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Regional Economist - January 2011

Regional Economist - January 2011

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Published by: Federal Reserve Bank of St. Louis on Jan 31, 2011
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 A Quarterly Reviewof Business and Economic Conditions
Vol. 19, No. 1
 Jaa 2011
The Federal reserve Bank F sT. luis
ameriCa’s eConomy
Community Profle
Federal Grant, Higher TaxShore Up Kentucky City 
District Overview
Mortgage Delinquency RatesNot As Bad As National Average
A Close Look
Assistance Programsin the Wake o the Crisis
A Close Look
By Richard G. Anderson and Charles S. Gascon
During the fnancial crisis, an unprecedented amount o aidwas extended to companies, agencies and individuals by theTreasury, the Fed and the FDIC. is assistance was necessary and, in many cases, will return a proft to taxpayers.
The Regional
 JAnuAry 2011
VoL. 19, no. 1
3 president’s message11 nationaL oVerView
Foecastes Expect SolidGowth, Low Iatio
By Kevin L. Kliesen
e recovery rom the latest reces-sion has been lethargic, but thereare signs that the economy is poisedto pick up the pace. Consumer andbusiness spending have risen, as havestock prices and exports. Mean-while, yields on Treasury securitiesand mortgages remain low.
12 community profiLe
Owesboo, K.
By Susan C. Tomson
With the help o the ederal govern-ment, Owensboro stopped theerosion o its riverront and startedto redevelop not just the downtownbut its entire economy.
Teachig Teachesabot the Ecoom
By William Bosshardt,Paul Grimes and Mary Suiter 
Workshops put on or teachers by the Atlanta and St. Louis Feds arehaving the desired results, a recentassessment shows. Teachersare learning about the economy and personal fnance, and they are passing this inormation onto a student body that desperately needs it.
18 district oVerView
Motgage Cisis Is Mildei Distict tha i natio
By Subhayu Bandyopadhyayand Lowell R. Ricketts
e nation’s rate o serious delin-quencies has been worse than theDistrict’s or more than two years.However, there are pockets in theDistrict where the rate is much worsethan the current national average.
Have Hosig TedsHit the Bottom?
By Bryan Noethand Rajdeep Sengupta
On a national level, the number o  vacant homes is declining, as is thepercentage o mortgages in seriousdelinquency. However, the demandor housing hasn’t picked up, norhave prices.
22 economy at a gLance23 reader excange
The Regional Economist 
 blhql b h rh  pbla   h flrv Bk  s. L. i h l, l  l   h , ll h l    h ehhfl rv d. V   l h h s. L f   h flrv s.pl    sbh Bh  314-444-7425  b -l  bh.bh@l.b.. y l   h  h  bl.sb   l  h v  h h      b / blh  
The RegionalEconomist 
l h  h. w v h h  l  l  lh.
Director of Research
chh J. wll
Senior Policy Adviser
rb . rh
Deputy Director of Research
cl c. chl
Director of Public Affairs
K B
sbh Bh
Managing Editor
al sbk
Art Director
J wllsl- b  .t bb, -l l..@l.b.    v .l./bl. y l  
The Regional Economist 
,pbl a o, fl rvBk  s. L, B 442, s. L,mo 63166.
The Eighth Federal Reserve District
 l ll  ak, m, h ill  i, Kk  t, h m. th ehh d-    Ll rk, Lvll,mh  s. L.
 AQuarterlyReviewofBusinessand EconomicConditions
 January 2011
The Federal reserve Bank F sT. luis
ameriCa’s eConomy
A Closer Look
Assistance Programsin the Wake o the Crisis
The Regional Economist
 Jaa 2011
 James Bllad
, p  ceofl rv Bk  s. L
Te Fe’s Emergency Liquiity Facilities:Why Tey Were Necessary 
president’s message
s the lender o last resort, a central bank typically lends extensively—though ata penalty rate—during a crisis. e FederalReserve took such actions to stabilize thefnancial system and avoid urther stressduring the fnancial crisis that began in early August 2007. e Fed created a number o temporary liquidity programs in 2007 and2008 to provide sound institutions with nec-essary access to credit.
