Regional Economist - January 2011

8/7/2019 Regional Economist - January 2011

1/24

A Quarterly Reviewof Business andEconomic Conditions

Vol. 19, No. 1

Jaa 2011

The Federal reserve Bank F sT. luis

C e n T r a l to a m e r i C a s e C o n o m y

Community ProfleFederal Grant, Higher Tax

Shore Up Kentucky City

District OverviewMortgage Delinquency Ra

Not As Bad As National A

A Close LookAssistance Programs

in the Wake o the Crisis


2/24

c o n t e n t s

A Close LookBy Richard G. Anderson and Charles S. Gascon

During the fnancial crisis, an unprecedented amount o aid

was extended to companies, agencies and individuals by the

Treasury, the Fed and the FDIC. is assistance was necessary

and, in many cases, will return a proft to taxpayers.

4

The Regional

Economist JAnuAry 2011 | VoL. 19, no. 1

3 p r e s i d e n t s m e s s a g e

1 1 n a t i o n a L o V e r V i e w

Foecastes Expect Solid

Gowth, Low Iatio

By Kevin L. Kliesen

e recovery rom the latest reces-

sion has been lethargic, but there

are signs that the economy is poised

to pick up the pace. Consumer andbusiness spending have risen, as have

stock prices and exports. Mean-

while, yields on Treasury securities

and mortgages remain low.

12 c o m m uni t y p r o f i L e

Owesboo, K.

By Susan C. Tomson

With the help o the ederal govern-

ment, Owensboro stopped the

erosion o its riverront and started

to redevelop not just the downtown

but its entire economy.

15 Teachig Teaches

abot the Ecoom

By William Bosshardt,

Paul Grimes and Mary Suiter

Workshops put on or teachers by

the Atlanta and St. Louis Feds are

having the desired results, a recent

assessment shows. Teachers

are learning about the economy

and personal fnance, and they

are passing this inormation on

to a student body t hat desperately

needs it.

18 d i s t r i c t o V e r V i e w

Motgage Cisis Is Milde

i Distict tha i natio

By Subhayu Bandyopadhyay

and Lowell R. Ricketts

e nations rate o serious delin-

quencies has been worse than the

Districts or more than two years.

However, there are pockets in the

District where the rate is much worse

than the current national average.

20 Have Hosig Teds

Hit the Bottom?

By Bryan Noeth

and Rajdeep Sengupta

On a national level, the number o

vacant homes is declining, as is the

percentage o mortgages in serious

delinquency. However, the demand

or housing hasnt picked up, nor

have prices.

22 economy at a gLance

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AQuarterlyReviewofBusinessandEconomicConditions

Vol.19,No.1

January 2011

The Federal reserve Bank F sT. luis

C e n T r a l to a m e r i C a s e C o n o m y

CommunityProfleFederalGrant,HigherTax

ShoreUpKentuckyCity

DistrictOverviewMortgageDelinquencyRates

NotAsBadAs NationalAverage

A Closer LookAssistance Programs

in the Wake o the Crisis

2 The Regional Economist |Jaa 2011


3/24

James Bllad, p ceo

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Te Fes Emergency Liquiity Facilities:Why Tey Were Necessary

p r e s i d e n t s m e s s a g e

As the lender o last resort, a central banktypically lends extensivelythough ata penalty rateduring a crisis. e Federal

Reserve took such actions to stabilize the

fnancial system and avoid urther stress

during the fnancial crisis that began in early

August 2007. e Fed created a number o

temporary liquidity programs in 2007 and

2008 to provide sound institutions with nec-

essary access to credit.1

Initially, the Fed encouraged depository

institutions to come to the discount windowor unding. On Aug. 17, 2007, the Fed decided

to reduce the spread between the primary

credit rate and the target ederal unds rate to

50 basis points. e loan maturity was also

extended rom overnight to a maximum o

30 days. Despite the narrower spread and lon-

ger maturity, relatively ew institutions came

to the discount window out o concern that

borrowing rom the discount window might

be perceived as a sign o fnancial weakness.

With the fnancial crisis intensiying, the

Fed created the Term Auction Facility (TAF) inDecember 2007 so that institutions could pur-

chase unds in the open market without going

to the discount window, thus circumventing

the stigma. Under TAF, the Fed auctioned

a fxed amount o term unds on a biweekly

basis; these loans had a maximum maturity o

84 days. For the frst auction, the total dollar

amount o bids was more than triple the dollar

amount o loans accepted. e overwhelming

demand or the TAF loans provides evidence

that stigma associated with discount-window

borrowing mattered during the crisis.U.S. fnancial markets were urther stressed

by problems in short-term dollar unding

markets. In response the Fed established

dollar liquidity swap lines with some oreign

central banks. Under this program, a oreign

central bank sold its currency to the U.S. in

exchange or dollars and then lent the dollars

to its own institutions. At most three months

later, the currencies were swapped back, with

the oreign central bank paying interest to the

Fed. e program helped ease strains in these

dollar unding markets during the crisis and

was reinstituted in May 2010 to help address

renewed problems in European markets.

TAF and the currency swap program gave

depository institutions a much-needed source

o short-term liquidity. In addition, the Fed

created programs in March 2008 to provide

primary security dealers with short-term

credit. Under the Primary Dealer Credit

Facility, primary dealers obtained overnight

collateralized loans at the primary credit rate.e Term Securities Lending Facility (TSLF)

allowed primary dealers to borrow Treasury

securities or 28 days in exchange or other

eligible, less-liquid securities. A ew months

later, the Fed established the TSLF Options

Program to oer extra liquidity (or up to two

weeks) during periods o elevated fnancial

stress, such as end-o-quarter periods. TSLF

loans and TSLF options were both awarded

through auctions.

Later in 2008, the Fed created programs to

ease the liquidity problems o other marketsand institutions. e Asset-Backed Com-

mercial Paper Money Market Mutual Fund

Liquidity Facility helped to stabilize money

market mutual unds that held illiquid asset-

backed commercial paper; without help, the

money unds had diculty meeting investors

demands or redemptions. e Commer-

cial Paper Funding Facility was designed to

increase liquidity in the commercial paper

marketa primary source o unding or

businessesand to provide assurances that

eligible commercial paper issuers would beable to repay their investors. Finally, the Term

Asset-Backed Securities Loan Facility was

created to stabilize the asset-backed securities

market, thus addressing the credit needs o

households and small businesses.

In implementing the above liquidity pro-

grams, the Fed ollowed standard risk-man-

agement practices to the extent possible. Only

sound institutions with good collateral met

the eligibility requirements to borrow under

these programs. In addition, the institutions

could borrow only a raction o their collateral

with the raction depending on the particular

collateral. As a result, the Fed did not lose any

money on programs that have already closed.

During the fnancial crisis, the Fed also

provided liquidity to systemically important

fnancial institutionsthose considered too

big to ail. In March 2008, the New York

Fed provided short-term credit to Bear Stearns

through JPMorgan Chase Bank, which the

company repaid. Shortly thereaer, the NewYork Fed provided credit to the newly created

Maiden Lane LLC or purchasing a portion

o Bear Stearns mortgage assets; this loan

enabled JPMorgan to acquire the remainder

o Bear Stearns, avoiding bankruptcy o the

latter. In September 2008, the New York Fed

provided credit to the American Interna-

tional Group (AIG) to prevent its disorderly

ailure. A ew months later, two newly

created LLCs received loans rom the New

York Fed to purchase certain assets and debt

obligations rom AIG. ese were some othe most controversial decisions made during

the entire fnancial crisis.

Overall, the emergency liquidity programs

proved to be successul at improving the unc-

tioning o fnancial markets. Most o the pro-

grams were closed naturally as the fnancial

crisis subsided because the borrowers ound

better terms in the private sector. e Federal

Reserve Board recently released detailed inor-

mation regarding these emergency liquidity

programs. eir size and variety demonstrate

how exible and powerul the lender-o-last-resort unction can be during a crisis.

1 For inormation on the programs, see www.ederal

reserve.gov/monetarypolicy/bst.htm

The Regional Economist | www.stloisfed.og 3


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c r i s i s o f 2 0 0 7 - 2 0 0 9

4 The Regional Economist |Jaa 2011 b bd


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A Clser LkAssistance Programs

in the Wake of the Crisis

By Richard G. Anderson and Charles S. Gascon

During the fnancial crisis o 2007-2009, the Treasury, the FederalReserve and the Federal Deposit Insurance Corp. (FDIC) extendedunprecedented amounts o assistance to banks, government housing agen-

cies, auto manuacturers, individual homeowners and others. Controversysurrounds such assistance. Opponents pejoratively reer to the assistance as

bailouts, arguing that billions o tax dollars were given to poorly managed

but politically well-connected frms. ey dismiss assertions that millions

o jobs would have been lost or as long as a decade i certain large frms had

ceased operation, believing that American entrepreneurs would have quickly

started new businesses to employ such workers. Proponents argue the assis-

tance was careully structured, was provided primarily to viable frms whose

principal sin was to be adversely aected by the fnancial crisis and, in cases

o assistance to insolvent frms, was careully collateralized so as to recover

the maximum amounts aer the crisis. Further, they argue, assistance in

a panic (such as the autumn o 2008) is unquestionably the correct policy

because a shallower recession and aster recovery beneft all American wage

earnersand taxpayers. e truth, o course, is somewhere in between.


