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The Regional Economist - July 2010 - Federal Reserve Bank of St. Louis

The Regional Economist - July 2010 - Federal Reserve Bank of St. Louis

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Published by: Federal Reserve Bank of St. Louis on Jul 14, 2010
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The Federal reserve Bank F sT. luis
ameriCa’s eConomy
Hard-to-Get Oil
Stuck in a Rock 
a Hard Place
More Such Companies Hailfrom Emerging Economies
 A Quarterly Reviewof Business and Economic Conditions
Vol. 18, No. 3
 July 2010
A Bleak 30 Yearsfor Black Men
Economic Progress WasSlim in Urban America
The Regional Economist
 July 2010
A Bleak 30 Years for Black Men
By Natalia Kolesnikova and Yang Liu
Between 1970 and 2000, black men in urban America made very little economic progress. In many ways, they werestill worse o than white men 35 years aer passage of theCivil Rights Act. A decline in manufacturing and relatively low levels of education were contributing factors.
The Regional Economist 
is publishedquarterly by the Research and PublicAffairs departments of the FederalReserve Bank of t. Louis. It addressesthe national, international and reionaleconomic issues of the day, particularlyas they apply to states in the ihthFederal Reserve District. Viewsexpressed are not necessarily thoseof the t. Louis Fed or of the FederalReserve ystem.Please direct your comments toubhayu Bandyopadhyay at 314-444-7425 or by e-mail at subhayu.bandyopadhyay@stls.frb.or. You canalso write to him at the address below.ubmission of a letter to the editorives us the riht to post it to our website and/or publish it in
The RegionalEconomist 
unless the writer statesotherwise. We reserve the riht to editletters for clarity and lenth.
Director of Research
hristopher J. Waller
Senior Policy Adviser
Robert H. Rasche
Deputy Director of Research
letus . ouhlin
ubhayu Bandyopadhyay
Managing Editor
Al tamborski
Art Director
Joni Williamsinle-copy subscriptions are free.o subscribe, e-mail carol.a.musser@stls.frb.or or sin up via www.stlouisfed.or/publications. You canalso write to
The Regional Economist 
,Public Affairs fce, Federal ReserveBank of t. Louis, Box 442, t. Louis,M 63166.
The Eighth Federal Reserve District
 includes all of Arkansas, easternMissouri, southern Illinois and Indiana,western Kentucky and ennessee, andnorthern Mississippi. he ihth Districtofces are in Little Rock, Louisville,Memphis and t. Louis. 
The Regional
 JULY 2010
VL. 18, . 3
 AQuarterlyReviewofBusinessand EconomicConditions
A Bleak 30 Yearsfor Black Men
Economic Progress WasSlim in Urban America
covr: © do mo/corb
3 PRID’ MAg10
Breaking the Cycle 
By Brett Fawley and Luciana Juvenal 
A program that pays poor, ruralMexican families to keep theirchildren in school didn’t translatewell to New York City. Te latter’s version will end this summer.Comparing the two programs,though, is problematic.
Early Childhood Education
By Rob Grunewald and Arthur J. Rolnick
High-quality early childhoodprograms, particularly for childrenat risk, result not only in economicgains for the children as they growup, but in savings on taxes, studieshave shown.
UnconventionalOil Production
By Kristie Engemannand Michael Owyang 
Oil can be derived from oil sands andoil shale, but the job is both economi-cally and environmentally costly.How high must the price of oil bein order to make these alternativescost-eective?
By Silvio Contessiand Hoda El-Ghazaly
Increasingly, these companies arehailing from emerging economies.Teir share of the foreign invest-ment pie grew from 0.4 percentin 1970 to 15.8 percent in 2008.What’s behind the growth?
Flight to Safety
By Bryan Noethand Rajdeep Sengupta
As in most crises, investors turnedto reasuries in droves over thepast couple of years, even as yieldsdeclined.
20 MMUIY PRFIL
Union City, Tenn.
By Susan C. Tomson
Tis town in the western part of thestate, along with surrounding coun-ties, is pinning its hopes on beinga transportation hub. Te areaalso benets from lots of old family money that is being used forpublic betterment, an examplebeing the planned Discovery Park of America.
23 AIAL VRVIW
Economy GainsMomentum
By Kevin L. Kliesen
Although the trajectory hasbeen atter and the ride a littlebumpier than usual, the U.S.economy continues to gainmomentum.
24 DIRI VRVIW
Real Estate Prices
By Alejandro Badel and Christopher Martinek
Nationally, home prices havefallen 15 percent from theirpeak. In the District, they’vefallen only 5 percent. Shouldthey be falling more in theDistrict?
26 MY A A gLA27 RADR HAg
The Regional Economist
 James Bullard
, President and Federal Reserve Bank of t. Louis
Te Long and Winding Road to Regulatory Reform
PRID’ MAg
