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F e d e r a l R e s e r v e B a n k o f S t. L o u i s Annual Report 2012 After the Fall Rebuilding Family Balance Sheets, Rebuilding the Economy We serve the Eighth District, covering all or parts of: Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. Leader in providing economic data. Promote equal access to credit. Econ Lowdown: our gateway to economic and personal finance lessons for teachers, students and the general public. With other regulatory agencies, we oversee banks and other financial institutions to ensure they operate soundly and treat customers fairly. We ensure banks have an ample supply of currency and coins to meet the demands of their depositors. Our economists advise our president by conducting regional, national and international economic research. Test more than 1 billion notes a year to ensure they are fit for circulation. 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Algunos de los materiales y presentaciones también están disponibles en español. We offer an array of publications, web sites, videos, podcasts, tutorials for those interested in economics and the economy. One of 12 regional Reserve banks around the country. F e d e r a l R e s e r v e B a n k o f S t. L o u i s Annual Report for the year 2012 Published May 2013 Table of Contents President’s Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 After the Fall: Rebuilding Family Balance Sheets, Rebuilding the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Our People. Our Work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Our Leaders. Our Advisers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Chairman’s Message . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Read our financial statements on our web site at www.stlouisfed.org/ar There, you can also find this entire report, along with a short video featuring key points in the essay and a Spanish version of the essay. 2 Federal Reserve Bank of St. Louis | Annual Report 2012 President’s Message The St. Louis Fed’s New Center for Household Financial Stability T he financial crisis and Great Recession had profound effects not only on the U.S. economy as a whole, but also on individual households. For instance, the collapse of the housing bubble sharply reduced the wealth of many homeowners and led many into foreclosure. Moreover, the collapse of the bubble left households with much more debt (relative to their incomes) than they had intended. Consequently, household deleveraging, or paying down debt, has played a key role in the recent recession and the slow recovery. It is important to learn more about the link between households’ balance sheets (their savings, assets, debts and net worth, as distinct from wages and income) and the overall performance of the U.S. economy, as well as the link between balance sheets and the stability and upward mobility of families. For this reason, we are pleased to announce the creation at the St. Louis Fed of the Center for Household Financial Stability, which is dedicated to further research on household balance sheets—their status and overall health, why they matter for families and the economy, and the best approaches for strengthening them. Information on the center and its team members can be found at www.stlouisfed.org/hfs This year’s annual report essay features some of the center’s new research. Authors Ray Boshara and Bill Emmons find that while many Americans lost wealth during the Great Recession, younger, less-educated and nonwhite families lost the greatest percentage of their wealth. According to the analysis, these subgroups had higher than average concentrations of their wealth in housing and more debt relative to their assets and income, meaning that the families most vulnerable to a deep recession often possessed the least healthy and riskiest balance sheets when the recession began. Boshara and Emmons also present evidence associating various levels of household balance-sheet health with college access and completion, upward economic mobility, and financial stability, as well as research suggesting that both sides of a family’s balance sheet—assets and liabilities— appear to impact spending and economic growth. Many in the Federal Reserve System and in other circles have, of course, been studying consumer finance for many years. What the center hopes to offer is a conceptual framework and a common table to work together and learn about household balance sheets. The center also plans to publish research on household balance sheets, including the new two-page research briefs, In the Balance. In addition, the team is constructing a balance-sheet data clearinghouse; creating a new balance-sheet index to gauge the health of American households’ balance sheets; and organizing research symposia, practitioner forums, a speaker series and other activities to understand family balance sheets and develop ideas on how to improve them. Work is under way and the partnerships are forming with colleagues throughout the Federal Reserve System, as well as external researchers and others. As we learn more about how microeconomic activity affects the performance of the macroeconomy, this research could have important public-policy implications, including insights for monetary policy. James Bullard President and CEO Federal Reserve Bank of St. Louis | stlouisfed.org 3 After the Fall Rebuilding Family Balance Sheets, Rebuilding the Economy By Ray Boshara and William Emmons Ray Boshara is a senior adviser at the Federal Reserve Bank of St. Louis and is the director of the Center for Household Financial Stability. Prior to joining the Fed in 2011, Boshara was vice president of the New America Foundation, a think tank based in Washington, D.C. Over the past 20 years, Boshara has advised presidential candidates; the Bush, Clinton and Obama administrations; and leading policymakers worldwide. He has testified before the U.S. Congress several times, most recently before the Senate Banking Committee in October 2011. Boshara is a graduate of The Ohio State University, Yale Divinity School and the John F. Kennedy School of Government at Harvard. William Emmons is the chief economist of the Center for Household Financial Stability. He is an assistant vice president and economist at the Federal Reserve Bank of St. Louis, where his areas of focus include household balance sheets and their relationship to the broader economy. He also speaks frequently on topics including banking, financial markets, financial regulation and the economy. Emmons received a Ph.D. in finance from the Kellogg School of Management at Northwestern University. He received bachelor’s and master’s degrees from the University of Illinois at Urbana-Champaign. 4 Federal Reserve Bank of St. Louis | Annual Report 2012 Glossary In this column are definitions of terms that are highlighted in bold in the text. mericans, imbued with great expectations and optimism, set several records in the past decade in pursuit of the American dream of homeownership. We had both the highest rate of homeownership and the highest concentration of wealth in housing ever recorded. Millions, including the Balance sheet: The financial accounting for an economic unit’s financial and tangible assets and its liabilities. A balance sheet consists of two columns, containing all assets on the left-hand side and all liabilities on the right-hand side. The difference between the value of assets and liabilities is defined as net worth, or wealth. Net worth can be positive or negative. most economically vulnerable, assumed risky mortgages to purchase these homes and ran up their other debts as well, leading to a personal debt-to-income ratio of 133 percent, an all-time high. And easy access to credit, along with rapidly rising home values, let our personal savings rate plunge to its lowest level since the 1930s. Leverage was the price we paid, and are still paying, for that American dream. The risk of leverage, of course, is that economically vulnerable groups possessed especially risky balance sheets going into the crisis. We then address the importance of it can multiply losses. As house prices balance-sheet health at the micro level—that fell, the balance sheets of economically is, the importance of sound financial footing fragile families were damaged. And while to families. Finally, we review research on household balance sheets have improved the importance of healthy household bal- in the past few years—families are rebuild- ance sheets to the economy, and we briefly ing their savings and paying down their convey our future research plans on house- debts—balance sheets have not yet fully hold balance sheets. rebounded. We estimate that only about 45 percent of the average inflation-adjusted household wealth that was lost since the onset of the downturn in 2007 has been recovered. (See sidebar on Page 14.) The Financial Crisis and the Impact on Households Household balance sheets were severely affected during the financial crisis and In this essay, we present new research ensuing recession. According to the regarding the damage to household balance Federal Reserve’s triennial Survey of sheets resulting from the Great Recession of Consumer Finances (SCF)—the most 2007-09. Specifically, we show which demo- comprehensive examination of household graphic groups lost the most wealth fol- balance sheets—average household wealth lowing the recession, and we illustrate how declined 15 percent between 2007 and Federal Reserve Bank of St. Louis | stlouisfed.org Leverage: In a qualitative sense, leverage refers to the degree to which a family’s assets are financed with debt. In a quantitative sense, leverage is defined in this article as the ratio or percent of a family’s debt relative to its assets. 