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1986 Economic Commentaries

  • The Changing Nature of Our Financial Structure: Where Are We Headed? Where Do We Want To Go?


    Karen Horn

    Abstract

    Changes in the financial markets have blurred the distinctions between banks and other depository institutions, and between depository institutions and other financial businesses. In the midst of the blur, calls for reform have been coming from all corners, including financial institutions, regulators, the Administration and Congress, and the general public. The consensus is that reform is needed, but consensus ends there. Banks want to go into other businesses. Other businesses want to enter the banking business. Consumers want better services at lower costs. Regulators are concerned about increasing risks. Read More

  • Labor Cost Differentials: Causes and Consequences


    Randall Eberts Joe Stone

    Abstract

    Labor costs are often cited as the primary hindrance to economic development in cities where wages are high and as a spur to development in cities where wages are low. The relationship between labor costs and growth is complex, however. Many high-wage cities do experience a decline in growth, but others do not. Similarly, many low-wage cities grow rapidly, but some do not. Read More

  • Is the Consumer Overextended?


    Kim Kowalewski

    Abstract

    In November, the current economic expansion attained the ripe old age of 48 months. It has lasted longer than six of the other eight post-World War II expansions. Given its relatively advanced age, analysts have wondered how much longer it can last before it ends in recession. Read More

  • Competition and Bank Profitability: Recent Evidence


    Gary Whalen

    Abstract

    The nature of the relationship between the number and size distribution of competitors in a market (market structure) and their performance is of crucial importance to bank regulators and others responsible for evaluating the competitive effects of bank and bank holding company mergers and acquisitions. Read More

  • Debt Growth and the Financial System


    John Carlson

    Abstract

    Since 1982, the indebtedness of domestic nonfinancial sectors has increased from around 140 percent of nominal gross national product (GNP) to 170 percent. This extraordinary growth contrasts sharply with the pattern of debt growth over most of the post- World War II period. Between 1951 and 1982, for example, debt growth was remarkably stable, continuing in direct proportion to nominal GNP. Although debt increased sharply relative to GNP from 1929 to 1933, this increase largely reflected a 46 percent decline in GNP over the same period. Meanwhile, some measures of debt were declining in absolute terms. In fact, domestic nonfinancial debt (the measure of total debt used in this article) actually declined 14 percent from 1929 to 1933. Read More

  • Monetarism and the Ml Target


    William Gavin

    Abstract

    The Federal Reserve has once again decreased emphasis on the Ml target as a guide for short-run policy actions. In the first half of 1986, Ml growth averaged 11.8 percent, while nominal gross national product (GNP) growth averaged only 4.6 percent and inflation continued to be lower than expected. Policymakers and economists, including leading monetarists, argue that Ml is no longer an appropriate short-run guide for monetary policy. Read More

  • Alternative Methods for Assessing Risk-Based Deposit-Insurance Premiums


    James Thomson

    Abstract

    One of the most widely debated topics in the political arena is the proposal to give the Federal Deposit Insurance Corporation (FDIC) the power to vary the cost of deposit-insurance on the basis of risk. The FDIC was created in 1933 and today is considered an integral part of the federal banking safety net whose purpose is to protect the savings and transactions balances of small savers and to help stabilize the banking system. Federally-insured banks currently pay a flat fee for the FDIC guarantee of the first $100,000 of each deposit account in the bank. Critics do not think this is fair or efficient because banks that take excessive risks with their depositor's money pay exactly the same rate for FDIC insurance as banks that are more conservative in their operations. Read More

  • Implications of a Tariff on Oil Imports


    Gerald Anderson Kim Kowalewski

    Abstract

    A sharp drop in the value of the dollar since February 1985 has created hopes that there will be an increase in net exports that will fuel economic gains both in Ohio and the nation. Proponents argue that such a tariff would help reduce the federal budget deficit, that it would help cut the foreign trade deficit, and would prop up a sagging domestic oil industry. However, our analysis indicates that while the tax would certainly contribute somewhat on all three of these counts, on balance it is probably a bad idea. The tax would reduce real economic growth, raise the overall price level, subsidize domestic petroleum production at the expense of the rest of the nation, hurt oil exporting nations-particularly heavily indebted ones such as Mexicoand move the world further away from the economic efficiencies of free trade. Read More

  • Will the Dollar's Decline Help Ohio Manufacturers?


