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The Regional

Economist

A Quarterly Review
of Business and
Economic Conditions
Vol. 17, No. 2

The Volcker Era

Social Responsibility

Actions by Today’s Fed
Harken Back to 1979

Corporations Can Profit
From Taking on a Cause

April 2009

The Federal Reserve Bank of St. Louis
C e n t r a l t o A m e r i c a ’ s Ec o n o m y

TM

This Is Not
Your Father’s
Recession
... or Is It?

c o n t e n t s
THE REGIONAL

6
The Regional

3

ECONOMIST

|

This Is Not Your Father’s Recession ...

President’s Message

19

Director of Public Affairs
Robert J. Schenk

Corporate Social
Responsibility
By Rubén Hernández-Murillo
and Christopher J. Martinek

22

Managing Editor
Al Stamborski

Corporations Can Profit
From Taking on a Cause

TM

n at i o n a l o v e r v i e w
Nearing the Bottom?
By Kevin L. Kliesen

Single-copy subscriptions are free.
To subscribe, e-mail carol.a.musser
@stls.frb.org or sign up via www.
stlouisfed.org/publications. You can
also write to The Regional Economist,
Public Affairs Office, Federal Reserve
Bank of St. Louis, Box 442, St. Louis,
MO 63166.
The Eighth Federal Reserve District

The Financial Crisis
in S, M and L
By Rajeev Bhaskar and Yadav Gopalan
An examination of what Iceland,
the United Kingdom and the United
States went through last September
and October during the financial
crisis reveals some important
differences and similarities.

Policymakers and fiscal authorities have already taken drastic
measures to prevent the hole that
the economy is in from getting
any deeper. Whether these
measures can be economically
justified in either the short term
or long term is uncertain.

district overview
Revisions to Jobs Data
By Thomas A. Garrett and
Michael R. Pakko
Employment data undergo
significant updating every
March. Often, major changes
result, particularly in times
like these. However, the latest
revision yielded little change
in the data for metro areas in
the Eighth District.

26

23

Art Director
Joni Williams

2 The Regional Economist | April 2009

24

e c o n o my a t a g l a n c e

Editor
Michael R. Pakko

13

Social Responsibility

c o mm u n i t y p r o f i l e

Businesses have found that it
can pay off to engage in social
stewardship, such as donating
to charity, protecting the
environment and nurturing a
diverse and safe workplace.

Deputy Director of Research
Cletus C. Coughlin

Actions by Today’s Fed
Harken Back to 1979

This Is Not
Your Father’s
Recession
... or Is It?

Now, more than ever, Fort Knox
looms golden to this small city
in western Kentucky. The Army
base, just 15 miles away, is in
the midst of a building boom
that will add to the thousands of
jobs already filled by residents of
Elizabethtown and its environs.

Director of Research
Robert H. Rasche

includes all of Arkansas, eastern
Missouri, southern Illinois and Indiana,
western Kentucky and Tennessee, and
northern Mississippi. The Eighth District
offices are in Little Rock, Louisville,
Memphis and St. Louis.

C E N T R A L t o A M E R I C A’ S E C O N O M Y

The current recession is the seventh since 1969. Today’s
declines in employment and income are consistent with
the past. Unique this time are the major drop in home
prices and the proactive response by policymakers.

Elizabethtown, Ky.
By Susan C. Thomson

4

The Volcker Era

By Charles S. Gascon

VOL. 17, NO. 2

The Regional Economist is published
quarterly by the Research and Public
Affairs departments of the Federal
Reserve Bank of St. Louis. It addresses
the national, international and regional
economic issues of the day, particularly
as they apply to states in the Eighth
Federal Reserve District. Views
expressed are not necessarily those
of the St. Louis Fed or of the Federal
Reserve System.
Please direct your comments to
Michael R. Pakko at 314-444-8564 or
by e-mail at pakko@stls.frb.org. You can
also write to him at the address below.
Submission of a letter to the editor
gives us the right to post it to our web
site and/or publish it in The Regional
Economist unless the writer states
otherwise. We reserve the right to edit
letters for clarity and length.

Vol. 17, No. 2
April 2009

THE FEDERAL RESERVE BANK OF ST. LOUIS

Economist
APRIL 2009

A Quarterly Review
of Business and
Economic Conditions

re ader e xchange

p r e s i d e n t ’ s

m e s s a g e

Jim Bullard, President and CEO
Federal Reserve Bank of St. Louis

Fed’s Bold Actions Harken Back to Volcker Era

E

lsewhere in this issue, you will find an
article titled “This is not your father’s
recession ... or is it?” It compares today’s
recession with those of the past 40 years.
In the same spirit, I would like to compare
today’s Fed, and the challenges we face, with
the Volcker Fed of 1979.1
During the 1970s, monetary policy had
followed a gradualist approach: fine-tuning
interest rate moves in an effort to avert
economic slowdowns. By 1979, it had
become apparent that such a strategy was
inadequate as inflation and inflation expectations continued to march upward and the
real economy deteriorated. Inflation rose
steadily from about 2 percent through
much of the ’60s to more than 13 percent
in December 1979. The Federal Reserve
was not seen by the public as credibly fighting inflation.
A drastic change in the approach to monetary policy was needed by the Fed in order
to regain its credibility, tame inflation and
restore confidence in financial markets. The
plan had to allow for substantial increases in
short-term interest rates while, at the same
time, reassuring financial markets that this
new policy approach would be effective and
the cost of disinflation would be minimized.
On Oct. 6, 1979, the Fed, under Paul
Volcker’s leadership, shifted its focus from
targeting nominal interest rates to targeting
non-borrowed reserves to control the money
supply. Volcker’s “monetarist experiment”
was ultimately successful in stabilizing
inflation and anchoring inflation expectations. The economy experienced a sharp
recession, but was then set for a long period
of stable growth. For more than two-anda-half decades following the monetarist
experiment, the economy grew in long
stretches, punctuated by just two relatively
mild recessions.
The situation we face today is not that
faced by the Volcker Fed in 1979. One

important difference is that U.S. inflation
and long-term interest rates are currently
very low. In fact, market-based indicators
of inflation expectations may be drifting
toward deflation. Still, there is a clear atmosphere of crisis. Financial turmoil continues
to impact a wide range of financial markets
and institutions around the globe. The Fed
has lost its usual ability to signal to the private sector via nominal interest rates as the
policy rate has reached the zero bound.
As in October 1979, the Fed has reacted to
the crisis situation with an aggressive change
in policy. Like the Federal Reserve in Vol-

“This is a very different mode
of operation than what
the Fed and the financial
markets have been used to
over the past two decades.
By acting aggressively, the
Fed may be able to replicate
the success of Volcker’s Fed
30 years ago.”

cker’s time, today’s Fed has taken unprecedented actions, departing from its traditional
approach to monetary policy—interest-rate
targeting—and focusing on quantitative
measures instead. Beginning in December
of last year, the FOMC shifted its focus for
future policy to the Fed’s balance sheet.
In some ways, our current environment
parallels the Japanese experience after 1990.

The Japanese banking system encountered
difficulties with “troubled assets,” and the
intermediation system broke down. Eventually, persistent year-over-year deflation
was observed in core measures of inflation,
and average economic growth stagnated. In
Japan, policy rates have been below 1 percent
for 14 years, and deflation was observed for
more than a decade. An outcome of sustained deflation and extremely low nominal
interest rates, as happened in Japan, is sometimes referred to as a deflationary trap.
To avoid the Japanese experience, the
Fed will need to provide enough sustained
growth in the monetary base to offset downward pressure on inflation coming from the
very sharp recession. At the same time, the
Fed cannot provide such a sustained high
level of monetary growth that medium-run
inflation takes hold. Either way, the signals
that the Fed sends about its future intentions
have to come from quantitative measures of
policy and not from interest rate movements.
This is a very different mode of operation
than what the Fed and the financial markets
have been used to over the past two decades.
By acting aggressively, the Fed may be able
to replicate the success of Volcker’s Fed 30
years ago.
1

See “Reflections on Monetary Policy: 25 Years After October 1979,” Federal Reserve Bank of St. Louis Review March/
April 2005, for a compilation of the conference proceedings
as well as personal reflections commemorating Oct. 6,
1979. Go to http://research.stlouisfed.org/publications/
review/05/03/part2/MarchApril2005Part2.pdf.
The Regional Economist | www.stlouisfed.org 3

b u s i n e s s

Corporate Social Responsibility

Can Be Profitable
By Rubén Hernández-Murillo and Christopher J. Martinek

C

orporate social responsibility (CSR)
is a doctrine that promotes expanded
social stewardship by businesses and organizations. CSR suggests that corporations
embrace responsibilities toward a broader
group of stakeholders (customers, employees and the community at large) in addition
to their customary financial obligations to
stockholders. A few examples of CSR include
charitable giving to community programs,
commitment to environmental sustainability
projects, and efforts to nurture a diverse and
safe workplace.1
As more attention is being paid by outsiders to the social impact of businesses,
corporations have acknowledged the need for
transparency regarding their social efforts.
In a recent survey, 74 percent of the top 100
U.S. companies by revenue published CSR
reports last year, up from 37 percent in 2005.
Globally, 80 percent of the world’s 250 largest
companies issued CSR reports last year.2
Is CSR Socially Desirable?

Despite the apparent acceptance of CSR
by businesses, many economists have taken
a skeptical view of CSR and its viability in a
competitive environment. Milton Friedman, in particular, doubted that CSR was
socially desirable at all. He maintained that
the only social responsibility of a business
is to maximize profits (conducting business
in open and free competition without fraud
or deception).3 He argued that the corporate executive is the agent of the owners
of the firm and said that any action by the
executive toward a general social purpose
amounts to spending someone else’s money,
be it reducing returns to the stockholders,
increasing the price to consumers or lowering the wages of some employees. Friedman
4 The Regional Economist | April 2009

pointed out that the stockholders, the customers or the employees could separately
spend their own money on social activities
if they wished to do so.
Friedman, however, also noted that there
are many circumstances in which a firm’s
manager may engage in actions that serve
the long-run interest of the firms’ owners
and that also have indirectly a positive social
impact. Examples are: investments in the
community that can improve the quality
of potential employees, or contributions to
charitable organizations to take advantage
of tax deductions. Such actions are justified
in terms of the firm’s self-interest, but they
happen to generate corporate goodwill as a
byproduct. Furthermore, this goodwill can
serve to differentiate a company from its
competitors, providing an opportunity to
generate additional economic profits.
Friedman’s argument provoked economists to explore the conditions under which
CSR can be economically justified. Economists Bryan Husted and José de Jesus Salazar,
for example, recently examined an environment where it is possible for investment in
CSR to be integrated into the operations of
a profit-maximizing firm. The authors considered three types of motivation that firms
consider before investing in social activities:
• altruistic, where the firm’s objective is
to produce a desired level of CSR with no
regard for maximizing its social profits, i.e.,
the net private benefits captured by the firm
as a consequence of its involvement in social
activities;
• egoistic, where the firm is coerced into
CSR by outside entities scrutinizing its social
impact; and
• strategic, where the firm identifies social
activities that consumers, employees or

investors value and integrates those activities
into its profit-maximizing objectives.
In agreement with Friedman, Husted and
Salazar conclude that the potential benefits
to both the firm and society are greater in
the strategic case: when the firm’s “socially
responsible activities” are aligned with the
firm’s self-interest.
Strategic CSR

Similarly, economists Donald Siegel and
Donald Vitaliano examined the theory
that firms strategically engage in profitmaximizing CSR. Their analysis highlights
the specific attributes of business and types
of CSR activities that make it more likely
that “socially responsible” actions actually
contribute to profit maximization. They
conclude that high-profile CSR activities
(e.g., voluntary efforts to reduce pollution or
to improve working conditions for employees) are more likely undertaken when such
activities can be more easily integrated into
a firm’s differentiation strategy.
Siegel and Vitaliano studied a large sample
of publicly traded firms and classified them
using the North American Industry Classification System codes into five categories. The
five categories were:
• search goods, whose quality can be readily
evaluated before purchase, e.g., clothing,
footwear and furniture;
• nondurable experience goods, whose quality is experienced over multiple uses and
frequent purchases, e.g., food, health and
beauty products;
• durable experience goods, which must
be consumed before their true value can
be determined, permit less learning from
repeated purchases and require a longer
period for the product’s characteristics to

the experience services category typically rely
as a form of brand differentiation. Banks,
which constitute a large portion of the firms
in the experience services category, can also
excel in this area of CSR by committing a
portion of their commercial loan portfolio to
community development initiatives.
In the human rights issue area, the five
categories of businesses have few, if any, firms
that demonstrated relative strength. The only
category with a sizeable proportion of firms
was the search goods category. This is also
understandable, as firms in this category face
higher pressures from activists concerned
about the working conditions of unskilled
labor employed (usually in developing countries) in the production process.

ENDNOTES
1
2
3
4

5

Being Responsible…and Profitable

Modern theoretical and empirical analyses
indicate that firms can strategically engage
in socially responsible activities to increase
private profits. Given that the firm’s stakeholders may value the firm’s social efforts,
the firm can obtain additional benefits from
these activities, including: enhancing the
firm’s reputation and the ability to generate
profits by differentiating its product, the
ability to attract more highly qualified personnel or the ability to extract a premium
for its products.

See General Mills Inc. for detailed examples
of corporate CSR efforts.
See KPMG.
See Friedman (1962, 1970).
A firm is considered to have a relative
strength in an issue area when the fraction
of strengths identified divided by the number
of strengths considered exceeds the fraction
of areas of concern identified divided by the
number of concerns considered.
The ratings in the seven social issue areas are
provided by Kinder, Lyndenberg and Domini
(KLD) from the 2008 KLD STATS database.
KLD rates the largest 3,000 publicly traded U.S.
companies in several categories of strengths
and concerns in each issue area. The classification of firms by product or service provided
used a listing of primary industry (NAICS)
codes provided by the Center for Research in
Security Prices (CRSP) database. Since some
firms received no ratings from KLD or did not
have a primary NAICS code listed in the CRSP
database, the total number of firms considered
is slightly fewer than 3,000.

