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1993 Economic Commentaries

  • Long-Term Health Care: Is Social Insurance Desirable?


    Jagadeesh Gokhale Lydia Leovic

    Abstract

    <p>The aging of the U.S. population portends steep increases in the demand for health care services well into the next century. Although many Americans rely on public health programs and private health insurance to provide financial protection for a diverse group of medical risks, the availability of such support for long-term disabilities is woefully inadequate. As of 1992, fewer than 10 percent of those age 65 or older were covered by private long-term care insurance.</p> Read More

  • Replacing Reserve Requirements


    Edward Stevens

    The significance of the Federal Reserve System's reserve requirements has been fading for the last 50 years, moving toward more universal application at less onerous rates. Read More

  • Community Lending and Economic Development


    Jerry Jordan

    Abstract

    <p>Improving access to credit by minority and low-income communities represents a serious challenge to lenders, community residents, and government officials. Hardly a day goes by without a story in a major newspaper or in a trade publication dealing with some aspect of this issue. My own view is that most discussions about community investment and lending discrimination ignore some fundamental lessons from economic theory and practical experience.</p> Read More

  • Making the SAIF Safe for Taxpayers


    William Osterberg James Thomson

    Abstract

    <p>The first concrete step toward resolving the decade-long thrift debacle was taken by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which overhauled the federal savings and loan regulatory apparatus. A principal goal of FIRREA was to separate the cost of resolving the already insolvent thrifts ("zombies") from the operations of the industry's new deposit insurance fund. Because the Federal Savings and Loan Insurance Corporation was bankrupt, Congress created the Resolution Trust Corporation to dispose of the zombies. This receivership agency was to be funded primarily by taxpayers, while any costs related to federal insurance of deposits at healthy thrifts would be paid for by the thrift industry itself through the Federal Deposit Insurance Corporation's Savings Association Insurance Fund (SAIF).</p> Read More

  • The Budget Reconciliation Act of 1993: A Summary Report


    David Altig Jagadeesh Gokhale

    Abstract

    <p>On August 5, the U.S. Senate cleared the Omnibus Budget Reconciliation Act of 1993 (OBRA93), one day after the House of Representatives had done likewise. President Clinton signed the bill into law on August 10, formalizing its role as the central fiscal blueprint for the nation's economy over the next five years.</p> Read More

  • Credibility Begins with a Clear Commitment to Price Stability


    Jerry Jordan

    Abstract

    <p>In the summer of 1971, the United States suspended the limited convertibility of the dollar for gold. Convertibility had not been operational for some time, except to foreign governments by special arrangement. Nevertheless, with the suspension came the recognition that America had cast aside its last formal commitment to gold convertibility and was now operating on a purely fiat currency. The idea of the dollar first being one-twentieth and then one-thirty-fifth of an ounce of gold, then being "worth" what a dollar would buy, without reference to some more basic standard of value, was a gradual process.</p> Read More

  • The Decline in U.S. Saving Rates: A Cause for Concern?


    Jagadeesh Gokhale

    Abstract

    <p>The surging federal budget deficit and health care reform proposals have been the subjects of choice in recent public policy debates. Relatively little attention, however, has been focused on another significant and ongoing economic phenomenon — the precipitous drop in saving rates in the United States. Should this decline be a cause for concern? The answer, of course, depends on whether the reduction is temporary or permanent and on whether it has the potential to seriously damage the U.S. economy. Moreover, if policymakers choose to address this problem, they should understand the underlying factors that led saving rates to plummet beginning in the past decade.</p> Read More

  • Airline Deregulation: Is It Time to Finish the Job?


    Paul Bauer Ian Gale

    Abstract

    <p>From the earliest days of air travel in the United States, the federal government has regulated many aspects of the industry. By the early 1970s, even though the number of passengers had grown exponentially and the airlines had vastly expanded their networks, it was becoming clear that economic regulation was constraining competition and stifling innovation. Passage of the Airline Deregulation Act in 1978 removed the government from the day-to-day operations of the air carriers, and though the transition was challenging for all concerned, most passengers have benefited greatly from more frequent service and lower fares.</p> Read More