5 Household: The U.S. Census Bureau defines a household as consisting of all the people who occupy a housing unit. (See “family,” too.) A house, an apartment or other group of rooms, or a single room, is regarded as a housing unit when it is occupied or intended for occupancy as separate living quarters, that is, when the occupants do not live with any other persons in the structure and there is direct access from the outside or through a common hall. Because the definitions of family and household are very similar, we use the terms interchangeably in the text. A household includes the related family members and all the unrelated people, if any, such as lodgers, foster children, wards or employees who share the housing unit. A person living alone in a housing unit, or a group of unrelated people sharing a housing unit, such as partners or roomers, is also counted as a household. The count of households excludes group quarters. Human capital: A concept meant to capture the potential earning power of an individual. Unlike physical capital, such as a machine, human capital cannot be measured precisely because it is not legal to buy and sell financial claims on a person’s future earnings. The concept is useful, nonetheless, to facilitate discussions of why people make investments in education and what financial benefits this investment might generate. Percentage Losses in Mean Net Worth 2007-2010 Resid in 20 50 by age, educational attainment, and race Percent 10 2 5 1 0 large declines, the Fed’s survey suggests that families that were younger, that had less than a college education and/or were members of a historically disadvantaged AAH: African-Americans and Hispanics of any race. WA: Whites and Asians. GED: General Educational Development certificate. minority group (African-Americans or SOURCE: Fed’s Survey of Consumer Finances, 2007 and 2010. Hispanics of any race) suffered particularly large wealth losses (Figure 1).1 Even before the crisis, younger, lesseducated and historically disadvantaged minority families were known to be among the most economically vulnerable groups because of the particular occupations and sectors in which they were overrepresented, concentrations of wealth in housing and high levels of debt. Large Portfolio Concentrations in Housing before the Crash Housing represented a relatively large such as low-wage service-sector jobs and share of total assets among economically construction. What was not well-known— vulnerable groups (Figures 2 and 3). Fig- but which we document here—is that ure 2 shows the average share of total assets families in these economically vulnerable held in the form of residential real estate in groups often also had very risky balance 2007 by each of the nine white and Asian sheets going into the crisis. Our research subgroups; Figure 3 shows the same infor- suggests that both economic vulnerability mation for the nine subgroups of blacks and risky financial choices may stem from and Hispanics. one or more common causes, including Among white and Asian families, the low levels of human capital, relative youth pattern of asset concentration in housing and inexperience, as well as the legacy along both age and educational-attainment of discrimination in education, employ- dimensions is remarkably clear. The ment, housing and credit markets. As we younger the family and the lower the level show later, these groups experienced the of educational attainment—that is, the most-acute balance-sheet “failures”—high more economically vulnerable the family— 6 Federal Reserve Bank of St. Louis | Annual Report 2012 4 High school dropout Although many subgroups experienced 5 3 15 College graduate reverse causation. 20 High school (or GED) graduate not difficult to interpret due to potential 25 40-61 measured, that are not subject to choice or 6 30 All “exogenous” dimensions that are reliably 7 35 Percent or ethnicity—demographic and other 8 40 Accordingly, we focus on families grouped 9 45 understand who lost wealth and why. 62-Max random variation over time, and that are More important, however, we must FIGUR 0-39 Reverse causation: A relationship between two variables, each of which may be important in explaining the other, rather than one being clearly causal with respect to the other. For example, income and marital status may be subject to reverse causation. Having a high income may increase the chance that an individual is married, but being married also might contribute to an individual’s having a higher income. Thus, the causal relationship between the variables is ambiguous. Demographic variables such as age and race or ethnicity are not subject to reverse causation in the same way. Being a minority may reduce a family’s chance of being a homeowner, due to discrimination in housing or mortgage markets, but not being a homeowner does not “cause” minority status. Causation clearly is one-way only, if it exists. dropped 39 percent. FIGURE 1 WA 2010, while median household wealth AAH Median: The number that ranks precisely in the middle of a set of numbers arranged in order of magnitude. If the set of numbers has an even number of members, the median is the average of the two numbers that are closest to the middle of the ranking. In contrast, the mean is the average value of a set of numbers divided by the number of members in the set. SOURC 70 60 60 50 50 40 40 30 30 20 20 10 10 High school dropout 0 0. 0 Younger YoungerMiddle-aged Middle-aged Older Older (under 40) (under 40) (40-61) (40-61) (62 or over) or over) (62 College graduategraduate College High school graduategraduate High school High school dropout dropout High school SOURCE: Fed’s Survey of Consumer Finances, 2007. 2007. SOURCE: Fed’s Survey of Consumer Finances, Younger YoungerMiddle-aged Middle-aged Older Older (under 40) (under 40) (40-61) (40-61) (62 or over) or over) (62 College graduategraduate College High school graduategraduate High school High school dropout dropout High school SOURCE: Fed’s Survey of Consumer Finances, 2007. 2007. SOURCE: Fed’s Survey of Consumer Finances, the higher its average housing concentra- higher levels (Figure 3). With a few slight tion. The difference in housing portfolio exceptions, the general principles enunci- shares between the economically strongest ated earlier hold here, too. The younger subgroup (older college-educated families) and the less-educated the family, the higher and the economically weakest (younger the average portfolio concentration in high school dropouts) is an enormous 41 housing. The very low level of homeowner- percentage points, making the latter group ship in 2007 among younger high school much more vulnerable to a housing-market dropouts, 24 percent, makes the group’s decline. The high average real-estate share 86 percent housing share of total assets all in total assets among all white and Asian the more remarkable. Comparing Figures high school dropouts as a group is even 2 and 3, it is clear that the third dimen- more striking when considering that the sion of economic vulnerability—belonging homeownership rate is relatively low in this to a historically disadvantaged minority group—52 percent in 2007 vs. 90 percent group—also was strongly predictive of a among older college grads. Said differently, relatively high exposure to housing risk. if younger high school dropouts have any assets of significance, they are likely to be in the form of a house. High Levels of Household Debt Economically vulnerable families The age-education pattern for blacks generally had higher balance-sheet lever- and Hispanics is very similar to that for age, which meant that any decline in the whites and Asians, albeit at uniformly value of their assets was multiplied into a Federal Reserve Bank of St. Louis | stlouisfed.org 7 Percent 70 Percent 80 Percent 90 80 Percent 90 Percent Residential Real-Estate Portfolio Shares Residential Real-Estate Portfolio Shares in 2007 among Whites and Asians in 2007 among Whites and Asians Assets: Tangible or intangible FIGURE 4 FIGURE 4 property owned by a family. Residential Real-Estate Portfolio Shares in Residential Real-Estate Portfolio Shares in RatioTangible of Debt to Total Assets in Ratio assets include houseof Total Total Debt to Total Ass 2007 among African-Americans and Hispanics 2007 among African-Americans and Hispanics among Whites and Asians among Whites such Asians hold durable goods, and as automobiles and home furnish90 90 90 90 ings, and real estate, including 80 80 80 80 a primary residence, vacation 70 70 70 70 residences and investment real estate. 60 Intangible assets include 60 60 60 financial assets such as bank 50 50 50 50 deposits, bonds, stocks, mutual 40 40 40 40 funds, the cash value of life insurance and pension entitle30 30 30 30 ments (although not anticipated 20 20 20 20 Social Security benefits, which 10 not10 10 10 are legally owned by the beneficiary). 0 0 0 0 FIGURE 3 FIGURE 3 Percent FIGURE 2 FIGURE 2 Younger YoungerMiddle-aged Middle-aged (under 40) (under 40) (40-61) (40-61) (6 Family: We follow the definition of “family” used by Bricker College graduategraduate College et al. in discussing the Federal High school graduategraduate High school Reserve’s Survey ofschool dropout High school dropout High Consumer Finances. (See “household,” too.) A household unit is divided into a “primary ecoSOURCE: Fed’s Survey of Consumer Finances, 2007. SOURCE: Fed’s Survey of Consumer Finances nomic unit” (PEU)—the family—and everyone else in the household. The PEU (family) is intended to be the economically dominant single person or couple (whether married or living together as partners) and all other persons in the household who are financially interdependent with that economically dominant person or couple. Because the definitions of family and household are very similar, we use the terms interchangeably in the text. Family head: The head of the primary economic unit (PEU) or family. (See definition of “family.”) Designation of a family head is not meant to convey a judgment about how an individual family is structured but as a means of organizing the data consistently. If a couple is economically dominant in the PEU, the head is the male in a mixed-sex couple or the older person in a same-sex couple. If a single person is economically dominant, that person is designated as the family head. FIGURE 4 FIGURE 4 al-Estate Portfolio Shares in al Real-Estate Portfolio Shares in Ratio Ratio of Debt to Total Assets in 2007 2007 of Total Total Debt to Total Assets in ong African-Americans and Hispanics frican-Americans and Hispanics among Whites and Asians among Whites and Asians gerYoungerMiddle-aged Middle-aged Older Older 40) (under 40) (40-61) (40-61) (62 or over) or over) (62 Ratio Ratio of Debt to Total Assets in 2007 2007 of Total Total Debt to Total Assets in among African-Americans and Hispanics among African-Americans and Hispanics 90 90 80 80 80 80 70 70 70 70 60 60 60 60 50 50 40 40 30 Percent 90 Percent 90 40 40 30 30 30 20 20 20 10 10 10 10 0 0 Percent 50 20 Percent 50 0 YoungerYoungerMiddle-aged Middle-aged Older Older (under 40) (under 40) (40-61) (40-61) (62 or over) or over) (62 College College graduate graduate High school graduate High school graduate High school dropoutdropout High school e College graduate graduate hool graduate High school graduate hool dropoutdropout High school y of Consumer Finances, 2007. 