Initially, the Fed encouraged depository institutions to come to the discount windowor unding. On Aug. 17, 2007, the Fed decidedto reduce the spread between the primary credit rate and the target ederal unds rate to50 basis points. e loan maturity was alsoextended rom overnight to a maximum o 30 days. Despite the narrower spread and lon-ger maturity, relatively ew institutions cameto the discount window out o concern thatborrowing rom the discount window mightbe perceived as a sign o fnancial weakness.With the fnancial crisis intensiying, theFed created the Term Auction Facility (TAF) inDecember 2007 so that institutions could pur-chase unds in the open market without goingto the discount window, thus circumventingthe stigma. Under TAF, the Fed auctioneda fxed amount o term unds on a biweekly basis; these loans had a maximum maturity o 84 days. For the frst auction, the total dollaramount o bids was more than triple the dollaramount o loans accepted. e overwhelmingdemand or the TAF loans provides evidencethat stigma associated with discount-windowborrowing mattered during the crisis.U.S. fnancial markets were urther stressedby problems in short-term dollar undingmarkets. In response the Fed establisheddollar liquidity swap lines with some oreigncentral banks. Under this program, a oreigncentral bank sold its currency to the U.S. inexchange or dollars and then lent the dollarsto its own institutions. At most three monthslater, the currencies were swapped back, withthe oreign central bank paying interest to theFed. e program helped ease strains in thesedollar unding markets during the crisis andwas reinstituted in May 2010 to help addressrenewed problems in European markets.TAF and the currency swap program gavedepository institutions a much-needed sourceo short-term liquidity. In addition, the Fedcreated programs in March 2008 to provideprimary security dealers with short-termcredit. Under the Primary Dealer CreditFacility, primary dealers obtained overnightcollateralized loans at the primary credit rate.e Term Securities Lending Facility (TSLF)allowed primary dealers to borrow Treasury securities or 28 days in exchange or othereligible, less-liquid securities. A ew monthslater, the Fed established the TSLF OptionsProgram to oer extra liquidity (or up to twoweeks) during periods o elevated fnancialstress, such as end-o-quarter periods. TSLFloans and TSLF options were both awardedthrough auctions.Later in 2008, the Fed created programs toease the liquidity problems o other marketsand institutions. e Asset-Backed Com-mercial Paper Money Market Mutual FundLiquidity Facility helped to stabilize money market mutual unds that held illiquid asset-backed commercial paper; without help, themoney unds had diculty meeting investors’demands or redemptions. e Commer-cial Paper Funding Facility was designed toincrease liquidity in the commercial papermarket—a primary source o unding orbusinesses—and to provide assurances thateligible commercial paper issuers would beable to repay their investors. Finally, the TermAsset-Backed Securities Loan Facility wascreated to stabilize the asset-backed securitiesmarket, thus addressing the credit needs o households and small businesses.In implementing the above liquidity pro-grams, the Fed ollowed standard risk-man-agement practices to the extent possible. Only sound institutions with good collateral metthe eligibility requirements to borrow underthese programs. In addition, the institutionscould borrow only a raction o their collateral,with the raction depending on the particularcollateral. As a result, the Fed did not lose any money on programs that have already closed.During the fnancial crisis, the Fed alsoprovided liquidity to systemically importantfnancial institutions—those considered “toobig to ail.” In March 2008, the New York Fed provided short-term credit to Bear Stearnsthrough JPMorgan Chase Bank, which thecompany repaid. Shortly thereaer, the NewYork Fed provided credit to the newly createdMaiden Lane LLC or purchasing a portiono Bear Stearns’ mortgage assets; this loanenabled JPMorgan to acquire the remaindero Bear Stearns, avoiding bankruptcy o thelatter. In September 2008, the New York Fedprovided credit to the American Interna-tional Group (AIG) to prevent its disorderly ailure. A ew months later, two newly created LLCs received loans rom the NewYork Fed to purchase certain assets and debtobligations rom AIG. ese were some o the most controversial decisions made duringthe entire fnancial crisis.Overall, the emergency liquidity programsproved to be successul at improving the unc-tioning o fnancial markets. Most o the pro-grams were closed naturally as the fnancialcrisis subsided because the borrowers oundbetter terms in the private sector. e FederalReserve Board recently released detailed inor-mation regarding these emergency liquidity programs. eir size and variety demonstratehow exible and powerul the lender-o-last-resort unction can be during a crisis.
For inormation on the programs, see www.ederalreserve.gov/monetarypolicy/bst.htm
The Regional Economist

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