EconSouth (First Quarter 2004)

Research Notes and News

Research Notes and News highlights recently published research as well as other news from the Federal Reserve Bank of Atlanta.

Atlanta Fed president
foresees steady growth

Jack Guynn, president and chief executive officer of the Federal Reserve Bank of Atlanta, discussed his outlook for the remainder of 2004 in a March 4 speech to real estate executives. Guynn said he sees a “pattern of solid and sustainable growth” and anticipates 2004’s economic growth to differ from 2003’s. “Residential investment and spending on durable goods—cars, refrigerators, furniture, and other kinds of items that are sensitive to interest rates—shouldered a disproportionately large share of last year’s overall growth,” he said. “And it’s clear that low interest rates, tax cuts and tax refunds helped to fuel aggressive spending by households. While I see no reason to expect a sharp falloff in housing and durable goods spending this year, I don’t think we can expect to see these sectors continue to grow at some of the rates we saw last year.”

Concerning job growth, Guynn anticipates that unemployment rates will decrease some in the coming months although businesses may add new employees at a slower pace than in other recent business cycles. “Despite the uncertain pace of job growth, there’s evidence that businesses are feeling more pressure to expand payrolls,” he said. “On top of continued strength in consumer spending and renewed vigor in business capital spending, we’re starting to see rebuilding of inventories—a sign of expanding final demand. Exports also appear poised to grow further after a strong fourth quarter.”

Guynn said monetary policy remains targeted at keeping inflation low. “One of the Fed’s goals with regard to inflation is to remove it as a factor in the economy so that you don’t have to think about it or adjust your plans because of large and unexpected changes in inflation or interest rates,” he said, adding that the Fed’s accommodative monetary policy will require adjustment as the economy strengthens. “While we’ve seen how accommodative monetary policy can cushion the downside of an economic cycle, it will be appropriate at some point to get back to a more neutral policy setting consistent with an expanding economy.”

In Japan, women less
tech savvy than men

The prevalence of women in part-time and contingent jobs in Japan has contributed to Japanese women having lower levels of information technology skills than Japanese men. In particular, Japan has larger gender differences in wages, labor force participation, and occupational distribution than the United States does. The lack of computer skills can lead to social exclusion as well as economic penalties, and groups that have reduced levels of IT skills risk being excluded from job and educational opportunities as well as losing political influence as computers and the Internet become increasingly important to how people live and work.

Authors Hiroshi Ono and Madeline Zavodny considered the 1997–2001 period to examine differences and trends in computer and Internet usage in the two countries. Their results indicate that there were significant gender differences in computer and Internet usage in both countries during the mid-1990s. By 2001, these gender differences had disappeared or were even reversed in the United States but remained in Japan. In both countries, people not currently working have lower levels of IT use and skills regardless of gender, but working women in Japan have lower levels of IT use and skills than working men, a difference that generally does not occur in the United States.

Ono and Zavodny’s research then explores several potential reasons for this gender gap in Japan, focusing on the role of work. Their results indicate that the prevalence of women in “bad jobs” (part-time work and contingent jobs) plays a significant role in the gender gap in information technology usage in that country.
Working Paper 2004-2
January 2004

Mexico builds secondary
mortgage market

Traditionally, the market for housing securitizations in Mexico has been dominated by the government. But now some Mexican mortgage-backed securities (MBS) are being denominated in dollars and aimed at U.S. investors. The details of the transaction have yet to be announced, but if the transaction is successful, it will no doubt signal an important step forward for the development of Mexico’s MBS market, according to an article by Michael Padhi, Jaime del Rio Castillo, and Stephen J. Kay. Mexican President Vicente Fox has set an ambitious goal of building 750,000 new housing units annually beginning in 2006. If Mexico’s MBS market begins to thrive (and manages to attract foreign investment), it would mark an important step toward bridging the housing gap in Mexico.

By providing partial mortgage guarantees, the Mexican government is expected to boost the secondary mortgage market. Investors are likely to be encouraged by the government’s assumption of a significant amount of the credit risk, and issuers will face lower transaction costs. Since the Sociedad Hipotecaria Federal (SHF)—a limited-purpose finance company funded by the Mexican government—assumes the risk for the loan’s first loss, less overall credit enhancement will be needed to meet a given rating standard. These SHF guarantees are similar to those provided in the United States by the Veterans Administration or private mortgage insurers.

The next major step in the development of an MBS market in Mexico will come when the massive National Workers Housing Fund (INFONAVIT), the home loan agency that holds 65 percent of Mexico’s $50 billion in outstanding mortgages, issues its first-ever MBS transaction. INFONAVIT recently received investment-grade ratings for both peso- and foreign currency–denominated debt issuance, which will facilitate the sale of these securities.
Financial Update
First Quarter 2004

Recent corporate scandals
focus attention on directors

Heightened attention has been focused on the role of corporate directors in the wake of governance scandals. Scrutiny of directors and expectations of their accountability have never been greater, according to an article by Lynn Woosley and Brian Bowling. Today, the authors maintain, integrity and oversight responsibilities prevail over directors’ ability to generate business. The central role that banks occupy in the U.S. economy and federal deposit insurance subsidies give bank directors the added responsibility of ensuring that banks operate safely and soundly and with adequate capital for the risks they assume. A banking governance failure of the magnitude of what has occurred recently in other industries could severely disrupt the financial and payment systems.

Woosley and Bowling identify five core principles to which corporate directors should adhere: Directors should have the skills, integrity, knowledge, and experience appropriate to fulfill their responsibilities; directors must be trustworthy and guard the confidentiality of proprietary, regulatory, and customer information; directors must commit adequate time and attention to overseeing the bank’s activities; directors, not management, determine the company’s risk appetite and strategic direction; and directors must be diligent in managing conflicts of interest between the institution and its board, management, principal shareholders, and affiliates.

The authors also point out that bank directors have several unique risk management responsibilities that arise from banks’ critical role in the U.S. economy and the payment system. Regardless of their institutions’ size and complexity, bank directors must understand and manage certain types of risk, including credit risk, operational risk, market risk, liquidity risk, and legal and reputational risk.
Financial Update
First Quarter 2004


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