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1992 Economic Commentaries

  • FDICIA's Discount Window Provisions

    Walker Todd


    On December 19, 1991, President Bush signed into law the Federal Deposit Insurance Corporation Improvement Act (FDIC1A), which Congress passed to address problems it saw in the supervision of federally insured banks. An important component of FD1CIA that has already received substantial public attention is the set of provisions detailing a new process for prompt corrective supervisory action against undercapitalized banks. Much more obscure, though perhaps as innovative, are the sections of the legislation that modify the terms and conditions under which the Federal Reserve Banks may lend to troubled banks at the discount window. Read More

  • Skepticism about the Direction of Inflation: Causes, Costs, and Cures

    Jerry Jordan


    Bumper stickers sometimes convey important ideas. In the 1980s, a familiar one on America's highways read "VISUALIZE WORLD PEACE." The underlying idea was that visualizing helps people behave in ways that tend to bring the vision to reality. Read More

  • Federal Credit and Insurance Programs: Beyond the Deficit Diversion

    David Altig


    Over the past decade and a half, public discussion of U.S. fiscal policy has been dominated by a growing obsession with the level and trend of government borrowing, manifested in federal budget deficits and the outstanding stock of public debt. The intensity of concern with these issues has, not surprisingly, increased in tandem with the magnitude of both. The view that something must be done to reduce the level and growth of government debt is nearly unanimous, and the sentiment that we require a dramatic remedy, such as a balancedbudget amendment to the Constitution, is not uncommon. Indeed, the durability of the Ross Perot presidential candidacy was in large part attributable to the sense that he alone among the candidates had insistently focused on the federal deficit. Read More

  • The Importance of Structure in Decisionmaking

    Jerry Jordan


    A learned early in my career as a business economist that perhaps the worst answer an economist can give to a question is, "I don't know." And having spent much of my life in the company of economists, I can honestly say it is a response I've not often heard. I am reminded of the remark Paul Samuelson once made about Milton Friedman: "I wish I was as certain about anything as Milton Friedman is about everything." Perhaps we are, as many believe, a profession that is frequently wrong, though never in doubt. Read More

  • NAFTA and the Midwest

    Randall Eberts Lydia Leovic


    In recent months, Midwestemers have consistently told pollsters and politicians that their No. 1 concern is jobs. The economy's tepid growth rate, coupled with die downsizing of several major U.S. corporations, has raised people's anxiety about job security and future employment prospects. Read More

  • Integrating Business and Personal Income Taxes

    Jeffrey Hallman Joseph G. Haubrich


    Edmund Burke's comment rings no less true today than it did in 1774. One need only observe political candidates' perennial attempts to tar their opponents with the "tax and spend" brush to know that Burke had gotten it right more than two centuries ago. Read More

  • The M2 Slowdown and Depository Intermediation: Implications for Monetary Policy

    John Carlson Katherine Samolyk


    Congress requires that the Chairman of the Board of Governors of the Federal Reserve report semiannually on the System's plans and objectives for monetary policy. Among its financial objectives, the Federal Reserve has placed the greatest emphasis on its target ranges for the M2 measure of money since around the mid-1980s. M2 comprises currency, checking and savings deposits, money market mutual funds (MMMFs), and certificates of deposit in denominations less than $100,000 (small CDs). Read More

  • FDICIA's Prompt Corrective Action Provisions

    Christopher Pike James Thomson


    Following passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which addressed the insolvency of the Federal Savings and Loan Insurance Corporation's deposit insurance fund, policymakers turned their attention toward heading off a similar collapse of the Bank Insurance Fund (BIF). After months of wrangling, Congress forwarded the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) to the White House last November 27. As President Bush signed the bill into law a few weeks later, the BIF was roughly $7 billion in the red — its first deficit since the 1930s. Read More

  • The Recent Rise in the Value of Education: Market Forces at Work

    Erica Groshen Colin Drozdowski


    In the past decade, higher levels of schooling have become more financially rewarding. Adjusted for inflation, the earnings of college-educated workers rose during the 1980s, while they declined for employees with a high-school diploma or less. This development stands in marked contrast to the 1970s, when college-educated workers actually lost ground relative to those with only a high school degree. Read More

  • Should the United States Hold Foreign Currency Reserves?

    Gerald Anderson Owen F. Humpage


    The United States holds a $43 billion portfolio of foreign exchange reserves— mostly German marks and Japanese yen — to defend against unwanted depreciations of the dollar in the world's currency markets. By selling these reserves when demand for its currency weakens, the United States can reduce the supply of dollars and thereby resist a decline in the dollar's foreign exchange price. Read More

  • The Business Cycle, Investment, and a Wayward M2: A Midyear Review

    Michael Bryan John Erceg


    Following a string of small advances that began early last year, the pace of economic expansion, as measured by gross domestic product (GDP), picked up in the first quarter. Led by a huge $43.1 billion increase in consumer spending, the annualized 2.4 percent GDP growth in 1992:IQ was the strongest rise in overall economic activity in three years and came despite another large liquidation of business inventories (down $17.6 billion). Read More

  • Has Someone Already Spent the Future?

