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1981 Economic Commentaries

  • Savings and Loan Mergers in 1980


    Gary Whalen

    Abstract

    Merger activity among the nation's savings and loan associations increased dramatically in 1980 and accelerated in 1981. Persistently high and volatile interest rates in tandem with recession have placed severe pressure on the earnings of most liability-sensitive thrift institutions. Competition in the financial services industry has intensified since passage of the Depository Institutions Deregulation and Monetary Control Act of 1980-both among depository institutions and among these institutions and the less regulated nonbank financial intermediaries, such as money market mutual funds. Existing regulatory barriers to geographic and product market competition continue to fall and/or are being circumvented through financial innovation. Read More

  • Current Perspectives on Home Ownership


    Judy Menich

    Abstract

    Between 1970 and 1979, the median sales price of an existing single-family home rose roughly 170 percent, while the general price level increased 113 percent. The number of housing units also increased substantially: 17.8 million housing units were produced during the 1970s, or 24 percent more than in the previous decade.1 As the 1970s advanced, the role of housing shifted from primarily a consumption item to an investment item, a role that was further enhanced by declines in real after-tax returns on such financial assets as stocks, bonds, and savings accounts Read More

  • Issue 1 and Workers' Compensation in Ohio


    Mark Sniderman

    Abstract

    The state of Ohio, which currently forbids private-insurance companies from competing with the state-run workers' compensation program, is now in the throes of deciding whether to allow private-insurance carriers to enter the market. A number of organizations have announced their opposition to this change, including the Ohio Manufacturers' Association, the Ohio Chamber of Commerce, the Greater Cleveland Growth Association, the Ohio AFL-CIO, and the Nationwide Insurance Company. Such a unique amalgam of interests opposing private competition for workers' compensation indicates the extent of confusion, complexity, and emotion in the lssue-l debate. The passage of Issue 1 will not guarantee competition; it will merely permit private-insurance carriers to enter the market. The Ohio Department of Insurance will be responsible for regulating these carriers if Issue 1 passes. Read More

  • Thrifts, Extended Credit, and Monetary Policy


    John Carlson Kim Kowalewski

    Abstract

    The thrift industry primarily serves as an intermediary between people who wish to save in relatively liquid deposits and people who wish to borrow mortgage funds. When long-term interest rates on mortgages are greater than short-term interest rates on deposits, thrifts generally can depend on a relatively stable supply of deposits and earn profits, retaining some of them in capital or net-worth accounts that are used to support additional mortgage lending. However, when short-term interest rates are higher than long-term rates, as they have been in 1981, many depositors withdraw funds from their savings accounts to buy higher-yielding assets. If net deposit outflows are large enough, then some thrifts may exhaust their liquidity and be forced to sell mortgage assets at a loss; if the loss is large enough, some thrifts could be forced out of business. Read More

  • The Battle for NOWs


    Paul Watro

    Abstract

    Competition among depository institutions has intensified since January 1, 1981, when commercial banks, savings and loan associations, and mutual savings banks were authorized to offer negotiable order of withdrawal (NOW) accounts nationwide. Depository institutions can now compete for interest-bearing transaction accounts of households and nonprofit orqanizations. The banking industry as a whole conceivably will lose some of its share of the third-party payments (or transaction account) market. Through aggressive marketing efforts and pricing schemes, banks can lessen the competitive impact of NOW accounts; indeed, some banks even may gain an additional share of the transaction account market. Read More

  • Military Spending and the Economic Outlook


    Michael Bryan Owen F. Humpage

    Abstract

    The United States is embarking on an unprecedented increase. in peacetime military spending. The program has prompted heated discussions about the implications of defense spending for real output, employment, and prices. Many economists expect the defense buildup to have a relatively small, yet significant, impact on real aggregate economic activity and price levels over the next few years. Nevertheless, the direct impact of increased military spending on some sectors, such as durable goods, and specific prices should be of much greater significance. Read More

  • Why Do Deficits Matter?