REFERENCES
Friedman, Milton. Capitalism and Freedom.
Chicago: University of Chicago Press, 1962.
Friedman, Milton. “The Social Responsibility
of Business Is To Increase Its Profits,” The
New York Times Magazine, Sept. 13, 1970,
No. 33, pp. 122-26. See www.colorado.edu/
studentgroups/libertarians/issues/friedmansoc-resp-business.html.
General Mills Inc. Corporate Social Responsibility Report, 2008. See www.generalmills.com/
corporate/commitment/NEW_CSR_2008.pdf
Husted, Bryan W.; and Salazar, José de Jesus. “Taking Friedman Seriously: Maximizing Profits and
Social Performance.” Journal of Management
Studies, January 2006, Vol. 43, No. 1, pp. 75-91.
KPMG, International Survey of Corporate Responsibility Reporting of 2008, October 2008. See
www.kpmg.com/Global/IssuesAndInsights/
ArticlesAndPublications/Pages/Sustainabilitycorporate-responsibility-reporting-2008.aspx.
Siegel, Donald S.; and Vitaliano, Donald F. “An
Empirical Analysis of the Strategic Use of
Corporate Social Responsibility.” Journal
of Economics and Management Strategy, Fall
2007, Vol. 16, No. 3, pp. 773-92.

Rubén Hernández-Murillo is an economist at
the Federal Reserve Bank of St. Louis. Christopher J. Martinek is a research associate there.

Proportion of the 3,000 Largest Publicly Traded U.S. Firms
Demonstrating Strength in Social Issue Areas

60
Diversity

Community

Corporate Governance

Employee Relations

50
Environment
PERCENT OF TOTAL

be fully known, e.g., automobiles and
appliances; and finally
• experience services and credence services,
which often involve strong information
asymmetries between sellers and buyers, who may find it difficult to assess the
service’s value even over a long period,
e.g., banking, financial counseling, auto
repairs and weight-loss programs.
Siegel and Vitaliano found, using an
aggregate measure of CSR involvement,
that firms selling experience goods and
experience and credence services are
more likely to engage in CSR than those
selling search goods. The difference in
the intensity of CSR involvement across
types of goods, they argued, is explained
by the consumers’ perception of a firm’s
involvement in CSR (even when the firm’s
product does not directly include a social
component) as a valuable signal of the
firm’s reliability and its commitment to
quality and honesty.
Using the same classification of firms as
Siegel and Vitaliano did, the accompanying chart shows the proportion of firms
in each classification that demonstrated
relative strength in seven different social
issues related to CSR as rated in 2007 by
Kinder, Lyndenberg and Domini (KLD),
an independent research firm that rates
the social performance of corporations.4
The chart reveals that the level of relative
strength in the seven individual areas of
CSR rated by KLD varies among the five
classifications of firms.5 In other words,
firms choose to invest in different types
of CSR when catering to different groups
of stakeholders.
A greater proportion of goods-producing firms showed strength in the environment issue areas. This result is perhaps not
surprising. Stakeholders in service firms
are not likely to value CSR efforts related
to the environment, since services probably have lower perceived environmental
impact than manufacturing firms do.
In the community issue area—where
strengths include giving programs,
volunteer programs and support for
local organizations—firms providing
experience services performed quite well.
Devoting resources to CSR activities in
community relations can bolster reputation, on which firms that are classified in

Human Rights

Product

40
30
20
10
0

Search Goods
122 firms

Nondurable
Experience Goods
269 firms

Durable
Experience Goods
1,250 firms

Experience Services
701 firms

Credence Services
414 firms

SOURCE: KLD Stats 2008

The Regional Economist | www.stlouisfed.org 5

e c o n o my

This Is Not
Your Father’s
Recession
... or Is It?
By Charles S. Gascon

R

Every recession and
financial crisis has certain
characteristics in common;
at the same time, each
event is unique.

6 The Regional Economist | April 2009

ecessions are a common occurrence
in any economy, part of the pattern of
expansion and contraction known as the
business cycle. For most Americans, the current recession is, by far, the worst recession in
their adult lifetime. Not since 1981 has the
economy contracted for more than a single
year. Heightening economic insecurity, this
particular recession is also associated with a
financial crisis, as many news stories recall
the turmoil of the Great Depression.
Although there is a strong correlation
between financial crises and severe economic
downturns, not all financial crises result in
a depression or even a recession: The U.S.
economy never slipped into recession after
the 1987 financial crisis.
Every recession and financial crisis has
certain characteristics in common; at the
same time, each event is unique. Similarities across recessions are generally related
to declines in employment, production
and inflation. Financial crises tend to be

associated with an increased demand for
government-backed assets and a decline in
demand for private assets—a feature known
as “flight to quality.”
The unique characteristics of the current
recession are a significant decline in home
prices and the resulting financial crisis.
Surprising to many, the recent declines in
employment and income, so far, have been
consistent with past recessions. One feature
of the current environment that stands out
as a stark departure from past financial
crises—particularly compared with the
Japanese financial crisis or with the Great
Depression—is a proactive response by
policymakers.
Comparing U.S. Recessions

Since 1978, economists and policymakers
have accepted the judgment of the National
Bureau of Economic Research (NBER) Business Cycle Dating Committee on the start
and end of a recession, or business cycle

turning points. The NBER is a nonprofit
organization, and the committee consists of
well-respected economists from around the
country. This group defines a recession as
“a significant decline in economic activity
spread across the economy, lasting more
than a few months.” The committee does
not use the popular definition of a recession as two consecutive quarters of negative
growth in real gross domestic product (real
GDP). Because of this, dating of recessions is
sometimes confusing. The committee dated
the start of the current recession as December 2007, even though real GDP actually
increased by an average annual rate of 1.9
percent during the first two quarters of 2008.
According to the committee, the U.S.
economy has experienced six periods of
recession during the past 40 years.1 On
average, these past recessions have lasted
10.8 months. The longest recessions—
beginning in November 1973 and July
1981—each lasted 16 months. The shortest

recession—beginning in January 1980—
lasted six months. Although the end of the
current recession is unclear, some economists
expect it to extend into mid-to-late 2009, a
duration of about 18 to 24 months.
In its December 2007 report, the committee focused on four indicators: industrial
production, total nonfarm employment, real
personal income less transfer payments, and
wholesale and retail sales. Many economists
follow these indicators to gauge the state of
the economy.2 Surprising to many noneconomists, the unemployment rate is not
included. (See Figure 1.) The rate tends to
reach its minimum after the recession has
begun. This occurs because the unemployment rate measures the share of the population not employed but actively seeking work.
As the economy moves into recession, many
people stop looking for work and are omitted
from the index. Cushioning the unemployment rate’s decline, when the economy
improves people will once again seek work.

Three popular leading economic indicators that tend to move prior to business cycles
are stock price indices, housing starts and
interest rate spreads.3 In particular, stock
price indices normally increase about three
months prior to the end of a recession.
Figure 2 displays a broad collection of indicators used to assess the state of the economy.
The series were selected because they exhibit
trends generally unique to the current
recession. Other important indicators have
exhibited normal recessionary declines. The
figure compares the declines throughout the
current recession (red lines) to the average
decline over the past six recessions (solid blue
lines). Each series reports the percent change
from the business cycle peak. The horizontal
axis reports the months before and after the
peak. For example, the datum on the red line
at month one reports the percentage decline
from December 2007 to January 2008, while
the datum on the solid blue line at month
one reports the average decline during the
The Regional Economist | www.stlouisfed.org 7

Leading, Lagging and Coincident Indicators
S&P 500 Stock Price Index
AVERAGE

1941-43=10

1800
1600
1400
1200
1000
800
600
400

Jan. 98
Jan. 98

Jan. 04

Jan. 92
Jan. 92

Jan. 86

Jan. 80

Jan. 68

0

Jan. 74

200

Civilian Unemployment Rate
%, SEASONALLY ADJUSTED

12
10
8
6
4

Jan. 04

Jan. 86

Jan. 80

Jan. 68

0

Jan. 74

2

Total Nonfarm Employment

MILLIONS, SEASONALLY ADJUSTED

160
140
120
100
80
60
40
0

8 The Regional Economist | April 2009

Jan. 92

Jan. 86

Jan. 80

Jan. 74

Jan. 68

first month of the past six recessions. The
variability in each series is captured by the
two dashed lines, which report the highest
and lowest values recorded across the past
six recessions.
The two charts on the top row describe
the general state of the economy through
data on total nonfarm employment and real
personal income less transfer payments.
Percentage decreases in these series, thus far,

Jan. 98

20

have been within the range exhibited by past
recessions. In December 2008 (month 12
on the chart), employment was 2.2 percent
lower than a year ago, while real incomes
declined by less than 1 percent. Although
simple charts alone cannot suggest reasons
for these declines, low inflation has likely
assisted in stabilizing real incomes, and
active monetary and fiscal policies have
mitigated the spillover effects from turmoil
in financial markets into these broad measures of economic well-being.
In the second row are two series that
describe the current financial crisis: home
prices, measured by the median sales price
of existing family homes, and stock prices,
measured by the S&P 500 index. The
decrease in home prices started months
before the current recession, dropping
12 percent in the six months before the
recession and another 15 percent in the 12
months after the recession began. During
past recessions, home prices tended to be
relatively stable. Only during the 1990-1991
recession did home prices decline by more
than 3 percent. Falling home prices erased
over $3 trillion in home equity from the
wealth of American households in 2008.
The problems in the housing market have
also taken a significant toll on equity prices,
particularly the equities of financial institutions highly exposed to real-estate-related
securities. Over the first 13 months of the
recession, the S&P 500 lost over 40 percent
of its value.
Trends in real consumption are reported
in the third row of the figure. Consumption is separated into two components:
consumption of durable goods and consumption of nondurable goods and services.
Consumption of durable goods can be
thought of as a type of household spending on “big ticket” items (e.g., refrigerators
and automobiles), which are more likely
dependent on financing. Consumption of
nondurable goods and services tends to be
smaller purchases that households buy with
cash. The figure indicates that these two
types of consumption have different cyclical
properties. On the one hand, consumption
of durables declined during past recessions;
on the other hand, consumption of nondurables and services remained stable or even
grew during past recessions. It is likely,
continued on Page 11

Jan. 04

Figure 1
Business cycle indicators can be classified as leading,
lagging or coincident based on their turning points
relative to the business cycle. For example, the S&P
500 is a leading indicator because it generally turns
down before the onset of a recession and up before the
recession ends. (There are always exceptions.) While
the unemployment rate is a lagging indicator, total
employment is a coincident indicator—its peaks and
troughs generally occur in the same month as business
cycle peaks and troughs. The gray bars represent the
current and past six recessions.

figure 2

Comparison of Business Cycle Indicators
Average

EMPLOYMENT

Current

Highest

The current recession is different, but how
different? The charts to the left put things into
perspective. The red lines represent the percent
change in each series from the start of the current
recession, December 2007. As a benchmark, the
blue lines report the average (solid line), highest
(gold dotted lines) and lowest levels (purple dotted lines) experienced over the past six recessions.
(They do not represent data for a particular recession.) If the red line remains close to the average,
or at least above the lowest, the decline can be
interpreted as a normal recessionary one. The
numbers on the horizontal axes represent months
before and after the business cycle peak.

Lowest

REAL INCOME

1.5%

2.0%

1.0%

1.0%

0.5%

0.0%

0.0%
–0.5%

–1.0%

–1.0%

–2.0%

–1.5%

–3.0%

–2.0%

–4.0%

–2.5%
–3.0%
–6

–4

–2

0

2

4

6

8

10

12

MEDIAN HOME PRICE

–5.0%
–6

–4

–2

0

2

4

6

8

10

12

–4

–2

0

2

4

6

8

10

12

S&P 500

15%

30%

10%

20%
10%

5%

0%

0%

–10%

–5%

–20%

–10%

–30%

–15%

–40%

–20%
–6

–4

–2

0

2

4

6

8

10

12

REAL CONSUMPTION: DURABLE GOODS

–50%
–6

REAL CONSUMPTION: NONDURABLES AND SERVICES

20%

5%

15%

4%

10%

3%

5%

2%

0%

1%

–5%

0%

–10%

–1%

–15%

–2%

–20%
–6

–4

–2

0

2

4

6

8

10

12

–3%
–6

–4

–2

0

2

4

6

8

10

12

2

4

6

8

10

12

FEDERAL FUNDS RATE

CONSUMER PRICE INDEX

60%

15%

40%
10%

20%
0%

5%

–20%
–40%

0%

–60%
–80%

–5%

–100%
–10%
–6

–4

–2

0

2

4

6

8

10

12

–120%
–6

–4

–2

0

SOURCES: Employment and the Consumer Price Index are from the Bureau of Labor Statistics; real income and real consumption are from
Bureau of Economic Analysis; S&P 500 is from The Wall Street Journal; federal funds rate is from the Federal Reserve Board H.15.

The Regional Economist | www.stlouisfed.org 9

Are Great Depression Fears Warranted?