    Jagadeesh Gokhale


    As massive budget deficits continue to push the national debt to record levels, Americans have grown increasingly concerned about how lawmakers' seemingly irresistible urge to spend now and pay later may be compromising the nation's economic future. Who among us has not wondered how much heavier the burden on our descendants will be because of the government's refusal to live within its means? Read More

  • Auctioning Treasury Securities

    Edward Stevens Diana Dumitru


    The U.S. Treasury expects to sell about a trillion dollars of new securities this fiscal year to finance a projected $400 billion budget deficit and to refinance maturing debt. Most of the securities will be issued through public auctions, where competition among bidders might be expected to minimize interest payments on the debt. Read More

  • Gilt by Association: Uncovering Expected Inflation

    Joseph G. Haubrich Ann Dombrosky


    One unfortunate aspect of life in the United States today is that guesses about inflation really matter. We have to consider expected changes in the cost of living when negotiating our wages. Similarly, we need to think about future inflation when computing both the returns to investing and the cost of borrowing. Explicitly or implicitly, inflation expectations have become an integral part of all our economic decisions. Read More

  • What Monetary Policy Can and Cannot Do

    Jerry Jordan


    One of the peculiar aspects of my return to the monetary policymaking arena has been the media's interest in labeling me a "hawk" or "dove," or someone who is anti-inflation or pro-growth. I regularly receive calls from reporters when economic statistics are released asking about my reactions to the numbers so that they can speculate on how I might vote at the next Federal Open Market Committee meeting. "Fedwatchers" — a fraternity I once belonged to — other market participants, and the media have increasingly focused on interpreting policymakers' actions and on the minutiae of implementing policy. This focus has contributed to confusion about what monetary policy can and cannot do and has added to the age-old confusion between money and credit. Read More

  • Securitization: More than Just a Regulatory Artifact

    Charles T. Carlstrom Katherine Samolyk


    Competitive and regulatory pressures have prompted banks and other financial intermediaries to participate in credit markets in ways that are not directly reflected on their balance sheets. This poses a problem for regulators, who must assess the risks of these off-balance-sheet lending activities. One such activity is the packaging of loans into marketable securities, which is known as asset-backed lending or securitization. Read More

  • Can Conventional Theory Explain the Unconventional Recovery?

    David Altig Michael Bryan


    Ask the average intelligent observer of economic matters to define a business cycle and chances are good that you will receive an explanation along the following lines: Advanced economies are characterized by long-run trends in the level of gross domestic product (GDP) that can be predicted with virtual certainty. However, the actual path of output is not smooth. GDP will sometimes be above its trend level, and sometimes below. It is this "cycling" around the long-run trend that defines the periods of contraction and expansion that constitute the business cycle. Read More

  • A Price Objective for Monetary Policy

    William Gavin


    The idea of monetary policy aimed at producing a stable price level has gained increasing support in the United States in recent years. In 1991, the Neal Resolution proposed to make such a policy objective law. Elsewhere, the notion of price stability has also become more popular. For example, the central banks of Canada and New Zealand recently adopted explicit multiyear targets for inflation, and a commitment to price stability is widely thought to be a necessary condition for successful monetary union in the European Community. Read More

  • The Case for Disinflation

    Lawrence Lindsey


    Thank you. It is a pleasure to be here tonight. Quite frankly, this time every four years, it's nice to be almost anywhere but Washington, D.C. And, since you've just endured the Super Tuesday limelight, I'll bet you all know what I mean. The Olympics are over and the baseball season has yet to begin. And life just wouldn't be the same without some contest to stir the blood. So I suppose we should be grateful for these Tuesday night events. Read More

  • Is the Rust Belt's Revival Real?

    Gerald Anderson


    The Great Lakes region was battered in the 1970s and early 1980s by a number of structural and cyclical adjustments. Heavy industry retrenched, manufacturing jobs were slashed by the thousands, and many factories were permanently closed. So severe were the economic woes felt here that the region became known nationwide as the Rust Belt, an area seemingly destined to suffer a continuing downward spiral in relative employment levels and living standards. Read More

  • Round table's Rx for the Economy: First, Do No Harm

    John Erceg John Martin


    In this political season, there are as many prescriptions being written for the economy as there are would-be healers. Though the diagnosticians agree that the patient will certainly recover, they are divided on just how aggressively treatment should proceed. Read More

  • Is Household Debt Inhibiting the Recovery?

    David Altig Susan Bryne Katherine Samolyk


    Forecasting short-run economic activity is a tenuous business. Though all economic contractions and expansions have certain well-defined characteristics, history never completely replicates itself. Thus, the particulars of past economic downturns are distinct, and the task of forecasters is something of an art — that of identifying the relevant caveat in the current economic outlook. Read More

  • Uncertain Inflation and Price-Level Rules

    Jeffrey Hallman


    Nearly all economists believe that the sole cause of long-run inflation is excessive money growth. In analyzing the economy, it has long been standard practice to employ models in which only unexpected variations in the quantity of money affect real activities and decisions, while anticipated variations affect only the price level. This property is known as neutrality. If inflation comes from money, and money is neutral, there may be little to gain by pursuing policies that reduce inflation. Read More

  • Unbalanced Growth and the U.S. Productivity Slowdown

    Paul Bauer


    The single most important factor in determining a nation's standard of living in the long run is the productivity of its resources (primarily labor and capital). If maintained over time, even relatively small productivity growth rates can have large effects on living standards. For example, if productivity grew at a moderate 2.0 percent each year, the overall standard of living would double in only 35 years. Read More