6/24

Ae Bailots Eve Wise?

A well-unctioning (and well-regulated)

fnancial system is essential in any economy

that seeks to provide its citizens a high

standard o living. Yet, inherent in fnancial

systems is risk, including the risk o major

fnancial panics. At such times, wisely

administered government assistance is essen-tial or both fnancial and nonfnancial frms.

Not all bailouts are wise. A frm that ails

during normaleconomic times due to poor

management, inadequate capital investment

or excessive risk-taking should be allowed

to ail (absent concerns regarding national

security). To do otherwise is the equivalent

o counseling managers and entrepreneurs

that taxpayers stand ready to backstop their

ailures.

But ailure during periods oextreme

fnancial stress diers. e historical

record suggests that judicious bailouts

(we preer the term assistance) during

periods o fnancial stress are economically

ecient and can beneft both employeesand taxpayers.

Critics o assistance argue that prudent

managers o both fnancial and nonfnan-

cial frms should maintain adequate

liquidity at all times so as to survive any

adverse shocki not, then ailure is their

proper Darwinian ate, and the economy is

strengthened by their demise. For modern

economies, this argument is naveand

alse. e simplest argument is the most

powerul: Virtually all businesses depend

on borrowing capital against collateral, butin times o fnancial stress it oen is impos-

sible to determine prices or such collateral.

is observation underlies Walter Bagehots

dictum in his 1873 bookLombard Street

that in times o fnancial crisis a central

bank must lend against any and all collat-

eral, even i its value may be questionable.1

Assistance is wise until such time as cooler

heads, in less tumult, can sort through

the problem.

Oen overlooked by these same critics is

the alternative: an even more-heavily regu-

lated economy, so battened-down against all

perils that it ails to provide the maximum

standard o living or its citizens. Yes, assis-

tance programs o the past couple o years

have placed large sums o taxpayer money at

riskbut it must be remembered that these

frms employ taxpayers, buy products and

services rom other taxpayers, and are owned

by taxpayers.

Assistance programs, even in fnancial

crises, should be judicious, transparent and

granted at arms length as much as possible.

Legitimate questions can be asked whether

terms o the 2007-2009 assistance were su-

fciently onerous to ward o moral hazard.

We believe they were. In many cases, frms

owners (the shareholders) were wiped out

and senior managers were replaced. Admit-

tedly, in other cases (and especially caseswhere banks borrowed rom the Federal

Reserve), senior managers and stockholders

remain whole, or nearly so.

How Costl Ae Bailots?

A person who receives his inormation

primarily rom news broadcasts might

be orgiven or believing that trillions o

dollars o taxpayer unds have been lost in

bailouts. In act, the assistance programs o

the Federal Reserve and FDIC have earned

signifcant profts, and the Treasurys pro-gramsexcept or those related directly to

the housing marketsare projected to incur

no more than small losses. Signifcant losses

as we discuss later, are confned to the ederal

housing government-sponsored enterprises

(Fannie Mae and Freddie Mac) and to the

eorts to assist individual mortgage holders

threatened with oreclosure.

At their core, assistance programs are o

value to frms (and the economy) because

they buy risk (that is, bear risk) at prices that

the ree-market, during times o fnancialcrisis, is unwilling to pay. (An assistance

program that places no taxpayer unds at

risk is useless to the economy.) Measured

by the aggregate number o dollars initially

set aside, Treasury, Federal Reserve and

FDIC assistance programs risked nearly

$3 tril lion. Federal Reserve short-term

collateralized lending to banks comprised

approximately hal. e Treasury operated

13 programs o varying sizes, all unded by

n ll bl . a h l normal

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7/24

$600 $500 $400 $300 $200 $100 $0 $100

Bear Stearns (Maiden Lane)

Freddie Mac

Fannie Mae

AIG

Homeowner Support Programs

Automobile Companies

Bank Capital Programs

$293$510

$10

$200

$43

$1$46

$46

$63

$82

OUTLAYS I NCOM E

$28

$29

$0.3

$85$200

$111

$97$180

$12

$250

$16$50

$69$17

Temporary LiquidityGuarantee Program

Authorized Current Outlays Projected net gain (+) or loss()

Otlas ad Pojected Gais o Losses o Selected Pogams

g 1

$ , b

d : urrent outlays are cumulative outlays minus repayments, interest, fees an iviens. he values reporte in the chart are from the

folloing government reports: emporary iquiity Guarantee Program, ongressional versight Panel (2010, Figure 40); bear tearns (Maien ane), Fb

H.4.1 ale 1; Freie Mac/Fannie Mae, FHF (2010, Figure 6); G, .. reasury (2010); Homeoner upport Programs, GP (2010, p. 49); utomoile

ompanies, GP (2010, ale 2.35) .. reasury (2010a, Figure 2-b); bank apital Programs, .. reasury (2010a, pp. 22-29).

the $700 billion Troubled Asset Relie Pro-

gram (TARP) unds authorized by Congress

in late September 2008.

e Federal Reserve operated two broad

categories o programs: lending to deposi-

tory institutions and extraordinary lending

to nondepository fnancial institutions. Fed

lending to depository institutions was at mar-

ket interest rates and ully collateralized. In a

recent study, the Congressional Budget Oce

concluded that these programs provided no

subsidy to banks because the interest rate

was set in an open auction.2 Some critics

have argued that Fed lending bailed out

imprudent banks, whose managers had over-

invested in high-yielding but illiquid assets.

It may be true or a ew banks, but there is no

evidence that it is true or many.

e FDIC initiated its principal program,

the Temporary Liquidity Guarantee

Program, on Oct. 14, 2008. One part othat program provided unlimited deposit

insurance or certain noninterest-bearing

accounts, usually held by businesses. Its

intent was to calm ears that depositors

might move deposits rom smaller to larger

banks (perceiving these as less likely to be

allowed to ail) or might move deposits rom

banks into money market mutual unds

aer the regulators had provided de acto

unlimited insurance to these unds. e

second eature o the FDIC program was to

allow banks that ound debt markets inhos-pitable to roll maturing senior debt into new

issues ully guaranteed by the FDIC.3

Figure 1 summarizes into eight categories

the assistance programs o the Federal

Reserve, Treasury and FDIC.4 For each cat-

egory, the blue bar measures the total unds

authorized, the red bar shows current outlays

and the green bar shows the projected net

gain (positive values) or loss (negative values).

In most categories, the net outlay (taxpayer

cost) is small relative to initial program size.

Assistance to Banks

Assistance to banks was in three parts.

First, the Treasury advanced $205 billion

between October 2008 and December 2009

to 707 fnancial institutions in 48 states,

in amounts ranging rom $300,000 to $25

million, and at interest rates between 5 and

7.7 percent (increasing to 9 to 13.8 percent

aer fve years). Each advance was secured

by preerred stock or debt securities, plus

warrants that permitted the Treasury to buy

common shares. As o Sept. 30, 2010, three-

quarters ($152 billion) had been repaid, plus

an additional $21 billion had been receivedin dividends and interest and rom the sale

o warrants; $3 billion had been written o

due to ailed companies.5

e second part o Treasury assistance

came in January 2009, when the Treasury

advanced $20 billion each to Citibank and

Bank o America. ese loans were short-

lived: Both were repaid in ull by December

2009. (In addition, the Treasury received

$3 billion in interest.6)

In the third part, also in January 2009, the

Treasury, Federal Reserve and FDIC jointlyguaranteed losses on $118 billion and $301

billion o shaky assets held, respectively, by

Bank o America and Citicorp. Again, the

assistance was short-lived: Bank o America

terminated the agreement six months later,

paying the Treasury a $425 million termina-

tion ee despite never having received any

unds rom the Treasury. Citicorps guaran-

tee line remains open. At inception, to secure

the guarantee, Citicorp paid the Treasury



8/24

$7.1 billion in preerred stock (with an 8 per-

cent dividend), plus warrants or 66.5 million

common shares. rough Sept. 30, 2010, the

Treasury had received $440 million in stock

dividends rom Citicorp, despite Citicorp not

requesting any unds rom the Treasury, and

the sale o the common shares is expected to

bring a proft o $12 billion.7

e Federal Reserves largest lending

program was the Term Auction Facility

(TAF), which auctioned to banks each week

the right to borrow unds rom the Federal

Reserve. All borrowing was ully collateral-

ized, the Fed incurred no risk and suered

no losses, and there were no expenditures

except administrative costshence, the TAF

is not included in Figure 1. e TAF began

December 2007 and ended April 2010.