2007. ’s Survey of Consumer Finances, FIGURE 5 FIGURE 5 SOURCE: Fed’s Survey of Consumer Finances, 2007. 2007. SOURCE: Fed’s Survey of Consumer Finances, proportionately larger decline in the fam- 0 YoungerYoungerMiddle-aged Middle-aged Older Older (under 40) (under 40) (40-61) (40-61) (62 or over) or over) (62 College College graduate graduate High school graduate High school graduate High school dropoutdropout High school SOURCE: Fed’s Survey of Consumer Finances, 2007. 2007. SOURCE: Fed’s Survey of Consumer Finances, Figure 4 shows that younger and less- ily’s net worth (Figures 4 and 5). A high educated white and Asian families tended concentration in housing need not lead to have higher debt-to-asset ratios in 2007 to financial distress in a housing market than older and better-educated families. crash if the owner has sufficient net assets (A similar pattern existed for debt-to- (including homeowners’ equity) and suf- income ratios.) It appears that relative ficient cash flow after debt service to meet youth is the strongest influence on average other needs. If the owner doesn’t have debt ratios, while the effect of educational sufficient assets or cash flow, however, the attainment is not as strong or clear-cut. family may default on its debts, losing a The dominant influence of age on house, a car and access to additional credit balance-sheet leverage is evident also in on good terms. Figure 5, which depicts debt-to-asset ratios The SCF data reveal that economically for nine black and Hispanic subgroups. vulnerable families often financed their Educational attainment also may matter, housing investments in a risky way with as the debt ratios of all dropout groups lots of debt and little margin for error. That were higher than those of college-graduate is, among the subgroups we consider, those groups of the same age. Comparing Fig- who are economically most vulnerable have, ures 4 and 5, race or ethnicity also emerges on average, the highest concentrations in as a powerful predictor of debt ratios, as housing and the most debt, whether it is every black or Hispanic subgroup had measured against assets or income. more debt than the corresponding white or 8 Federal Reserve Bank of St. Louis | Annual Report 2012 Net worth: A family’s assets minus its liabilities. It is a synonym for wealth and is likely to be positively related to a family’s financial stability. TABLE 1 The Link between Saving and Graduating from College No Savings Account Only Basic Savings School Savings <$1 School Savings $1-$499 School Savings >$500 % Who Graduated from College—All Children 14% 26% 30% 31% 49% % Who Graduated from College—Lower-Income Children 5% 9% 13% 25% 33% Savings Level Mobility: Movement up or down in a family’s or individual’s level or ranking on an economic or financial measure. Absolute mobility refers to a change in an individual’s level of income, for example, regardless of any changes in other individuals’ incomes. Relative mobility refers to changes in an individual’s ranking among other individuals on some measure. Source: Elliott, Nam and Song. Asian group. Illustrating the point made likely to attend college than youth lacking above, historically disadvantaged minor- accounts. Elliott also found other powerful ity families tended to finance their assets correlations between savings and postsec- with more debt than did white and Asian ondary education outcomes—namely, that families, which amplified the effects of higher levels of savings are associated with high housing concentrations on net-worth higher rates of college graduation, even for declines during the crisis. lower-income children (Table 1). Why Damage to Balance Sheets Matters for Families To illustrate how balance sheets matter No doubt these modest amounts of savings would not be enough to finance a college education, but the research suggests that dedicated college savings forge what is called for families, let us look at some postsec- a “college-bound identity,” which appears to ondary education, economic mobility and extend a child’s planning horizon and spur family stability outcomes. behavior changes associated with college College outcomes. The economics literature is rich with data about the role that parental education and income levels, success, such as selecting more challenging classes and prompting parental engagement. Levels of debt appear to play a role, neighborhoods, high schools, race, test too, in college success. Scholars Michael scores and other factors play in predict- Sherraden and Min Zhan found that liquid ing college success, yet only recently have and nonliquid assets are positively associ- scholars closely examined how various ated with later college completion, while balance-sheet components drive college unsecured debt is negatively associated access and completion. with college completion. And researchers William Elliott III, a leading researcher Elliott and Ilsung Nam found that stu- in this area, found that among youth who dent loans may reduce net worth later in intend to go to college, those with savings life: Households with a four-year college accounts in their own name, regardless of graduate and outstanding student loans the amount, were nearly seven times more have $185,996 less net worth than houseFederal Reserve Bank of St. Louis | stlouisfed.org 9 Liquid assets: Financial assets that can be sold or traded relatively easily and at little cost. These include bank deposits, stocks, bonds and mutual funds. Nonliquid assets: Financial assets that cannot be sold or traded easily and at little cost, such as pension assets, as well as durable goods, business assets and real estate. Unsecured debt: A loan that does not require the borrower to pledge collateral, such as a house or an automobile, to the lender. Examples include credit-card loans and student loans. holds with a four-year college graduate Thomas Shapiro, an expert on the racial but no outstanding student loans. The authors speculate that student loans may Economically vulnerable families that diversify their assets beyond housing achieve greater financial stability. dimensions of wealth, interviewed nearly 200 families throughout the U.S. and push down credit scores, reduce access to examined national survey data with 10,000 credit, and consume disposable income and families. He found that families with pri- savings—thus suppressing the acquisition vate wealth are able to move up from gen- of other productive assets and investments eration to generation, relocating to safer (for example, homes, businesses, retirement communities with better schools and pass- accounts) that typically lead to the building ing along the accompanying advantages of net worth. to their children. At the same time, those 2 Economic mobility outcomes. As families without wealth remain trapped with education, research on economic in communities that do not allow them to mobility has largely focused on the role of move up, no matter how hard they work. parents, earnings, education and other fac- Shapiro also reported that the presence tors in predicting whether individuals and of even small amounts of wealth at key their children move up (or down) the eco- moments in life—at the brink of launching nomic ladder. The role of savings, assets a small business, starting college, purchas- and net worth has been, until recently, ing a home, or the onset of unemployment relatively unexamined. or bankruptcy—can have a “transforma- Research thus far suggests that balancesheet factors generate upward mobility. Heri- tive” effect on the life course. Financial stability outcomes. Finally, tage Foundation scholars found that financial a growing body of research shows that capital, family structure and educational healthy balance sheets, and not just attainment are the three best predictors of income, matter for basic household finan- economic mobility in America—with finan- cial stability. Urban Institute researchers cial capital (savings and assets) the strongest found that households that are “liquid- predictor. Similarly, sociologist Dalton asset poor” are two to three times more Conley reports, “While race, income, likely than those with liquid assets to expe- job status and net worth all tend to vary rience “material hardship”—being unable hand-in-hand, careful statistical parsing to pay a bill or skipping necessary spend- shows that it is really net worth that drives ing on food or health care—after a job loss, opportunity for the next generation.” Fur- health emergency, death in the family or ther, a study published by Pew’s Economic other adverse event. Mobility Project looked at the role of savings Experiments also show that households in economic mobility; the study found that with savings may have fewer day-to-day among adults in the bottom income quartile financial worries, allowing them to be bet- from 1984 to 1989, 34 percent of those with ter planners and more future-oriented in low initial savings left the bottom within their economic and social decision-mak- the period between 2003 and 2005, but 55 ing. Conversely, the lack of savings and percent of those with high initial savings left assets can hurt future consumption and the bottom during that period. security: Seventy percent of workers report 10 Federal Reserve Bank of St. Louis | Annual Report 2012 withdrawing money from college and spending while they struggled with weak retirement accounts in order to make ends balance sheets, others likely would take up meet, and these withdrawals will likely lead the slack, contributing to reasonably steady to losses of wealth in future years. overall growth. Finally, researchers Tammy Leonard It has come as somewhat of a surprise, and Wenhua Di report that lower- and therefore, that many economists now are moderate-income families that invest in calling the Great Recession of 2007-09 productive assets and reduce their debts a “balance-sheet recession” and that were more likely to achieve and maintain balance-sheet failures of the type described financial stability (defined by them as a above are seen as important contributors family having enough savings and assets to the downturn and weak recovery. Two on which to survive for three months). key aspects of the current economic cycle Leonard and Di define “productive” assets explain this description: (1) wealth effects as businesses, nonhousing real estate, and (2) defaults and deleveraging. stocks or bonds—which underscores a Wealth effects. Economists long have key insight from our own research: Eco- sought to estimate how much a one-time, nomically vulnerable families that diversify unexpected change in the value of house- their assets beyond housing achieve greater holds’ assets might affect their spending, financial stability. both in the short term and in the long Why Damage to Balance Sheets Matters for the Economy Prior to the Great Recession, many term—what are called “wealth effects.” Economists Karl Case, John Quigley and Robert Shiller found, first, that housingwealth effects are much larger than finan- respected economists were not worried cial-wealth effects (stocks, bonds, mutual about the management of household bal- funds). They estimated that, in recent years, ance sheets and the role balance sheets an unexpected, one-time increase of 1 per- played in macroeconomic performance. cent in housing wealth led to an increase of This may have been due to the lack of 0.08 to 0.12 percent in consumer spending recent historical evidence suggesting that each year afterward.3 In contrast, the same household balance-sheet failures, such as increase in financial wealth was followed by high concentrations in housing or high a less than 0.03 percent permanent increase levels of debt, actually harmed the econ- in consumer spending. omy. At the same time, many economists Second, they found that consumer believed that consumer credit markets were spending reacts much more strongly to reasonably competitive and efficient so that declines than increases in household most households’ balance sheets were in wealth. In particular, an unexpected pretty good shape. In short, policymakers decline of 1 percent in house prices results thought that any household balance-sheet in about a 0.10 percent permanent decline problems would largely work themselves in consumer spending, while a 1 percent out on their own without harming the increase in house prices results in only economy. If some families reduced their about a 0.03 percent increase in consumer Federal Reserve Bank of St. Louis | stlouisfed.org 11 Household financial stability: A concept meant to express the degree to which a family’s financial situation is stable, sustainable and resilient to temporary shocks and setbacks. There is no precise measure of household financial stability, but it is likely to be positively related to a family’s net worth, its stock of liquid assets, and its anticipation of cash flows from paid employment, trust funds, pensions, gifts or other sources. Balance-sheet recession: A recession that is caused by or is made worse by many weak balance sheets in one or more sectors of the economy. A weak balance sheet, in turn, is one that has a low or negative ratio of net worth to total assets compared to historical experience. Deleveraging: Reducing debt or a debt ratio (typically relative to assets or income) either by paying off debt, increasing debt more slowly than assets, if assets are increasing, or increasing debt more slowly than income, if income is increasing. Deleveraging may be voluntary or involuntary from the perspective of the borrower. spending.4 Applying these estimates to the in both 2008 and 2009 from a baseline of actual declines in housing wealth experi- about 2.5 percent annual growth. Thus, enced between 2005 and 2009—about 35 Hatzius predicted roughly zero growth percent after inflation adjustment—the for the two years. As it turned out, real authors estimate that consumer spending GDP fell 0.3 and 3.1 percent in those years, ended up on a path about 3.5 percent lower somewhat worse than he predicted. than otherwise would have been expected, Another body of research suggesting or roughly $350 billion less than it would that large-scale defaults can have signifi- have been in 2010. cant harmful effects on economic growth Based in part on studies like this, some includes the work of Carmen Reinhart macroeconomists analyzing the Great and Kenneth Rogoff, well-known for their Recession and subsequent weak recovery book, This Time Is Different. They studied believe that negative household wealth both banking crises and government debt effects played an important role. They defaults in many countries over a long time describe the huge declines in asset values span and concluded that losses on loans or and net worth as one of the shocks that bonds can amplify economic weaknesses threw the economy into recession. Skeptics when the losses damage financial interme- might argue that the asset-price declines diaries, impairing the economy’s credit- themselves merely reflect anticipated dete- creation mechanisms. 5 rioration elsewhere in the economy and, There is a substantial amount of empiri- therefore, are not themselves fundamental cal evidence documenting the contours causes of the downturn. These questions and extent of household “deleveraging”— merit further study. households paying down their debts and Defaults and deleveraging. There rebuilding their savings—in the wake of are two distinct but related ways in which the crisis. The International Monetary the liability side of household balance Fund combined an examination of current sheets may have harmed the economy in levels of household debt in 36 countries recent years—namely, through defaults with an analysis of previous episodes of and deleveraging. excessive household debt. The IMF con- Defaults that discharge debt in excess firmed that household debt can become so of acquired collateral value result in a loss large and burdensome that it hampers eco- to the lenders; it is the concentration of nomic growth; the organization also con- losses at highly leveraged financial insti- cluded that policy responses that involve tutions that appears to give loan defaults debt restructuring can alleviate some of their macroeconomic significance. An the burdens on the economy. In earlier early, and remarkably accurate, analysis of work, economists at the McKinsey manage- likely mortgage defaults and their effects ment consulting firm stressed the need for on financial institutions, mortgage lending countries to avoid the buildup of excessive and the economy as a whole by economist household debt in the first place.6 Jan Hatzius predicted a huge reduction of Economists Atif Mian, Amir Sufi and 2.6 percentage points in real GDP growth their co-authors wrote a series of papers 12 Federal Reserve Bank of St. Louis | Annual Report 2012 documenting the cross-sectional diver- able groups. Thus, the very families most sity of the housing and credit boom and exposed to the economic fallout of a deep bust at the county level. They showed that recession—fallout that came in the form of large precrisis increases in debt-to-income job loss or reduced income—possessed the ratios were strong predictors of early and weakest and riskiest balance sheets. sharp corrections in house prices. Soon We also presented evidence suggest- Additional terms thereafter, those counties with the sharpest ing that it matters—for both family and declines in house prices also experienced economic growth outcomes—whether surges in unemployment and mortgage households have healthy or unhealthy defaults, while auto sales and building balance sheets. Surveying the research, permits plunged. Mian and Sufi also we presented evidence associating vari- estimated that roughly two out of every ous levels of household balance-sheet three (4 million out of 6.2 million) jobs lost health with college access and completion, between March 2007 and March 2009 were upward economic mobility, and financial indirectly attributable to weak household stability. And the research suggests that balance sheets. both the asset-side wealth effect and the Further, economists Karen Dynan and liability-side deleveraging effect appear to be important contributors to the overall households that had high leverage before household balance-sheet effects on spend- the crash subsequently decreased their ing and the economy. spending more than low-leverage houseand Edelberg’s work was to disentangle the two sides of households’ balance sheets in harming the broader economy. They 7 document an independent debt-overhang effect: Households with greater leverage decreased spending more, even when holding constant the change in net worth across different households. Summary Our examination of household balance sheets shows that while many Americans lost wealth because of the Great Recession, younger, less-educated and African-American and Hispanic families lost the most. We also found that these subgroups had both higher-than-average concentrations of their wealth in housing and higher debt-toasset ratios than less economically vulner- Looking Ahead Examining the balance sheets of American households is relatively new territory for researchers and policymakers who are concerned about the economic health of families and our nation. Much remains to be learned, including a better understanding of the links between microeconomic activity and macroeconomic performance. In the months and years ahead, the St. Louis Fed’s newly launched Center for Household Financial Stability will take on the challenge of this important area of study. Instead of reacting to the last decade’s balance-sheet failures—high levels of debts, low levels of savings and insufficient assets beyond homeownership—we aim to proactively assess and monitor the continued on Page 15 Federal Reserve Bank of St. Louis | stlouisfed.org Mortgage debt: Any debt secured by real estate, including first-lien mortgages, juniorlien mortgages, fixed-rate and variable-rate loans, balances owed on home-equity lines of credit (HELOCs), and homeequity loans. Nonmortgage debt: Any debt not secured by real estate, including credit-card debt, auto debt, student loans and other personal loans. Wendy Edelberg found that individual holds. A significant contribution of Dynan Liabilities: Amounts owed by a family to creditors. Examples include mortgages, auto loans, credit-card debts, student loans, security credit and taxes payable. 