Economic Letter

This Economic Letter is adapted from remarks by Robert T. Parry, President and CEO of the Federal Reserve Bank of San Francisco, delivered to the Stanford Institute for Economic Policy Research Associates on the campus of Stanford University on March 4, 2003.

The possibility of a “bubble” in house prices has received considerable attention lately. To be sure, house price appreciation has been strong in spite of the slowdown in the economy.

California’s labor market has not yet shown much sign of recovery from the recession that began in 2001. As in the rest of the nation, employment has been flat to down, the unemployment rate has remained at elevated levels, and the jobless are facing increasingly lengthy spells of unemployment.

The surge in U.S. productivity growth that began in the mid-1990s has generated considerable debate among economists. While most agree that the boom in information technology (IT) investment greatly contributed to this surge, many argue whether this contribution is mostly due to productivity gains in the manufacture of IT goods or whether the productivity gains “flowed downstream” from the IT manufacturers to the users of IT goods in other industries.

Over the past several years, there has been a steady march toward financial integration across product lines among larger financial firms. The trend is in part due to the increasing globalization of financial markets, the development of new financial instruments, and advances in information technology.

Since the mid-1980s, virtually all states in the nation have seen nonfarm employment growth rates become much more stable than they were in the 1960s, 1970s, and early 1980s. However, the volatility of employment growth has declined by different amounts in different regions.

Bank supervisors and stock market investors engage in extensive monitoring of bank holding companies (BHCs), but for different reasons. While investors are looking to ensure that BHC managers maximize shareholder value, bank supervisors monitor BHCs to enforce regulations, gauge their safety and soundness, and guard against broader systemic risk.

This Economic Letter summarizes the papers presented at the conference “Financial Issues in the Pacific Basin Region” held at the Federal Reserve Bank of San Francisco on September 26-27, 2002, under the joint sponsorship of the Bank’s Center for Pacific Basin Monetary and Economic Studies and the Journal of the Japanese and International Economies.

A key issue on the agenda for bank regulators is how to leverage market discipline to supplement their supervisory efforts. For example, in the recently proposed revision of the Basel Capital Accord, market discipline is one of the three pillars, along with capital regulation and supervision, of the structure for safeguarding the banking system.