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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
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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
23 r e a de r e x c ang e
The Regional Economist blh
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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
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James Bllad, p ceo
fl rv Bk s. L
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
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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.
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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
, q
l v v k-k hl b ll
l (b l ). ... B
l extreme l .
6 The Regional Economist |Jaa 2011
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$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
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$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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8 The Regional Economist |Jaa 2011
continued on Page 10
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The Regional Economist | www.stloisfed.og 9
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
10
-12
SAAR*PERCENTCHANGE
2006 2007 2008 2009 2010
6
5
4
3
2
1
0
1
2
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
M P M
G d P
P F
(ACTuAL AnD MODEL SIMuLATED DATA)
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l h h .12
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wh h l
hhl hz, h bl
b.
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r Could Have Been mh w
PH G/H MG
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8/7/2019 Regional Economist - January 2011
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
10 The Regional Economist |Jaa 2011
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.
8/7/2019 Regional Economist - January 2011
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
The Regional Economist | www.stloisfed.og 11
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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
12 The Regional Economist |Jaa 2011
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.
8/7/2019 Regional Economist - January 2011
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.
The Regional Economist | www.stloisfed.og 13
8/7/2019 Regional Economist - January 2011
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8/7/2019 Regional Economist - January 2011
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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
The Regional Economist | www.stloisfed.og 15
g 1
8/7/2019 Regional Economist - January 2011
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 .
16 The Regional Economist |Jaa 2011
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.
8/7/2019 Regional Economist - January 2011
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
The Regional Economist | www.stloisfed.og 17
8/7/2019 Regional Economist - January 2011
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
18 The Regional Economist |Jaa 2011
8/7/2019 Regional Economist - January 2011
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.
The Regional Economist | www.stloisfed.og 19
g 2
Seios Deliqec rate b Cot
Sept. 2008 Sept. 2009 Sept. 2010
8/7/2019 Regional Economist - January 2011
20/24
20 The Regional Economist |Jaa 2011
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.
8/7/2019 Regional Economist - January 2011
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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.
The Regional Economist | www.stloisfed.og 21
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
8/7/2019 Regional Economist - January 2011
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
22 The Regional Economist |Jaa 2011
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