    Amy Durrell Philip Israilevich Kim Kowalewski

    Abstract

    A sharp drop in the value of the dollar since February 1985 has created hopes that there will be an increase in net exports that will fuel economic gains both in Ohio and the nation. The decline in the dollar has come at a time of sluggish growth in the national economy, which has been in a period of recovery since November 1982. This period featured record employment increases in the U.S. between 1983 and mid-1984. Ohio's growth throughout the recovery, however, has been below the national average, leaving industries in the state particularly anxious for an economic stimulant. Many hope that the decline in the dollar may be that stimulant. Read More

  • Target Zones for Exchange Rates?


    Owen F. Humpage Nicholas Karamouzis

    Abstract

    In recent years, growing dissatisfaction with the levels and the volatility of dollar exchange rates has led to calls for greater coordination of economic policies among nations and for an investigation into alternative exchange-rate systems. A number of economists and policymakers, for example, have advocated limiting the fluctuations of the dollar with a target-zone arrangement for exchange rates. Under such a proposal, countries would establish central exchange rates values for their currencies and would keep the actual exchange rates within a specific margin of the central values. Read More

  • Equity, Efficiency, and Mispriced Deposit Guarantees


    James Thomson

    Abstract

    Federal deposit insurance is supposed to protect savers and to help stabilize our banking system. However, if the deposit guarantees are mispriced, federal deposit insurance has unintended effects that are undesirable. In this Economic Commentary, we examine the factors that determine the value of deposit insurance. We show how insured banks can increase the value of their insurance and discuss their incentives to do so. Read More

  • Domestic Nonfinancial Debt: After Three Years of Monitoring


    John Carlson

    Abstract

    The Federal Reserve is required by the Full Employment and Balanced Growth Act of 1978 to report to Congress its annual growth objectives for money and credit. Over the years, most attention has been paid to objectives for measures of moneyparticularly Ml, which traditionally served as the primary guide for monetary policy. Recently, however, measures of credit have received more attention by researchers. Read More

  • The Emerging Service Economy


    Patricia Beeson Michael Bryan

    Abstract

    Alice and the Dormouse in Lewis Carroll's classic story offer a lesson about human nature that can be applied to our economy. Change often produces uncertainty and anxiety. When the economic environment changes, our anxieties are frequently reflected in political and legislative action. Read More

  • The Thrift Industry: Reconstruction in Progress


    Thomas Buynak

    Abstract

    During the 1981-82 recession, high interest rates sparked a financial crisis in the savings and loan (thrift) industry. A number of companies were liquidated; others required help from the Federal Home Loan Bank Board (FHLBB). Since then, the industry has shrunk from about 4,000 to 3,200 institutions." In this Economic Commentary, we discuss the problems that high and volatile interest rates have caused for thrifts, starting with the first major hint of trouble back in 1966. We show that, despite deregulation of the lending and other asset powers of thrifts since 1980, more must be done to reduce their susceptibility to high interest rates and to unfavorable economic conditions. Read More

  • How Good Are Corporate Earnings?


    Paul Watro

    Abstract

    Recent corporate profits from current production could be viewed as weak or strong, depending on how they are measured. On the one hand, after-tax reported profits of nonfinancial corporations have indeed been sluggish, increasing at a 14 percent annual pace over the current expansion. This is substantially below the 20 percent annual rate of growth, on average, for reported profits in post-Korean War recoveries. On the other hand, numbers can be deceiving, and reported profits are not the most accurate indicator of earnings from current production.' Reported profits are simply the difference between total receipts and total expenses which include "depreciation" as reported for tax purposes. Economic profits, which adjust reported profits for price changes and depreciation allowances, are generally thought to be a better gauge of corporate performance. In contrast to reported profits, after-tax economic profits of nonfinancial corporations have been strong in the current expansion, growing at a 45 percent annual pace, which far exceeds their average annual rate of 19 percent in previous expansions. Read More

  • Monetary Policy Debates Reflect Theoretical Issues


    James Hoehn

    Abstract

    Can monetary policy act to stabilize the economy? Should policy attempt to do so? These questions have been the subject of considerable controversy during the last few decades. The continuing controversy reflects, in large part, the inability of economists to resolve theoretical issues surrounding the relationship between nominal variables, such as inflation and money growth, and real variables, such as output and employment. Read More

  • A Revised Picture: Has Our View of the Economy Changed?


