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Federal :-~.J··ve B.s nk
of St . Louis



2 199f

Economic Education Newsletter

Federal Reserve Bank of Boston

Vol. 17, No. 1-Spring 1991


The Top Ten'' Economic Events of 1990


ere are the Public Services
Department's choices for the
"Top Ten Economic Events of 1990~ As
is the case with most "Top Ten" lists,
our choices are subjective. We make
no claim that ours is the definitive list,
nor do we offer an in-depth analysis of
each event. Rather, we hope that our
list will prompt you to review last
year's events, make your own choices,
and extensively discuss the events you
choose. Some specific cases or incidents are noted to refresh your memory on what a busy year 1990 was in
the world of economics.

The S&L/Bank Crisis


he bailout of the savings and loan
industry continued to make headlines. When the crisis began in the
late 1980s, original estimates had put
the cost of protecting depositors of
failed institutions at $60 billion, but by
the end of 1990 the projected cost had
soared to $500 billion.

Analysts continued to offer a variety of
explanations for the S&L crisis. Some
pointed to portfolios of real estate
loans that had gone bad, while others
attributed the crisis to such things as
deregulation, junk bonds, lax supervision, and fraud. There seem to be
enough examples to partially support
any of the theories.
In April, officials of Columbia Savings and Loan (Beverly Hills, CA)
announced that their institution was
insolvent. Columbia, once the most
profitable S&L in the United States,
had fallen victim to its big stake in
junk bonds. When the market collapsed, Columbia's junk bond portfolio lost more than half its face value.
Federal Reserve Bank of St. Louis

Charles Keating and Lincoln Savings
and Loan were back in the news
in September when Keating surrendered to authorities on a 42-count
criminal fraud indictment. Although
his attorneys won dismissal of more
than half the charges in November,
Keating's problems were far from over.
There were also indications last year
that banks, particularly northeastern
banks, were experiencing some of
the same difficulties that had beset
S&Ls. The year began with Citicorp's
announcement on January 17 that it
was adding $1 billion to reserves for
problem Latin American loans . Less
than two weeks later, the board of
directors at the troubled Bank of New
England ousted that bank's president.
Bank of New England's loan portfolio
was filled with real estate deals that
had gone sour.
In July, regulators ordered U.S. banks
to write-off 20 percent of their $11 .1
billion in loans to Brazil and 20 percent of their $2.9 billion in loans to
Argentina. Two months later, Chase
Manhattan announced that it would
slash its dividend and cut its staff
by 5,000.
Most observers seemed reluctant to
predict how much the protection
of insured bank deposits might ultimately cost the U.S. taxpayers, but
whatever the cost, it would be in addition to the $500 billion projected for
the S&L bailout.

The Three Rs:
Recession/Real Estate


ack in October of 1987, investors
were badly shaken when the U.S.

stock market lost more than 500
points during a single day of trading,
but the one-day "crash" didn't trigger
a recession . The American economy
continued an expansion that had
begun five years earlier.
By the end of 1990, however, most
analysts agreed that the economy was
sliding into recession with New England and the Mid-Atlantic states leading the way. The northeast's real estate
and construction boom had gone
bust and caused problems for developers and bankers alike. Even Donald
Trump couldn't escape the ill effects.
Midway through 1990 it looked as if
the person who had brought the
world Trump Towers, the Trump Shuttle, and the Taj Mahal Casino was in
danger of defaulting on a bond payment until his bankers put together a
$65 million Trump bailout.
Beyond the headlines, newspapers offered yet another indication
that the economy had cooled. With
each new edition, " help wanted" ads
seemed to lose more column inches
to real estate auctions and foreclosure
notices. Company after company
announced major lay-offs. Sears, Data
General, McDonnell Douglas, Chase
Manhattan, Pan Am , and a host of
other companies eliminated thou sands of jobs.

U.S. Debt/Government
Shuts Down During
Columbus Day Weekend


olumbus Day Weekend (1990)
was not a good time to visit a
national park, a national historic site,
or the nation's capital. The doors to
the Smithsonian were locked . The
pandas at the National Zoo munched
their bamboo shoots without the

usual crowd of onlookers. Park range rs turned campers away from
Yosemite. Boats that normally ferried
passengers to the Statue of Liberty
remained tied to their moorings.

All these things happened, or didn't
happen, because the U.S . government had run out of money. Despite a
series of high-profile budget summits,
Congress and the Administration had
been unable to agree on a deficit
reduction program .
At the beginning of the 1980s, The
U.S. debt had stood at just over $1
trillion. By mid-1990, it had surpassed
$3.2 trillion.
The budget deficit for FY 1990 was
approximately $221 billion-the
second highest in U.S. history. Government sources predicted that the
deficit for FY 1991 would be a record
$318 billion, but it could go higher
depending on whether or not our
allies make good on their commitment to defray the cost of the Persian
Gulf war.