13 How Much Household Wealth Has Been Recovered? Household Net Worth: Nominal, Inflation-Adjusted and Inflation-Adjusted per Household 100 95 90 85 80 75 Nominal household net worth Inflation-adjusted net worth Inflation-adjusted net worth per household in the Flow of Funds accounts; aggregate inflation-adjusted net worth; and average inflation-adjusted net worth per household, a household-level measure consistent with the data format in the Survey of Consumer Finances as discussed in this article. Clearly, the 91 percent recovery of wealth losses portrayed by the aggregate nominal measure paints a different picture than the 45 percent recovery of wealth losses indicated by the average inflation-adjusted household measure. Considering the uneven recovery of wealth across households, a conclusion that the financial damage of the crisis and recession largely has been repaired is not justified. Alternative Measures of Wealth Loss and Recovery Peak-to-Trough Percent Change Trough-to-2012:Q4 Percent Change Percent Recovery by 2012:Q4 of Peak-to-Trough Decline 1) Nominal net worth (reported in Flow of Funds) –24% 29% 91% 2) Inflation-adjusted net worth (calculated as  deflated by Personal Consumption Expenditures price index) –26% 19% 56% 3) Inflation-adjusted net worth per household (calculated as  adjusted for population growth; corresponds to mean value reported in Survey of Consumer Finances) –27% 16% 45% SOURCES FOR CHART AND TABLE: Federal Reserve Flow of Funds accounts, Bureau of Economic Analysis and Census Bureau. 14 Federal Reserve Bank of St. Louis | Annual Report 2012 2013:Q1 2012:Q1 2011:Q1 2010:Q1 2009:Q1 2008:Q1 2007:Q1 2006:Q1 2005:Q1 70 2004:Q1 Index values equal 100 at respective peaks in 2007 T he Federal Reserve reported March 7, 2013, that aggregate household net worth at the end of 2012 was $66.1 trillion, nearly back to its precrisis peak of $67.4 trillion, reached at the end of the third quarter of 2007. After falling to $51.4 trillion at the end of the first quarter of 2009, the subsequent increase of $14.7 trillion through the end of last year represented a recovery of 91 percent of the losses suffered. Does this mean that the financial damage of the financial crisis and economic recession largely has been repaired? The simple metric of aggregate household net worth is misleading for at least three reasons. First, the effect of inflation is ignored. Consumer prices increased about 2 percent per year in the five and one-quarter years since the third quarter of 2007, reducing the purchasing power of a dollar by a total of about 10 percent. Therefore, a return to the previous nominal dollar peak does not mean that a given amount of wealth could buy as much as before. Second, simple aggregate net worth does not adjust for population growth. The number of households increased by about 3.8 million between the third quarter of 2007 and the end of 2012, or about 3.4 percent. The wealth of all American households now is shared by more families than before. Third, the recovery of wealth has not been uniform across families. Of the total recovery of $14.7 trillion between the first quarter of 2009 and the fourth quarter of 2012, $9.1 trillion, or 62 percent, of the gain was due to higher stock-market wealth. Stock wealth is unevenly held, with the vast majority of stocks owned by a relatively small number of wealthy families. Thus, most families have recovered much less than the average amount. The figure and table provide details of three different measures of household net worth—aggregate nominal net worth, as reported continued from Page 13 health of household balance sheets, including the creation of new data warehouses and indexes. Along with our partners in the Federal Reserve System and beyond, we are excited about our new research on the health and consequences of household balance sheets for both struggling American families and the recovering economy. Bryan J. Noeth, a policy analyst at the Center for Household Financial Stability, provided valuable research assistance. The Center for Household Financial Stability will focus on rebuilding the household balance sheets of struggling American families. The HFS team will be conducting and publishing research on key balance-sheet issues, organizing research conferences and symposia, establishing a web-based research clearinghouse, developing a Household Balance Sheet Index and organizing forums to better understand the balance-sheet issues affecting struggling families and communities. Endnotes 1 Notice that the percent declines in average net worth between 2007 and 2010 for each of the education groups is larger than the overall average decline. This anomaly is due to changes in the number of families in each category and differences in the average wealth losses in those categories. To illustrate how changing cell sizes can produce individual category percentage declines that all are larger than the overall decline, consider a simple example. Suppose that, in 2007, you owned two cats and two dogs. The average weight of your cats was 5 pounds and the average weight of your dogs was 10 pounds; so, the average weight of your pets was 7½ pounds. Suppose that, in 2010, you had one 4-pound cat and three dogs with an average weight of 9 pounds. Comparing 2007 and 2010, the average weight of the cats you owned decreased 20 percent, and the average weight of your dogs decreased 10 percent. But the average weight of your pets actually increased 31/3 percent, from 7½ to 7¾ pounds. In terms of wealth changes among families of different education levels, less-than-high-school families with relatively large average losses (analogous to cats) decreased as a share of the sample, while college-educated families with relatively small average losses (analogous to dogs) increased as a share of the sample. The number of families with college degrees increased between 2007 and 2010, from 35 to 37 percent of the sample, while the number of families with less than a high school degree declined from 14 to 12 percent. The number of high school-degree families stayed roughly the same, at about 51 percent. 2 Researchers at the Federal Reserve Bank of New York found that young people with student debt saw bigger declines in homeownership and vehicle purchases since 2008 than young people without student debt. See Brown and Caldwell. 3 See Table 7 in Case, Quigley and Shiller. 4 See Table 8 in Case, Quigley and Shiller. 5 For example, Federal Reserve Bank of St. Louis President James Bullard observed, “A better interpretation of the behavior of U.S. real GDP over the last five years may be that the economy was disrupted by a permanent, one-time shock to wealth.” See Bullard. Federal Reserve Gov. Sarah Bloom Raskin highlighted the importance of wealth inequality for understanding the recession. See Raskin. 6 See Croxson et al. 7 The issue is that Mian and Sufi cannot rule out the possibility that the boom and bust together represented a huge positive wealth effect followed by an equally large negative wealth effect; in other words, they cannot verify an independent role for the liability side of the balance sheet in propagating the economic shock because they do not observe individual households’ balance sheets. References Amar, Eric; Atkins, Charles; Dobbs, Richard; Kwek, Ju-Hon; Lund, Susan; Manyika, James; Roxburgh, Charles; and Wimmer, Tony. “Debt and Deleveraging: The Global Credit Bubble and Its Economic Consequences.” McKinsey Global Institute Report, January 2010. Bricker, Jesse; Kennickell, Arthur B.; Moore, Kevin B.; and Sabelhaus, John. “Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances.” Federal Reserve Bulletin, June 2012, Vol. 98, No. 2, pp. 1-80. Brown, Meta; and Caldwell, Sydnee. “Young Student Loan Borrowers Retreat from Housing and Auto Mar- kets.” The Federal Reserve Bank of New York’s Liberty Street blog, posted April 17, 2013. Bullard, James. “Inflation Targeting in the USA.” Speech to the Union League Club of Chicago, Feb. 6, 2012. Butler, Stuart M.; Beach, William W.; and Winfree, Paul L. “Pathways to Economic Mobility: Key Indicators.” Washington, D.C.: Pew Charitable Trusts Economic Mobility Project, 2008. Case, Karl E.; Quigley, John M.; and Shiller, Robert J. “Wealth Effects Revisited 1975-2012.” National Bureau of Economic Research (NBER) Working Paper 18667, January 2013. Conley, Dalton. “Savings, Responsibility and Opportunity in America.” New America Foundation Policy Paper, April 20, 2009. Cooper, Daniel; and Luengo-Prado, Maria. “Savings and Economic Mobility.” In: Cramer, Reid; O’Brien, Rourke; Cooper, Daniel; and Luengo-Prado, Maria (eds.), A Penny Saved Is Mobility Earned: Advancing Economic Mobility through Savings. Washington, D.C.: Pew Charitable Trusts Economic Mobility Project, 2009, pp. 6-10. Croxson, Karen; Daruvala, Toos; Dobbs, Richard; Forn, Ramon; Lund, Susan; Manyika, James; and Roxburgh, Charles. “Debt and Deleveraging: Uneven Progress on the Path to Growth.” McKinsey Global Institute. January 2012. Di, Wenhua; and