Perhaps the Feds most controversial

program was Maiden Lane I (ML I), created

March 14, 2008, to assist the acquisition byJ.P. Morgan Chase (JPMC) o the ailed Bear

Stearns and Co. Regulators believed that

fnancial markets would be harmed griev-

ously i Bear Stearns primary businesses

(collateral and market-clearing services,

particularly or Far East customers) were

unavailable on that Monday morning. Some

$30 billion o Bear Stearns shakiest assets

were placed into ML I, unded by a loan

rom the Federal Reserve Bank o New York.

It was agreed that JPMC would absorb the

frst $1 billion o losses on these assets, withthe Fed absorbing the excess. Valued at

market prices as o Nov. 17, the value o the

assets is more than sucient to repay 100

percent o its loan to the New York Fed and

94 percent to JPMC.

Assistance to Insurance Companies

e Treasury and the Federal Reserve

assisted a number o insurance companies

most visibly AIG. Assistance to frms

otherthan AIG consisted largely o the

Federal Reserve strengthening market

confdence in the frms by approving

their applications to become bank hold-

ing companies. For AIG, assistance began

in September 2008 with a collateralized

Federal Reserve loan o $85 billion. On

Nov. 25, 2008, the Treasury bought $40

billion o newly issued AIG preerred stock,

the proceeds used to repay a portion o

the Federal Reserve loan. On April 17,

2009, the Treasury created a $29.8 billion

equity capital acility or AIG, o which the

frm has drawn one-quarter. As o Sept.

30, 2010, the Treasurys assistance to AIG

was $69.8 billion. In exchange, Treasury

held a 79 percent ownership stake and had

announced its intention to increase its stake

to 92 percent through a conversion o debt

and preerred shares to common equity.

e Federal Reserve also assisted AIGduring the autumn o 2008 via the creation

o the special purpose frms Maiden Lane

II and III. Using $70 billion borrowed

rom the Federal Reserve Bank o New

York, these frms strengthened AIG by

buying certain shaky AIG liabilities. (ML

II assumed the remainder o the Septem-

ber 2008 loan; ML III bought certain

AIG liabilities in the open market.) As o

November 2010, both Maiden Lane II and

III showedprots on their investments

due to increased market prices o thepurchased assets.

Analysts dier widely regarding the

Treasurys likely recovery o its assistance

to AIG; how much is recovered depends on

projections or AIGs earnings and stock

price. I the Treasury sells eventually its

common equity at the current market price

o AIG common stock (approximately $40

a share), the net loss might be as small as

$5 bill ion. More-pessimistic projections

are a loss o $25 billion.

Was assistance to AIG wise? Assistanceshielded customers, including thousands

o households and both large and small

businesses (many U.S. taxpayers), rom

disruption and loss. Assuming the Trea-

sury converts its debt to equity, AIGs

extant shareholders wil l hold only 8

percent. Senior management has resigned.

AIGs bondholders, however, certainly

benefted rom the frms avoidance o

bankruptcy.

Assistance to Fannie, Freddie

e Treasurys most expensive program

to date is assistance to Fannie Mae and

Freddie Mac, which were placed into

conservatorship Sept. 7, 2008, aer losses

overwhelmed their small capital bases.

e Treasury has injected capital by buy-

ing newly issued senior preerred stock.As o June 30, 2010, the Treasury had

invested $148 billion, roughly equal to the

frms losses.8 Recent best- and worst-case

projections, respectively, are or addi-

tionalTreasury purchases o between

$73 billion and $215 billion, with a net

loss to the Treasury through 2013 o

between $135 billion and $259 billion.

Treasurys assistance did not bail out

the frms owners. Shareholders $36 bil-

lion in equity held at the time o conser-

vatorship is now worthless; the primary

losers are smaller commercial banks and

retirement/pension unds. No losses

were imposed, however, on holders o the

frms debt ($1.8 billion) and guaranteed

mortgage-backed securities ($3.8 billion);

these owners include households, state

and local governments, banks, security

brokers, insurance companies, and pen-

sion and mutual unds.

Assistance to the Auto Industry9

e Treasury assisted both General

Motors and Chrysler during 2008. Criticso assistance argued that these frms were

ill-managed and should cease operation.

Supporters argued that up to 3 million jobs

would be lost i the frms closed and that

a decade might pass beore these workers

would become re-employed. For GM, the

Treasury lent $49.5 billion in exchange

or $6.7 billion in debt (now repaid), $2.1

billion in preerred stock and a 61 percent

common equity stake. For Chrysler, the

Treasury lent $12.5 billion and received a

9.9 percent common equity stake.e Treasury also assisted auto-lending

frms GMAC (now Ally Financial) and

Chrysler Financial. e Treasury lent

GMAC $17.2 bill ion in exchange or a 56.3

percent common equity stake, $2.7 billion

in trust preerred securities and $11.4 bil-

lion in preerred shares. e Treasury lent

$1.5 billion to Chrysler Financial, which

w aig ?

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continued on Page 10


9/24


2006 2007 2008 2009 2010

18

16

14

12

10

8

6

4

PERCENT

2006 2007 2008 2009 2010

6

4

2

0

2

4

6

8

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SAAR*PERCENTCHANGE

2006 2007 2008 2009 2010

6

5

4

3

2

1

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34

YEAROVERYEAR%C

HANGE

Actual Data

Fiscal Stimulus

Baseline

No Policy

Special Lending Programs

*Seasonally Adjusted at an Annual Rate

: bureau of conomic nalysis, bureau of aor tatistics,

bliner an Zani (2010)

: pecial lening programs inclue government programs not

inclue in this article, such as the Feeral eserves purchase of

government-sponsore enterprise (G) et an mortgage-acke

securities (Mb).

Did the Bailots Save the Ecoom?

g 2

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10/24

was ully repaid in July 2009.

e Treasurys assistance did not bail out

the ownersall shareholders equity in the

old GM and Chrysler was extinguished in

bankruptcy. Owners o bondsindividuals

and institutionsalso suered losses

in bankruptcy, averaging approximately70 percent o their investments.

In total, the Treasury assisted the indus-

try with $81.7 billion, o which $11.2 billion

had been repaid and $2.9 billion had been

received in dividends, interest and ees

as o Sept. 30. e Treasury recouped an

additional $14 billion rom GMs public

stock oering in November. e projected

eventual loss on auto industry assistance

is $17 billion. Although a proft on GM is

possible, this depends on the stocks price

at the time o sale. e Treasurys break-even price, relative to the assistance pro-

vided, is roughly $57 per share.

Assistance to Homeowners

Potentially the Treasurys second most

expensive programs (aer Fannie Mae and

Freddie Mac) are the homeowner support

programs, or which the Treasury has

pledged $45.6 billion to oreclosure mitiga-

tion.10 As o Sept. 30, 2010, some 207,000

permanent loan modifcations had been com-

pleted at a cost o $540 million. Althoughindividual mortgage borrowers are the

programs most visible benefciaries, perhaps

equally important are the holders o the

related mortgage-backed securities: ey

risk losses as high as 70 percent i properties

are oreclosed. Ironically, the largest single

amount (more than $7.5 billion) has been

pledged to Countrywide Home Loans Servic-

ing and to Bank o America, both previously

large subprime lenders.11 Because this pro-

grams unds assist borrowers to make perma-

nent changes in their mortgages, the Treasury

does not anticipate recovering the unds.

What Is the Bottom Lie?

Both Federal Reserve and FDIC assistance

programs have earned net profts. Small

losses on some programs have been more

than oset by earnings elsewhere, including

Maiden Lane III and the interest received

by the Fed on loans to banks. (We do not

include Federal Reserve earnings beginning

March 2009 on its quantitative easing.)

e FDIC has received guarantee ees and

increased insurance premiums on demand

deposits, with minimal expenditures.

e Treasury anticipates small profts

on some programs (see Figure 1), more

than oset by losses on the government-

sponsored enterprises (GSEs) and assistance

to individual homeowners. Excluding

housing-related programs, recent estimates

are that the Treasury will likely recover 90

to 95 percent o assistance unds, the largest

uncertainty being the sale price o its shares

in GM and AIG.

Too Mch o Too Little?

An evaluation o the role o government

assistance must look beyond taxpayers

profts or losses. Large-scale assistance stirs

debate regarding both moral hazard and the

undamental role o government, although

at times, fnancial crisis seems orgotten.

Disparate views are highlighted by U.S.