T

he Great Depression (1929-1939) began

average of 9.2 percent of all banks failed every

about August 1929 with a severe reces-

year. The FDIC reported last year that only 30

sion, which lasted for 43 months. Between

of over 7,000 banks failed or received assis-

1933 and 1937, the economy expanded, actu-

tance. This is less than 0.5 percent.10

ally reaching its 1929 level of output. In May

The accompanying table compares recent

1937, the economy again slipped into reces-

declines in income, employment and stock

sion, although one that was much less severe

prices with those experienced during the

and that lasted only through June 1938. Most

1929-33 recession. The column on the left

historians agree that the Great Depression

reports the percentage declines during the

ended sometime in 1939, although the worst

first year of the current recession, the center

year of the Depression was probably 1933.

column shows the percentage declines over

One popular phrase in recent months has

the first year of the Great Depression and the

been “the worst decline since the Great

column on the right shows the total declines

Depression.” Fortunately, the difference

over the entire 1929-33 recession.11

between the “worst since” and “as worse as”

The S&P 500 lost more value in the first

the Great Depression is vast. Some events are

12 months of the current recession than in the

similar: The failure of major investment banks

first 12 months of the Great Depression. But

and the largest commercial bank, as well as

broader economic indicators have been much

a sharp decline in consumer spending, have

stronger of late. Per capita income declined

been the main points of comparison between

by over 10 percent during the first year of the

these episodes. Contrary to the Depression-

Depression, while current per capita incomes

era references, institutions designed to pre-

(before adjusting for inflation) have remained

vent banking collapses and substantial action

stable. Similarly, employment declined by
5.6 percent during the first year of the Great
Depression, but declined by 2.2 percent in

recession vs. depression

the first year of the current recession.
While it cannot be directly inferred from the

Percentage declines between dates

chart, differences in government policy likely

Dec. 2007
to Dec. 2008

1929 to 1930

1929 to 1933

Per capita personal income
less transfer payments

–0.7

–11.7

–48.0

Total nonfarm employment

–2.2

–5.6

–15.8

S&P 500 stock price index*

–40.8

–30.9

–79.3

SOURCES: Author’s calculations using data from: Historical Statistics of the United States, Bureau of Economic Analysis,
and The Wall Street Journal. * Changes are from August 1929 to August 1930 and August 1929 to March 1933.

exacerbated the Depression-era’s declines in
income and employment while mitigating the
current declines. During the Depression, the
Revenue Act of 1932 raised taxes to meet
budget shortfalls, and the Federal Reserve
failed to sufficiently expand the money supply
to offset the effect of the elevated demand
for currency. In contrast, in 2008, the Federal
Reserve greatly increased the money supply,
and the federal government implemented
increased spending and tax reductions.

by policymakers make these two episodes
very different.

10 The Regional Economist | April 2009

A final point of interesting information: In
the year after the 1929-33 recession, the

The current recession would have to last

stock market rallied, increasing 72 percent in

another 2.5 years before reaching the length

one year. However, it took another 20 years

of the 1929-33 recession. Investment banks

until the S&P 500 reached its 1929 levels. In

have failed during the current crisis, but

more recent times, stock prices fell 40 percent

depositors’ confidence in their banks has

between 1999 and 2002, and only five years

remained firm. Between 1930 and 1933, an

were needed to recover the losses.

continued from Page 8
because real incomes have remained stable,
that recent declines in wealth and/or liquidity constraints have suppressed both forms
of consumption. Consumption of durables
declined 11 percent in the first 12 months of
the recession. Consumption of nondurables
and services, while remaining relatively
stable, declined about 1 percent over the
same time period.
Losses in wealth associated with home
and stock prices have reduced consumer
spending. Economic theory suggests that
consumption is primarily driven by lifetime
wealth. In response to short-term declines
in income, households will smooth their
consumption by borrowing. That means
that consumption spending will fluctuate less
over business cycles than household income
or wealth will fluctuate. This theoretical
result must be amended to account for
liquidity constraints, that is, some households will find it difficult to borrow money
as their income falls because lenders will
be uncertain of future earnings and, hence,
prospects for repayment. The current
financial crisis has reportedly increased the
difficulty of individuals and businesses to
borrow. The result has been the largest recessionary decline in real consumption in the
past 40 years.
The bottom row reports the trend in
inflation, measured by the Consumer Price
Index, and the trend in the effective federal
funds rate. Slowing inflation has allowed the
Federal Reserve to act in a proactive fashion
when dealing with the current recession.
Not only have reductions in the federal funds
rate been larger than in past recessions, but
the reductions actually started three months
before the onset of the latest recession. The
federal funds target decreased from 5.25
percent on Sept. 17, 2007, to 2 percent on
April 30, 2008. By the spring of 2008, when
the financial crisis was fairly certain, the
Federal Reserve began to aggressively reduce
its target, ultimately to between 0 and 0.25
percent on Dec. 16, 2008.
Comparing Financial Crises

Tightening of credit, declines in asset
prices, and banking runs or failures tend to
characterize financial crises.4 Tightening
of credit occurs because banks, institutions
and individuals fear that borrowers will be

unable to repay a loan or investment. The
inability of investors to evaluate the creditworthiness of borrowers causes
them to move away from private assets
(i.e., stocks or corporate bonds) and toward
government-issued (or guaranteed) debt
(i.e., Treasuries, bank deposits or currency).
The shift from private to government-issued
debt may reduce the demand for private
assets, such as houses or equities, which,
in turn, pushes down their prices.
Prior to the creation of the Federal Deposit
Insurance Corp. (FDIC), bank runs were a
feature of crises. Depositors who were worried about their ability to access cash that was
held at their bank would run to the bank to
withdraw their money. As depositors withdrew funds, banks would be forced to quickly
liquidate assets, possibly at a loss, resulting at
times in the failure of the bank.
In the current recession, bank runs at
FDIC-insured institutions have not occurred.
Worried investors, however, did withdraw
large amounts from money market mutual
funds after a major fund “broke the buck” in
September 2008.5 In response, the Treasury
and Federal Reserve instituted federal guarantees for all money market fund shares held
as of Sept. 18, 2008. Similarly, some hedge
funds have been forced to halt redemptions
due to attempted runs.

The Japanese crisis, which lasted through the 1990s,
is similar in many ways. In the decade preceding the
crisis, deregulation allowed banks to transform their
balance sheets, exposing them to more risk.
Many have studied the Japanese financial
crisis for lessons on how to handle the current U.S. financial crisis. The Japanese crisis,
which lasted through the 1990s, is similar
in many ways.6 In the decade preceding
the crisis, deregulation allowed banks to
transform their balance sheets, exposing
them to more risk. Over this same period,
the percentage of loans that banks extended
to real estate doubled. During the financial
crisis and subsequent recession, home prices
in Japan declined over 35 percent and equity
prices declined by roughly 60 percent. For
many, the U.S. declines in home and equity
prices are all too similar. (See Figure 2.)
The Japanese crisis was unique, on the other
The Regional Economist | www.stlouisfed.org 11

hand, because of its longevity (lasting over
a decade), but with only modest declines in
output (close to 1 percent) and low unemployment (under 5 percent).
Many economists have been quite critical
of how Japanese policymakers handled the
crisis. Economist Benjamin Friedman suggested in 2000 that the Japanese government
incorrectly pursued a policy of forbearance,
wherein weak supervision standards allowed
banks to postpone the correct classification
of nonperforming assets. Friedman also
suggested that Japan should have applied
more-expansionary monetary and fiscal
policies. In response to the crisis, the Bank
of Japan did, in fact, lower its key interest
rate to virtually zero percent. Many have
suggested, however, that the Bank of Japan
could have gone further and was mistaken
to assume that zero interest rates ended its
ability to stimulate the economy through
monetary policy.7 U.S. policymakers have
learned from this experience and pursued
expansionary policy even with target interest rates close to zero percent.
In a recent study, economists Carmen
Rienhart and Kenneth Rogoff compare the
recent declines in major economic indicators with the declines experienced during
15 previous financial crises associated with
recessions in the U.S. and elsewhere. 8 Three
common features of the data are: (1) a collapse in asset prices, (2) profound declines
in output and employment and (3) exploding government debt.
As expected, collapses in asset prices tend
to be severe during financial crises. Reinhart and Rogoff report that, on average, real
equity prices declined by 55.9 percent, while
home prices declined by an average of 35.5
percent. The duration of these declines was
particularly long: Equity declines lasted,
on average, 3.4 years, and home prices
slid for six years. While the durations are
unknown, the declines reported in Figure 2
are generally consistent with these averages.
The reported declines in output and
employment are smaller than decreases in
asset prices. The average decline in real
GDP per capita lasted just under two years,
exhibiting a total decline of 9.3 percent, or an
average quarterly decline of about 1 percent.
In 2008, the average quarterly decline in
real GDP per capita was 0.75 percent. At its
highest, the unemployment rate across these
12 The Regional Economist | April 2009

countries averaged 7 percent, which is only
about 1 percentage point above the 40-year
average U.S. unemployment rate. A useful
comparison is the Great Depression, during
which the real GDP per capita declined by
almost 30 percent and the unemployment
rate increased to 23 percent. (See sidebar
on Great Depression comparison.)
Exploding government debt is possibly the most astounding characteristic of
financial crises. In the major post-WWII
crises that Reinhart and Rogoff studied, the
average increase in real government debt
was 86 percent. The outlook for the U.S.
national debt was ominous even before the
current financial crisis, increasing roughly
60 percent between 2000 and 2007.9 Nevertheless, the debt had increased another 8.5
percent between January and September
2008. Reinhardt and Rogoff note that while
antirecessionary government spending surely
increases the national debt, the primary
factor tends to be declining tax revenue from
a slowing economy. This finding is possibly
at odds with some criticism that government stimulus programs may raise the debt
burden. Absent of its effect, government
spending will increase the debt burden, but
successful government stimulus programs
could actually reduce the debt by growing the
economy and, thus, increasing tax revenue.
Look Beyond the Headlines

Much of the fear surrounding the current
recession has stemmed from the collapse in
home prices and subsequent turmoil in
financial markets. The “historic” undertone
in the reporting of most economic data has
heightened economic insecurity. As unique
as the current recession may be, the policy
response has been very proactive. So far, this
has mitigated the impact of the financial
crisis on broader measures of economic
health. By understanding the parallels
among recessions, it is possible to disentangle the typical recession-period bad news
from the truly unexpected bad news that
might signal unusual problems.

Charles S. Gascon is a research associate at the
Federal Reserve Bank of St. Louis.

endnotes
1

2

3

4

5
6

7
8

9
10

11

According to the NBER, the past six recessions began in December 1969 (lasting 11
months), November 1973 (16), January 1980
(6), July 1981 (16), July 1990 (8) and March
2001 (8).
See the Federal Reserve Bank of St. Louis’
“Tracking the Recession” at http://research.
stlouisfed.org/recession.
Interest rate spreads are the difference
between a long-term interest rate (10-year
Treasury bond) and a short-term interest rate
(federal funds rate). Interest rate spreads have
been negative before every recession in the
past 40 years.
Tightening of credit is not necessarily unique
to financial crises; it occurs during most, if
not all, economic downturns.
“Breaking the buck” means that the fund’s
asset value falls below $1 per share.
Freidman provides parallels between Japan’s
financial crisis and the U.S. savings and loan
crisis of the late 1980s and early 1990s. This
section is based on Friedman’s interpretation
of the Japanese experience and data reported
in Reinhart and Rogoff.
Bernanke (2000) is often credited for this
critique.
The crises are: Norway (1899), U.S. (1929),
Spain (1977), Norway (1987), Finland (1991),
Sweden (1991), Japan (1992), Hong Kong
(1997), Indonesia (1997), South Korea (1997),
Thailand (1997), Malaysia (1997), Philippines (1997), Colombia (1998) and Argentina
(2001).
See Pakko for a complete discussion.
Depression-era failures are reported in Bernanke (1983). Current failures are reported
in FDIC table BF01, total institutions in FDIC
table CB01.
According to the NBER, the business cycle
peak occurred in August 1929. Only annual
data are available during this time period;
1929 is used as the recession start. The magnitudes of the declines are modestly increased
when using the 1930 to 1931 percent change.

R eferences
Bernanke, Ben S. “Nonmonetary Effects of
the Financial Crisis in the Propagation of
the Great Depression,” American Economic
Review, 1983, Vol. 73, No. 3, pp. 257-276.
Bernanke, Ben S. “Japanese Monetary Policy:
A Case of Self-Induced Paralysis,” in Ryoichi
Mikitani and Adam S. Posen eds., Japan’s
Banking Crisis and Its Parallels to U.S. Experience, pp 149-166. Washington: Institute for
International Economics, 2000.
Friedman, Benjamin M. “Japan Now and the
United States Then: Lessons from the Parallels,” in Ryoichi Mikitani and Adam S. Posen
eds., Japan’s Banking Crisis and Its Parallels to
U.S. Experience, pp 37-56. Washington: Institute for International Economics, 2000.
Pakko, Michael. “Deficits, Debt and Looming
Disaster.” The Regional Economist, January
2009, Vol. 17. No. 1, pp. 4-9.
Reinhart, Carmen M.; and Rogoff, Kenneth S.
“The Aftermath of Financial Crises,” paper
presented at the 2009 American Economic
Association meetings. American Economic
Review, forthcoming.

i n t e r n a t i o n a l

The Financial Crisis in S, M and L
Three Very Different Countries Respond Similarly

By Rajeev Bhaskar and Yadav Gopalan

L

ast September and October were critical
for the United States in the ongoing
financial crisis. Almost daily, there were
announcements of mergers—and failures—
of major financial institutions, and huge
corporations across many industries pleaded
for government help. In response, federal
lending and other assistance programs
popped up like mushrooms after a downpour, offering hundreds of billions
of dollars in aid.
While many Americans were shaken
by the problems in the private sector, they
were just as anxious about the response
from the federal government. Although the
response was unprecedented in many ways,
it’s important to know that the U.S. wasn’t
taking such action in a vacuum. At the
same time that the crisis was snowballing in
the United States, it was spreading around
the world. And government leaders in other
countries were responding with similarly
bold and unprecedented actions.
This article examines the crisis and
response last fall in a sampling of countries
—a small one (Iceland,) a medium one
(the United Kingdom) and a large one (the
United States). While each country had
somewhat different problems and different
institutions to deal with those problems, all
responded with forceful action and major
intervention to keep their financial systems
from a complete collapse.
The U.S. Situation

The U.S. economy is the largest in the
world. In 2007, GDP was $13.8 trillion,
approximately five times larger than that of
the U.K. and 708 times larger than that of Iceland. The U.S. financial sector represented
8.9 percent of the total economy in 2007.