  • Assessing Real Interest Rates


    Charles T. Carlstrom

    Abstract

    <p>Since the late 1970s, the Federal Open Market Committee (FOMC) of the Federal Reserve System has set ranges for growth of money and debt at the beginning of each year, as required by the Humphrey-Hawkins Act. These ranges are reconsidered at the FOMC's July meeting, where preliminary ranges are chosen for the next calendar year. Monetary targets were intended not only as policy guides, but also as a means to communicate the thrust of monetary policy to others—particularly in regard to its long-term intentions. For example, in the 1980s the FOMC sought to slow trend money growth in order to reduce the inflation rate over time. Financial markets have thus paid a great deal of attention to monetary targets.</p> Read More

  • Free Markets and Price Stability: Opportunities for Mexico


    Jerry Jordan

    Abstract

    <p>Mexico has been making important progress on several economic fronts, moving toward less inflation, increased reliance on privately owned capital and companies, and greater integration of its economy with those of other nations. At times of transition such as this, there are many choices to be made. There is also less resistance to change. That puts Mexico in a position to select policies and shape institutions that will affect its prosperity for decades to come.</p> Read More

  • The Evolving Loan Sales Market


    Joseph G. Haubrich

    Abstract

    <p>Nearly everyone, from daily readers of the <em>American Banker</em> to devotees of <em>It's a Wonderful Life</em> or <em>Bonnie and Clyde,</em> somehow learns a few basic facts about banking. Most people know that a bank accepts deposits and uses the money to make loans. Many people believe that if too many depositors want their money back at once, the bank will fail. What would people think if they knew banks could make loans without taking in deposits, and sell loans when depositors want their money returned?</p> Read More

  • Enterprise Liability: A Prescription for Health Care Reform?


    Charles T. Carlstrom

    Abstract

    <p>Few issues facing society touch as many lives as health care. Although most Americans would probably agree that the quality of available medical services in the United States is first-rate, many question whether the price being paid for that quality is too high. Recognizing this, President Clinton, who made health care reform a central promise of his campaign, appointed a blue-ribbon task force headed by First Lady Hillary Rodham Clinton to look into ways of containing skyrocketing costs while increasing access to the nation's doctors and hospitals.</p> Read More

  • Do Deficits Matter?


    Owen F. Humpage

    Abstract

    <p>The federal debt keeps rising, like a monster from the sea, and now threatens to take a $ 12,700 bite out of each of us. Many observers blame the deficit beast for—among other things—high real interest rates, an overvalued dollar, and the deterioration in our international accounts, and they warn that it will inevitably gnaw away at our standard of living. With national concern rising, President Clinton has made deficit reduction a focus of his economic policy, and his opposition has found it a convenient topic for political haranguing.</p> Read More

  • Are the Great Lakes Cities Becoming Service Centers?


    Erica Groshen Laura Robertson

    Abstract

    <p>During the past 20 years, American business has restructured itself along many dimensions. While some industries have suffered a protracted decline, others have expanded, moved to new regions, or revamped their production processes. Two much-noted effects of this restructuring are the elimination of many manufacturing jobs nationwide and sluggish overall employment growth in the large cities bordering the Great Lakes.</p> Read More

  • Does Small Business Need a Financial Fix?


    Katherine Samolyk Rebecca Wetmore-Humes

    Abstract

    <p>Although by most conventional economic standards the recent recession is two years past, the health of the economy remains a concern to policymakers. The slow pace of the recovery and the attendant lack of employment growth have led to the perception that a shortage of credit, especially bank lending, is part of the problem. As the story goes, the small business sector, considered a major source of job creation in our economy, is stagnating, largely because of a credit crunch. Shortages of bank credit tend to hit small businesses particularly hard because banks have traditionally been the major source of funding for this sector.</p> Read More

  • The Energy Tax: Who Pays?


    Mark E. Schweitzer Adam Werner

    Abstract

    <p>In his State of the Union address, President Clinton called for a broad-based energy tax to help reduce the federal budget deficit. The tax is expected to generate $21.1 billion in 1997 when it is fully phased in — one-quarter of all new revenue in the overall budget package. However, the motivation of the tax is not solely revenue generation. The administration's favoring of an energy tax over other potential revenue sources is clearly rooted in its desire to further the social goals of protecting the environment, conserving energy, and reducing our dependence on foreign oil. In addition, the Treasury Department indicated that the tax had to be structured so that it would be borne "fairly and equitably across the country."</p> Read More