Rep. Erik Paulsen, R-Minn., and ormer

U.S. Sen. Robert Bennett, R-Utah. e frst

argued, We would be much better-served i

private institutions either ail or be success-

ul on their own, while the senator argued,

[TARP] did save the world rom a fnancial

meltdown. ... Even i it did not all get paid

back, it was still the [right] thing to do.

e ultimate judgment must come down

to two actors:1) Did the assistance prevent a 1930s-scale

collapse (see sidebar on Page 9)? and

2) In complex fnancial markets, where

taxpayers are employees, owners, customers

and creditors o both frms and the GSEs,

who is really being bailed out? Corpo-

rate bailouts benefted debt holdersor

example, pension unds and 401(k)s; home-

owner bailouts benefted investors who had

bought risky mortgage-backed securities.

Although the jury is out on defnitive

answers to these questions, the consensusthat emerges will determine the tools avail-

able to the government and Federal Reserve

during the next fnancial crisis.

Richard G. Anderson is an economist andCharles S. Gascon is the research supportcoordinator at the Federal Reserve Bank ofSt. Louis. See http://research.stlouisfed .org/econ/anderson/ for more on Andersons work.

continued from Page 8


E N d N o E

1 Bagehot oen is misquoted as arguing t he

opposite. See Anderson.2 e exceptions are $21 billion, primarily rom

the TALF program, that provided general sup-

port to auto, student and small-business loan

securitization markets.3 e two programs are the Transaction

Account Guarantee Program and Debt

Guarantee Program, respectively.4 Due to changing economic conditions and

the restructuring o existing programs, there

is margin or error around these projections.

Moreover, the complexities in each program

have led to vary ing methodologies and

dierent results. Details can be obtained rom

the publicly available reports cited.5 is program is the Capital P urchase

Progra m. See U.S. Treasury (2010a).6 is program is the Targeted Investment

Progra m. See U.S. Treasury (2010a).7 is program is the Asset Guarantee Program

See U.S. Treasury (2010a).8 is is the Senior Preerred Stock Purchase

Agreement.9 is is the Automotive Industry Financing Pro-

gram, which includes the Auto Supplier Support

Program and the Auto Warranty Commitment

Program. See U.S. Treasury (2010a).10 A number o separate initiatives lie under

this banner, including the Home Aord-

able Modifcation Program, the Second-Lien

Modifcation Program, the Home Aordable

Foreclosure Alternatives, the Home Aordable

Unemployment Program and the Principal

Reduction Alternative program. See Oce o

the Special Inspector General.11 e predatory behavior o Countryw ide Mort-

gage prior to June 2008 is well-documented.

For example, on June 7, 2010, the Federal Trade

Commission announced a $108 million settle-

ment with Countrywide with respect to exces-

sive ees charged to struggling homeowners and

mishandling o loan documents.12 See IMF.13 See Blinder and Zandi.

R E F E R E N C E

Anderson, Richard G. Bagehot on the Financial

Crises o 1825 ... and 2008. Economic Synopses

No. 7 (2009). See http://research.st louised.

org/publications/es/09/ES0907.pd

Blinder, Alan S.; and Mark Zandi. How the Great

Recession Was Brought to an End. Moodys

Analytics special report, July 27, 2010, p. 7.

Congressional Budget Oce. Te Budgetary Im-

pact and Subsidy Costs of the Federal Reserves

Actions during the Financial Crisis, May 2010.

Congressional Oversight Panel. September Over-

sight Report: Assessing the ARP on the Eve of

its Expiration, Sept. 16, 2010.

Federal Housing Finance Agency. Projections of th

Enterprises Financial Performance, October 2010

International Monetary Fund, World Economic

Outlook: Crisis and Recovery, April 2009.

Oce o the Special Inspector General or the

Troubled Asset Relie Progra m (SIGTARP).

Quarterly Report to the Congress, Oct. 26, 2010.

U.S. Department o the Treasury, Oce o Finan-

cial Stability. roubled Asset Relief Program:

wo Year Retrospective, October 2010a.

U.S. Department o the Treasury, Treasury

Update on AIG Investment Valuation, Press

Release, November 2010b.


11/24

Forecasters Expect Solid Growth,

Low Ination in 2011

n a t i o n a L o V e r V i e w

By Kevin L. Kliesen

The U.S. economys recovery rom the2007-2009 recession is lethargic byhistorical standards. Job gains remain disap-

pointingly weak, and most orecasters expect

to see only a grudgingly slow decline in theunemployment rate over the next year or two.

Moreover, many in the business and fnancial

community have regularly cited uncertainty

about the economic and political landscape

as a reason or their reluctance to hire, invest

and lend.

at said, business conditions are on the

mend and economic activity is expanding

at a modest pace. Eventually, uncertainty

will ebb, paving the way or rising levels o

employment and real incomes. is dynamic

will be assisted importantly by the economysnatural recuperative orces, improvements in

fnancial market conditions and an expan-

sion o the global economy.

On balance, the U.S. economy should

surpass its long-run growth rate sometime

in 2011, with continued low and stable

ination. But there are risks. ese include

the possibility o spending cuts and higher

taxes to reduce yawning budget defcits at

the ederal, state and local levels. In addi-

tion, because o the size o the Feds balance

sheet and rising commodity prices, there isan unusually large amount o disagreement

among orecasters about the direction o

ination over the next ew years.

Hdles Become Lowe

Construction remains the economys so

spot. In a typical economic recovery, hous-

ing construction is a key driver o growth.

Because o the housing bust and the large

number o oreclosures, there is a sizable

inventory o houses or sale, limiting the need

or new construction. is supply also helps

put downward pressure on house prices.

Recently, however, home sales and new hous-

ing starts have stabilized at a low level, whichis the frst step toward recovery.

Meanwhile, vacancy rates on commercial

and industrial properties are quite high

because there was also a boom and bust in

commercial construction. ere is, thus, no

pressing need today or the speculative build-

ing in commercial real estate that typically

occurs during a recovery.

Other aspects o the economy look mark-

edly better. Consumer spending in the third

quarter o 2010 advanced at about a 2.75

percent annual rate, and early indicationssuggest continued solid gains in the ourth

quarter. Likewise, business spending on

equipment and soware was quite vibrant

going into the end o 2010, providing a boost

to the manuacturing sector. Business capital

spending has been bolstered by continued

solid growth in exports, healthy profts and a

relatively low cost o capital.

Financial conditions have also improved

signifcantly over the past year, according

to the St. Louis Feds fnancial stress index.

Yields on long-term Treasury securities andmortgages are down appreciably rom a year

earlier, while stock prices have risen sharply.

As yet, though, bank lending remains rela-

tively weak. Part o the weakness in demand

or consumer loans reects a renewed

preerence among households or saving and

debt retirement. Business lending remains

weak, in part, because many nonfnancial

frms remain ush with cash. Also, there

appears to be a general unwillingness among

consumers and businesses to borrow aggres-

sively in the ace o a weak economy and

lackluster employment growth.

Iatio remais Tame

Ination was on a downward track in 2010

For the 12 months ending in November 2010,

the consumer price index (CPI) increased

by about 1 percent; core CPI (excluding ood

and energy prices) increased by 0.7 percent.

e pronounced slowing in the core ination

rate worries some Federal Reserve ocials

since it conjures up parallels with Japans

long bout with deation. Accordingly, with

the economy growing at a subpar rate, the

Federal Open Market Committee announced

Nov. 3 that it intends to buy up to $600 billiono U.S. Treasury securities by June 30, 2011.

Most Fed ocials believe that the potential

growth-enhancing benefts o this decision

outweigh the possibility o a rise in ina-

tion and ination expectations. In general,

though, the consensus o most orecasters is

that this new round o Treasury purchases

will have, at best, only a modest eect on

economic activity. e consensus o the

orecasters is that CPI ination will continue

to be relatively low and stable (about 1.5 to 2

percent) this year. However, there is consid-erably more disagreement about the direction

o ination over the next 2-5 years. is is

yet another layer o uncertainty that the U.S.

economy must overcome.

Kevin L. Kliesen is an economist at the FederalReserve Bank of St. Louis. Go to http://research.stlouisfed.org/econ/kliesen/ for more on his work.

St. Lois Fiacial Stess Idex

The St. Louis fnancial stress index, as of dec. 24, 2010. pates can eseen on the t. ouis Fes Fd (Feeral eserve conomic data) e site.ee http://research.stlouisfe.org/fre2/

6

5

4

3

2

1

0

1

2

(Index)

2005 2006 2007 2008 2009 2010 2011

Shaded areas indicate US recessions.2011 research.stlouisfed.org

St. Louis Financial Stress Index (STLFSI)Source: Federal Reserve Bank of St. Louis



12/24

*

**

**

***

c o m m u n i t y p r o f i L e

Federal FundsTax IncreaseHelp Owensboro

Shore Up Its Econom

By Susan C. Tomson

For years, the Ohio River had been washingaway the waterront park in Owensboro,Ky., threatening to eventually submerge the

downtown streets behind it. A $40 million

ederal erosion-control project secured by U.S.