The turbulent financial market conditions in the fall of 2008, along with the
ongoing financial crisis, have their roots in
the subprime crisis dating back to mid2007. When financial institutions suffered
significant losses to their subprime mortgage portfolios, investor confidence in the
credit markets was shaken. The ensuing
year-long credit and liquidity crisis overflowed onto the global arena in September
2008. This period can be characterized by
severe liquidity contraction in the credit
markets, mounting losses and failures of
financial institutions, as well as the threat
of insolvency to many other financial
institutions.
Fannie Mae and Freddie Mac, the two
housing government-sponsored enterprises
(GSEs), were among the first of the large
troubled institutions that the government
aided. Falling house prices and rising
foreclosures led to significant losses. The
two GSEs saw their stock prices plummet
more than 90 percent over the year. More
bad news came when Lehman Brothers filed
for bankruptcy protection Sept. 15, rattling
the markets across the globe. AIG (American International Group) was the next large
financial services company in trouble. On
Sept. 16, credit rating agencies downgraded
AIG, requiring it to post collateral on its
credit default swaps. This led to a liquidity
crisis for AIG; it was unable to generate the
billions of dollars in cash required to meet
its obligations. Next was the failure on Sept.
26 of the largest thrift in the U.S., Washington Mutual, which had assets of more than
$300 billion.
The U.S. has a complex and diverse
financial regulatory structure, consisting of
numerous federal and state agencies with

different roles, jurisdictions and objectives. Though many government agencies
have played some role in the response to
the financial crisis, there have been four
major players: the Federal Housing Finance
Agency (FHFA), the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve and
the Treasury.
The Response
FHFA

The FHFA was created July 30, 2008, by the
merger of the Federal Housing Finance Board
(FHFB) and the Office of Federal Housing
Enterprise Oversight (OFHEO). The new
agency oversees the secondary mortgage
markets. Soon after its formation, the FHFA
nationalized the two housing giants Fannie
Mae and Freddie Mac. The government, in
effect, invested in them, took control of their
boards and managements, and restricted
their activities. These actions reassured
market participants that Fannie and Freddie
still had the necessary funds to buy mortgage
loans and would continue to play an important role in providing liquidity to the U.S.
mortgage market.
The FDIC

The FDIC is an independent agency of
the federal government that has a mandate
to maintain financial stability by insuring deposits, examining and supervising financial institutions, and managing
receiverships. Through legislative action,
the FDIC’s deposit insurance limit was
raised to $250,000 from $100,000 through
December 2009 in order to provide security
The Regional Economist | www.stlouisfed.org 13

A Timeline of the Events of Fall 2008 for U.S., U.K. and Iceland
Sept. 7

Sept. 14

Sept. 15

Sept. 16

Fannie Mae and Freddie Mac
nationalized.

Bank of America buys Merrill
Lynch for $50 billion.

Lehman Brothers files for
bankruptcy protection.

Federal Reserve
aids AIG with
$85 billion loan.

(AP Photo / Mary Altaffer)

(AP Photo /Susan Walsh )

Treasury Secretary Henry Paulson Jr.
speaks during a news conference
in Washington on Sept. 7 on the
nationalization of mortgage giants
Fannie Mae and Freddie Mac.

Bank of America bought Merrill Lynch in
a $50 billion deal that created a bank
offering everything from fixed-income
trading to credit-card lending.

Robin Radaetz holds a sign in front of the Lehman
Brothers headquarters Sept. 15 in New York. Lehman
Brothers, a 158-year-old investment bank choked by
the credit crisis and falling real estate values, filed for
Chapter 11 protection in the biggest bankruptcy filing
ever and said it was trying to sell off key business units.

to depositors and small businesses during
the financial crisis. The FDIC, through its
rule-making powers, initiated a temporary
liquidity guarantee program that guarantees
newly issued senior unsecured debt of banks,
thrifts and certain holding companies and
that provides insurance coverage of noninterest bearing deposit transaction accounts.
The Fed

The Federal Reserve, the central bank of
the United States, is independent from the
fiscal authority (the Treasury). The role of
the central bank is to foster a sound banking
system and a healthy economy. The Fed is
different from the central banks of Iceland
and the U.K. in that the U.S. central bank
is the only one that is also a regulator and
supervisor of banks.
As early as August 2007, when the markets began showing financial strain, the
Fed lowered its discount rate by 50 basis
points. This was followed by a rapid easing
of monetary policy. The target fed funds
rate was lowered from 5.25 percent in
September 2007 to a range of 0-0.25 percent
in December 2008. The easing helped in
lowering short-term lending rates, yet activity in the credit and securitization markets
remained clogged.
14 The Regional Economist | April 2009

In a bid to save financial
markets and economy from
further turmoil, the Federal
Reserve said Sept. 16 it would
provide up to $85 billion in
an emergency, two-year loan
to rescue the New York-based
insurance corporation.

The Fed has also provided an enormous
amount of liquidity (close to $1 trillion) to
private institutions to restore the normal
functioning of credit. The Fed’s actions have
included direct lending to banks and primary
security dealers, and have provided liquidity
directly to borrowers and investors in key
credit markets. At the height of the crisis,
the Fed provided an initial loan of up to $85
billion to the beleaguered AIG to meet its
short-term needs. To help maintain liquidity
in worldwide financial markets—which are
largely denominated in dollars—the Fed
has initiated swap lines with several central
banks around the world.
The Treasury

The Treasury Department is the executive
agency of the government responsible for
promoting economic prosperity and ensuring the financial security of the United States.
Through its bureaus (the Office of the
Comptroller of the Currency and the Office
of Thrift Supervision), the Treasury regulates
and supervises depository institutions.
Among the most far-reaching actions
taken by the government last fall was the
Treasury’s $700 billion financial services
stabilization package, formally known as
TARP (Troubled Asset Relief Program).

Sept. 17

Sept. 19

Sept. 21

Britain’s biggest mortgage lender,
HBOS, is taken over by Lloyds TSB
in a £12 billion deal.

U.S. Treasury secretary announces $700 stabilization plan.

Morgan Stanley and Goldman
Sachs become bank holding
companies.

Senate Majority Leader Harry Reid, D-Nev., speaks to reporters after members of Congress
met with SEC Chairman Chris Cox, second from left, and Treasury Secretary Henry Paulson,
third from left, House Speaker Nancy Pelosi, and Federal Reserve Board Chairman Ben Bernanke, right, on Sept. 18 in Washington. Democrats began the week by blaming President
Bush for the financial crisis and said it was his job to fix it. But as the disarray became a
meltdown and the entire U.S. economy was at stake, they pledged to work with Republicans
on a rescue that could cost taxpayers hundreds of billions of dollars.

(AP Photo / L auren Victoria Burke)

(AP Photo / John Stillwell, pool)

Halifax Bank of Scotland Chief Executive Andy Hornby,
left, shakes hands with Lloyds TSB Chief Executive
Eric Daniels, right, while Lloyds Chairman Victor Blank
looks on after the merger was agreed to Sept. 17 in
London. Blank said that the prime minister had told
him the day before that competition rules would be set
aside to make way for the merger.

This package was designed to buy troubled
assets, especially mortgage backed securities (MBS), and to provide capital to banks
that had severe liquidity needs. Between
the creation of TARP and its implementation, however, the thrust of the program
morphed into one of recapitalizing financial
institutions. As of Jan. 6, 2009, the Treasury had invested a total of $187.5 billion
in senior preferred shares in 214 financial
institutions; $40 billion to AIG under the
Significant Failing Institutions Program;
$19.4 billion to the auto industry; $20 billion to Citigroup as part of the Targeted
Investment Program; and $20 billion for a
Federal Reserve consumer-finance program.
The grand total was $282.9 billion.
the situation in iceland

Until fairly recently, Iceland’s two major
industries had been fishing and tourism. The
government had tight control over many sectors, including banking. Earlier this decade,
Iceland’s government privatized many sectors of the economy by selling off state assets,
including its banking institutions.
Following privatization between 2001
and 2003, Iceland’s commercial banks grew
tremendously. In addition, some banks
used debt, primarily denominated in euros,

Late Sunday, Sept. 21, the Federal Reserve
granted Goldman Sachs and Morgan Stanley,
the country’s last two major investment
banks, approval to change their status to
bank holding companies.

to finance aggressive expansion overseas.
Figure 1 (on the next page) shows the speed
at which Iceland’s banks issued credit and
marketable securities; it also shows the
growth in their deposits.
The sector was dominated by three main
banks: Glitnir, Landsbanki and Kaupthing.
All three institutions expanded internationally and had become savings havens for
Europeans who wanted to take advantage of
Iceland’s high interest rates.
Right before the crisis, the sector’s collective assets had ballooned to roughly
eight times the country’s overall GDP.1
Furthermore, the banks’ stocks had risen
to comprise roughly 75 percent of Iceland’s
stock market value.2
Glitnir, the third largest financial institution in Iceland, had borrowed heavily for
aggressive expansion abroad. On Oct. 15, the
bank had roughly €600 million in maturing
debt; in addition, it needed to pay out €150
million as part of a loan it arranged with
Bayerische Landesbank, a German bank.
Due to a precipitous drop in the value of the
currency, as well as the central bank’s insufficient foreign reserves, Glitnir did not have
the cash necessary to pay down its debt, as
well as to pay its loan to Bayerische Landesbank. (The German government eventually

structured a rescue package for Bayerische
Landesbank.)
Landsbanki, the second largest bank,
was a particular magnet for foreign savers,
especially for British savers. In the wake
of Glitnir’s collapse, British depositors
withdrew roughly $272 million in deposits
from Landsbanki over one weekend, causing
severe liquidity problems for the bank.
For Kaupthing, Iceland’s largest bank,
problems arose when the Icelandic government guaranteed a higher level of deposits
for Icelanders but not for foreigners. As
a result, the U.K. government invoked
anti-terror laws to freeze Kaupthing’s foreign assets.
Institutional Structure
and Policy Responses

The main organizations that orchestrated Iceland’s response to its crisis were
its central bank (Sedlabanki Islands), its
fiscal authority (the Finance Ministry) and
its financial regulatory body (the Financial Supervisory Authority, also known as
FME, a derivation from its Icelandic name).
Unlike in the United States, Iceland’s banks,
as well as its financial markets as a whole,
are regulated by a single authority, the FME.
Its authorities and responsibilities are
The Regional Economist | www.stlouisfed.org 15

Sept. 26

Sept. 29

Oct. 1

Oct. 3

Washington Mutual, with
$307 billion in assets,
becomes largest thrift failure.

Iceland takes
control of Glitnir,
the country’s
third largest bank.

Financial crisis spreads
widely across Europe.

Congress passes stabilization
package, called the Troubled
Assets Relief Program (TARP).
In this video image from APTN, the final vote
tally is displayed after the Senate passed the
Economic Stabilization Act by a vote of 74-25
on Oct. 1. The House passed it on Oct. 3 and
President Bush signed it within hours.

(AP Photo /APTN )
(AP Photo / Virginia Mayo)

U.K. nationalizes
mortgage lender
Bradford & Bingley.

(AP Photo / DOUGL AS C. PIZAC, FILE)

In this April 8, 2008, photo, a closure notice hangs
in the window of a Washington Mutual home loan
center in Salt Lake City. On Sept. 26, Washington
Mutual, one of the nation’s largest banks, was
seized by the Federal Deposit Insurance Corp. and
then sold to JPMorgan Chase & Co.

figure 1
Icelandic Banking and GDP Growth, 2000-2007

INDEXED PERCENTAGE GROWTH

YEAR 2000=1
10
9
8
7
6
5
4
3
2
1

Credit and Marketable Securities
Total Deposits
GDP

2001 2002 2003 2004 2005 2006 2007
YEAR

16 The Regional Economist | April 2009

French President Nicolas Sarkozy, center,
gestures while speaking during a media
conference at an emergency financial
summit at the Elysee Palace in Paris on
Oct. 4. The global financial crisis is forcing
the leaders of France, Britain, Germany and
Italy to come together for an emergency
summit in Paris. Seated at left is German
Chancellor Angela Merkel, and at right is
British Prime Minister Gordon Brown.

much broader than any single agency in the
United States.3
Iceland’s central bank is primarily
charged with price stability. It achieves this
by controlling its interbank policy interest
rate to affect the cost of borrowing. The
central bank also promotes financial stability, maintains Iceland’s foreign reserves,
manages public debt, and serves as public
repository of economic data and statistics.4
Because of its small size and its isolated
location, Iceland’s central bank kept interest rates high in an effort to support the
exchange value of its currency.
The Icelandic Finance Ministry is a
department within the national government. The finance minister is usually
an elected Member of Parliament. The
ministry’s objectives are to promote a stable
economy, collect revenue on behalf of the
government, administer the public debt
and manage national finances. Unlike its
analogous department in the United States,
the Treasury, the Icelandic Finance Ministry
is not involved with any supervisory tasks.
The central bank, the FME and the
Finance Ministry were all central to stabilizing Iceland’s banks. Iceland’s currency lost
tremendous value over the course of two
months. From September through October,

the krona lost 20 percent versus the U.S.
dollar and 17 percent versus the euro. Thus,
Glitnir’s krona-denominated assets made it
difficult for the institution to pay off its debt.
To compound the issue, the central bank
could not properly function as the lender
of last resort because of insufficient foreign
currency reserves. On Sept. 29, the FME
helped resolve the issue with Glitnir Bank by
acquiring a 75 percent stake in the bank, a
stake valued at roughly $782 million.5
One week later, on Oct.6, the government
passed emergency laws enabling the FME to
take over banks. Through this legislation,
Icelandic officials formally nationalized
Landsbanki and Glitnir.
In the midst of the Landsbanki takeover,
U.K. and Icelandic officials debated the fate
of the British deposits at Icelandic banks.
As a result of Iceland not being able to
guarantee foreign deposits beyond set European limits, the U.K. invoked anti-terror
legislation to freeze assets associated with
Icelandic banks and transfer them to ING,
a Dutch bank. Due to the exodus of these
deposits, Kaupthing was forced to submit to
government takeover as well.
The FME then created three “new banks”
to continue regular banking operation,
while the “old banks” were kept in existence

Oct. 7

Oct. 8

Oct. 8

Oct. 10

Icelandic bank
Landsbanki
nationalized.

