Economic Letter

The enormity of the current financial collapse, widely described as a bursting bubble, raises the question whether the crisis could have been predicted, possibly permitting action to offset its effects. In the first of two Economic Letters on the subject, we look at developments in the United States and find evidence suggesting that simple indicators based on asset market developments can provide early warnings about potentially dangerous financial imbalances.

Unemployment insurance benefits have been on an upward trend over the past two decades, partially reversing an earlier decline. The trend is associated with shifts toward a higher share of job losers among the unemployed and longer durations of unemployment, which may cause benefits to lapse for some recipients as labor market weakness persists.

Many credit line agreements contain restrictive covenants and other contingencies that may limit the ability of borrowers to draw on their lines, which is a particular concern to small firms. This Economic Letter reviews recent empirical studies that suggest that private firms’ access to credit lines is much more sensitive to changes in bank lending standards than is access by publicly traded firms.

Total factor productivity—a measure of the efficiency with which labor and capital are used—has fallen during the current recession. But, after adjustment for lower utilization of labor and capital, such productivity has risen strongly over the past two years. These growth–accounting measures suggest that efficiency gains have continued during the recession, boding well for long-term economic growth.

In response to turmoil in the interbank lending market, the Federal Reserve inaugurated programs to bolster liquidity beginning in December 2007. Research offers evidence that these liquidity facilities have helped lower the London interbank offered rate, a key market benchmark, significantly from what it otherwise would have been expected to be.

Papers presented at the conference on “Macroeconomic Models for Monetary Policy” held March 6, 2009, at the Federal Reserve Bank of San Francisco addressed such issues as how to model wage and price behavior and how to measure economic output. The answers to these and other questions examined at the conference are highly relevant for monetary policy and for the macroeconomic models in use at central banks around the world.

The Federal Reserve has responded to a severe recession by developing programs to bolster the financial system and restore economic growth. The Fed has the tools to unwind these programs when appropriate, maintaining price stability. The following is adapted from a speech delivered by the president and CEO of the Federal Reserve Bank of San Francisco to the Commonwealth Club in San Francisco on June 30, 2009.

As policies are proposed to expand health insurance coverage in the United States, it is useful to focus on the experience of Hawaii, where employers are required to offer such insurance to their full-time employees. Our findings suggest that Hawaii’s law has substantially increased health insurance coverage in the state, although the impact has been partially offset by employers’ increased reliance on the exempt class of employees who work fewer than 20 hours per week.

Should fiscal policy be used to fight recessions? Most economists would answer that, for normal economic ups and downs, business cycle stabilization should be left to monetary policy and that fiscal policy should focus on long-term goals.