Sen. Mitch McConnell, R-Ky., has stopped the

destruction. A new steel containment wall

has been sunk into the riverbed at the waters

old edge. Tons o dirt have been hauled in and

graded, restoring the wasted bank.

Inspired by the announcement in 2005

o the ederal unds, civic leaders got seri-ous about redeveloping the wider riverront

area, a subject o o-and-on discussion since

World War II. In late 2008, a bold master

plan or downtown was unveiled. Streets

would be rerouted and a pedestrian-riendly

plaza created, revitalizing dozens o blocks.

e park would be re-created with a plaza

named or McConnell, plus ountains, play

areas, a waterall, a hotel and an indoor

events center.

Owesboo, K. b h b

Population .................. .................... ................... 55,745

Labor Force ................... ..................... ............... 28,003

Unemployment Rate .....................................9 percent

Per Capita Personal Income.................. .......... $33,278

* U.S. Bureau o the Census, estimate July 1, 2009

** BLS/HAVER, October 2010, seasonally adjusted

*** BEA/HAVER, 2008

TOP EMPLOyErS

Owensboro Medical Health System ................... 3,200

Daviess County Public Schools .......................... 1,755

U.S. Bank Home Mortgage .................................. 1,261

Owensboro Public Schools ................... ................. 778

Specialty Food Group (meat processing) ............... 470

Sel-reported

SOURCE: Greater Owensboro Economic Development Corp.

PH b . HM

e elected commissioners o the city and o

Daviess County separately approved the plan

in early 2009. ey also raised taxes to ensure

that it would be realized. A our-percentage-

point increase in their assessments on premi-

ums or all personal and business insurance

other than health is projected to produce the

needed $79 million over 20 years.

PH Pdd b H F wb


mblematic o the old economy is the no-shuttere Greeniver teel o. plant. t is eing raze.

With $40 million in ederal aid, the city put in a ne retaining all to halt erosion of onton y the

hio iver. hat project spurre reevelopment of much of onton.


13/24

is was a remarkable step orward, with

the city and county governments, with their

dierent constituencies, coming together

or the common good o the community

and overcoming the inertia o 65 years, said

Owensboros city manager, William Parrish.

Over those same years, the Owensboro

economy has slowly shied away rom

manuacturing. In 2001, Green River Steel

Co., where hundreds once worked, closed

a plant that is now being razed. General

Electric Co., where 6,600 people made radio

and television tubes in the mid-1960s, was

down to 109 employees making motors when

it closed in October. Now the economy is

more mixed, consisting o a little o several

things, said Jody Wassmer, president o the

Greater Owensboro Chamber o Commerce.

Among the mid-sized employers he cited are

two natural-gas pipeline companies, a meat

packer and makers o pasta sauce, auto partsand chewing tobacco.

Nicholas Brake, president o the Greater

Owensboro Economic Development Corp.,

said the area has benefted rom a lot o

success rom the internal growth o existing

companies.

e Owensboro Medical Health System

and U.S. Bank illustrate his point. Both are

outgrowths o long-time local enterprises that

have serendipitously evolved over the years

into job-creating powerhouses.

In 2001, aer 30 years o mergers andacquisitions, a one-time Owensboro start-up

became U.S. Banks national mortgage-

servicing center. By early 2010, it had run out

o space or its burgeoning work orce. e

bank started planning or a new building, one

that would accommodate an additional 500

workers. Owensboro was in competition or

that building with unidentifed larger cities in

Kansas and Wisconsin.

Bob Smiley, executive vice president or

the mortgage business, admits to rooting or

Owensboro because o its abundanceo workers with the right work ethic.

A combination o incentives, speedily

arranged, won the day or Owensboro. In a

package valued at $1.7 million, the city oered

to build an 81,000-square-oot building and

lease it back to the bank or 20 years at below-

market rates. e company also qualifed

or state tax credits worth up to $4.5 million,

depending on the exact number o jobs cre-

ated. e building is under construction.

Across town, the Owensboro Medical

Health System is building a $385 million

hospital, which it is fnancing itsel. e

system, the result o two local hospitals that

combined in 1995, has grown into a regional

enterprise serving 11 counties. In the pro-cess, it has taken on 1,200 more employees,

including well-paid specialist physicians

and other clinical proessionals. e chie

executive, Je Barber, estimated that the

system will add 300 jobs beore the new

hospital opens in 2013 and then a couple

o hundred new positions aer that.

e new hospital will replace the systems

existing 360-bed one and provide space

or it to operate its ull complement o 447

licensed beds. e older building wil l stay

open or, among other uses, outpatientdiagnostic and lab services, cancer treat-

ment and research, and degree-completion

programs. e last are oered by the system

in cooperation with the University o Louis-

villes School o Nursing and the University

o Kentuckys College o Pharmacy.

In 2006, the health system bought the

production acilities o then-bankrupt Large

Scale Biology Corp. An oshoot o Owens-

boros once-thriving tobacco industry, the

company developed a unique system using

tobacco plants to make proteins or theproduction o vaccines and other drugs.

e purchase was a move not just to secure

technology o potential patient beneft but

also to bring employment and economic

growth to the area, Barber said.

e state o Kentucky, having identifed

biosciences as a key uture industry, tapped

its national tobacco settlement unds to

lend the company hal o the $6.4 million

purchase price.

A lab technician at entucky bioProcessing,

Jill therton, prepares to test proteins.

PH b H MHG

The Owensboro Medical Health System is uil-

ing a $385 million hospital, hich ill have 447

es, almost 100 more than in the current hospital.

At Kentucky BioProcessin, greenhouse manager

Jennifer Poole harvests toacco plants. he plants

unergo an extensive process to purify an extract

proteins for use in vaccines an other meicine.



14/24


15/24

e d u c a t i o n

Teacher WorkshopsChip Awayat Economic Illiteracy

Hih School conomicsequirement

Hih School Personalinance equirement

K-8 conomics Standardsin Social Studies

Social Studies Testin

Arkansases, omine ithPersonal Finance

o es o

llinois o es es o

ndiana es o es o

Kentucky o o es o

Mississippi es o o o

Missouri o es es o

Tennessee es es es o

By William Bosshardt, Paul Grimes and Mary Suiter

Numerous studies reveal that mostAmericans do not have a strongunderstanding o basic economic concepts

and fnancial principles. e results o a 2010

survey indicate that ewer than 44 percent

o adults can identiy the Federal Reserve

System as the institution responsible or thenations monetary policy.1

e potential costs o economic illit-

eracy in a market economy are great. For

example, the recent fnancial crisis and

ensuing recession are replete with stories

o household and business decision-makers

who did not ully understand how changing

market orces would impact the agreements

and contracts that they signed. A poor

understanding o the marketplace results in

poor choices, which, in turn, lead to poor

outcomes not only or individuals but orsociety in general.

Members o the Federal Reserves Board o

Governors recognize the importance o an

economic and fnancially literate citizenry,

and each o the 12 regional Federal Reserve

banks provides public outreach programs

in economics and personal fnance. e

president o the Federal Reserve Bank o

St. Louis, James Bullard, has pointed out,

Many people think economics is too compli-

cated. But everyone lives with the conse-

quences o supply and demand every day. Welive in a market system, and people need to

understand how the system works.2

Although each regional Federal Reserve

bank oers economic education program-

ming, the programs are dierent. e Federal

Reserve banks o St. Louis and Atlanta have a

similar ocus, one in which teacher workshops

are an important strategy. e two banks

ound that the resources they invest in these

workshops yield results many times over.

Teachers who participate in proessional

development workshops reach students not

only during the year in which the teachers

attend a workshop, but they continue to reach

additional students each subsequent year o

their teaching career. e benefts, obviously,

roll down to the students. Many researchstudies provide evidence that proessional

development or K-12 teachers increases

student knowledge o economics and per-

sonal fnance.3 For example, results rom a

2006 study show that high school students

whose teachers participated in economic

education training programs and workshopsscored better on required state assessments in

economics.4

Because o the emphasis on these work-

shops by the St. Louis and Atlanta Feds, it

made sense or the two banks to partner in

an assessment o their programs.

Stadads ad Istmets

In a 2009 survey, the Council or Eco-

nomic Education reported that 49 states

(all but Rhode Island) and the District o

Columbia include economics as part o their

public schools curriculum but that only

40 states require local school districts to

implement specifc standards.5 In the Eighth

District, Missouri and Illinois have a high

school personal fnance requirement, but noeconomics requirement. Tennessee has both

a high school personal fnance requirement

and an economics requirement. Mississippi

and Indiana have a high school requirement

or economics but not personal fnance.

