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Regional Economist - October 2010

Regional Economist - October 2010

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Categories:Types, Research
Published by: Federal Reserve Bank of St. Louis on Oct 19, 2010
Copyright:Attribution Non-commercial


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 A Quarterly Reviewof Business and Economic Conditions
Vol. 18, No. 4
October 2010
The Federal reserve Bank F sT. luis
ameriCa’s eConomy
Monetary Policy
Te Costs and Benetsof Low Interest Rates
Government Debt
European Sovereign JittersGeographically Contained
The Dissenting Votes AreJust Part of the Story
Cove lluon: y Cmpbell
Europe’s SovereignDebt Woes
By Amalia Estenssoro
Te rapidly mounting debts of the governments of Greece andother European countries caughtpolicymakers o guard earlierthis year. Markets panickedamid fears of a nancial conta-gion. But a review of who holdsthe debt of these countries showsthat any contagion risk shouldbe conned to Europe.
Benets and Costsof Low Interest Rates
By Kevin L. Kliesen
On the plus side, low interestrates can spur spending by busi-nesses and households. Tey can also improve banks’ balancesheets and raise asset prices.But low interest rates discouragesaving and encourage people totake more risks when investing.
When a Sick EconomyCan Be Good for You
By Rubén Hernández-Murilloand Christopher J. Martinek
A recession, as long as it’s nottoo deep or too long, may begood for your health, recentstudies suggest.
Second Wind Needed
By Kevin L. Kliesen
Aer a burst of activity late lastyear and early this year, theeconomy hit the summer dol-drums. While growth prospectsare better for 2011, businessesremain hesitant to expand theirproductive capacity and hireadditional workers.
Tax Revenue CollectionsSlow Down Even More
By Subhayu Bandyopadhyayand Lowell R. Ricketts
ax revenue in the Eighth Districtstates this year has droppedmuch more, percentage-wise,than it has for the nation as awhole. Last scal year, theseseven states fared better thanthe national average.
The Difculty inComparing Incomeacross Countries
By Julieta Caunedo and Riccardo DiCecio
 Dierent currencies and dierentbaskets of goods—these are justsome of the problems in compar-ing incomes around the world.Economists are testing newmeasurements of growth, such asthe amount of light emanated atnight from a country, as seen by satellites.
Osceola, Ark.
By Susan C. Tomson
When enough factories shutdown, this community in north-eastern Arkansas sprang intoaction, coming up with enoughmoney to lure new industrialdevelopment.
c o n t e n t s
 AQuarterlyReviewofBusinessand EconomicConditions
The Federal reserve Bank F sT. luis
ameriCa’s eConomy
The Dissenting Votes AreJust Part of the Story
Disagreement at the FOMC
By Michael McCracken
Recently released data on economic forecasts madeby voting and nonvoting members of the FOMCsuggest that there has been more disagreement amongcommittee members than the voting record indicates.
The Regional Economist 
The RegionalEconomist 
Director of Research
Senior Policy Adviser
Deputy Director of Research
Managing Editor
Art Director
The Regional Economist 
The Eighth Federal Reserve District
The Regional
The Regional Economist
October 2010
 James Bullard
ecently the key concern in worldnancial markets has been the extentto which the sovereign debt crisis in Europeportends a global shock, possibly strongenough to upset the global recovery.Tere is no question that, in part as aresponse to the events of 2008 and 2009,many governments in Europe and elsewhereelected to increase decit spending and thusto increase their debt as a percentage of GDP.For some countries, starting from weak economic conditions, the increase in borrow-ing was so large as to call into question theirability and willingness to repay in interna-tional nancial markets. Condence lost insuch markets is dicult to regain, and for thisreason I think we can expect market concernsto remain for months, possibly years, ratherthan just days or weeks. Governments musttake aggressive action to earn credibility, andthen sustain that eort over a long period of time. I think that a well-run scal consolida-tion can be a net plus for economic growth,as it was in the U.S. during the 1990s.o be sure, sovereign debt crises are notat all unusual in the history of the globaleconomy. Nations oen have incentives toborrow internationally and are not alwayswilling to repay. Over the past 200 years,there have been at least 250 cases of a gov-ernment defaulting in whole or in part onits external debt. While sovereign debtrestructuring or outright default is oenassociated with substantial market volatil-ity—understandably, since some partiesare not getting repaid—the events are notnormally global recession triggers. A rela-tively recent and prominent example wasthe Russian default of 1998.Te agreement in Europe to provide fund-ing if necessary through a Special Purpose
Te European Debt Crisis: Lessons for the U.S.
p r e s i d e n t ’ s m e s s a g e
Vehicle backed by government guaranteesand through the IMF has provided timefor the aected countries to enact scalretrenchment programs. Tose programshave a good chance of success because theincentive for countries to keep unfetteredaccess to international nancial markets issubstantial. Even if a scal consolidationprogram does not go well in a particularcountry, so that a restructuring of debt hasto be attempted at some point in the future,restructuring is not unusual in globalnancial markets and can be accomplishedwithout signicant disruptions.One of the persistent worries duringthis crisis has been that some of the largestnancial institutions in the U.S. and Europemight be exposed to additional losses andthat a type of nancial contagion couldoccur should conditions worsen. I think this is a misreading of the events of the pasttwo years. U.S. and European policymak-ers have essentially guaranteed the largestnancial institutions. Tis has been theessence of the very controversial “too big tofail” policy. Te policy has clear problems,including its inherent unfairness and thefact that economic incentives for institutionsthat are guaranteed can be badly distorted.But to argue that governments would nowgive up these guarantees in the face of anew shock that could threaten the globaleconomy seems to me to be far-fetched.One important lesson from the Europeansovereign debt crisis, well-known in emerg-ing markets, is that borrowing on interna-tional markets is a delicate matter. Terecan be benets of such borrowing in somecircumstances, but too much can erodecredibility and lead to a crisis in the bor-rowing country. In short, countries cannotexpect to borrow internationally and use theproceeds to spend their way to prosperity.Te U.S. scal situation is dicult as well,with high decits and a growing debt-to-GDP ratio. Te U.S. has exemplary cred-ibility in international nancial markets,built up over many years. Now that the U.S.economy is about to achieve recovery inGDP terms, it is time for scal consolidationin the U.S. Irresponsibly high decit anddebt levels are not helping the U.S. economy and could damage future prospects througha loss of credibility internationally.
The Regional Economist

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