ongress has taken steps to reform ournancial system, a dicult and complextask. As of this writing, only the rst stepshave been taken: Initial legislation has yet tobe nalized, and more reforms are needed if we are to prevent future crises.At the top of my list of additional reformsis an overhaul of Fannie Mae and FreddieMac, the government-sponsored enterprisesthat were at the center of the recent crisis.Teir actions severely damaged the mortgagemarket, forced both institutions into conser- vatorship and will require ongoing large bail-outs with taxpayer funds. At a minimum, weneed to break up these GSEs—perhaps intoregional companies—to open up the marketto private players and restructure the incen-tives under which they operate. Legislatorshave promised to deal with the GSE problemslater this year.Next, we need to nd a way to prevent runson major nonbank nancial institutions, theso-called shadow banking sector. Beforethe crisis, regulators were not concernedwith the possibility of such runs. Te morefamiliar type of run—bank runs by deposi-tors—has occurred numerous times in oureconomic history, but deposit insurance hassuccessfully thwarted such panics since itwas introduced in the 1930s. No one thoughtthat secured creditors of companies suchas Bear Stearns, AIG and GMAC wouldabruptly abandon their repurchase agree-ments, threatening not only the viability of these companies but also the stability of global nancial markets. Deposit insuranceis not eective here since these rms do nottake deposits. Stricter capital requirementshave been proposed as a backstop againstexcessive risk-taking in the future, but capitalrequirements alone will not prevent runs.Extremely large, globally interconnectednancial rms are also part of the “too bigto fail” conundrum. I can understand theopposition to bailing out these companies.But if we allow abrupt failure, panic willlikely ensue, costing society more than wouldalmost any bailout. We need to nd a way to unwind these companies in an orderly fashion, similar to the way troubled smallerbanks are now quickly and quietly takenover. Te proposed legislation does set up aliquidation facility for large nancial rms.Tat facility will probably not gain credibility until it is actually used—until then, we likely have to live with “too big to fail.”Another segment of the nancial systemthat needs an overhaul is the credit ratingagencies. Tese agencies provided invest-ment-grade ratings to portfolios of risky mortgages that later turned out to be worth very little. Te ratings ination was fueled by laws requiring huge institutional investors tobuy only highly rated securities. In addition,the agencies depended on income from the very companies whose securities they werebeing asked to rate. Competition among theraters was severely limited. Clearly, a freshstart is needed here.Moreover, some of the proposals in thepending legislation remain problematic. Forexample, I am not convinced that a council of regulators and political appointees can eec-tively oversee systemic risks. Preventing therecent crisis would have required that sucha committee have (i) the insight to recognizethe housing bubble ve years ago, (ii) theability to agree on the appropriate course of action and (iii) the authority and fortitudeto implement regulatory policies to stabilizethe situation. Such actions would have been very unpopular at the time, given publicpolicies aimed at supporting greater homeownership and given that everyone—themortgage originator, the mortgage investor,the homeowner, home builders and so on—seemed to be beneting from the boom. TeFed, with an arm’s-length separation fromdaily politics and a long-term view of theeconomy, may be a better candidate to moni-tor systemic risk.Te proposal for a new consumer nancialprotection agency also needs honing. I sup-port the intention of the proposed legislation,but if this agency is going to be housed in theFed, it needs to be accountable to the Fed. If not, it should stand on its own.As we continue to reform our nancialsystem, we must keep in mind two additionalfacts. First, nancial markets are global. Wewill need the cooperation of regulators inother countries if we are to prevent crises.Such cooperation may not come easily. Sec-ond, the nancial system is not just the bank-ing system. As the recent crisis illustrates,nonbanks—the GSEs, the investment banks,the insurance conglomerates—are as muchof a concern, if not more so, than the banks.We must take into account and regulate theentire nancial landscape. Success at thistask is still far down the road.
The Fed, with an arm’s-lengthseparation from daily politicsand a long-term view of the economy, may be abetter candidate to monitorsystemic risk.

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