U.S., U.K. and other countries
cut interest rates.

U.K. government announces £500
billion bank rescue package.

Icelandic bank Kaupthing
is nationalized.

Demonstrators gather outside the Bank of England in
London on Oct. 10 to protest against the government’s
bank rescue plan. Earlier in the week, the government
announced it would provide debt guarantees of £250
billion, short- term loans of £200 billion and a Treasury
injection of £50 billion.

(AP Photo /Arni Torfason )

(AP Photo / Lef teris Pitarakis)

A journalist in London reporting on the financial crisis holds up
a newspaper with the headline “Too little, too late and too much
faffing, say the traders.” (“Faffing” is slang in the U.K. for
“wasting time.”) On Oct. 8, six major central banks cut interest
rates in a coordinated move to try to ease the effects of the
global economic crisis. The banks were those of the U.K., U.S.,
European Union, Canada, Switzerland and Sweden.

as a mechanism to handle foreign deposits
and assets, as well as any complex securities. This marked the beginning of a period
of recovery for Iceland’s banking system.
Iceland also secured $2.07 billion in loans
from Denmark, Norway, the Faroe Islands
and Poland. In addition, Iceland and the
International Monetary Fund structured a
$2.1 billion economic stabilization program,
centered upon preventing further depreciation of the Icelandic krona, developing
a plan to restructure its banks as well as
putting the country back on sound fiscal
footing in the medium term.
the U.k. situation

Like the quick rise of Iceland’s banking sector, the United Kingdom had also
experienced an unprecedented growth in
its financial sector, to the point at which
it rivaled New York and Tokyo as a major
center for finance. By the time the U.K.
economy started showing signs of weakness,
in the summer of 2007, the financial services
sector contributed roughly 32 percent
toward the U.K. GDP.6
The U.K.’s financial institutions began
to show signs of strain much earlier than
such institutions in Iceland or even in the
United States. In the fall of 2007, the U.K.

(AP Photo /Sang Tan )

experienced its first bank run in 141 years,
with the flight of deposits from lender
Northern Rock. Compounding the issue,
U.K. authorities resolved to take care of
another institution, Bradford & Bingley.
The nationalization of Northern Rock in
early 2008 and of Bradford & Bingley’s
mortgages in the fall of 2008 shook British markets. This was compounded by
the weak market reaction to the takeover
by U.K. bank Lloyds TSB of another bank,
HBOS.
In addition, spillovers from the turmoil
in the U.S. markets affected the financial
sector in London. Many U.S. banks, brokerages and investment firms, including Bear
Stearns and Lehman Brothers, had large
operations in London.
Institutional Structure
and Policy Responses

The United Kingdom’s efforts to promote financial stability are anchored by
three important institutions: the Bank of
England, the Treasury and the Financial
Services Authority (FSA). The U.K.’s institutional structure is similar to Iceland’s.
The Bank of England sets monetary policy
by controlling its main interbank policy
interest rate. In addition, it has a mandate

A protester speaks to the crowd outside
the Central Bank of Iceland in Reykjavik on
Oct. 10 during a demonstration demanding
the resignation of the chairman, David
Oddsson. Iceland suspended trading on
its stock exchange for two days and took
control of the country’s largest bank—
the third to be placed under its protective
custody as Iceland struggles to bring its
economy back from the brink.

to promote financial stability. The Bank of
England also serves as a lender of last resort
to the nation’s financial institutions. The
U.K. Treasury coordinates fiscal and economic policy on behalf of the government as
a whole. It carries out its fiscal policy objectives by collecting tax revenue and managing government debt. Through its goal of
coordinating economic policy, the Treasury
helps support broad economic growth.
Unlike in the United States, the U.K.’s Treasury is not involved in bank supervision.
Despite their differing functions within
the financial sector, the U.K. Treasury and
the Bank of England worked closely together
in forging a policy response. On Oct. 8, the
British government and the Bank of England unveiled a three-part plan estimated to
cost £500 billion to help stabilize the financial system.7 The first part of the plan called
for a £50 billion recapitalization of Tier 1
capital in the country’s financial institutions. An aggregated £25 billion would first
be injected into the eight largest institutions, and an additional £25 billion would
be used to recapitalize all other institutions.
The government would buy preferred stock
or preferred interest bearing shares (PIBS)
in these entities. As a part of this package,
the Treasury would assist in equity offerings
The Regional Economist | www.stlouisfed.org 17

by these institutions. Institutions, on their
part, have to submit to the government
proposals on executive compensation and
dividend payouts, as well as safeguards to
ensure that the government investments
would go toward lending.
The second part of this plan committed
£250 billion to guarantee short- to mediumterm debt issuance by financial institutions.
For those institutions that do raise a sufficient amount of Tier 1 capital, the government would use this guarantee program to
help refinance any prior debt or financing
obligations that may be maturing. The aim
of this part of the plan is to make funding
costs cheaper to banks.
The third part of this plan involved the
Bank of England’s increase in funds available through its Special Liquidity Scheme
(SLS) to £200 billion. Designed by the Bank
of England, the SLS enables British financial
institutions to swap illiquid assets in return
for Treasury bills, which are generally moreliquid assets. Through the amended SLS
program, the Bank of England would swap
British pounds for three months and U.S.
dollars for one week against the collateral
that financial institutions put forward.
An additional element in the U.K.’s regulatory structure is the Financial Supervisory
Authority (FSA). Set up in the late 1990s,
the FSA is an independent agency in charge
of regulating all financial services firms.
Like Iceland’s FME, the FSA has a mandate
to supervise all financial services firms and
financial markets as a whole. The Financial
Services Compensation Scheme (FSCS) is
an independent body set up by the British
government in 2000 to cover deposits of an
insolvent financial institution. Similar to
the FDIC in the U.S., it guarantees consumers up to 100 percent of the first £50,000,
as well as guarantees for some investments
and insurance.
Despite handling claims from lost deposits
in Icelandic banks, the FSCS did not create
broad guarantees or funding instruments as
did its American counterpart, the FDIC. Nor
did legislators expand the scope of deposit
guarantees, as was the case in the U.S.
Conclusion

In terms of size, scope and regulatory
structure, the three countries described in
this article are very different. Yet one
18 The Regional Economist | April 2009

common factor is the decentralized nature
of financial regulation. A number of
separate institutions exist to carry out
specific functions. Yet in the face of crisis,
these organizations were able to work
together to form cohesive national
responses. The financial crisis in each
country, though disproportionate in size
relatively speaking, was national in scope
for all three. This required, and got, all
significant government entities to work
together to produce a swift and strong
response. As policymakers around the
world consider financial market reforms,
these experiences should be kept in mind.

Rajeev Bhaskar and Yadav Gopalan are research
associates at the Federal Reserve Bank of
St. Louis.

endnotes
1
2
3

4
5

6

7

See Iceland Review Magazine.
See Forelle.
The FME oversees operations of banks,
investment banks, securities companies, securities brokerages, insurance companies, insurance brokers, the stock exchange (and more
broadly, capital markets), central securities
depositories, as well as depository activities
of any cooperative institution. See Financial
Supervisory Authority—Iceland at www.fme.
is/?PageID=157.
See Central Bank of Iceland.
See Federal Reserve Bank of St. Louis timeline for complete perspective on the chain
of events.
OECD (Organization for Economic Cooperation and Development) country data. See
http://stats.oecd.org/WBOS/index.aspx.
U.K. Treasury’s rescue plan can be found at
www.hm-treasury.gov.uk/press_100_08.htm.
See, too, www.hm-treasury.gov.uk/fin_
support_lending.htm.

R eferences
Bank of England information and that on the
U.K.’s financial regulatory agency can be
found at www.bankofengland.co.uk/index.
htm and www.fsa.gov.uk/Pages/About/Aims/
index.shtml.
Bernanke, Ben. “The Crisis and the Policy
Response.” Presented at the Stamp Lecture,
London School of Economics, London, England, Jan. 13, 2009. See www.federalreserve.
gov/newsevents/speech/bernanke20090113a.
htm.
Central Bank of Iceland. Objectives and Roles.
See www.sedlabanki.is/?PageID=188.
Central Bank of Iceland information and that on
Iceland’s Financial Regulatory Agency can be
found at www.sedlabanki.is/?PageID=188, at
www.fme.is/?PageID=157 and at www.fme.
is/?PageID=867.
Federal Deposit Insurance Corp.’s information
on “Temporary Liquidity Guarantee Program” can be found at www.fdic.gov/regulations/resources/tlgp/index.html.
Federal Reserve Bank of St. Louis’ “The Financial Crisis: A Timeline of Events and Policy
Actions.” See www.stlouisfed.org/timeline.
Forelle, Charles. “The Isle That Rattled the
World.” The Wall Street Journal, Dec. 27,
2008, Page 1. See http://online.wsj.com/
article/SB123032660060735767.html?mod
=testMod#CX.
Iceland Review Magazine. Vol. 46, No. 1. March
2008. Interview with Prime Minister Geir
Haarde. See www.icelandreview.com/
icelandreview/search/news/Default.
asp?ew_0_a_id=303247.
Treasury Department’s “Emergency Economic
Stabilization Act” can be found at www.treas.
gov/initiatives/eesa/.
World Bank. Gross Domestic Product 2007.
See http://siteresources.worldbank.org/
DATASTATISTICS/Resources/GDP.pdf.

CO M M UNIT Y

P RO F I L E

Helps Protect Economy of Elizabethtown, Ky.
A building boom at nearby Fort Knox is music to the ears of those who live in Elizabethtown and elsewhere in Hardin
County. The fort employs more county residents than any other employer. Workers toil on the new human resources
command center, a 900,000-square-foot building set for completion in June 2010.

By Susan C. Thomson

Elizabethtown by the numbers
Population
City of Elizabethtown................................... 23,777 *
Hardin County.............................................. 97,949 *
Labor Force
County.......................................................... 46,639 **
Unemployment Rate
County...................................................7.3 percent **
Per Capita Income
County........................................................ $31,875 ***
* U.S. Bureau of the Census, estimate 2007
** HAVER/BLS, December 2008
*** BEA/HAVER, 2006

Top Five Employers
Hardin Memorial Hospital.................................... 1,600 †
Akebono Brake Systems......................................... 825 †
Wal-Mart Stores Inc................................................. 600 †
Dana Corp. . ............................................................ 500 †
AGC Automotive Americas .................................... 350 ††
†
††

Self-reported, February 2009
SOURCE: Elizabethtown/Hardin County Industrial
Foundation, February 2009

T

hrough the fog of the current recession,
Fort Knox looms golden to Elizabethtown, Ky.
The Army base, next to the U.S. bullion
depository of the same name, came through
the base realignment and closure exercise
in 2005 with an enhanced mission. Over
the next three years, it will bulk up into a
bastion of 20,000 jobs, 5,500 of them new.
The biggest share of the additions will come
with the Army’s human resources command, to be consolidated at the fort from
sites around the country. By one estimate,
allowing for slots taken by current soldiers
or Army employees, 1,500 to 1,800 of those
new jobs will remain for civilians either in
the Fort Knox area or recruited to it. These
will be permanent jobs of the corporateheadquarters sort—managerial and technical included, all white-collar.

Although 15 miles outside of Elizabethtown and only partly in Hardin County, Fort
Knox has long been the economic elephant in
the area. More county residents—2,166 civilians, by the Army’s count—work at the post
than for any other employer.
In addition, hundreds of local trades
people have found temporary work on the
fort’s many expansion-related construction
projects, says B. Keith Johnson, president
of Elizabethtown’s First Federal Savings
Bank. Of these projects, the centerpiece is
an office building of about 900,000 square
feet—equal to the playing area of 15 football
fields. In all, the Army’s investment in the
base’s expansion is projected to approach
$1 billion.
Larry Hayes, Kentucky’s acting economic
development secretary, describes the base’s
buildup as “one of the most significant
The Regional Economist | www.stlouisfed.org 19

With 1,600 workers, Hardin Memorial Hospital (above) is the No. 1 employer in Elizabethtown. Bad debts are ballooning
at the hospital as more uninsured and underinsured people seek services there.

economic development projects” in the state
since the late 1980s, when Toyota opened
its assembly plant in Georgetown, 85 miles
from Elizabethtown.
Auto Plants Are Still Key

Toyota gave Elizabethtown its biggest
shot of business adrenalin pre-Fort Knox.
Over the following decade, parts makers
Akebono Brake Corp. (auto brake systems),
AGC Automotive Americas (automotive
safety glass) and Dana Corp. (truck frames)
built new plants in town. Tokyo-based
Akebono took the extra step of moving its
North American headquarters to Elizabethtown from Michigan in 2007.
Incentives helped attract the three plants.
Elizabethtown Mayor David Willmoth says
the city agreed to return to the plants, for
five years, three-quarters of the 0.8 percent
in taxes it collected on their employees’
earnings. In some cases, the city also issued
industrial revenue bonds.
“We are always willing to work with
clients to make their project work in our
area,” especially in today’s slack economy,
says Rick Games, president of the Elizabeth/
Hardin County Industrial Foundation.
The foundation markets Elizabethtown
as something of an incentive in itself, given
its location, where two four-lane Kentucky
parkways meet up with Interstate 65, which
itself connects the Gulf Coast and suburban
20 The Regional Economist | April 2009

Chicago. From Elizabethtown, the new
parts plants could easily supply Toyota and
numerous new auto plants eventually built
close to that interstate between Alabama
and Indiana.
Akebono’s vice president and general
manager, Carl Lay, says his company was
won over by the city’s logistical pluses,
which also included service by two rail lines
and proximity to the Louisville airport, 40
miles and minutes north on Interstate 65.
Akebono has since come to value “the progressiveness of the community,” exemplified, he says, in its openness to the Japanese
managers who came with the plant.
Together over the years, Akebono and
the other two parts plants created upward
of 2,500 jobs, mostly nonunion, with good
wages and benefits. Now, along with their
automaker customers, all three have shifted
into reverse. Akebono announced its first
layoffs in January. Dana and AGC have
been shedding jobs for several years and are
down by half from their employment peaks,
Games says.
Still, the three plants rank among the
largest employers in the city, a roster topped
by Hardin Memorial Hospital. For the
past decade, the hospital has been adding
services, facilities, medical specialties and
jobs, extending its reach from Hardin into
several surrounding counties and securing
its standing as a regional medical center.