Arkansas recently instituted a high school

requirement or a semester o economics andpersonal fnance combined. Kentucky does

not have an economics or a personal fnance

requirement. Although these seven states

have standards or inusion o economics

content in the lower grades, this eort is part

o social studies, and social studies is no lon-

ger tested by the states. Furthermore, most

states, including those in the Eighth District,

lack strong teacher training requirements or

economics and personal fnance. A typical

La oyce gaines, a teacher at umner High chool in t. ouis, participate in an economic

eucation orkshop for teachers at the Feeral eserve bank of t. ouis.

Eighth Distict States Ecoomics ad Pesoal Fiace reqiemets


g 1


16/24

Prescore PostscorePercent Who Tauht

conomicsNumber o

Observations

Teachers with No PriorWorkshops 9.24

(3.53)11.94(3.55)

46 85

Teacherswith Prior Non-ederal eserve Workshop

10.40(3.62)

13.23(3.16)

72 47

Teacherswith Prior ederaleserve Workshop

12.43(4.45)

14.01(3.86)

80 84

: Prior orkshops refer to orkshops in economics or personal nance in the past three years. ( ) - stanar eviation

: uthors calculations.

high school teacher in the St. Louis and

Atlanta districts completed only two courses

in economics while in college. us, there is

a need or teacher training and proessional

development that is not being ully met.Given the importance o teacher work-

shops, the St. Louis and Atlanta banks

recently undertook a comprehensive assess-

ment o these outreach programs. is proj-

ect examined 65 workshops across the two

districts. Participating teachers completed

a pre-workshop survey, a post-workshop

evaluation orm and a web-based ollow-up

survey, which was sent several weeks aer

their training. For some workshops, teach-

ers were pre- and post-tested, using assess-

ment instruments specifcally developed orthis project.

First, the two banks identifed the content

that was considered essential or meeting

the Board o Governors charge o delivering

educational outreach programs in econom-ics and personal fnance. A work group

composed o research economists, economic

educators, other Fed sta and a consulting

team that was hired to oversee the assess-

ment project identifed three basic areas

into which most o the banks workshops

could be categorized: 1) the Federal Reserve

System, 2) personal fnance and 3) gen-

eral economics. Content standards were

developed in two o these areasthe Federal

Reserve System and personal fnance.

(ese standards can be viewed at www.

rbatlanta.org/edresources/assessment/) Fo

general economics, the decision was made

to use the National Voluntary Standardsin Economics, as published by the Council

or Economic Education. Two assessment

instruments were then developed based on

these standards: the Federal Reserve Educa

tion Test (FRET) and the Personal Finance

Test (PFT). ese were used to test teacher

knowledge gains as a result o participation

in the Fed workshops.

e pre-workshop survey included

questions about the teachers proessional

experiences and prior interactions with the

Fed. e post-workshop survey containeda variety o evaluation items about the

teachers workshop experience; it also col-

lected inormation about current teaching

schedules and plans to use the inormation

presented during the workshop. Finally, the

ollow-up survey, sent approximately our

to six weeks aer the workshop, was used to

determine i teachers used the knowledge

and materials received at the workshop in

their classrooms.

reslts

Participants rom eight one-day teacher

workshops on the Federal Reserve System

were pre- and post-tested using the 20-ques-

tion FRET. Each o these workshops was

taught by Federal Reserve education out-

reach specialists and ollowed roughly the

same outline. Figure 2 reports the results

or the 216 teachers who took both the pre-

test and post-test and provided background

inormation on their prior workshop

a l hh hl h h s. L al

l l hl

ll. th, h h

l vl h b ll .


g 2

Mea Pe- ad Post-Test Scoes fo Teaches Attedig Fedeal reseve Wokshops

Mary Suiter, manager of economic

eucation at the Feeral eserve bankof t. ouis, leas a iscussion on the

Great depression at a orkshop for his-

tory teachers hel at the bank in 2009.


17/24

experience. e teachers were asked i they

had participated in workshops on econom-

ics or personal fnance during the previous

three years. In addition, they were asked

about prior attendance at workshops, on any

topic, produced by the Fed.

e table clearly reveals that all teacher

groups increased their knowledge o the Fed

as a result o workshop participation. For

teachers with no prior workshop experience,

the increase was 2.70 points, which was

close to the increase o 2.83 points or teach-

ers who had not participated in a previous

Federal Reserve workshop but who had been

to other proessional development work-

shops. For those teachers who had attended

a previous Federal Reserve workshop, the

increase was 1.58 points or nearly 13 percent

over their pre-test mean. All o these gains

are statistically signifcant.

Figure 2 also indicates that teachersbeneft rom attending multiple workshops

over time. Teachers with no prior workshop

experience scored 9.24 points on the pre-test

and le their frst workshop with a post-

score o 11.94 points. A teacher returning

aer a prior workshop given by the Federal

Reserve comes in with a pre-score o 12.43,

which increases urther to 14.01. Since a

score o 15 points on the FRET is considered

to be the level required or mastery o the

material, two workshops seem to go a long

way toward meeting that goal.O course, the data inherently reect a

sel-selection process. Economics teachers,

who possess relatively more knowledge

about the Fed, are more likely to attend a

Fed workshop. Teachers who voluntarily

choose to attend a workshop are also more

likely to make that choice again. It should

be noted that while teachers with no prior

workshop experience o any kind were

generally not economics teachers, the two

subgroups (prior non-Fed workshop versus

a prior Fed workshop) o the teachers whohad been to a prior workshop contained

approximately the same (high) proportion

o economics teachers. When compar-

ing teachers with previous Fed workshop

experience to those who had been to prior

non-Fed workshops, the experienced group

scored signifcantly higher on the FRET.

Taken together, the results imply that the

Fed workshops increase teacher learn-

ing about the Fed and that this learning

compounds over time through participation

in additional workshops.

Although the testing revealed that teach-

ers learn as a result o workshop participa-

tion, the extent to which they actually use

that learningand the curriculum mate-

rial received at the workshopsin their

classes is another question. e evaluation

conducted aer all Fed workshops asked

teachers i they thought they would use

their learning in the classroom. Overall,

83 percent indicated a specifc course in

which they planned to use the inormation

learned. On average, teachers reported

reaching about 80 students in the courses

in which they planned to use the materials.

With an average teacher attendance o about

25, each Fed workshop had an immediate

impact on roughly 2,000 students. e ol-

low-up survey sent to teachers asked them i

they had indeed used their new knowledgein their classes. Overall, 73 percent o the

respondents to the ollow-up said they had.

Beod Wokshops

Teacher workshops are only one part o

the Feds educational outreach portolio o

activities. e St. Louis and Atlanta Feds

also produce and distribute lesson plans

and curriculum materials or K-12 teach-

ers, conduct presentations and seminars at

proessional education conerences, publish

newsletters or educators and produce vari-ous programs or specially targeted groups,

such as college proessors. e St. Louis

Fed has recently expanded its educational

outreach through online lessons that can

be directly accessed by high school students,

as well as the general public. (See www.

stlouised.org/education_resources/online_

learning.cm)

William Bosshardt is associate professor ofeconomics and director of the Center forEconomic Education at Florida AtlantaUniversity. Paul Grimes is associate dean,professor of economics, and director of theCenter for Economic Education at MississippiState University. Mary Suiter is the managerof the Economic Education department at theFederal Reserve Bank of St. Louis.

E N d N o E

1 See Grimes et al.2 See Bullard.3 See Allgood and Walstad; Buckles, et al.; and

Sosin et al.4 See Swinton et al.5 See Council or Economic Education, 2009.

R E F E R E N C E

Allgood, Sam; and Walstad, William B. e

Longitudinal Eects o Economic Education

on Teachers and eir Students. Journal of

Economic Education, Spring 1999, Vol. 30,

No. 2, pp. 99-111.

Buckles, Steven; Strom, Robert J.; and Walstad,

Will iam B. An Evaluation o a State Con-

sumer and Economic Education Program:

Implications or Eective Program Delivery.

Journal of Economic Education, Spring 1984,

Vol. 5, No. 2, pp. 101-10.

Bullard, James. New President Bullard Bullish

on Economics, Federal Reserve Bank o

St. Louis Central Banker, Summer 2008,

p. 1. See www.stlouised.org/publications/

cb/2008/b/pages/lead_story.cm

Council or Economic Education. Survey of

the States. New York: Council or Economic

Education, 2009.

Council or Economic Education. National

Content Standards in Economics. New York:

Council or Economic Education. 2010.

Grimes, Paul W.; Rogers, Kevin E.; and Boss-

hardt, Willia m D. Economic Education and

Consumer Experience During the Financial

Crisis . Working paper, College o Business ,

Mississippi State University, 2010.

Sosin, Kim; Dick, James; and Reiser, Mary Lynn.