  • On the Political Economy of Trade Restraints


    Jerry Jordan

    Abstract

    <p>If you laid all the economists in the world end to end, or so the story goes, they would never reach a conclusion. On one subject, at least, this maxim is inaccurate. Virtually all economists agree that only a liberal world trading order can make every nation better off. They understand, as did Adam Smith, that free trade is truly the source and essence of the wealth of nations. This ideal, however, has never been realized. Instead, history charts a continual ebb and flow of protectionism. We can point to countries, rich in human and natural resources, that have withered behind trade barriers, and others, lacking such endowments, that have traded their way to world prominence.</p> Read More

  • Price Isn't Everything


    Edward Stevens

    Abstract

    <p>What determines the role of the public and private sectors in the nation's payments system? This <em>Economic Commentary</em> examines the transfer and settlement of large-dollar payments, an exercise made timely by recent announcements of two potential innovations. In the public sector, the Federal Reserve has asked for comment on a proposal to open its Fedwire payment network two hours earlier each banking day, at 6:30 am, and to keep even longer hours in the future. In the private sector, The Global Settlement Fund, Inc., has formed a new network for making payments 24 hours a day.</p> Read More

  • A Market-Based Approach to Regulatory Reform


    Jerry Jordan

    Abstract

    Regulatory requirements and prohibitions impose significant, although sometimes unintended, taxes on the business of banking. As with all business taxes, the true burden is shared jointly by investors in the form of reduced market valuations of their investment, by employees in the form of lower real wages, and by customers — in this case, in the form of higher interest paid on loans and lower interest received on savings. Read More

  • An Overview of the Clinton Budget Plan


    David Altig Jagadeesh Gokhale

    Abstract

    Virtually all government policies alter the allocation of economic resources. The timing of the policies, the nature of government spending, and the form of revenue collection affect decision-making over time, change the distribution of costs and benefits across households and firms, and reshuffle the burdens borne by different generations. Whether intended or not, allocative consequences are the reality of economic policy. Read More

  • Home Mortgage Lending by the Numbers


    Robert Avery Patricia Beeson Mark Sniderman

    Abstract

    During the past year, several Federal Reserve reports on home mortgage lending have attracted widespread attention for what they revealed about racial lending patterns. The Federal Reserve Board, in backto- back analyses of 1990 and 1991 data gathered nationwide, reported that black and Hispanic applicants are denied credit at roughly <em>twice</em> the rate of white applicants. And in a study designed to investigate the sources of differential mortgage denial rates in the Boston area, that region's Reserve Bank concluded that lenders approved conventional home purchase loans for white applicants at a much greater rate than for black and Hispanic applicants who appeared, statistically at least, to be similarly qualified.</p> Read More

  • Some Fiscal Advice for the New Government: Don't Let the Sun Go Down on BEA


    David Altig

    Abstract

    In mid-February, President Clinton will outline his administration's first, and much anticipated, economic plan. Although the exact nature of the package is still speculative as of this writing, it is clear that any short-run stimulus will be accompanied by long-run deficit reduction measures. For this, the administration is being praised in advance, not the least by financial markets, which have responded with a nearly 40-basis-point decline in long rates since the election. But whether the markets — and by inference the American public — stay on board depends on the administration's ability to follow through with a clear and credible long-term plan to accomplish the deficit reduction it and the new Congress clearly desire. Read More

  • Bank Exposure to Highly Leveraged Transactions


    William Osterberg

    Abstract

    The commercial banking industry as a whole fared well in 1992, with many institutions citing improvements in profitability. Despite this overall good news, however, analysts continue to question the health of some sectors of the industry. Such doubts ring familiar to those who recall banks' difficulties in the 1980s as a result of overinvestment in loans to agricultural and energy interests, to less-developed countries, and to commercial real-estate ventures in the Northeast and Southwest. Read More

  • The Cost of Buying Time: Lessons from the Thrift Debacle


    James Thomson

    Abstract

    The collapse of the Federal Savings and Loan Insurance Corporation's (FSLIC) deposit insurance fund, coupled with the subsequent appropriation of taxpayers' money to underwrite the cleanup of the thrift industry, ranks as one of the greatest financial disasters of our time. When all is said and done, around $200 billion (in 1990 dollars) will have been spent to honor the claims of depositors in closed thrifts and to dispose of failed-thrift assets. To put this number into perspective, the <em>combined</em> loan guarantees for Lockheed, New York City, and Chrysler Corporation in the 1970s were only about $9 billion in equivalent dollars. Read More