Leonard, Tammy. “Is Household Wealth Sustainable? An Examination of Asset Poverty Re-entry after an Exit.” Journal of Family and Economic Issues, published online March 24, 2013. Dynan, Karen. “Is a Household Debt Overhang Holding Back Consumption?” Working Paper, August 2012. Dynan, Karen; and Edelberg, Wendy. “What’s Driving Deleveraging? Evidence from the 2007-2009 Survey of Consumer Finances.” Working Paper, 2013. Elliott, William; Nam, Ilsung; and Song, Hyun-a. “Small-Dollar Accounts, Children’s College Outcomes, and Wilt.” Children and Youth Services Review, March 2013, Vol. 35, No. 3, pp. 535-47. Elliott, William; and Nam, Ilsung. “Are Student Loans Jeopardizing the Long-Term Financial Health of US Households?” Working Paper, 2013. Hatzius, Jan. “Beyond Leveraged Losses: The Balance Sheet Effects of the Home Price Downturn.” Brookings Papers on Economic Activity, Fall 2008, pp. 195-227. International Monetary Fund. “Dealing with Household Debt.” World Economic Outlook, Chap. 3, April 2012, pp. 89-124. Mian, Atif; and Sufi, Amir. “The Great Recession: Lessons from Microeconomic Data.” American Economic Review, May 2010, Vol. 100, No. 2, pp. 51-56. Mian, Atif; and Sufi, Amir. “What Explains High Unemployment? The Aggregate Demand Channel.” NBER Working Paper 17830, February 2012. Mian, Atif; Rao, Kamalesh; and Sufi, Amir. “Household Balance Sheets, Consumption, and the Economic Slump.” Working Paper, February 2013. Raskin, Sarah Bloom. “Aspects of Inequality in the Recent Business Cycle.” Speech at the 22nd Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies. New York, N.Y., April 18, 2013. Reinhart, Carmen M.; and Rogoff, Kenneth S. This Time Is Different. Princeton, N.J.: Princeton University Press, 2009. Shapiro, Thomas M. The Hidden Cost of Being African American: How Wealth Perpetuates Inequality. New York: Oxford University Press, 2004. Sherraden, Michael; and Zhan, Min. “Assets and Liabilities, Educational Expectations, and Children’s College Degree Attainment.” Children and Youth Services Review, June 2011, Vol. 33, No. 6, pp. 846-54. Federal Reserve Bank of St. Louis | stlouisfed.org 15 Our People. Our Work. 1,003 employees, the majority of whom work at the District’s headquarters in St. Louis, with staff also located at branches in Little Rock, Louisville and Memphis. All numbers in this section are for 2012. 116 state-chartered banks were under our supervision. The St. Louis Fed also supervised 527 bank holding companies and 21 savings and loan holding companies. 20,400 Twitter followers and 2,100 likes on Facebook. Nearly 3 billion notes (currency) handled by our Cash Operations department. As the bankers’ bank, the St. Louis Fed received more than 39,000 deposits and filled nearly 86,000 orders for U.S. currency. 10,400 business leaders and members of the general public attended 169 speeches given outside the Bank by Bank executives. Six times, the Emergency Communications System was activated for weather emergencies, including Hurricane Sandy. The system, developed and run by the St. Louis Fed, is used by the Fed and by state banking departments to notify depository institutions of operational status in the event of natural or other disasters. More than 2,500 financial institutions in 17 states were registered in the system last year. 16 Federal Reserve Bank of St. Louis | Annual Report 2012 More than $30,000 in donations and canned goods raised by employees of the Bank in its annual drive—now in its 19th year—to benefit a local food bank. The Bank’s Research department is ranked: • No. 5 (out of 105) among central banks’ research departments around the world, • No. 30 (out of 1,270) of all U.S. research institutions and • No. 46 (out of 6,062) of such institutions worldwide. Based on RePEc/IDEAS rankings. Nearly 5,000 students in the St. Louis metropolitan area were taught the basics of saving during Teach Children to Save Day in April. Volunteers from the St. Louis Fed and commercial banks in the area brought the lessons to classrooms across the region. The Export Matchmaker Trade Fair & Conference at the Bank in October was co-sponsored by the Bank’s Community Development department and by the U.S. Small Business Administration. More than 150 small businesses and export companies sent representatives. The event was one of 70 for the department; they were attended by 6,000 people. In addition, the department held more than 150 outreach meetings with community-based organizations, municipal leaders, academics and financial institutions. Our Research department had 40 papers either published or accepted in peer-reviewed journals. More than 61,000 data series in FRED® (Federal Reserve Economic Data), our economics database that in 2012 was called “the most amazing economics web site in the world.” Business Insider, 2012 ready.save.grow. In March, the Treasury Relations and Support Office of the St. Louis Fed worked on Treasury’s behalf to launch the Ready.Save.Grow. public education campaign to promote Treasury’s vision of building a nation of savers and to encourage saving with Treasury securities. At the end of the year, Ready.Save.Grow. had 11,462 Facebook fans. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. More than 11 million unique visitors from 226 countries and territories to the St. Louis Fed-hosted web sites of RePEc (Research Papers in Economics). Federal Reserve Bank of St. Louis | stlouisfed.org 17 ... a trusted source for economic education For the second year in a row, our Econ Ed department received the Award of Excellence from Tech & Learning magazine. The department was once again honored for its suite of online economic education tools for teachers. The St. Louis Fed’s Student Board of Directors, new in 2012, serves as a bridge between St. Louis-area schools and the Fed. The dozen students meet every other month at the Fed to discuss issues related to economics and personal finance; they also listen to speakers on topics ranging from leadership development to career planning. By the end of December, more than $1.18 billion in savings to taxpayers was achieved as a result of the Go Direct campaign, a Treasury initiative to convert federal benefit payments, like Social Security, to electronic delivery. The Treasury Relations and Support Office at the St. Louis Fed manages the Go Direct campaign. During 2012, the campaign helped convert 2,688,586 paper payments to electronic delivery, with the total for the life of the campaign as of December 2012 at 8,786,810. 399,330 enrollments of students in online courses related to economic and personal finance education. 248,000 downloads of lesson plans by teachers. 18 Federal Reserve Bank of St. Louis | Annual Report 2012 Employees who belong to FEVR (Fed Employee Volunteer Resources) donate their time throughout the year to communitybetterment initiatives. They collect school supplies for needy children, send care packages to troops overseas, mentor and tutor children and adults, and work in soup kitchens, to cite a few examples. Above, some members of the group took part in a community-wide effort to clean up trash at the confluence of the Missouri and Mississippi rivers near St. Louis last spring. 23 million pageviews to the Bank’s web sites. The Bank was named a Top 50 Business by the St. Louis Regional Chamber. 28 summer interns. Their work at the Bank culminated in an Intern Expo, at which they showcased their projects to management. The Community Development department’s biennial Exploring Innovation Week attracted 300 people to five events held in four major cities of the District. The events focused on entrepreneurship, urbanization, arts as an economic development tool, community development finance and “livability” issues. Six Dialogue with the Fed events, including one in Spanish, attended by more than 800 people and watched by many more via webcast. The Dialogue series, begun in 2011, offers the general public an opportunity to discuss current financial and economic topics with Fed experts. 64,200 subscribers to our periodicals. 19 Our Leaders. Our Advisers. T he Federal Reserve’s decentralized structure—the Board of Governors in Washington, D.C., and the 12 independent Reserve banks around the country— ensures that the economic conditions of communities ILLINOIS INDIANA and industries across the U.S. are taken into account in deciding monetary policy. The members of our boards St. Louis of directors and of our advisory councils are among the Louisville many voices of “Main Street” that we listen to. On the MISSOURI KENTUCKY following pages are current board members from each of the four offices of the St. Louis Fed: St. Louis, Little Rock, Louisville and Memphis. Members of our advi- TENNESSEE ARKANSAS sory councils are also listed, as are officers of the Bank. Memphis Little Rock The Eighth Federal Reserve District is composed of four zones, each of which is centered around one of the four main cities: St. Louis, Little Rock, Louisville and Memphis. Finally, we salute those board members and advisory council members who have retired recently. MISSISSIPPI Seattle Helena Portland MINNEAPOLIS Buffalo Detroit Omaha CLEVELAND 4D 2B Salt Lake City Pittsburgh Cincinnati Denver KANSAS CITY 10J Baltimore 8H ST. LOUIS 12L SAN FRANCISCO BOSTON Memphis 3C NEW YORK PHILADELPHIA BOARD OF GOVERNORS Louisville Oklahoma City 1A CHICAGO 7G 5E RICHMOND Nashville Charlotte Little Rock Los Angeles 6F ATLANTA Birmingham DALLAS El Paso Houston San Antonio Alaska Hawaii American Samoa Northern Mariana Islands Guam The San Francisco Federal Reserve District serves Alaska, Hawaii, American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. 