Greatly Strengthened Banking SystemAided Economy Since Early 1990s
By Bill Poole, president of the Federal Reserve Bank of St. Louis
This is the last Feditorial by Bill Poole, who retires from the Fed March 31.
etween the end o the brie 1990-91 reces-sion and the ourth quarter o 2007, a spano 67 quarters, the U.S. economy experi-enced only three quarters o decline in real grossdomestic product (GDP). The down quarters wereewer than 5 percent o the total. During the prior 44 years, 19 percent o the quarters (33 out o 176)saw a decline in real GDP. No wonder we call theperiod since 1991 the Great Moderation.The general agreement is that during the GreatModeration, improved inventory managementamong businesses and better Fed monetary policyprobably played some role. Some observers believewe also have been lucky because we haven’t acedeconomic shocks like those o the 1970s, includingoil embargoes and grain harvest ailures.My view is that good luck fows rom good policy.The U.S. economy
aced serious nancial andeconomic shocks in recent years, but despite themhas been more stable than in the past. Consider some o the shocks: emerging-market debt crises in1994 (Mexico) and 1997-98 (Asia); nancial marketturbulence when short-term interest rates rose sharply(1994-95) and when the large hedge und Long-TermCapital Management imploded (1998); and, o course,the terrorist attacks o Sept. 11. The bursting o thehigh-tech stock-market bubble (2000-02) causedripple eects throughout the economy and nancialmarkets. Since late 2001, the oil price has quintupledto nearly $100 per barrel. Other commodity pricesalso have risen strongly in recent years. The dollar hasbeen volatile. And, today, we are acing a potentiallyhistoric correction in the housing market at the sametime that credit markets are experiencing unusualstrains rom deaults on subprime mortgages.A notable aspect o the U.S. economy’s improvedperormance since the early 1990s, despite manyshocks, is a greatly strengthened banking system.As the nation’s central bank, we are keenly aware o the importance o strong depository institutions inwhich the public justiably can place its condence.It was not always so. Failures o banks and thritsaveraged 255 per year between 1982 and 1992—anaverage o more than 21 every
Many o thebanks and thrits that survived the 1980s and early1990s were under stress; the economic recovery romthe 1990-91 recession was hampered by a creditcrunch—reduced credit availability or marginal andeven some strong borrowers.The bank ailures themselves weeded out many o the unsound bankers and thrit managers who oper-ated during the 1980s. Those who remained under-stood that higher ratios o bank capital to assets wouldbe necessary to survive and prosper in the uture.New legislation and bank regulations reinorcedthis newound nancial discipline. Bank ailuresduring 1997-2007 averaged only our per year.Bank protability has been consistently strong sincethe early 1990s, encouraging hundreds o newbanks to begin operations. Bank-lending growthhas comortably exceeded and, thereore, supportedGDP growth or most o the past 15 years.There is no reason to expect that we will be anymore or less lucky than those who came beore.We should expect to ace our share o economicand nancial challenges. A strong, well-capitalizedbanking system subject to well-designed prudentialsupervision increases the economy’s resilience. Lowinfation rom sound monetary policy and soundbanking practices will go a long way in creatingthe good luck the economy needs.
Data on bank and thrit ailures are available at www2.dic.gov/hsob/SelectRpt.asp?EntryTyp=30.
w w w . s t l o u i s f e d . o r g
Fostering innovation in community development among banks and otherentities is the goal o the St. Louis Fed’s Exploring Innovation Week, April 14-18.The event stems rom last May’s Exploring Innovation conerence, whichconcentrated mainly on community development nance. The Bank’s Com-munity Development department is planning various activities throughout theDistrict, including speeches, resource airs and workshops on topics such asinnovation in housing nance and new ways to promote entrepreneurship.For more inormation, call these Fed sta:
Matthew Ashby, 314-444-8891
Amy Simpkins, 501-324-8268
Faith Weekly, 502-568-9216
Kathy Moore Cowan, 901-579-4103Visit www.exploringinnovation.org or more inormation.
Fed Invites Banks To Explore Innovation in Community Development