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1987 Economic Commentaries

  • Financial Reform at a Crossroads


    W. Lee Hoskins

    Abstract

    Today, 75 years after the founding of the Federal Reserve System and 55 years after the nationwide bank holiday of 1933, financial regulation is once again at a crossroads. The conflict between market forces and regulation has created serious problems that cannot be avoided much longer. At issue is a very basic question: should we go forward with deregulation, or should we turn back? The answer will have an important bearing on the future structure of the financial services industry. Should we make market forces exert a more powerful influence in the financial sector, or should we reinforce the blanket protections of the regulatory process? Read More

  • Stock-Market Gyrations and Investment


    William Osterberg

    Abstract

    The worldwide stock-market decline on October 19 has increased uncertainty about future changes in employment and output both in the United States and abroad. Part of the reason for this uncertainty is that changes in the level of equity prices have been one of the best leading indicators of economic activity (Moore, 1980). In particular, the stockmarket decline may affect consumer spending and business purchases of plant and equipment. Read More

  • Economic Policy Issues for 1988 and Beyond


    W. Lee Hoskins

    Abstract

    The 1980s have been especially difficult years for industrial areas of the country. We have experienced an enormous transformation in our economies. Once prominent industries have declined in absolute and relative importance. Under the pressures of competition, firms have been forced to alter operations and restructure facilities. Change of this sort is usually painful for the people and the communities involved, but if change is inevitable and leads to a better world, then much has been accomplished. Read More

  • Local Thrift Competition and Bank Earnings


    Paul Watro

    Abstract

    Economic and legislative changes have clearly eroded differences between commercial banks and thrift institutions. Commercial banks traditionally offered a unique cluster of products that were not available from other institutions. Because of the expanded powers of thrift institutions in the early 1980s, however, thrifts have been operating more like commercial banks, providing a wide range of financial services, including checking accounts and business loans. Read More

  • Two Neglected Implications of Dollar Depreciation


    Gerald Anderson

    Abstract

    The foreign-exchange value of the dollar has been depreciating for more than two-and-a-half years. Most discussion about this depreciation has focused on traditional issues, such as its effects on the overall trade balance, economic growth, import prices, inflation, and interest rates. Read More

  • FDIC Policies for Dealing with Failed and Troubled Institutions


    Daria Caliguire James Thomson

    Abstract

    Bank failures reached a post- Depression high in 1986. One hundred thirty-eight banks, including one mutual savings bank, were closed by their primary regulator; an additional seven banks needed assistance from the Federal Deposit Insurance Corporation (FDIC) to prevent them from failing. Read More

  • Competition, Concentration, and Fares in the U.S. Airline Industry


    Paul Bauer

    Abstract

    The current performance of the U.S. airline industry with regard to safety, fares, and service has been a topic of widespread concern among policymakers and the public. One aspect of this concern is the relationship between competition, concentration, and air fares. Competition is required to achieve and preserve the full benefits of deregulation, particularly if fares are to be set as low as possible. Read More

  • U.S. Dependence on Foreign Saving


    Gerald Anderson John Carlson

    Abstract

    Earlier this year, foreign central banks made very substantial purchases of U.S. securities. They did so with some of the proceeds of their massive intervention in the foreign-exchange market, involving purchases of the dollar intended to prevent its depreciation. In the same period, private international investors sharply reduced their net new investment in U.S. financial markets. Read More

  • Lessons from the European Monetary System


    Nicholas Karamouzis

    Abstract

    Many economists and policy makers have argued that the industrialized countries could minimize exchange-rate volatility and enhance economic stability if West Germany, Japan, and the United States linked their currencies in a target zone arrangement. Under a target-zone system, countries adjust their national economic policies to maintain their exchange rates within a specific margin around agreed-upon, fixed central exchange rates. I Such a system already exists for the major European currencies in the form of the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). A review of the ERM provides valuable lessons about the operations, costs, and benefits of target-zone arrangements. Read More

  • Interbank Exposure in the Fourth Federal Reserve District


    James Thomson

    Abstract

    Contagion risk in the banking system - the sensitivity of a bank to the failure of another bank - is a source of public policy concern. It is especially a problem when the failure of one bank, or a limited number of banks, causes multiple failures in the banking system. Significant contagion effects have public policy implications both for the way banks are regulated and for the solvency of federal deposit insurance funds. Read More

  • A Critical Look at SIPC


    Jerome Fons

    Abstract

    Throughout most of its U.S. history, operation of the securities market has been directed by private associations with very little government regulation or interference.</p> <p>This situation changed after the Crash of 1929, when an estimated $50 billion stock market loss triggered the Great Depression and ended the government's hands-off attitude. Read More

  • M1A - M.I.A.?


