Economic Letter

Currency crises are troubling events. They tend to spread from country to country in a region, leaving the hardship of recession–and, consequently, the risk of protectionism–in their wake. Currently, the problems of currency crises are addressed by assistance from the International Monetary Fund (IMF), which arranges rescue packages on a case by case basis.

On October 23, 1997, a massive speculative attack took place against the Hong Kong dollar. Interbank interest rates soared into triple digits, and one-month interest rates hit 50%.

The buzzword in popular international economics in the 1990s is “globalization.” And there’s no doubt that financial markets have become increasingly integrated internationally.

Under the current Social Security law, 10.7% of nearly every U.S. employee’s gross annual wage (up to a maximum of $72,600) must be “contributed” to the Old Age and Survivor’s Insurance (OASI) program. For many individuals, these contributions represent the most important (and perhaps only) investment they will make to provide financial support for themselves during retirement.

This Economic Letter is adapted from a speech delivered by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, at the Annual Meeting of the National Association of Business Economists on September 27, 1999, in San Francisco.

The banking industry is in its eighth year of strong earnings. As a result, banks have rebuilt their capital positions, and conditions in the industry appear to be quite good by historical standards. Against the backdrop of strong profits, it is useful to remember that banks, as financial intermediaries, are in the business of taking risk.

Living wage ordinances (LWOs) have been adopted by a number of local governments in recent years. Among the newest initiatives is the proposed law under consideration by the City and County of San Francisco.

Following the dramatic currency depreciations in many East Asian economies in 1997, these countries suffered sharp and lingering recessions. This outcome runs counter to the notion that depreciations ought to boost output because they make domestically produced goods cheaper.

Nations have long pursued exchange rate pegs to avoid wide fluctuations in the international values of their currency. As we have seen in recent crises in Asia and Latin America, however, when pegs are set at values that speculators deem unsustainable, they are attacked and usually break down during currency crises.

The financial crises in Japan and East Asia have been costly; they disrupted credit channels and curtailed economic activity not only in those countries but in other parts of the world as well. Such high costs make it desirable to have some form of early warning system of impending banking sector distress. If policymakers could identify the factors that lead to a higher likelihood of banking problems, they might be able to take steps to avert them.