German Reunification


very map of Europe printed from
1945 to 1990 showed a divided
Germany and a divided Berlin . As
recently as two years ago hardly anyone would have dared predict that
East and West Germany would be
reunited anytime soon, but that is
exactly what happened on October
3, 1990.
"The Wall~ which had divided East
and West Berlin since 1%1, had begun
to come down at the end of 1989. And
even before reunification became a
reality, throngs of East Berliners made
day-trips to gaze at the astonishing
variety of consumer goods in West
Berlin's shops.
By and large, Germans, Europeans,
and Americans looked upon German
reunification as a positive development. But reunification also raised a
number of complex, and sometimes
troubling, economic issues. How
would West Germans react to the
unrestrained flow of East Germans
seeking economic opportunity in the
West? How would the German government cope with the unemployment resulting from the shutdown of
uncompetitive East German factories
and businesses? Who would pay to
clean up the frightful environmental
damage wrought by 45 years of East
German government neglect and
indifference? Would the German and
Federal Reserve Bank of St. Louis

European capital that had been helping to finance the U.S. budget deficits
now go to finance the economic
revitalization of East Germany? How
much more formidable an economic
competitor would a united Germany
prove to be? As of December 1990,
these questions remained largely

The Gulf Crisis


n August of 1990, Saddam Hussein
sent Iraqi troops to invade and
annex Kuwait. His action had immediate economic repercussions.
By the middle of October, oil prices
had topped $40 a barrel, and analysts
were predicting even higher prices if
a shooting war erupted between Iraq
and the coalition of forces arrayed
against it. (Events proved them wrong.
By December, the price of a barrel of crude had dropped back into
the twenties.)
No one was sure how much the war
would cost and who would pay for it.
In an effort to defray the expense,
U.S. diplomats successfully pressed
Japan , Germany, and Arab allies to
pledge billions toward the war effort,
but the $300-$500 million daily pricetag could rise to more than $1 billion if
hostilities escalate into a full-scale
ground war. [A full-scale land war
commenced and ended in February
1991. The monetary cost hasn't yet
been calculated.]
On top of all that, the U.S. government has forgiven a $7 billion debt
owed by Egypt, and Israel has
requested billions in U.S. aid . All this
comes at a time when the U.S. budget
deficit for FY 1991 is projected to be
a record $318 billion . There had
been talk of a war tax, but Administration officials seemed reluctant to
call for one.
Meantime, domestic critics of U.S .
policy in the Persian Gulf have
lamented the fact that military action
has diverted scarce resources from
urgent problems at home. Earlier in
1990, warming relations with the
Soviet Union and the democratization
of Eastern Europe had fostered hopes
that the U.S. government might be
able to spend less on defense and
more on education, health care ,
the environment, and the country's
decaying infrastructure. By the end of
the year, however, it had become
apparent that that there would be no
"peace dividend~ An end to the Cold
War didn't necessarily mean that

the United States could shift billions
from defense spending to domestic programs.

The 1990 Census


he 1990 census confirmed what
many people have long suspected: The Sunbelt's population
continues to increase while many
northern cities and states seem to be
declining in population .

Politicians on either side of the MasonDixon line are reacting very differently
to the census results. In the North,
many big city mayors, governors, and
members of Congress are charging
that the latest figures aren't accurate.
They claim the census didn't fully
count the homeless and the inhabitants of poor urban neighborhoods.
By contrast, southern politicians
seemed fairly satisfied with the results.
Some half-jokingly talked about the
Confederacy's long-awaited revenge.
At stake in the census controversy are
Congressional seats and federal dollars. If the figures are indeed accurate,
the ensuing Congressional reapportionment could lead to a shift in
the Congressional balance of power,
resulting in an increased flow of
federal funds to the Sunbelt-perhaps at the expense of northern cities
and states.
Of course something quite different
could also happen. Politicians in the
Sunbelt's expanding metropolitan
areas might conclude that they share
many common interests with their
northern counterparts . Ultimately,
members of Congress might form
alliances that depend less on geography and more on the need to address
problems that affect metropolitan
areas in all parts of the country.