Determinants o Achievement o Economics

Concepts by Elementary Students. Journal

of Economic Education, Spring 1997, Vol. 28,

No. 2, pp. 100-21.

Swinton, John R.; De Berry, omas; Scafdi,

Ben; and Woodard, Howard C. Does Proes-

sional Learning or High School Economics

Teachers Improve Student Achievement?

Paper presented at the 2007 American

Economic Association Meetings, Chicago.

See www.aeaweb.org/annual_mtg_papers/

2007/0105_1015_1203.pd

Watts, Michael. What Works: A Review o

Research on Outcomes and Eective Program

Delivery in Precollege Economic Education.

National Council on Economic Education.

2005. See www.counciloreconed.org/eee/

research/WhatWorks.pd



18/24

d i s t r i c t o V e r V i e w

Mortgage Delinquency Rates in DistrictAre Not As Bad As National Average

The ihth ederal eserve District

is compose of four zones, each of

hich is centere aroun one of

the four main cities: ittle ock,

ouisville, Memphis an t. ouis.

By Subhayu Bandyopadhyay and Lowell R. Ricketts

The mortgage crisis has been milder in the Eighth District than in the nation. As shown in Figure 1,

the nations serious delinquency (SD) rate surpassed that o the District in October 2008. e SDrate is defned as the sum o mortgages with payments over 90 days delinquent and o mortgages in the

process o oreclosure, divided by the total number o mortgages serviced.1 e SD rate peaked at 8.2

percent or the nation during February 2010 and 6.5 percent or the District in January 2010.

ese respective levels are about our times

the average rate (2.1 percent) or the nation

and close to 2.5 times the average

(2.7 percent) or the District over the three

years leading up to the start o the recession.

SD rates began to decrease or the nation in

March 2010 and or the District in February

2010. Since then, that trend has remainedsteady, despite leveling o in August and July

2010 or the nation and District, respectively.

While the trend reversal is an important frst

step on the road to recovery, SD rates are still

hovering at 7.2 percent and 5.4 percent or the

nation and District, respectively. ese rates

amount to 3.5 and two times the prereces-

sion averages or the nation and District,

respectively.

Within the District, there is signifcant

variation o SD rates across geographic areas.

e maps in Figure 2 show a county break-down o SD rates or the portions o each

state within the District. Clearly, Arkansas

and Missouri are doing much better than the

District portion o Mississippi, Illinois, Indi-

ana, Kentucky and Tennessee. For example,

Cleburne County, Ark. (1.8 percent SD rate,

6.4 percent unemployment), Osage County,

Mo. (1.9 percent SD rate, 6.2 percent unem-

ployment) and Schuyler County, Mo. (1.6

percent SD rate, 7.5 percent unemployment)

were doing very well relative to the District as

o September 2010.

Some o the counties that were the worst

o, as o September 2010, are Holmes

County, Miss. (16.8 percent SD rate, 17.4

percent unemployment), Winston County,

Miss. (13.5 percent SD rate, 16.8 percent

unemployment) and Noxubee County, Miss.(10.6 percent SD rate, 19.9 percent unemploy-

ment). Interestingly, the 2008 map shows

that northern Mississippi, western Tennessee

and southern Indiana had relatively higher

SD rates even beore the recession began.

A comparison between the 2009 and

2010 maps reveals that, while the SD rates

have improved overall, the improvement

has not been uniorm across counties. For

example, Monroe County, Ark., saw its SD

rate increase rom 3.4 percent in 2009 to 7.4

percent in 2010, while the SD rate or ClayCounty, Ill., jumped rom 5.1 percent to 8.7

percent in the same time period.

Factos Affectig SD rate

One important question that is relevant to

policymakers is what actors contribute to the

SD rate. e academic literature suggests that

homeowner equity plays an important role

in determining mortgage deault rates.2 One

widely used measure o homeowner equity is

the loan-to-value (LTV) ratio, which is defned

as the total mortgage amount divided by the

appraised value o the property.

As the LTV ratio increases, borrowers migh

deault on their mortgage or a number o rea-

sons. For example, borrowers may have di-

fculty refnancing their mortgage or they may

choose to deault when the costs associatedwith deaulting plus the estimated value o the

home are less than the mortgage amount. e

mortgage crisis has been characterized by an

11.2 percent decline in national house prices

rom their peak in the frst quarter o 2007.

is decline translates to a considerably lower

denominator in the LTV ratio, thus, increasing

the probability o borrower deault.

Fortunately, the District has ared better

than the nation in the mortgage crisis, in part

because the housing bubble was not as severe

in the District rom 2003-2006. Specifcally,house prices in the District have declined by

only 2.2 percent rom their peak in the frst

quarter o 2008.3 is could be a actor that is

contributing to the dierence between aggre-

gate SD rates or the nation and the District.

It is also reasonable to question whether

macroeconomic eects, such as the unemploy-

ment situation, have a major impact on the SD

rate. Without a steady income, homeowners

fnd it increasingly dicult to make mortgage



19/24

Seios Deliqec rate fo u.S. ad Eighth Distict

g 1

payments. Using 2008-10 annual unemploy-

ment rate data or counties within the District

(as ound in the St. Louis Feds GeoFRED

database), we fnd a positive correlation

between the unemployment rate and SD rate.

However, when we analyze the year-over-

year changes in the two rates or 2009-10 and

2008-09, we fnd that there is little correlationbetween the changes in these rates. ese

fndings suggest careul econometric analysis

is necessary beore we can come to any defni-

tive conclusion on the role that unemploy-

ment may play in aecting the SD rate in the

District.

Will recove Cotie?

Overall, the distribution o SD rates in the

District shows signs o a nascent recovery

in the housing market. However, with a

slowdown o the downward movement in SD

rates or the District and the nation as a whole,

there is cause or concern. Furthermore,

the signs o recovery are not applicable to all

locales; several counties in the District are

experiencing increasing SD rates, while others

have had relatively little change. ereore, asustained recovery in the Districts housing

market is, to borrow a parlance rom politics,

too close to call.

Subhayu Bandyopadhyay is an economist andLowell R. Ricketts is a research analyst, bothat the Federal Reserve Bank of St. Louis. Go tohttp://research.stlouisfed.org/econ/bandyopad-hyay for more on Bandyopadhyays work.

ENdNoE

1 Figures are or both prime and subprime

loans.2 See Krainer and LeRoy.3 Based on the average o the quarterly Federal

Housing Finance Agency (FHFA) house price

index or all metropolitan statistical areas

located entirely within the District.

REFERENCE

Krainer, John; and LeRoy, Stephen. Underwater

Mortgages. Federal Reserve Bank o San Fran

cisco Economic Letter, Oct. 18, 2010, No. 31.

Jan. 06 May 06 Sept. 06 Jan. 07 May 07 Sept. 07 Jan. 08 May 08 Sept. 08 Jan. 09 May 09 Sept. 09 Jan. 10 May 10 Sept. 10

9

8

7

6

5

4

32

1

0

Eighth District

United StatesPERCENT

Data unavailable

0%-2%

2%-4%

4%-6%

6%-8%

8%-up

: uthors calculations ase on ata provie y P pplie nalytics.

: ggregate rate for the ighth district is calculate from the average of each county ithin the districts ounaries. he serious elinquency

(d) rate is equal to the sum of mortgages ith payments over 90 ays elinquent an mortgages in the process of foreclosure ivie y the total

numer of mortgages service. both gures inclue ata for oth prime an suprime rst mortgages.

: uthors calculations ase on ata provie y P pplie nalytics.


g 2

Seios Deliqec rate b Cot

Sept. 2008 Sept. 2009 Sept. 2010


20/24


p o s t - r e c e s s i o n

The housing market has been a drag onthe economy since the real estate bubbleburst a ew years ago. As news continues

to emerge rom the housing market, it is

important to look at the overall trends o

dierent aspects o the U.S. market since

the downturn.Higher delinquencies and oreclosures

have been a consistent eature o the mort-

gage market since 2005. Figure 1 shows

the increasing oreclosure rates or the past

two years. As o October 2010, the ore-

closure rate stood at about 3.3 percent. In

contrast, the percentage o mortgages in

serious delinquency peaked in early 2010

and has been on the decline since, drop-

ping to about 4.1 percent in October.

Have the rens in Husing

Bttme out?

continued on Page 22

By Bryan Noeth and Rajdeep Sengupta

(We defne a mortgage as seriously delin-

quent i payments have been past due or

over 90 days but the mortgage has not been

oreclosed upon.) A decline in serious

delinquencies would imply that oreclosurerates in the near uture are likely to all,

absent any surge in new delinquencies. O

course, there is little doubt that these rates

are signifcantly higher than normal and

that mortgage markets in the U.S. are still

under signifcant stress. To put things in

perspective, seriously delinquent rates and

oreclosure rates averaged 0.84 percent

and 0.46 percent over the frst hal o the

decade, respectively.