    William Gavin

    Abstract

    The current budget process is likely to produce large budget deficits in fiscal year 1982 and thereafter. The budget deficit is the residual from the taxing and spending policies of the federal government. Our founding fathers gave the government the power to borrow money in article 1, section 8, of the U.S. Constitution. Without such authority the government would be forced to collect taxes priorto making expenditures. Economic theory and empirical evidence suggest that it is in the interest of the people and in the self-interest of political leaders to plan tax collections independently of expenditures. In such a budget process there is obviously room for temporary deficits. Read More

  • Community Development Corporations


    Judy Menich

    Abstract

    Over the past 20 years, considerable attention has focused on community development and revitalization, largely in response to the economic problems of our nation's older, industrialized cities. Although urban revitalization and reinvestment traditionally have come under the purview of federal agencies such as the Department of Housing and Urban Development and the Economic Development Administration, there is a growing trend toward encou raging greater private-sector involvement in such efforts. In particular, legislation such as the Community Reinvestment Act of 1977 places affirmative responsibility on financial institutions to undertake the promotion of community development. The stagnation and decline of many large urban areas have prompted financial institutions to search for methods to arrest these unfavorable trends. To be successful, efforts to revitalize urban areas must rely on the initiative, creativity, and capital investments of the private sector. Financial institutions, like community residents, have a vested interest in the economic vitality of their communities- a fact that has sharpened their interest in community development projects. Read More

  • Interpreting the Ms after the NOWs


    Theresa Gwazdauskas

    Abstract

    The nationwide introduction of negotiable order of withdrawal (NOW) accounts on December 31, 1980, has produced large shifts of funds from other assets into these interest-bearing transaction accounts. The deposit shifts distort standard money-supply figures compiled by the Federal Reserve System, adding to the difficulty of interpreting money growth. The bulk of the $37.5-billion increase in other checkable deposits in the first four months of the year appears to have been transferred from regular checking accounts, thus tending to depress growth of the narrow definition of money, M-1A. NOW accounts also have boosted M-l B expansion, because the remaining portion of the increase in other checkable deposits originated in funds previously held in savings accounts and other instruments not included in this aggregate. As a result, growth of these two narrow monetary aggregates has deviated significantly from the normal patterns. Moreover, the money-supply measures are not directly comparable with figures reported for periods prior to the introduction of NOW accounts. Read More

  • The Community Reinvestment Act: Early Experience and Problems


    Thomas Buynak

    Abstract

    The Community Reinvestment Act of 1977 (CRA), effective November 6, 1978, requires financial institutions to " ... demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business." The CRA directs four regulatory agencies- the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Home Loan Bank Board (FHLBB), and the Federal Deposit Insurance Corporation (FDIC)-to encourage each institution under their jurisdiction to help meet the credit needs of the local community. The four regulatory agencies also are required to assessan institution's record of meeting the credit needs of its community, including low-to-moderate income neighborhoods, consistent with the safe and sound operation of the institution. These assessments are to be taken into account when the regulatory agencies evaluate various applications by institutions. Read More

  • Bank Expansion in Ohio


    Gary Whalen

    Abstract

    Both economic theory and available empirical evidence suggest that the relaxation of geographic restraints on bank expansion, particularly de novo expansion, promotes actual and potential competition in banking markets. Greater competition, in turn, benefits consumers by increased and improved financial services. If geographic barriers to entry do not exist, each banking organization operating in a given market is pressured to provide the mix of services desired by consumers at prices reflecting the lowest possible costs of production. Failure to do so would result in revenue ceclines and ultimate loss of market share. Geographically unconstrained rivals that operate within or on the fringes of a market can be expected to perceive market opportunities resulting from a competitor's inferior performance; rivals might react by branching, either de novo or through merger/acquisition, into and/or throughout the market in an effort to attract profitable business. Just the threat of entry by legally uninhibited rivals and knowledge of the attendant consequences should spur the performance of banks operating in any given market. Read More