Foreign Ownership
of U.S. Companies and
Real Estate


oes it really matter if a foreignowned company controls the
food, lodging, and souvenir concessions in Yosemite National Park?
Apparently, quite a few Americans
think that it does.
Last year there was an unanticipated
side effect when Japan's Matsushita
Electric Industrial Company paid $6.6
billion to acquire MCA Inc., the Los
Angeles-based entertainment production and theme park company. Before
the deal was even final, a number of
sources, including the U.S. Depart-

ment of the Interior and the National
Park Service, expressed concern over
the fact that Yosemite's MCA-owned
concessionaire was part of the package. The thought that a foreignowned company would control the
concessions in one of America's preeminent national parks seemed to be
more than many Americans could
bear. As a result of the uproar, Matsushita and MCA agreed to put the
Yosemite concessionaire in escrow
and find an American buyer for it.
The flap over who would run Yosemite's hotels, shops, and bus tours was
yet another indication that Americans
seem increasingly concerned over the
trend toward foreign ownership of
U.S. companies and real estate. MCA
wasn't the first major American entertainment company to be acquired by
Japanese owners. Sony bought CBS
Records in 1987 and Columbia Pictures in 1989.
Foreign buyers have also displayed
great interest in American real estate.
During the 1980s, buyers from Europe
and the Middle East spent- heavily on
U.S. properties, and Japanese investors bought New York's Rockefeller
Will the trend continue in the 1990s? If
so, what will the effects be? Does it
matter who owns Rockefeller Center?
Should Matsushita's ownership of
MCA cause Americans any more concern than General Electric's own ership of NBC? The ability of the
Japanese to make huge investments
in the United States is a result of
Japan's large surplus in its merchandise trade with the United States. The
foreign trade deficit of the U.S. could
easily be considered one of the major
economic events of the year.

The Environment and the
Green Revolution"


he twentieth anniversary of Earth
Day may have received the most
media hype, but several other stories
about the environment figured prominently in last year's economic news.
Passage of a second Clean Air Act,
disagreement over the seriousness
of global warming, concern over the
loss of "old growth" trees and tropical
rain forests, increased demand for
products that don't harm the environment, and defeat of California's "Big
Green" referendum question are
issues that reflect the ongoing conflict
between increasing concern for the
environment and established economic interests.
Federal Reserve Bank of St. Louis

The Clean Air Act of 1990 provides a
perfect example. Nearly everyone
hailed the Act as a "historic" measure
that would eliminate or substantially
reduce urban smog, acid rain, and
toxic chemical emissions, but the
ease with which it sailed through
Congress (89-10 in the Senate; 40125 in the House) belied the fact
that a number of powerful interest
groups had successfully lobbied Congress and the White House for years
to block passage of new clean air
One provision of the Act called for a
drastic reduction of the sulfur dioxide
emissions that cause acid rain . To
comply with the stricter regulations,
utilities knew they would have to
install costly scrubbers, retrofit their
plants with "clean coal" technology,
or switch from high-sulfur to low-sulfur coal; all would lead to higher utility rates, lower utility company profits,
and severe economic dislocation in
areas that depend on the mining of
high-sulfur coal. Faced with those
impacts, the utility companies, the
high-sulfur coal producers, and their
respective constituents felt compelled
to lobby against clean air legislation.
Joining them in their efforts were the
automakers, chemical companies,
and other groups that feared higher
costs. It took years of legislative wrangling and compromise to overcome
their objections.
Similar conflicts surrounded other
environmental issues in 1990. California voters defeated "Big Green; a farreaching referendum question that
would have banned many pesticides,
strengthened the state's air pollution
regulations, banned offshore oil drilling, and set aside money to buy
stands of ancient redwood trees ("old
growth" forests).
In Brazil, there was conflict between
those seeking to develop the Amazon
rain forest and those who feared its
destruction. World attention focused
on the trial of wealthy landowners
accused of murdering Chico Mendes,
a Brazilian rubber-tapper and environmental activist who opposed further
development of the rain forest.
Yet there were also stories of successfu I attempts to strike a balance
between environmental concerns and
economic interests. After years of
pressure from environmental groups,
the major tuna processors adopted
policies to protect the dolphins that
often accompany schools of tuna. As
a result of the new policies, most cans

of tuna now sold in the United States
are labeled "Dolphin Safe~
In another encouraging development,
McDonald's and the Environmental
Defense Fund agreed to cooperate in
finding ways for the nation's biggest
fast food chain to reduce its volume
of solid waste and increase its use of
recyclable packaging materials. One
of the first steps McDonald's took was
to announce the phase-out of its plastic foam meal containers.

The Demise of Drexel and
the Collapse of the Junk
Bond Market


anking Terminology, published by
the American Bankers Association, defines junks bonds as "speculative bonds .. . sold at a low price or
at very high interest rates because
of their high risk of default': (When a
company issues junk bonds, its debt
burden increases, often without any
corresponding increase in earning
assets.) In the eyes of buyers, the
higher yield compensates for the
higher risk.