Aothe Sig of Hope

On a brighter note, inventories o vacant

homes have begun to come down aer

increasing consistently over the past ew

years (Figure 2). According to the Census

Bureau, the total number o housing units

increased to 130.68 million in the thirdquarter o the year. Although the levels o

housing units are always increasing, the

upward trend has been dampened since the

crisis. O the total housing stock, roughly

18.77 million unitsor 14.4 percent o the

totalwere vacant in the third quarter o

2010. ese levels are down rom the second

quarter o the year, although relatively

elevated compared with the vacancy rate o

less than 13 percent in 2005. Naturally, the

increase in oreclosures has contributed to

the high percentage o vacant homes.

At the same time, there has been a sharp

decline in the demand or housing. Hous-

ing starts have been decreasing slightlyover the past ew months, although the

overall trend has not seen a signifcant

change since starts bottomed out in Janu-

ary 2009 at a bit less than 500,000 a month.

(See Figure 3.) is October, there were

519,000 housing starts, about 69,000 ewer

than in September.

e decrease in housing demand is

best viewed in terms o loan application

indices compiled by the Mortgage Bankers

Association.1 Loan applications or

purchases in recent years have remained

signifcantly low and substantially below

loan applications or refnances. Refnances

typically occur in booms, usually at times o

low rates (because households seek to reduce

obligations by switching to a lower mortgagerate) or at times o high price appreciation

(because homeowners tend to cash out the

equity appreciation). As shown in Figure 4,

applications or refnances have increased

with decreases in the conventional mortgage

rate.2 ere have been two refnance booms

since mid-2008. e frst occurred with a

drop in the mortgage rates around the end

o 2008 and the beginning o 2009. e

second occurred with another drop in the

mortgage rates around the second hal o

2010. In early December, the conventionalmortgage rate was roughly 4.46 percent,

which was up rom the low o 4.17 percent

in mid-November.

Another summary indicator o the hous-

ing market is the home prices themselves.

Figure 5 shows the Federal Housing Finance

Agency house price index and the Case-

Shiller Home Price Composite 20 index.

In September, housing prices decreased

between 0.68 percent and 0.80 percent,

depending on the index. ese indices are

signifcantly down rom their peak.More recently, the mortgage market

showed some signs o recovery. e

National Association o Realtors Index

tracks home contracts that have been

signed but not closed. e index gained

10.4 percent in October, suggesting a jump

in overall existing home sales at least or

November.

PH / F H/b

o h l h k, hl 18.77 ll 14.4 h l v h h q 2010.

th lvl h q h ,

lhh lvl lv h h v

l h 13 2005.


21/24

E N d N o E

1 For details on the creation o the index,

see Frumkin.2 e mortgage rate given here is or a 30-year,

fxed-rate, prime, conventional, conorming

mortgage. For details, see www.reddiemac.

com/pmms/abtpmms.htm3 See Elul et al.

R E F E R E N C E

Elul, Ronel; Souleles, Nicholas S.; Chomsisen-

gphet, Souphala; Glennon, Dennis; and

Hunt, Robert M. What Triggers Mortgage

Deault? Working Paper No. 10-13, Federal

Reserve Bank o Philadelphia, April 1, 2010.

See http://ssrn.com/abstract=1596707

Frumkin, Norman. Guide to Economic Indica-

tors. Fourth edition. London: M. E. Sharpe,

2006, pp. 182-84.


Jan. 05 July 05 Jan. 06 July 06 Jan. 07 July 07 Jan. 08 July 08 Jan. 09 July 09 Jan. 10 July 10

6

5

4

3

2

1

0

Seriously Delinquent

Foreclosure

U.S. Delinquency and Foreclosure Rates

FIGURE 1

SOURCE: Staff calculations based on data provided by LPS Applied Analytics

A mortgage is dened as seriously delinquentif payments have been past due for over 90 daysbut the mortgage has not been foreclosed upon.

2005:Q3 2006:Q3 2007:Q3 2008:Q3 2009:Q3 2010:Q3

15.0

14.5

14.0

13.5

13.0

12.5

12.0

11.5

Percentage of Vacant Homes in U.S.

FIGURE 2

SOURCES: Haver Analytics, Census Bureau

U.S. Housing Starts

FIGURE 3

Oct. 05 April 06 Oct. 06 April 08 Oct. 08 April 09 Oct. 09 April 10 Oct. 10Oct. 07April 07

2500

2000

1500

1000

500

0

SEASONALLY

ADJUSTED

IN

THOUSANDS

SOURCES: Haver Analytics, Census Bureau

U.S. Mortgage Applications, Mortgage Rates

FIGURE 4

8000

7000

6000

5000

4000

3000

2000

1000

0

SOURCES: Haver Analytics, Mortgage Bankers Association and Federal Home Loan Mortgage Corp.

Nov. 08 May 09 Nov. 09 May 10 Nov. 10

Purchase

Renancing

30-Year Conventional Rate

6.50

6.00

5.50

5.00

4.50

4.00

3.50

3.00

U.S. House Price Indices

FIGURE 5

SOURCES: Haver Analytics, Standard & Poors Fiserv, MacroMarkets LLC and Federal Housing Finance Agency (FHFA)

Case-Shiller Composite 20

FHFA House Price Index

220

200

180

160

140

120

100Jan. 05 Jan. 06 Jan. 08 Jan. 09 Jan. 10

230

220

210

200

190

180

170


22/24

leven more charts are availale on the e version of this issue. mong the areas they cover are agriculture, commercialanking, housing permits, income an jos. Much of the ata is specic to the ighth district. o go irectly to these charts,use this : .stlouisfe.org/pulications/pu_assets/pf/re/2011/a/1-11ata.pf

. . G d F M G H P

05 06 07 08 09 10

75

60

45

30

15

0

NOTE: Data are aggregated over the past 12 months.

Exports

Imports

OctoberTrade Balance

BILLIONS

OF

DOLLARS

05 06 1007 08 09

190

170

150

130

110

90

NOTE: Data are aggregated over the past 12 months.

August

Crops Livestock

BILLIONS

OF

DOLLARS

M P M

05 06 07 08 09 10

11

10

9

8

7

6

5

4

PERCENT

November

05 06 07 08 09 10

6

5

4

3

2

1

0

10-Year Treasury

Fed Funds Target

November1-Year Treasury

PERCENT

NOTE: On Dec. 16, 2008, the FOMC set a target range for

the federal funds rate of 0 to 0.25 percent. The observations

plotted since then are the midpoint of the range (0.125 percent).

F - d X d d P d F d F d F d d

3.0

2.5

2.01.5

1.0

0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

NOTE: Weekly data.

5-Year

10-Year

20-Year

PERCENT

Dec. 10

06 07 08 09 10 Dec. 10 Jan. 11 Feb. 11 March 11 April 11 May 11

0.20

0.18

0.16

CONTRACT MONTHS

PERCENT

8/10/10

9/21/10

12/14/10

11/3/10

G d P G w H M P d X

05 06 07 08 09 10

Q3

8

6

4

2

0

2

4

6

8

NOTE: Each bar is a one-quarter growth rate (annualized);

the red line is the 10-year growth rate.

PERCENT

05 06 07 08 09 10

6

3

0

3PERCENT

CHANGE

FROM

A

YE

AR

EARLIER

November

CPIAll Items

All Items Less Food and Energy

e c o n o m y a t a g L a n c e


The role of the Oveall Ecoom

Needless to say, the uture path o house

prices will depend not only on the trends in

housing but also the condition o the overall

economy, including the unemployment rate.

As o November, the national unemployment

rate stood at 9.8 percent with continuinginsipid growth in the economy overall. I the

unemployment rate continues to increase

and the economy suers urther job losses,

higher deault rates on mortgages could

occur, leading to lower prices. A all in house

prices could imply that more mortgages are

underwaterthat is, the amount homeown-

ers owe on their mortgages exceeds the cur-

rent market price o their homes. As recent

research has shown, this could lead, in turn,

to urther deaults, exacerbating the stress in

mortgage markets.3

Expectations o economic conditions and

uture house prices also play a signifcant

role, as do interest rates. I prospective buy-

ers expect home prices to decline, they are

more likely to postpone purchasing a home

in avor o renting. Also, i long-term rates

rise, the recent slide in mortgage rates could

reverse; such a move, in turn, would dampen

mortgage demand.

Weaker job growth and higher mortgage

rates are unlikely to spur demand or hous-

ing. Until people eel the economys pros-pects are defnitely getting better, they wil l

remain less likely to buy a home.

Rajdeep Sengupta is an economist and BryanNoeth is a research analyst, both at the FederalReserve Bank of St. Louis. For more on Sen-guptas work, go to http://research.stlouisfed.org/econ/sengupta/

continued from Page

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Regional Economist - January 2011