  • Debt Management of Ohio's Major Cities


    Robert Schnorbus

    Abstract

    Municipal debt grew dramatically between 1968 and 1978-a period when gross capital formation by state and local governments was ebbing. The relative decline in public capital formation by state and local governments has been attributed to several factors, including lessening need for new capital (particularly with declining school enrollments) and rising interest rates. Furthermore, cutbacks in capital spending have been steepest among older cities suffering from long-run decl ine in economic activity, especially in the industrial Northeast. Despite the decline in investment, however, debt has risen rapidly, as a larger share of capital formation has been financed through long-term debt. In addition, new financing devices (mostly non-guaranteed revenue bonds) have encouraged state and local governments to use the municipal bond market to attract industry. Because the new financing devices often have been backed only by the "moral obligation" of the governmental unit, their increased use has been a matter of growing concern in municipal bond markets. Read More

  • U.S. and Foreign Productivity and Competitiveness


    Gerald Anderson

    Abstract

    Although the level of productivity is very high in the United States, productivity growth has slowed sharply in recent years. Moreover, growth of productivity is significantly slower in the United States than in the other major industrialized nations. For example, annual real growth in gross national product per employed worker in the United States slowed from 1.9 percent in 1963-73 to only 0.1 percent in 1973-79. In the latter period, Japan's productivity growth was 3.4 percent per year, West Germany's, 3.2 percent and France's, 2.7 percent." This Economic Commentary compares U.S. and foreign productivity growth rates, explores the relationship between productivity growth and changes in international price competitiveness, and examines the impact on the U.S. share of world manufactured good exports. Read More

  • Inflation, Interest Rates, and Monetary Growth


    William Gavin

    Abstract

    On October 6, 1979, the Federal Reserve System changed its operating procedures for monetary policy. The period following that change has been one of turbulence in the money and capital markets. Not only have interest rates risen to unprecedented heights, but both interest rates and money supply growth have been unusually volatile. During this period, the objectives of the Federal Reserve have remained constant-to reduce inflationary pressures and eventually the level of interest rates by gradually lowering the growth of the money stock. In principle, the growth of the money stock could be constrained by controlling either interest rates or bank reserves. Under the former operating procedure, the Federal Reserve estimated the relationship between interest rates and the money supply, then "targeted" the interest rate on federal funds in a narrow range that was estimated to be consistent with desired monetary growth. This procedure proved to be unsatisfactory, because the relationship between interest rates and the money supply changed as inflation accelerated and because changes in interest rates were often not large enough to control money supply growth. Read More

  • Does the Federal Government Spend Too Much?


    Owen F. Humpage

    Abstract

    The Reagan administration has set itself to the herculean task of reducing the growth of federal spending. The administration plans to trim approximately $5 billion from the current budget (FY 1981) and approximately $41 billion from the FY 1982 budget. At the same time, the administration proposes to increase military spending and maintain basic services to the poor. Although the task of slowing federal spending is not insurmountable, skepticism is a natural reaction. In addition, the Reagan administration is proposing budget cuts, while weak economic activity is automatically increasing expenditures in such areas as unemployment compensation. Read More

  • Trends in Long-Term Commercial Bank Lending


    Gary Whalen

    Abstract

    Interest rates rose to unusually high levels in 1980, fluctuating widely and sharply throughout the year. The prime rate reached an unprecedented high of 20 percent in April, fell to 11 percent in July, then climbed to a historical high of 21 percent in December. Unexpectedly large fluctuations in interest rates create problems for commercial banks, since their profitability crucially depends on their net interest margins-the difference between their interest income and expense. Margins change as earning asset and liability volumes, maturities, and rates are adjusted in response to actual and expected market rate changes. Read More

  • Consumer Lending and the Bankruptcy Reform Act of 1978


    Kim Kowalewski

    Abstract

    The Bankruptcy Reform Act of 1978, effective October 1, 1979, is the first complete revision of U.S. bankruptcy law since 1898. Since that time, the enormous growth of the consumer credit industry has paralleled that of the number of consumer bankruptcies. The increase in consumer bankruptcies has placed great strain on the bankruptcy court system, while the diversity and number of consumer debt instruments have made the equitable administration of consumer bankruptcy cases more difficult. The equity issue involves not only rehabilitation of consumer debtors and their right to a "fresh start," but also the right of creditors to equitable distribution of a debtor's estate. Apart from important administrative changes in the U.S. bankruptcy code address this equity issue; specifically, they relate to valuation of a debtor's estate and actions creditors can take against debtors. Read More