President David L. Gray says demand for
the hospital’s services continues to grow,
especially among people either uninsured
or underinsured. The hospital’s bad debts
ballooned 30 percent in the past year.
Because the Army provides its people with
excellent health benefits, he welcomes the
new Fort Knox jobs, which will start arriving this summer.
Retailing Takes a Hit

For now, unemployment is ticking up.
Mayor Willmoth sees the evidence in an
expected $1 million shortfall in the $11.1
million in earnings taxes the city budgeted
for this fiscal year. A downturn in retailing
contributes to the gap, he says.
To the casual observer, the retailing sector looks healthy enough. On or near the
four-lane Ring Road that draws a letter C
just within the city limits, big-name stores
like JCPenney, Lowe’s, Home Depot, Target, Best Buy, Kohl’s and Wal-Mart stand
strong to all appearances, testifying to the
regional shopping mecca Elizabethtown has
become. A Sam’s Club opened in January.
But a number of smaller stores—including
Waldenbooks, KB Toys and the local outlets
of two bankrupt regional clothing stores—
have closed. Willmoth calculates that as
many as 500 retailing jobs have been lost.
In housing, too, Elizabethtown has taken
a blow from the brutal recession. Johnson
of First Federal Savings says permits for
new single-family homes fell 54 percent
in the city and 51 percent in unincorporated Hardin County from 2006 to 2008.
Willmoth mostly blames the slowdown
in residential development for an overall
drop in construction in the city—from
$80 million worth of projects in 2007 to
$59 million last year.
Included in that lower total, though, were
two new hotels, which brought the city’s
total to 21. Twelve of them cluster at the
main Elizabethtown exit on Interstate 65,
under a canopy of signs beckoning travelers
in from the road.
Catering to Tourists

The hospitality industry serves the city
well. Over the past 10 years, receipts from
a longstanding 3-percent tax on hotel
rooms—more than 1,500 of them now—
have risen every year but one. Two years

ago, the city added a 2-percent tax on
restaurant meals. The take from the two
taxes together this year is expected to add
up to $2.7 million, earmarked for promoting tourism.
The city’s lead effort in that area is a
planned 100-acre outdoor recreational
complex. Its football, soccer, softball and
baseball fields will be designed not just for
local leagues but also for team competitions
from beyond the immediate area. Sherry
Murphy, executive director of the Elizabethtown Tourism & Convention Bureau,
describes this venture in “sports tourism”
as a potential economic-development tool.
Timothy Asher, president of the Elizabethtown-Hardin County Chamber of
Commerce, praises the effort as an example
of the community “trying new things” and
not just relying on the “same old economic
development efforts.” He also sees development potential for Elizabethtown in
attracting retirees, especially military from
Fort Knox, and in developing more homegrown entrepreneurs.
Both Asher and the foundation’s Games
cited Michael and Dana Bowers as leading
examples of entrepreneurs. The husbandwife duo combined two small enterprises
into iPay Technologies. Their company
provides software and customer service for
online bill paying to community banks and
credit unions. Since its founding in 2001,
iPay has grown to 225 employees.

At the Akebono Brake Corp. plant, Barbara Hardesty
assembles disc brakes. The Tokyo-based company moved
its North American headquarters to Elizabethtown from
Michigan in 2007.

“Significant Skills Gap”

The community’s immediate and major
focus is on Fort Knox, including the challenges of its explosive growth. To accommodate it, schools, roads and housing
must be built. People must be hired, a task
complicated by “a significant skills gap,”
says Sherry Johnson, associate director
of the eight-county Lincoln Trail Area
Development District, headquartered in
Elizabethtown. She says candidates for the
new “knowledge-based” Fort Knox jobs,
especially those in information technology,
are in thin supply in the basically rural,
blue-collar area. An effort is under way to
recruit workers, including recent college
graduates, from across northern Kentucky
and southern Indiana.
“Smaller cities like Elizabethtown typically do not have the mix of amenities—

The H.B. Fife Courthouse is the heart of the public
square downtown. Elizabethtown and county officials,
along with the Chamber of Commerce, are looking at
ways to bring businesses back to the downtown area.
Motorists traveling through downtown must navigate
around the courthouse as they travel on U.S. 31W.

The Regional Economist | www.stlouisfed.org 21

e c o n o my

a t

a

g l a n c e

Eleven more charts are available on the web version of this issue. Among the topics they cover are agriculture, commercial
banking, housing permits, income and jobs. Much of the data is specific to the Eighth District. To go directly to these charts,
use this URL: www.stlouisfed.org/publications/re/2009/b/pdf/4-09-data.pdf.
REAL GDP GROWTH

CONSUMER PRICE INDEX

8

6.0

6
4.0

2

PERCENT

PERCENT

4

0
–2

2.0

0.0

–4

CPI–All Items

–6
–8

03

04

05

06

07

–2.0

08

NOTE: Each bar is a one-quarter growth rate (annualized);
the red line is the 10-year growth rate.

1.00

2

0.80

PERCENT

PERCENT

1
0
–1
10-Year

20-Year

06

07

08

3/17/09

Mar. 09 Apr. 09 May 09 Jun. 09 Jul. 09 Aug. 09

5
4

7.0
6.5
6.0
5.5

PERCENT

PERCENT

1/28/09

6

8.0
7.5

3
10-Year Treasury

2
Fed Funds Target

5.0
4.5

1
1-Year Treasury

February

04

05

06

07

08

0

09

NOTE: Beginning in January 2003, household data reflect revised
population controls used in the Current Population Survey.

U . S . A G R I C U LT U R A L T R A D E

04

05

06

February

07

08

09

NOTE: On Dec. 16, 2008, the FOMC set a target range for the
federal funds rate of 0 to 0.25 percent. The observations
plotted since then are the midpoint of the range (0.125 percent).

FA R M I N G C A S H R E C E I P T S

75

190
Exports

Imports

Trade Balance

60
BILLIONS OF DOLLARS

170

45
30

0

12/16/08

I N T E R E S T R AT E S

9.0
8.5

Crops

Livestock

150
130
110

January

04

05

06

07

08

NOTE: Data are aggregated over the past 12 months.
22 The Regional Economist | April 2009

10/29/08

CONTRACT MONTHS

15

Susan C. Thomson is a freelance writer.

09

0.40

0.00

09

C I V I L I A N U N E M P L O Y M E N T R AT E

4.0

08

0.60

NOTE: Weekly data.

BILLIONS OF DOLLARS

air service, universities, restaurants, major
sports, arts and cultural institutions—for
luring high-paying office jobs of the kind
Knox is providing,” says Paul A. Coomes,
professor of economics at the University
of Louisville and a specialist in regional
economics. In the new Army jobs, he says,
the area’s economy is “getting through the
federal government what it would not likely
get through the private sector.”
For the long haul, he sees the area as best
suited for “attracting companies that have
to make complicated, heavy, expensive
things that have to be shipped to consumer
markets throughout the United States.”
Manufacturers, in other words.
Games is on the case. “There are a lot of
manufacturing projects out there to be landed
when this economy improves, especially those
between five and 25 employees,” he says.
Even now, he says, he’s hearing from prospects whose interest has been piqued by all
of the activity around Fort Knox.

March 13

05

05

07

0.20

–2
–3

06

RATES ON FEDERAL FUNDS FUTURES ON SELECTED DATES

3

5-Year

February

04

NOTE: Percent change from a year earlier.

I N F L AT I O N - I N D E X E D T R E A S U R Y Y I E L D S P R E A D S

Above, the 100-acre Field of Dreams isn’t much more
than a sign at this point, but civic leaders hope that it
will eventually draw football, soccer, baseball and softball
teams from near and far. The city already has a substantial hospitality industry.

All Items Less Food and Energy

09

90

November

03

04

05

06

07

NOTE: Data are aggregated over the past 12 months.

08

n a t i o n a l

o v e r v i e w

Nearing the Bottom, or
Digging a Deeper Hole?
By Kevin L. Kliesen

T

he recessionary headwinds that began
in late 2007 show few signs of abating.
In the United States, we have witnessed
sizable declines in employment; a multitrillion dollar decline in household net wealth,
which has shaken consumer confidence
and eroded consumer spending; a recordsmashing plunge in the single-family housing
construction industry, coupled with historic
declines in house prices; a domestic automotive industry fighting through the worst
slump in decades; and, not least, spectacular
fraud, failure and turmoil in the banking and
financial investment sector. Not surprisingly,
real GDP contracted at a 6.25 percent annual
rate in the fourth quarter of 2008, its largest
decline since 1982. Moreover, economic
activity is likely to decline and the unemployment rate rise through the first half of 2009.
Otherwise, things are OK.
In response to these events, policymakers worldwide have scrambled to prop up
their ailing economies. To begin with,
central banks in the United States and most
other major countries have significantly
reduced their interest rate targets. In the
United Kingdom, for example, the Bank of
England has lowered its target to its lowest
level in more than 300 years. In the United
States, the Federal Open Market Committee
reduced its federal funds target rate to zero,
in effect, and communicated it would keep
the target there for an extended period.
Many central banks have also implemented new, unconventional lending facilities designed to stabilize credit and financial
markets. In early March, the Federal Reserve
unveiled yet another new special lending
program: the Term Asset-Backed Securities
Loan Facility. As a result of this and previous actions, the Fed engineered a stunning

escalation in the monetary base
(the raw material for money creation) from
about $871 billion in August 2008 to more
than $1.7 trillion in January 2009.
Fiscal authorities have also jumped into
the fray. In February, Congress passed, and
President Barack Obama signed, a $787
billion package of expenditures and tax cuts
designed to boost economic activity over a
two-year period. Then, building upon the
$700 billion Troubled Asset Relief Program
(TARP), which was implemented in October
2008, the administration unveiled its Financial Stability Plan in February. In addition to
offering more financial assistance for banking organizations, the plan seeks to stem the
tide of home foreclosures.
Finally, in its budget that was released
in late February, the Obama administration proposed to spend $3.9 trillion in fiscal
year 2009, a 32 percent increase from a year
earlier. This startling level of spending is
projected to be about 28 percent of GDP and
to produce a budget deficit of $1.7 trillion in
the fiscal year that ends Sept. 30—easily the
largest expansion of government spending
since World War II.
Weighing the Costs and Benefits

Does the depth of the current recession
justify this level of intervention? In March
2009, the recession was into its 16th month,
which is considerably longer than the postWWII average duration of 10 months. However, it is not yet clear that the recession will
be deeper than normal, though that looked
increasingly likely as of March. For the
10 recessions that have occurred from 1945
to 2001, the average peak-to-trough decline
in real GDP is 2.1 percent, while the unemployment rate increases by an average of

2.9 percentage
points. Through the
fourth quarter of 2008,
real GDP had declined only
1.7 percent from its peak in 2008:Q2,
while the unemployment rate had risen
by 3.7 percentage points from its trough in
the fourth quarter of 2007. These numbers,
while likely to worsen further over the first
half of 2009, still pale in comparison to
the 27 percent decline in real GDP and the
nearly 25-percentage-point increase in the
unemployment rate that occurred from
1929 to 1933.
When the depth and duration of the
current recession are put into a historical
context, the economic justification for the
massive monetary and fiscal stimulus actions
becomes less clear. While these actions may
indeed end the recession significantly sooner
than if policymakers had adopted a more
moderate course of action, this benefit might
be more than offset over time by (1) higher
future marginal tax rates to pay for the
increase in public debt, (2) a more interventionist regulatory structure that diminishes
the role of market incentives and (3) the
possibility of higher inflation and inflation
expectations from excessive money growth.
Policymakers must be exceedingly careful not to put in place policies that begin
to erode the nation’s growth rate of labor
productivity, which is the building block for
rising living standards over time.

The Regional Economist | www.stlouisfed.org 23

d i s t r i c t

o v e r v i e w

ILLINOIS

INDIANA

St. Louis
Louisville

MISSOURI

ARKANSAS

Annual Revision of Metro Jobs Data
Shows Little Change from Earlier Reports

KENTUCKY

Memphis

TENNESSEE

Little Rock
MISSISSIPPI

The Eighth Federal Reserve District
is composed of four zones, each of
which is centered around one of
the four main cities: Little Rock,
Louisville, Memphis and St. Louis.

