EconSouth (First Quarter 2008)
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 discusses credit market instability
Lockhart placed recent events in a global context, explaining that the U.S. economy and credit markets continue to deal with persistent global imbalances—trade imbalances, savings and investment imbalances, fiscal imbalances, and foreign-owned dollar surpluses.
In Feb. 7 remarks to the Atlanta chapter of the Association for Corporate Growth, Lockhart addressed four questions stemming from recent financial turmoil: Are banks going to regain their share of credit intermediation? Is securitization dead or dying? Will there be permanent shrinkage in the leveraged loan market? And will foreign investors flee U.S. credit markets?
On the first question, Lockhart said that despite the rise of off-balance-sheet special purpose vehicles, hedge funds, and other nonbank entities, recent financial turbulence has made it clear that banks have retained a central role in channeling credit to borrowers. As to whether securitization was dead or dying, Lockhart said "the answer is an unambiguous no." But participants in the securitization process must address certain issues, he said, including lowering of standards and, in some cases, fraudulent behavior by originators.
In the leveraged loan market, Lockhart believes the private equity industry will continue to operate but at more modest levels of deal size, leverage, and loan terms. Finally, Lockhart said that while foreign investors might become more selective, they will not retreat from American credit markets.
In fact, in a Feb. 8 speech to the Southern Center for International Studies, Lockhart emphasized the significant role of global financial imbalances, particularly foreign dollar surpluses, in the domestic economy and credit markets.
The effect of those imbalances is that large, mature countries like the United States can be net debtors to the rest of the world for long periods of time. This development can be a creative force: The movement of capital from net saving countries causes financial market innovation as bankers try to design vehicles that appeal to investors, including foreign investors, Lockhart said.
Certain countries have amassed surpluses of dollars from selling large quantities of goods and commodities, such as oil, to the United States, Lockhart noted. In the 1970s and 1980s, many of those dollars were channeled through banks to uncertain emerging-market debt. More recently, that money helped finance risky U.S. household debt, again with banks in the middle, Lockhart said.
"At this point conclusions about cause and effect are more speculation than science," he said of the role of global imbalances in U.S. markets. "But I am persuaded that the liquidity conditions created by foreign-owned dollar surpluses trying to find an investment home in this country contributed to markets' recent unstable conditions."
Lockhart stressed that the United States "should not become identified with investment protectionism," nor should the nation impose excessive regulation that would undermine innovation and competition.
"If global imbalances are unlikely to disappear for some time, and we must live with them, then market practitioners and financial authorities must improve their ability to monitor global investment flows and recognize incipient problems," he said.
Atlanta Fed launches Regional Economic Information Network
The REIN—at frbatlanta.org under "Economic Research & Data"—has two components: an online repository of Southeastern data and analysis, and the Local Economic Analysis and Research Network (LEARN).
The repository of data and analysis contains Atlanta Fed reports on regional economic data that are updated on a regular basis. One new data series, the D6 Factor (Sixth District Common Economic Factor), is an estimate of the trend common to 25 distinct monthly series of economic data for the six Southeastern states in the Sixth Federal Reserve District. Other reports examine developments in the Southeast's agriculture, construction and real estate, consumer spending, financial services, industrial activity, labor markets, and state government finances.
LEARN is a forum for academics and researchers who have a detailed knowledge of economic developments in local economies in the Southeast. LEARN participants discuss and exchange ideas on research, methodologies, and current economic developments.
"In our monetary policy role, we collect and analyze data covering various industries and indicators within the Sixth District," said John Robertson, vice president and regional research team leader at the Atlanta Fed. "Sharing information helps to better position the Atlanta Fed as a knowledge source. In addition, LEARN will hone our analysis and expand relationships. At the end of the day, our objective is enhanced understanding of the economy. More information leads to more informed decision making."