20 Federal Reserve Bank of St. Louis | Annual Report 2012 New Orleans Jacksonville Miami Puerto Rico U.S. Virgin Islands The New York Federal Reserve District serves the Commonwealth of Puerto Rico and the U.S. Virgin Islands. Chairman’s Message “The St. Louis Fed remains a vibrant partner with its customers, the community and the country.” s the U.S. economy continues to slowly grow out of the depths of the 2007-2009 recession, I continue regulatory responsibilities seriously and are fortunate to have a best-in-class bank regulatory organization, one to be impressed with the vital role the Federal Reserve that not only regulates banks within the District but is a System plays in nurturing this healing process, a role best national leader in training other regulatory bodies. exemplified by the Federal Reserve Bank of St. Louis. Finally, the St. Louis Fed is the key coordinator of a Foremost has been the implementation of a monetary range of services provided to the U.S. Department of the policy that has restored liquidity to the markets and that Treasury on behalf of the entire Federal Reserve System. has driven down interest rates in an effort to support Our leadership in this area has been outstanding, as investment and demand. Our president, James Bullard, evident by the extraordinary approval rankings from this has been a key contributor to this process, and his effec- key customer and by the expanded range of services the tiveness has been enhanced by the insights of the Eighth Federal Reserve System is providing to the Treasury. District’s impressive team of economists and analysts. The St. Louis Fed remains a vibrant partner with its The St. Louis Fed is an economic research powerhouse— customers, the community and the country. On behalf of highly ranked, not just in the Federal Reserve System the board of directors, whose job is oversight, I thank the but in the world. What better basis from which to guide Bank’s executives for their outstanding leadership, and I monetary policy? thank all the Bank’s colleagues for their dedication and Explaining monetary policy, and how it works within effectiveness. the broader economy, is vital to the policy’s effectiveness. Fortunately, the Eighth District is blessed with a group Sincerely, of dedicated professionals who are adept at communicating this Bank’s role in shaping the economy. Assisting the president in his communication role, reaching out to business and community leaders, and implementing Ward M. Klein community-wide programs are just some of the functions Chairman of the Board of Directors of our outstanding public affairs organization. Ensuring that the banking system is sound is yet another important job of the St. Louis Fed. We take our Federal Reserve Bank of St. Louis | stlouisfed.org 21 St. Louis Board Chairman Deputy Chairman William E. Chappel Gregory M. Duckett Sonja Yates Hubbard Ward M. Klein Sharon D. Fiehler CEO Energizer Holdings Inc. St. Louis Executive Vice President and Chief Administrative Officer Peabody Energy St. Louis President and CEO The First National Bank Vandalia, Ill. Senior Vice President and Corporate Counsel Baptist Memorial Health Care Corp. Memphis, Tenn. CEO E-Z Mart Stores Inc. Texarkana, Texas Robert G. Jones Cal McCastlain George Paz Susan S. Stephenson President and CEO Old National Bancorp Evansville, Ind. Partner Dover Dixon Horne PLLC Little Rock, Ark. Chairman, President and CEO Express Scripts St. Louis Co-chairman and President Independent Bank Memphis, Tenn. © corbis © Steve Geer, istock © Kent Steffens, istock © pawel gaul, getty images 22 Federal Reserve Bank of St. Louis | Annual Report 2012 © Jeremy Edwards, istock Little Rock Board Chairman Michael A. Cook Mary Ann Greenwood Senior Vice President and Assistant Treasurer Wal-Mart Stores Inc. Bentonville, Ark. Chairman and Investment Adviser Greenwood Gearhart Inc. Fayetteville, Ark. Robert Martinez Kaleybra Mitchell Morehead Mark D. Ross Owner Rancho La Esperanza De Queen, Ark. Vice President for College Affairs/ Advancement Southeast Arkansas College Pine Bluff, Ark. Ronald B. Jackson Chief Operating Officer Bank of the Ozarks Little Rock, Ark. Ray C. Dillon President and CEO Deltic Timber Corp. El Dorado, Ark. Chairman and CEO Simmons First Bank of Russellville Russellville, Ark. Robert A. Hopkins Regional Executive Little Rock Branch Federal Reserve Bank of St. Louis Federal Reserve Bank of St. Louis | stlouisfed.org 23 Louisville Board Chairman Vice President River Hill Capital LLC Louisville, Ky. David P. Heintzman Jon A. Lawson President The Malcolm Bryant Corp. Owensboro, Ky. Chairman and CEO Stock Yards Bank & Trust Co. Louisville, Ky. President, CEO and Chairman Bank of Ohio County Beaver Dam, Ky. Susan E. Parsons Gerald R. Martin Malcolm Bryant Gary A. Ransdell Kevin Shurn President Western Kentucky University Bowling Green, Ky. President and Owner Superior Maintenance Co. Elizabethtown, Ky. Chief Financial Officer, Secretary and Treasurer Koch Enterprises Inc. Evansville, Ind. © shutterstock Maria G. Hampton Regional Executive Louisville Branch Federal Reserve Bank of St. Louis 24 Federal Reserve Bank of St. Louis | Annual Report 2012 Memphis Board Chairman Roy Molitor Ford Jr. Mark P. Fowler Lisa McDaniel Hawkins Charles S. Blatteis Vice Chairman and CEO Commercial Bank and Trust Co. Memphis, Tenn. Vice Chairman Liberty Bank of Arkansas Jonesboro, Ark. President Room to Room Inc. Tupelo, Miss. Managing Member Blatteis Law Firm PLLC Memphis, Tenn. Lawrence C. Long Clyde Warren Nunn Charlie E. Thomas III Partner St. Rest Planting Co. Indianola, Miss. Chairman and President Security Bancorp of Tennessee Inc. Halls, Tenn. Regional Director of External and Legislative Affairs AT&T Tennessee Memphis, Tenn. Martha Perine Beard Regional Executive Memphis Branch Federal Reserve Bank of St. Louis Federal Reserve Bank of St. Louis | stlouisfed.org 25 Industry Councils Council members represent a wide range of Eighth District businesses from four key industries and periodically report on economic conditions to help inform monetary policy deliberations. Agribusiness Based in Little Rock, Ark. Health Care Based in Louisville, Ky. Real Estate Based in St. Louis Transportation Based in Memphis, Tenn. Sam J. Fiorello Chief Operating Officer and Senior Vice President Donald Danforth Plant Science Center St. Louis Calvin Anderson Chief of Staff and Senior Vice President of Corporate Affairs Blue Cross Blue Shield of Tennessee Memphis Joseph D. Hegger Director Jeffrey E. Smith Institute of Real Estate University of Missouri-Columbia Columbia, Mo. Bob Blocker Senior VP Sales and Customer Service American Commercial Lines Jeffersonville, Ind. Timothy J. Gallagher Executive Vice President Bunge North America Inc. St. Louis Keith Glover President and CEO Producers Rice Mill Inc. Stuttgart, Ark. Bert Greenwalt Professor of Agricultural Economics Arkansas State University Jonesboro, Ark. Leonard J. Guarraia Chairman World Agricultural Forum St. Louis Richard M. Jameson Owner Jameson Family Farms Partnership Brownsville, Tenn. John C. King III Owner King Farms Helena, Ark. Lyle B. Waller II Owner L.B. Waller and Co. Morganfield, Ky. Steven J. Bares President and Executive Director Memphis Bioworks Foundation Memphis Jeffrey B. Bringardner President of Kentucky Market Humana-Kentucky Inc. Louisville Paul Halverson, M.D. Director, State Health Officer Arkansas Department of Health Little Rock Susan L. Lang CEO HooPayz St. Louis Rich A. Lechleiter Chief Financial Officer Kindred Healthcare Inc. Louisville Dixie L. Platt Senior Vice President Mission and External Relations SSM Health Care St. Louis Stephen A. Williams President and CEO Norton Healthcare Louisville Janet Horlacher Principal and Executive Vice President Janet McAfee Inc. St. Louis J. Scott Jagoe Owner Jagoe Homes Inc. Owensboro, Ky. Larry K. Jensen President and CEO Commercial Advisors LLC Memphis Chuck Kavanaugh Executive Vice President Home Builders Association of Louisville Louisville Gregory J. Kozicz President and CEO Alberici Corp. St. Louis Jack McCray Managing Director KW Commercial Little Rock Little Rock William M. Mitchell Vice President and Principal Broker Crye-Leike Realtors Memphis Lynn B. Schenck Executive Vice President and Director of Leasing and Sales Jones Lang LaSalle St. Louis E. Phillip Scherer III President Commercial Kentucky Inc. Louisville Mary R. Singer President CresaPartners Commercial Realty Group Memphis 26 Federal Reserve Bank of St. Louis | Annual Report 2012 Charles L. Ewing Sr. President Ewing Moving Service and Storage Inc. Memphis Rhonda Hamm-Niebruegge Director of Airports Lambert International Airport St. Louis Richard McClure President UniGroup Inc. St. Louis Judy R. McReynolds President and CEO Arkansas Best Corp. Fort Smith, Ark. Mitch Nichols President UPS Airlines Louisville Dennis B. Oakley President Bruce Oakley Inc. North Little Rock, Ark. John F. Pickering Chief Operations Officer Cass Information Systems Inc. Bridgeton, Mo. David L. Summitt President Summitt Trucking LLC Clarksville, Ind. Paul Wellhausen President Lewis and Clark Marine Granite City, Ill. Community Development Advisory Council Community Depository Institutions Advisory Council The council keeps the Bank’s president and staff informed about community development in the Eighth District and suggests ways for the Bank to support local development efforts. The members meet twice a year to advise the Bank’s president on the credit, banking and economic conditions facing their institutions and communities. The council’s chairman also meets twice a year in Washington, D.C., with his counterparts from the 11 other Fed districts and with the Federal Reserve chairman. Joe W. Barker Executive Director Southwest Tennessee Development District Jackson, Tenn. Chairman Glenn D. Barks President and CEO First Community Credit Union Chesterfield, Mo. Whitney Bishop Executive Director Southern Indiana Asset Building Coalition Jeffersonville, Ind. Tamika Edwards Director of Public Policy Southern Bancorp Community Partners Little Rock, Ark. Brian Fogle President and CEO Community Foundation of the Ozarks Springfield, Mo. George Hartsfield Community Volunteer Jefferson City, Mo. David Howard Jr. Vice President of Equity Federation of Appalachian Housing Enterprises Inc. Berea, Ky. Edgardo Mansilla Executive Director Americana Community Center Louisville, Ky. Paulette Meikle Chair and Associate Professor Delta State University Cleveland, Miss. Joe Neri President IFF Chicago Ines Polonius Executive Director alt.Consulting Pine Bluff, Ark. Eric Robertson President Community LIFT