    Theodore Bernard

    Abstract

    The Bureau of Economic Analysis (BEA), a part of the U.S. Commerce Department, produces the National Income and Product Accounts (NIPA) statistics. These statistics summarize the nation's total economic activity, and provide statistical views of our gross national product (GNP). NIPA statistics are important economic tools. They provide information that helps government policymakers and business leaders to understand past and present economic activity, and to make decisions that have far reaching effects in the economy. Aside from regularly scheduled revisions, the BEA also releases benchmark revisions approximately every five years, as new census data become available.' The most recent benchmark revision took place in December 1985, the eighth such revision of its kind. Read More

  • The Government Securities Market and Proposed Regulation


    James Balazsy Jr.

    Abstract

    The failure of several unregulated government securities dealers since 1982 has led to pressure for at least minimum regulation of this market. According to some estimates, the failures in 1985 of just two government securities firms, E.S.M. Government Securities Inc. (ESM) and Bevill, Bresler and Schulman Asset Management Corp., caused losses of over $500 million to those who dealt directly with them. Losses also were sustained indirectly by individuals who never transacted business with ESM, including taxpayers of municipalities such as Toledo, Ohio. The failure of ESM also produced a temporary decline in the foreign exchange value of the dollar, led to the temporary closing of 70 privately insured savings and loan associations in Ohio, and contributed to a subsequent loss of confidence in private deposit insurance systems in other states. Read More

  • Should We Be Concerned About the Speed of the Depreciation?


    Owen F. Humpage

    Abstract

    Over the past 12 months, the dollar has depreciated approximately 30 percent on a trade-weighted average basis against the currencies of our major trading partners.' This recent depreciation, at a rate of approximately 2.4 percent per month, has been the most rapid since the floating-exchange-rate system began in March 1973. In contrast, between September 1977 and October 1978, a period characterized by a worldwide lack of confidence in U.S. economic policies, the dollar depreciated at a pace of only 1.3 percent per month on a trade-weighted basis. Read More

  • American Automobile Manufacturing: It's Turning Japanese


    Michael Bryan

    Abstract

    In the last 10 years, the world auto market has been undergoing possibly the most dramatic transformation since assembly line production was introduced in 1913. Sparked by rising gasoline prices, the industry has developed and introduced new engineering materials and technology in an effort to produce smaller, lighter, and more fuel-efficient vehicles. This environment of change has also seen the emergence of foreign manufacturers as major competitors in the U.S. new-car marketplace. Read More

  • Can We Count on Private Pensions?


    James Siekmeier

    Abstract

    As a nation, Americans save a smaller portion of income than residents of most developed, free-market economies. For example, between 1960 and 1983, the savings rate in the United States averaged about 7.5 percent of disposable personal income. This is significantly less than the rates in West Germany (14.5 percent), in France (12.9 percent), and in Japan (18.9 percent). Read More

  • Junk Bonds and Public Policy


    Jerome Fons

    Abstract

    Over the past few years, the financial public has developed a fascination with the growth in the market for so-called junk bonds. In this Economic Commentary we would like to shed some light on the role of these instruments by providing a working definition of the term "junk bonds," by discussing their place in the financial world, and by examining a few of the issues surrounding concern over the growth of corporate debt. Read More

  • Bank Holding Company Voluntary Nonbanking Asset Divestitures


    Gary Whalen

    Abstract

    In the late 1970s and early 1980s an increasing number of nonfinancial corporations decided to alter their asset portfolios through voluntary divestiture- that is, by selling off or spinning off one or more of their operating subsidiaries.' The motives and financial impacts of this activity have been examined in several recent studies. Read More

  • A Correct Value for the Dollar?


    Owen F. Humpage Nicholas Karamouzis

    Abstract

    The dollar's rapid appreciation in foreign-exchange markets between mid- 1980 and February 1985 greatly reduced the international competitiveness of many U.S. industries, contributed to unemployment in the trade-sensitive sectors of the economy, and heightened calls for protectionist legislation. Although the dollar has since depreciated in foreign-exchange markets, many analysts contend that it remains "overvalued" or "too high." Read More