By Thomas A. Garrett and Michael R. Pakko

S

tatistics on metro-area employment are
among the most timely and comprehensive source of information about economic
conditions on a local and regional level. In
fact, the monthly data from the Bureau of
Labor Statistics (BLS) are often featured
prominently on these pages. Based on a
survey of employers, these data are compiled
by the BLS as part of its Current Employment
Statistics (CES) program.
Despite representing a broad sample of
employment, the CES survey is incomplete.
(See sidebar.) Each year, the BLS carries out a
benchmark revision, in which it uses information from the more comprehensive Quarterly
Census of Employment and Wages (QCEW)
to revise the monthly payroll data. The quarterly report is a very comprehensive measure
of employment, based on information about
workers covered by state and federal unemployment insurance programs. Although
comprehensive, the QCEW reports are available only after a lag of six to seven months.
Consequently, they are of limited value for
gauging current economic conditions.
To bridge the gap, economists are left
with a two-step process for evaluating local
labor markets. Each year, the BLS uses
information from the QCEW to establish
new benchmarks for the CES data, bringing
the sample data more closely in line with the
census data. Between benchmark revisions,
monthly changes reflect the incomplete
nature of the CES survey.
As a result, once per year (in early March),
we are presented with an employment picture

24 The Regional Economist | April 2009

that is sometimes dramatically different
than recent data had been indicating. This
is particularly true around turning points in
economic activity, when incomplete survey
data are more likely to miss important developments in local labor markets.
This year, in the midst of a recession,
data revisions for metro areas in the Eighth
Federal Reserve District might be expected to
be particularly dramatic. As it turns out, this
year’s revisions are relatively small.

1.4 percent over this period. This revised
estimate is less than the previous estimate
of –1.7 percent, in part due to a relatively
smaller upward revision in December 2007
employment (revised from 1,369,300 to
1,374,000, an upward revision of 4,700 jobs).
This pattern of revisions has the effect of
improving the job growth figures for 2007.
It had been earlier estimated that employment in St. Louis increased by a meager 0.1
percent, whereas the new figures show an
increase of 0.5 percent.

Employment in District Metro Areas

Prior to this year’s benchmark revisions,
employment data for Eighth District metro
areas were showing job losses across the
board. More variation was evident among
smaller metro areas, but most were showing
employment declines for the year as a whole.
The revisions to payroll employment
resulted in employment gains for some
metro areas in the District and losses for
other metro areas for December 2008.
Despite the upward revision in December
2008 employment for some metro areas, all
major metro areas in St. Louis experienced a
decline in jobs between December 2007 and
December 2008.
St. Louis

Employment in the St. Louis metro area
for December 2008 is now estimated at
1,354,200, up from the previous estimate of
1,346,300 (an increase of 7,900 jobs). New
estimates from December 2007 to December
2008 reveal that job growth in St. Louis fell

Louisville

For Louisville, revised payroll employment
for December 2008 is 613,800, down 3,400
jobs from the previous estimate. Revised
estimates from December 2007 to 2008 reveal
that job growth in Louisville fell 2.7 percent
over this period. This revised estimate of job
growth is a bit larger than the initial estimate
of –2.5 percent. The downward revision for
2007 data is also reflected in a slower estimate of growth for that year. The new data
show growth of 0.7 percent, compared with
1.1 percent in the earlier estimates.
Memphis

In Memphis, employment growth for
2008 was unaffected by the revisions, but
only because a dramatic downward revision
affected both December 2008 and December
2007. For both months, the revised figures
show 5,500 fewer jobs than did the unrevised data. The revised data show a total
of 633,500 jobs in the Memphis area at the

A Tale of Two Data Sets

Metro-Area Employment changes
December 2007-December 2008

Large Metro Areas

Original Estimate as of
January 2009

December 2006-December 2007

Revised Estimate as of
March 2009

Original Estimate as of
January 2009

Current Employment Statistics (CES) is a

Revised Estimate as of
March 2009

monthly survey that is compiled from information from about 160,000 businesses and

Thousands of Jobs
Lost or Gained

Percent
Change

Thousands of Jobs
Lost or Gained

Percent
Change

Thousands of Jobs
Lost or Gained

Percent
Change

Thousands of Jobs
Lost or Gained

Percent
Change

Little RockN. Little Rock, Ark.

–5.8

–1.7

– 4.7

–1.3

5.2

1.5

5.0

1.5

Louisville, Ky.-Ind.

–16.1

–2.5

–16.9

–2.7

6.9

1.1

4.3

0.7

hundreds of thousands of employers, these

Memphis, Tenn.Ark.-Miss.

–15.7

–2.4

–15.7

–2.4

5.4

0.8

– 0.1

0.0

employers make up only a small percentage of

St. Louis, Mo.-Ill.

–23.0

–1.7

–19.8

–1.4

2.0

0.1

6.7

0.5

Small and Medium Metro Areas

government agencies, representing approximately 400,000 individual work sites around
the United States. Although the survey covers

all businesses and work sites in the country.
The Quarterly Census of Employment and
Wages (QCEW) is a tabulation of employment

Fayetteville-SpringdaleRogers, Ark.

–2.5

–1.2

– 2.6

–1.2

0.9

0.4

1.2

0.6

information for workers covered by state and

Fort Smith, Ark.-Okla.

–1.6

–1.3

–1.4

–1.1

1.7

1.4

2.1

1.7

federal unemployment insurance programs.

Texarkana, Texas-Ark.

1.2

2.1

0.9

1.6

0.7

1.2

0.9

1.6

As its name suggests, the QCEW is a census

Bowling Green, Ky.

– 0.8

–1.3

–1.5

– 2.4

1.8

2.9

1.6

2.6

that achieves nearly 100 percent sampling

Evansville, Ind.-Ky.

– 2.5

–1.4

– 4.6

– 2.6

1.4

0.8

– 0.2

– 0.1

of the nation’s employment and is, therefore,

Jackson, Tenn.

– 0.9

–1.4

–1.7

– 2.7

0.3

0.5

0.0

0.0

very accurate. Lags in the compilation of the

Columbia, Mo.

0.0

0.0

1.1

1.2

1.0

1.1

– 0.1

– 0.1

data, however, mean that the QCEW is not a

–1.0

–1.2

– 0.7

– 0.9

1.5

1.9

1.5

1.9

very good source for up-to-date information.

0.1

0.1

– 4.6

– 2.3

5.2

2.6

4.4

2.2

Jefferson City, Mo.
Springfield, Mo.

To bridge the gap, the Bureau of Labor Statistics (BLS) needs to augment the CES with

SOURCE: Bureau of Labor Statistics

The table shows how the estimates of jobs lost and gained changed between January and March 2009. For example, according to the estimate released in January 2009, the St. Louis MSA had lost 23,000 jobs between December 2007 and December
2008, and it had gained 2,000 jobs between December 2006 and December 2007. But, according to the revised estimate
that was released in March 2009, the St. Louis MSA had lost 19,800 jobs between December 2007 and December 2008, and
it had gained 6,700 jobs between December 2006 and December 2007.

an estimate of the number of establishments
in the area. This can be difficult: When the
economy is going into a recession, for example, old firms might be going out of business,
while the formation of new firms might be
slowing. The BLS doesn’t find out about the

end of 2008. The revisions had a substantial impact on job growth in 2007. Before
the revision, the data showed an expansion
of 5,400 jobs over the year, amounting to a
growth rate of 0.8 percent. After the revision,
2007 employment appears to have been stagnant, with a net decline of about 100 jobs.
Little Rock

Of the four major metro areas in the
District, Little Rock has fared the best over
the past two years, and the revised data do
little to change that perception. Revised
data for December 2008 show total employment of 345,900 jobs in the metro area, an
upward revision of 900 jobs. The revision
for December 2007 represented only a slight
decrease compared with the pre-revision
levels. As a result, Little Rock employment
growth for 2007 is essentially unchanged at
1.5 percent. For 2008, the new data show
smaller job losses than previously estimated.
Employment is now measured at –1.3 percent
for the year, compared with –1.7 percent in
the pre-revision estimates.

Small and Medium Metro Areas

Several of the smaller metro areas in the
District experienced downward revisions
for both years. Data for Bowling Green,
Ky., Evansville, Ind., Jackson, Tenn., and
Springfield, Mo., all show downward revisions for growth in 2007 and 2008. Data for
Texarkana were revised downward for 2008,
but job growth in that metro area remains
positive for both years. The revisions also
show positive job growth for Columbia, Mo.,
in 2008, but only because data for 2007 were
revised sharply downward. Employment in
Jefferson City, Mo., was unaffected by the
revisions for 2007, but job losses were revised
downward in 2008. In Fort Smith and the
Fayetteville areas of Arkansas, small upward
revisions for 2007 were balanced by downward revisions in 2008.

changes until the unemployment insurance
records are updated, which can take several
months or more. This lag is compounded by
the fact that small firms, which provide the
bulk of jobs, might need to provide unemployment insurance information only once a
year rather than monthly or quarterly, as is
required of larger firms.
Because of the lags and revisions to the
QCEW data, the annual benchmarking affects
employment data from the CES going back
21 months. Consequently, the estimates that
were released in March have affected the
yearly employment changes for 2007 and
2008. Note also that the estimates for job
growth in 2008 will change again in March
2010, when the data for 2008 will once
again be revised in the annual benchmark
revision process.

Thomas A. Garrett and Michael R. Pakko are
economists at the Federal Reserve Bank of
St. Louis. Luke Shimek provided research
assistance.
The Regional Economist | www.stlouisfed.org 25

R e a d e r

e x c h a n g e

ask AN economist

Portfolios if stock goes up to $35

Bill Emmons is an assistant vice president
and economist at the St. Louis Fed.
For more on him and his work, see
www.stlouisfed.org/banking/PDFs/CVs/
Emmons_vitae.pdf.

Cash

Stock

Investor A

Options

Total

$35

Investor B

$35

Investor C

$5

$35
$35

$35

$40

Complex payoffs. To see how complex payoff patterns can be on options,
consider some other possible stock-price changes. If the stock price stays the
same or falls, investor A will not exercise his call option, letting it expire worthless. Investor B will suffer any decline in stock price, but would get to keep
the $5 option premium paid by Investor A. Investor C simply would suffer the
stock-price decline.

—Christopher Schlie, accounting student at the University of Cincinnati
Yes, derivatives are financial weapons of mass destruction. Firms and
individual investors can lose a lot of money very quickly. But you can also
lose everything you invest in a single day in stocks and bonds. For that
matter, any other kind of asset—including your house, car or a painting—
can decline rapidly in value, too. Yet, the vast majority of derivatives traders
and end-users do not complain, either because the contracts are useful in
hedging risks or because they have consciously chosen to speculate using
derivatives.
Why did Mr. Buffett make a special point about derivatives being financial
weapons of mass destruction? Most likely, he meant to highlight at least
three features of derivatives that distinguish them from other assets: 1) they
contain a great deal of “implicit” leverage, 2) they often have very complex
payoff patterns and 3) they lack transparency when they are traded over the
counter (OTC), or away from an organized exchange.
Leverage. A futures contract or an option contract (two important
types of derivatives) automatically leverages, or multiplies, an investor’s
exposure to the underlying risk. The price of an option on a share of stock,
for example, can be much lower than the price of the stock itself, while the
potential profit or loss per share is the same in dollar terms. Given the
smaller initial investment, the option contract multiplies the gain or loss in
percentage terms.
To illustrate, suppose there are three investors, A, B, and C, each with $30
in cash. Investors B and C each buy a share of a stock for $25. Investor A
pays investor B $5 for a call option that gives A the right to buy a share of
the stock currently worth $25 from B at that price either today or tomorrow.
Portfolios at end of first day

Cash

Stock

Investor A

$25

Investor B

$10

$25

Investor C

$5

$25

Options

Total

$5

$30

–$5

$30
$30

If the stock price goes up $10 tomorrow, to $35, A can acquire a share for
$25 by exercising his option. A would make a net gain of $5 (after deducting
the $5 cost of the option)—not bad for a $5 investment. Investors B and C
had to invest $25 to earn net gains of $5 and $10, respectively.
26 The Regional Economist | April 2009

Cash

Investor A

$25

Investor B

$10

$15

$25

Investor C

$5

$15

$20

Cash

Stock

Portfolios if stock goes down to $5

Stock

Options

Total
$25

Options

Total

Investor A

$25

Investor B

$10

$5

$15

Investor C

$5

$5

$10

$25

Because the stock price could go up quite a bit as well as down, consider a
$20 stock-price increase.
Portfolios if stock goes up to $45

Cash

Stock

Investor A

Options

Total

$45

Investor B

$30

Investor C

$5

$45
$30

$45

$50

Investor C appears to have the riskiest portfolio while the option traded
between Investors A and B appears to have damped down the volatility of
their portfolios. Yet the option-trading investors have portfolios with complex
relationships to the stock price itself, as the chart below illustrates. Investor
C’s portfolio returns rise and fall smoothly with increases and decreases in
the stock price. Investors A and B experience portfolio returns that are much
more difficult to describe—they are more like hockey sticks than straight lines.

Portfolio Payoffs
100
PERCENT RETURN ON INITIAL $30 PORTFOLIO

Warren Buffett described some derivatives as “financial
weapons of mass destruction.” ¹ In light of recent events
on Wall Street, does The Regional Economist agree?

Portfolios if stock goes down to $15

75
50
25
0
–25
Investor A: Option buyer

–50

Investor B: Option seller

–75
–100

Investor C: Stock owner

0

5

10

15

20

25

30

ENDING STOCK PRICE IN DOLLARS

35

40

45

50

Lack of transparency. The amount of derivatives trading that occurs on
an organized exchange such as the Chicago Mercantile Exchange is public
information. In OTC derivatives markets, there is no central counterparty
and no reporting requirement. Therefore, there is no way to know how
many contracts of a particular type actually are being traded at any given
time. In some cases, the amount of derivatives trading may far exceed the
amount of trading in an underlying asset. Because derivatives contracts are
“zero-sum” (for every winner, there is a loser), they can be created without
limit and, in some cases, without the consent of the issuer of a security on
which the derivatives are based. The result is that the OTC derivatives markets are not very transparent and, therefore, can yield some nasty surprises.
So Warren Buffett is absolutely correct that derivatives are financial weapons of mass destruction. Like real weapons, they can be extremely damaging if used imprudently. Fortunately, most derivatives traders and end-users
are fully aware of the danger.
1 See pp. 13-15 of Berkshire Hathaway’s 2002 Annual Report at

www.berkshirehathaway.com/2002ar/2002ar.pdf.