Memphis, Tenn. Kirk P. Bailey CEO Magna Bank Memphis, Tenn. Royce Sutton Vice President, Community Development Manager Fifth Third Bank St. Louis Carolyn “Betsy” Flynn President and CEO Community Financial Services Bank Benton, Ky. Elizabeth Trotter Senior Vice President/CRA Director IBERIABANK Lafayette, La. H. David Hale Chairman, President and CEO First Capital Bank of Kentucky Louisville, Ky. Keith Turbett First Vice President Community Development Manager Memphis and Nashville Regions SunTrust Bank Memphis, Tenn. Gary E. Metzger President Liberty Bank Springfield, Mo. Cary Tyson Assistant Director Arkansas Historic Preservation Program Little Rock, Ark. Johanna Wharton Executive Vice President Grace Hill Settlement House St. Louis Deborah Williams Chief Executive Officer HANDS Inc. Bowling Green, Ky. Larry W. Myers President and CEO First Savings Bank Clarksville, Ind. Frank M. Padak President, CEO and Treasurer Scott Credit Union Collinsville, Ill. Mark A. Schroeder Chairman and CEO German American Bancorp Jasper, Ind. Steve Stafford President and CEO First National Bank in Green Forest Green Forest, Ark. Gordon Waller President and CEO First State Bank & Trust Caruthersville, Mo. Larry T. Wilson President and CEO First Arkansas Bank & Trust Jacksonville, Ark. Vance Witt Chairman and CEO BNA Bank New Albany, Miss. Federal Advisory Council Member The council is composed of one representative from each of the 12 Federal Reserve districts. Members confer with the Fed’s Board of Governors at least four times a year on economic and banking developments and make recommendations on Fed System activities. D. Bryan Jordan Chairman, President and CEO First Horizon National Corp. Memphis, Tenn. Federal Reserve Bank of St. Louis | stlouisfed.org 27 Management Committee James Bullard Karl W. Ashman First Vice President and COO Senior Vice President Administration and Payments Karen L. Branding Cletus C. Coughlin Mary H. Karr Senior Vice President Public Affairs Senior Vice President and Policy Adviser to the President Senior Vice President, General Counsel and Secretary Legal Kathleen O’Neill Paese Julie L. Stackhouse Christopher J. Waller Senior Vice President Treasury Services 28 David A. Sapenaro President and CEO Senior Vice President Banking Supervision, Credit, Community Development and Learning Innovation Senior Vice President and Director of Research Federal Reserve Bank of St. Louis | Annual Report 2012 Bank Officers ST. LOUIS James Bullard President and CEO David A. Sapenaro First Vice President and COO Karl W. Ashman Senior Vice President Karen L. Branding Senior Vice President Cletus C. Coughlin Senior Vice President and Policy Adviser to the President Roy A. Hendin Vice President, Deputy General Counsel and Assistant Corporate Secretary James L. Huang Vice President Debra E. Johnson Vice President Vicki L. Kosydor Vice President Michael J. Mueller Vice President James A. Price Vice President Mary H. Karr Senior Vice President, General Counsel and Secretary B. Ravikumar Vice President Kathleen O’Neill Paese Senior Vice President Daniel L. Thornton Vice President Michael D. Renfro Senior Vice President and General Auditor Matthew W. Torbett Vice President Julie L. Stackhouse Senior Vice President Christopher J. Waller Senior Vice President and Director of Research Richard G. Anderson Vice President David Andolfatto Vice President Jonathan C. Basden Vice President Timothy A. Bosch Vice President Timothy C. Brown Vice President Marilyn K. Corona Vice President Susan K. Curry Vice President Kathy A. Freeman Vice President, Director of Office of Minority and Women Inclusion William T. Gavin Vice President Susan F. Gerker Vice President Anna M. Helmering Hart Vice President Scott M. Trilling Vice President David C. Wheelock Vice President Jane Anne Batjer Assistant Vice President Diane E. Berry Assistant Vice President Dennis W. Blase Assistant Vice President Winchell S. Carroll Assistant Vice President Hillary B. Debenport Assistant Vice President William R. Emmons Assistant Vice President William M. Francis Assistant Vice President Mary C. Francone Assistant Vice President James W. Fuchs Assistant Vice President Timothy R. Heckler Assistant Vice President Paul M. Helmich Assistant Vice President Cathryn L. Hohl Assistant Vice President Joel H. James Assistant Vice President Visweswara R. Kaza Assistant Vice President Patricia M. Goessling Treasury Officer Catherine A. Kusmer Assistant Vice President Stephen P. Greene Public Affairs Officer Michael Z. Markiewicz Assistant Vice President Karen L. Harper Treasury Officer Michael W. McCracken Assistant Vice President Terri L. Kirchhofer Audit Officer and Assistant General Auditor Raymond McIntyre Assistant Vice President Kevin L. Kliesen Research Officer Christopher J. Neely Assistant Vice President Jackie S. Martin Support Services Officer Arthur A. North II Assistant Vice President Alexander Monge-Naranjo Research Officer Glen M. Owens Assistant Vice President Michael Thomas Owyang Research Officer Kathy A. Schildknecht Assistant Vice President Jennifer L. Robinson Financial Management Officer Philip G. Schlueter Assistant Vice President Abby L. Schafers Human Resources Officer Scott B. Smith Assistant Vice President Yvonne S. Sparks Community Development Officer Katrina L. Stierholz Assistant Vice President Rebecca M. Stoltz Information Technology Officer Kristina L.C. Stierholz Assistant Vice President Mary C. Suiter Economic Education Officer James L. Warren Assistant Vice President Donald J. Trankler Information Technology Officer Yi Wen Assistant Vice President LITTLE ROCK Carl D. White II Assistant Vice President Robert A. Hopkins Regional Executive Marcela M. Williams Assistant Vice President Christian M. Zimmermann Assistant Vice President Subhayu Bandyopadhyay Research Officer Heidi L. Beyer Research Officer LOUISVILLE Maria G. Hampton Regional Executive Ronald L. Byrne Vice President Cassie R. Blackwell Treasury Officer MEMPHIS Ray Boshara Community Development Policy Officer Martha L. Perine Beard Regional Executive Adam L. Brown Information Technology Officer Ranada Y. Williams Assistant Vice President Carlos Garriga Research Officer Federal Reserve Bank of St. Louis | stlouisfed.org 29 Retirees from the Boards of Directors and Advisory Councils We bid farewell and express our gratitude to those members of the boards of directors and of our advisory councils who retired recently. From the Boards of Directors Little Rock William C. Scholl C. Sam Walls Louisville Barbara Ann Popp Memphis Allegra C. Brigham From the Industry Councils Agribusiness Ted Huber Steven Turner David Williams Health Care Kevin Bramer Robert Gordon Russell Harrington Richard Pierson Jan Vest From the Community Development Advisory Council The Rev. Adrian Brooks Brian Dabson Trinita Logue Sara Oliver Kevin Smith Emily Trenholm Sherece West From the Community Depository Institutions Advisory Council D. Keith Hefner William J. Rissel Dennis M. Terry Larry Ziglar Real Estate Steven Lane Transportation Gene Huang 30 Federal Reserve Bank of St. Louis | Annual Report 2012 The Federal Reserve Bank of St. Louis is one of 12 regional Reserve banks that, together with the Board of Governors, make up the nation’s central bank. The St. Louis Fed serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Illinois and Indiana, western Kentucky and Tennessee, and northern Mississippi. The Eighth District offices are in St. Louis, Little Rock, Louisville and Memphis. Federal Reserve Bank of St. Louis Louisville Branch One Federal Reserve Bank Plaza Broadway and Locust Street St. Louis, MO 63102 314-444-8444 National City Tower 101 S. Fifth St., Suite 1920 Louisville, KY 40202 502-568-9200 Little Rock Branch Memphis Branch Stephens Building 111 Center St., Suite 1000 Little Rock, AR 72201 501-324-8205 200 N. Main St. Memphis, TN 38103 901-579-2404 Credits Al Stamborski Editor Joni Williams Designer Eva Vazquez Illustrator Mark Gilliland Kevin Manning Steve Smith Photographers For additional copies, contact: Public Affairs Federal Reserve Bank of St. Louis Post Office Box 442 St. Louis, MO 63166 Or e-mail email@example.com This report is also available online at: www.stlouisfed.org/publications/ar printed on recycled paper using 10% postconsumer waste PA1301 5/13 Federal Reserve Bank of St. Louis | stlouisfed.org 31 Free Resources on the Economy, Economics and Personal Finance The Federal Reserve Bank of St. Louis offers a wealth of information on these topics in a variety of formats. We have something for everyone—researchers, teachers, business executives, market analysts, policymakers, bankers, community developers, students and, of course, the general public. Our information is available on paper, online and on your phone or tablet. Below is a small sample of what we offer. For more, see www.stlouisfed.org More than 61,000 data series are available in FRED (Federal Reserve Economic Data), our signature database. See http://research.stlouisfed.org/fred2/ Our periodicals range from short newsletters to journals for academics. All can be read online, and some are available through the mail. For a list, see www.stlouisfed.org/publications The Econ Lowdown provides the basics—and then some—on economics and personal finance. Our Economic Education department provides mini courses, videos, podcasts, lesson plans, publications and more. See www.stlouisfed.org/education_resources/ On the FOMC Speak web site and app, you can find in one spot public speeches, testimony, interviews and commentary for all participants of the Federal Open Market Committee. See www.stlouisfed.org/fomcspeak The Fed offers many opportunities to meet face-to-face. One of the newest is Dialogue with the Fed: Beyond Today’s Financial Headlines. This evening series brings together Fed experts and the general public to discuss economic and financial issues of the day. See www.stlouisfed.org/dialogue Delve into FRASER, our digital library of archival documents, data and publications documenting the history of the Federal Reserve and the economic history of the United States back to the 1700s. See http://fraser.stlouisfed.org/