During the 1980s, junk bonds proved
to be an effective instrument for
financing leveraged buyouts and
entrepreneurial ventures. Many new
enterprises that were unable to raise
capital through traditional means,
such as investment-grade bonds and
stock offerings, got their start thanks
to junk bond financing.
Along the way, however, many investors seemed to lose sight of the fact
that junk bonds pay a higher yield
because they carry a higher risk, and
last year the junk bond market collapsed. It was a particularly bad year
for Drexel Burnham Lambert, the
investment house most closely associated with junk bonds, and for Michael
Milken, the Drexel financier credited with originating the junk bond
concept. Drexel Burnham Lambert
(pronounced lam-bare) filed for bankruptcy protection and Michael Milken
faced $600 million in fines and a tenyear prison sentence.
The ill-effects of the junk bond market
collapse weren't limited to Wall
Street. The downfall of Columbia S&L
(Beverly Hills, CA) was widely attributed to Columbia's large investment
in junk bonds. At one time, Columbia's junk bond holdings had a face
value of $4 billion. By the end of 1990,
the bonds were worth half that much.
(Many of Columbia's junk bonds were
bought from Drexel.)

New England Update

Trouble for the Airlines


he U.S. air travel industry experienced quite a bit of turbulence
last year. Much of it was in bankruptcy

Ledger Award Goes to B.C. High Teacher

Soaring fuel prices resulting from the
Gulf Crisis combined with a softening
economy to cause big problems for
some of the most renowned names in
American aviation. Eastern, founded
in the 1920s by World War I flying
ace Eddie Rickenbacker, filed for
bankruptcy in 1989, and its fortunes
worsened in 1990. [Eastern ultimately
failed in early 1991.) Pan Am, which
pioneered international air travel and
jet passenger service, experienced
severe financial difficulty last year.
Continental, a carrier that initially benefited from airline deregulation, filed
for Chapter 11 bankruptcy protection
in December 1990. lWA, saddled with
a $2.6 billion debt and an aging fleet
of fuel-guzzling aircraft, also experienced financial pressure last year.
Some industry analysts also pointed
to deregulation as the source of the
airlines' woes. Deregulation was supposed to foster increased competition
and lower fares . Those things came to
pass but not in the way that most people expected . More often than not,
the lower fares were the result of desperate fare slashing by airlines in the
most dire financial straits. Passengers
who didn't fly routes affected by the
price wars found themselves paying
higher fares than ever before . And
rather than stimulating the growth of
new carriers, deregulation seemed to
be hastening the consolidation of the
airline industry.

Get 'Em While
They're Hot


opies of the Bank's
newly revised and
redesigned Public Information Catalog

are now available.
The attractive new
catalog lists all the
publications and multimedia materials available through
the Federal Reserve Bank of Boston .
For a free copy, write to : Publications,
Public Services Department, Federal
Reserve Bank of Boston, P.O.
Box 2076, Boston, MA 02106-2076.
Federal Reserve Bank of St. Louis











Nicholas Argento (center) receives congratulations from B.C. High social studies
chairperson Margaret Florentine (left) and Ledger editor Robert Jabaily.


he Ledger Award is presented
annually to a teacher or administrator who has demonstrated a commitment to furthering economic
education in the First Federal Reserve
District. It is named for The Ledger, an
economic education newsletter published quarterly since 1974 by the
Federal Reserve Bank of Boston's Public Services Department.

The Ledger Award for 1990 went to
Nicholas Argento, a social studies
teacher at Boston College High
School in Dorchester, MA. Ledger
editor Robert Jabaily presented Mr.
Argento with a framed certificate during a special awards assembly at the
school, and he noted that it was "a
pleasure to present The Ledger Award
to someone who is not only an outstanding teacher but a genuinely nice
person as well': Students and teachers at the assembly gave Mr. Argento
a standing ovation when he rose
to accept the award.
The school's executive vice principal,
Paul J. Hunter, described Mr. Argento
as "a teacher who is active and
involved in all aspects of the school~

He said that Mr. Argento "has an
excellent rapport with students and
faculty" and added that "B.C. High
wouldn't be the same without him~
Social Studies Department chairperson Margaret Florentine called Mr.
Argento "a valuable member of the
staff who is always there in a pinch':
Mr. Argento has been a member of
the faculty at Boston College High
School for nearly nine years.
The Federal Reserve Bank of Boston
has been involved in economic education for more than 20 years. During
that time the Bank's Public Services
Department has worked with teachers and administrators to foster high
quality economic education in the
First Federal Reserve District.
If you would like to nominate a
teacher or administrator in the First
Federal Reserve District for The
Ledger Award, please let us know by
writing to : The Ledger, Public Services
Department, Federal Reserve Bank of
Boston, P.O. Box 2076, Boston, MA