old television for a while in hopes that the next generation of models will give you a lot more definition for less money. • a second reason is that the restructuring of the whole financial services industry across geographic and product lines is providing a huge opportunity for major institutions to rethink how they transmit information and make and receive payments. this restructuring, combined with the onrush of technology and the heavy emphasis across all business sectors on competitiveness, cost reduction and efficiency, could accelerate the substitution of electronic for paper based payments at the consumer as well as business level. but in the short - run