    William Gavin Michael Pakko

    Abstract

    For many years, monetary policy has been implemented largely through the pursuit of monetary aggregate targets. The Federal Open Market Committee (FOMC), the policy making arm of the Federal Reserve System, sets target ranges for the growth of various monetary aggregates, which are intended to be consistent with the broader objectives of policy. Read More

  • Reappraising the 1987-88 Outlook


    John Erceg William Murmann

    Abstract

    The economy is in the fifth year of an expansion that has been characterized by a relatively moderate inflation rate, by moderate growth in output, and by the continuation of large trade and federal deficits. Some observers feel that the economy, like Shakespeare's character Hamlet, is trying to make up its mind and is currently wavering between tendencies toward accelerated growth in output and inflation, or toward another year of moderate growth in inflation and output. Read More

  • Home Equity Lines: Characteristics and Consequences


    Kim Kowalewski

    Abstract

    Three traditional indicators of consumer financial distress have sent up warning flags in the past year. The rapid growth of consumer installment debt relative to that of disposable personal income pushed the debt-to-income ratio to new highs in 1986; delinquency rates on installment and mortgage debt continued to increase last year; and personal bankruptcies grew about 30 percent to reach a record high. Read More

  • Ohio Banks: Hitting the Interstate Acquisition Road


    Thomas Buynak John McElravey

    Abstract

    Changes in state banking laws have allowed interstate banking to spread rapidly throughout the United States during the past two years. As the process continues, and the geographic restraints on the banking industry fall away, there is increasing pressure for banks, particularly medium and large institutions, to move into new markets, and to compete on a regional, or even a national scale for retail deposits. Read More

  • Does Dollar Depreciation Matter: The Case of Auto Imports from Japan


    Gerald Anderson John Carlson

    Abstract

    In April 1987, the value of the U.S. dollar fell substantially, continuing a slide that began in February 1985 when the dollar peaked in relation to most currencies. Then worth more than 262 Japanese yen, the dollar is currently trading at about 140 yen. This means that it now takes 85 percent more dollars than it did in February 1985 to buy the same amount of yen. The dollar has demonstrated similar movements relative to currencies of some other major trading partners. Read More

  • Seeking Safety


    Edward Stevens

    Abstract

    Investors seeking safety frequently purchase U.S. government securities. Nonetheless, some investors lost over $750 million operating in the government securities market within the past five years. These losses were not incurred because the government repudiated its debt, of course, or even because of falling prices of outstanding government securities (in fact, prices were rising much of this time). Rather, losses arose from failures of securities firms with whom the investors were dealing. And out of the ensuing debate and calls for reform has come the Government Securities Act of 1986. Read More

  • Requirements for Eliminating the Trade Deficit


    Owen F. Humpage

    Abstract

    If the United States is to eliminate its external deficit, it must satisfy certain basic economic conditions with respect to its private savings, private investment, and total government budget deficit. The U.S. current-account deficit reached a record $140.6 billion in 1986 and probably will not improve, on balance, this year. A slight worsening early in 1987 could offset a modest improvement late in the year. Consequently, the United States will continue to amass external debts and will become one of the world's largest debtor countries. Read More

  • Debt-Deflation and Corporate Finance


    Jerome Fons

    Abstract

    Over the past few years, the rapid growth in the level of public and private domestic debt, and growth in the level of foreign debt owed to American banks, has been a major source of concern for our legislators and financial regulators. This concern centers on the possible negative effects that debt buildup might have on the economy as a whole and on industry in particular. Read More

  • The Japanese Edge in Investment: The Financial Side


    William Osterberg

    Abstract

    The dramatic loss of U.S. international competitiveness in manufacturing industries has been of increasing concern to U.S. policymakers. A particular focus of this concern has been the relative success of Japanese manufacturers. Proposed policy actions to offset the loss have ranged widely, from manipulation of exchange rates, to tax reform, to policies aimed at altering the level of interest rates. Read More

  • The Decline in U.S. Agricultural Exports


    Gerald Anderson

    Abstract

    Agriculture has always been a showpiece of American technology, efficiency, and productivity growth. Less than 3 percent of U.S. workers are engaged in farming, yet our farms produce enough to feed our population, to add to domestic surpluses, and to export enormous quantities. Agricultural exports have made major contributions to our merchandise trade balance, accounting for about one-fifth of total U.S. exports in the last 25 years. Read More

  • Should We Intervene in Exchange Markets?


    Owen F. Humpage

    Abstract

    The Group of Five countries (France, Germany, Japan, the United Kingdom and the United States), plus Canada, met in Paris on February 21 and 22, seeking ways to eliminate huge trade imbalances in the United States, Japan and Germany, to encourage greater exchange-market stability, and to thwart growing protectionism. Read More

  • Is the U.S. Pension-Insurance System Going Broke?


    Thomas Buynak

    Abstract

    Forty million Americans-about one third of the work force-have private, employer-sponsored pensions that are insured by the Pension Benefit Guaranty Corporation (PBGC). The PBGC is a federally chartered agency that is required by law to pay guaranteed retirement benefits to insured workers who would normally lose their pensions as a result of the failure or inability of an employer to meet its pension-fund obligations. Read More

  • Loan-Quality Differences: Evidence from Ohio Banks


    Paul Watro

    Abstract

    Bank earnings nationwide, as measured by return on assets, have been falling in the 1980s. Sixteen percent of the more than 14,000 commercial banks in the United States 'incurred net losses in 1985, up fourfold from the 1980 level. Bank loan quality continues to deteriorate and is causing increasing concern among regulators, investors, and analysts. Loan charge-offs have more than doubled in the last four years and have been a large contributing factor to the decline in bank earnings." Read More