Fed Flash Poll Results

Whenever a new issue of The Regional Economist is published, a new poll is
posted on the Bank’s home page, www.stlouisfed.org. The poll question is
always pegged to an article in that quarter’s issue. Here are the results of the
poll that went with the January issue. The question stemmed from the article
“Deficits, Debt and Looming Disaster.”
What would you do to trim the
debt and deficit?

10%
14%

46%

	Raise taxes to pay for current government programs.
Cut government spending across the board.
Do nothing. Allow deficit spending to continue.

16%

	Reform Social Security and Medicare,
focusing on revenue increases.
	Reform Social Security and Medicare,

802 responses as of 3/17/2009

4%

focusing on benefit reductions.

This issue’s poll question:

Letters to the Editor

These are in response to January’s article titled “Deficits, Debt and
Looming Disaster.”
Dear Editor:
The article seemed honest and sincere. My only comment, which is
general, is that most of the conversation is not dealing with the dire straits
we find ourselves in. The media is cheerleading and hoping that people
in America suspend reality. Our markets are in turmoil, and no amount of
bailouts for the banks is going to change this reality. We must either tell the
truth or face the consequences. Unemployment of millions of our populace
is neither a Democratic nor a Republican issue. It is a human issue. Let’s
tell America where we really stand and pull ourselves out of this hole.
—Leon Fainstadt, an insurance salesman and artist in Los Angeles
Dear Editor:
Thanks for your article in the January issue of The Regional Economist.
It is nicely juxtaposed to Mr. Bullard’s article on the “lender of last resort,”
the Federal Reserve Bank. We are told that the current economic crisis
is the most dangerous since the ’30s. It seems that a difference between
then and now is the nature of the currency—then it was real money, now
fiat money; then a store of value, now a medium of exchange. It is national
policy to reduce the exchange value of the currency at an annual rate of
2 to 3 percent. How does this change in the nature of the currency alter
possible policy options in managing the current crisis, what does it mean
in assessing the severity of both national debt and national deficit at future
dates and what does it imply about solutions to the future liabilities of Social
Security, Medicare and other promises of the government to pay?
—John F. Lindeman, M.D., of Chesterfield, Mo.

The following is related to the poll that went with the “Deficits, Debt and
Looming Disaster” article. See poll results to the right.
Dear Editor:
I went to the web site to participate in the current issue poll. The choices
were limited. What about these?

What motivates your company to be socially responsible?
1. Altruism. Doing the right thing is as important as profits.
2. Pressure. Our customer base is forcing us to do this.
3. Profits. If people feel good about our corporate image, they will buy more of
our product.
4. Huh? Our only responsibility is to our stockholders
After reading “Corporate Social Responsibility Can Be Profitable,” go to
www.stlouisfed.org to vote. Anyone can vote, but please do so only once.
(This is not a scientific poll.)

“There are numerous monetary ways the federal government can
deal with the country’s current economic maladies.
1.	Do nothing.
2.	Tax and lend and receive money and interest back, with no debt.
3.	Tax and lend interest-free, receive money back, with no debt.
4.	Tax and grant, receive no money back, with no debt.
5. Borrow and lend interest-free, receive money back, pay debt back plus
		interest.
6. Borrow and lend, receive interest and money back, pay debt back plus
		interest.
7. Borrow and grant, receive no money back, pay debt back plus interest.
8.	Create money and grant, receive no money back, no debt, pay no interest.
9.	Create money and lend interest-free, receive money back, no debt, pay no
		interest.
10.	Create money and lend, receive interest, receive money and interest back,
		no debt, pay no interest.
Congress and the executive can do any of the above singularly or any combination. All of these alternatives are identified in OUR Constitution. See Article
I, Section 8, Clauses 1,2 and 5.”
Personally, I favor items 8 and 9, with item 8 for infrastructure and educational projects and item 9 for all other projects. To learn more, see http://
createmoney-saveoureconomy-reducefederaldebt.net.
			
—Patsy Campbell of Murphysboro, Ill., retired from
			
county health department as business manager
The Regional Economist | www.stlouisfed.org 27

PRSRT STD
US POSTAGE
PAID

ST LOUIS MO
PERMIT NO 444

n e x t

i s s u e

Is the Nation’s Infrastructure
in Dire Need of Repair?
Many commentators suggested that the
Minneapolis bridge collapse in 2007 was
a symbol of a crumbling infrastructure
across the nation. Now, in 2009, Congress
and the Obama administration are proposing to spend tens of billions of dollars
on infrastructure improvements and additions. In the St. Louis area alone, the wish
list includes a new bridge over the Mississippi River and an expansion of MetroLink,
the light-rail public transportation system.
In the July issue of The Regional Economist,
economist Kevin Kliesen examines the
economics of public infrastructure investment. Are we building bridges to nowhere
or toward the future?

economy at a

The Regional

glance

Economist

april 2009

REAL GDP GROWTH

|

VOL. 17, NO. 2

CONSUMER PRICE INDEX

8

6.0

6
4.0

2

PERCENT

PERCENT

4

0
–2

2.0

0.0

–4

CPI–All Items

–6
–8

03

04

05

06

07

–2.0

08

February

04

NOTE: Each bar is a one-quarter growth rate (annualized);
the red line is the 10-year growth rate.

1.00

2

0.80

PERCENT

PERCENT

1
0
–1
20-Year
March 13

05

06

07

08

10/29/08

3/17/09

Mar. 09 Apr. 09 May 09 Jun. 09 Jul. 09 Aug. 09

I N T E R E S T R AT E S

6
5

8.0
7.5

4

7.0
6.5
6.0
5.5
5.0

PERCENT

PERCENT

1/28/09

CONTRACT MONTHS

9.0
8.5

3
10-Year Treasury

2
Fed Funds Target

1
1-Year Treasury

February

04

05

06

07

08

0

09

NOTE: Beginning in January 2003, household data reflect revised
population controls used in the Current Population Survey.

U . S . A G R I C U LT U R A L T R A D E

04

05

06

February

07

08

09

NOTE: On Dec. 16, 2008, the FOMC set a target range for the
federal funds rate of 0 to 0.25 percent. The observations
plotted since then are the midpoint of the range (0.125 percent).

FA R M I N G C A S H R E C E I P T S

75

190
Exports

Imports

Trade Balance

60

170
BILLIONS OF DOLLARS

BILLIONS OF DOLLARS

12/16/08

0.40

0.00

09

C I V I L I A N U N E M P L O Y M E N T R AT E

45
30
15
0

09

0.60

NOTE: Weekly data.

4.5
4.0

08

0.20

–2
–3

07

RATES ON FEDERAL FUNDS FUTURES ON SELECTED DATES

3

10-Year

06

05

NOTE: Percent change from a year earlier.

I N F L AT I O N - I N D E X E D T R E A S U RY Y I E L D S P R E A D S

5-Year

All Items Less Food and Energy

Crops

Livestock

150
130
110

January

04

05

06

07

08

NOTE: Data are aggregated over the past 12 months.

09

90

November

03

04

05

06

07

NOTE: Data are aggregated over the past 12 months.

08

U.S. CROP AND LIVESTOCK PRICES / INDEX 1990-92=100
195
Crops

Livestock

175
155
135
115
95
75

February

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

commercial bank performance ratios
U . S . B an k s by A sset S i z e / F O U R T H Q U A R T E R 2 0 0 8

All

$100 million­$300 million

Less than
$300 million

$300 million$1 billion

Less than
$1 billion

$1 billion$15 billion

Less than
$15 billion

More than
$15 billion

Return on Average Assets*

0.22

0.50

0.44

0.31

0.38

-0.07

0.14

0.25

Net Interest Margin*

3.15

3.91

3.94

3.84

3.89

3.83

3.86

2.94

Nonperforming Loan Ratio

2.94

2.22

2.13

2.58

2.37

2.89

2.64

3.06

Loan Loss Reserve Ratio

2.30

1.39

1.40

1.51

1.45

1.89

1.69

2.53

R E T U R N O N AV E R A G E A S S E T S *
0.34

NET INTEREST MARGIN*

0.87
0.77
0.69

1.03
0.86

1.01

0.78
0.05

1.10
0.96

3.66
3.56

Illinois

3.83
3.68

Indiana

3.89
3.85

Kentucky

3.93
4.08

Mississippi
3.56

Missouri

–0.06

.25

.50

.75

1.00 1.25

PERCENT

N O N P E R F O R M I N G L O A N R AT I O

1.63

1.0

1.5

2.0

Eighth District

1.22
1.03
2.61

4.5

1.13

1.18
1.17
1.36
1.20

Mississippi
2.17

Missouri
4.37

.00 .50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

1.43

Tennessee
PERCENT

1.63

1.17

Kentucky

Fourth Quarter 2008

4.0

1.26
1.19

Indiana

1.25
1.15

1.89

3.5

1.51
1.58

Illinois

1.35

3.0

1.78

1.35

Arkansas

3.10

0.97

2.5

L O A N L O S S R E S E RV E R AT I O

2.19

1.66

3.89

3.23
3.23

Tennessee

–.75 –.50 –.25 .00

0.55

4.05
4.01

Arkansas

0.98

0.0

–0.38

3.69
3.76

Eighth District

0.74

1.71
3.09

1.28

.00

.50

1.00

1.50

2.00

2.50

3.00 3.50

Fourth Quarter 2007

NOTE: Data include only that portion of the state within Eighth District boundaries.
SOURCE: FFIEC Reports of Condition and Income for all Insured U.S. Commercial Banks
* Annualized data

For additional banking and regional data, visit our web site at:
http://research.stlouisfed.org/fred2/categories/133.

regional economic indicators
nonfarm employment growth * / F O U R T H Q U A R T E R 2 0 0 8
year-over-year percent changE
United
States

Eighth
District †

Arkansas

Illinois

Indiana

Kentucky

Mississippi

Missouri

Tennessee

–1.6%

–1.7%

–0.6%

–1.7%

–2.1%

–1.9%

–2.1%

–0.7%

–2.3%

7.9

6.0

12.9

3.3

0.5

14.0

–2.1

–11.9

NA†

Construction

–7.6

–6.3

0.9

–8.2

–9.2

–5.6

–2.9

–4.4

NA†

Manufacturing

–4.9

–5.7

–4.2

–3.3

–7.9

–6.8

–7.5

–5.3

–6.5

Trade/Transportation/Utilities

–2.6

–2.6

–3.2

–2.3

–2.2

–2.3

–3.2

–2.2

–3.8

Information

–2.2

–2.0

–5.7

–1.6

–1.8

–1.3

–1.0

–0.2

–4.2

Financial Activities

–2.4

–2.0

–2.8

–2.8

–2.9

0.3

–2.3

–1.3

–0.8

Professional & Business Services

–3.0

–2.8

–0.9

–3.6

–4.2

–3.5

–2.3

0.9

–3.5

2.8

2.4

2.8

2.3

3.8

1.7

–0.3

2.3

2.8

–1.3

–0.7

1.8

–2.0

1.3

0.2

–2.8

–0.4

–0.8

Other Services

0.1

–0.5

0.2

0.7

–1.1

–2.5

–0.9

0.4

–2.6

Government

1.0

0.9

1.9

0.5

1.4

–1.0

2.1

1.3

0.7

Total Nonagricultural
Natural Resources/Mining

Educational & Health Services
Leisure & Hospitality

* NOTE: Nonfarm payroll employment series have been converted from the 1987 Standard Classification (SIC) system
basis to a 2002 North American Industry Classification (NAICS) basis.
†

E ighth District growth rates are calculated from the sums of the seven states. For Natural Resources/Mining and Construction categories, the data exclude
Tennessee (for which data on these individual sectors is no longer available).

U nemployment R ates

Eighth District Payroll
employment by industry-2008

IV/2008

III/2008

IV/2007

6.9%

6.1%

4.8%

United States
Arkansas

5.5

5.1

5.0

Illinois

7.0

6.7

5.5

Indiana

7.1

6.0

4.6

Kentucky

7.2

6.7

5.4

Mississippi

7.5

7.3

6.2

Missouri

6.8

6.2

5.3

Tennessee

7.2

6.7

5.3

Information 1.8%

Financial Activities 5.5%
Professional and
Business Services

11.8%
Trade
Transportation
Utilities

Education and
Health Services

13.3%

20.2%

9.5%

Leisure and
Hospitality

13.0%

Manufacturing

15.8%
Other Services 4.1%

Construction 4.7%
Natural Resources
and Mining 0.4%

Government

NOTE: The percentages are calculated from the sums of the seven district states.
For Tennessee, construction is no longer reported separately from natural resources/
mining; so, the total of the two is included here in the construction category.

H ousing permits / fourth quarter

R E A L P E R S O N A L I N C O M E * / fourth Q U A RT E R

year-over-year percent change in year-to-date levels

year-over-year percent change

–35.3

–16.0
–20.0
–48.7

4.5
–30.1

2007

All data are seasonally adjusted unless otherwise noted.

0.9
1.0

Mississippi

0.8

Missouri

0.8
0.3

Tennessee

–19.8

–50 –45 –40 –35 –30 –25 –20 –15 –10 –5 0

3.9

Kentucky

–8.3

–39.3

2008

0.0

Indiana

–14.8

–38.6

–40.1

4.7
0.2

Illinois

–27.7

5 10

2.1

–0.7

Arkansas

–27.8
–31.5

0.5

United States

–24.9

PERCENT

–2

–1
2008

0

1.4
2.5
2.1
1.6

1

2

3

4

5

2007

*NOTE: Real personal income is personal income divided by the PCE
chained price index.

6