Economic Letter

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.

After 15 years of federal budget deficits that overwhelmed every discussion of fiscal policy, the United States now faces the prospect of huge budget surpluses for the foreseeable future–that is, if recent projections by the Clinton administration and the Congressional Budget Office can be believed. But can they?

The California economy is stronger than it has been in a number of years. Employment growth is solid, unemployment is low, and consumer confidence is rising.

Over the past decade, the banking industry has undergone rapid consolidation. Before the 1990s, most bank mergers involved banks with less than $1 billion in assets; more recently, even the very largest banks have merged with other banks and with nonbank financial firms.

The San Francisco Bay Area has had a “hot” real estate market for the past four years. The median single family house price in the Bay Area has appreciated by 30 percent to $330,000 since 1995.

In 1988, the Basel Committee on Banking Supervision, an international organization of bank supervisory agencies, adopted a capital adequacy framework for internationally active commercial banks based in the G-10 countries. However, after ten years, the limitations of that framework have become increasingly apparent.

In recent years an increasing number of observers have argued that changes in the operation of the U.S. labor market have led to rising job instability and job insecurity for American workers. The manifestations of this include an apparent rise in layoffs and a corresponding deterioration in workers’ attitudes about the prospects for staying in their current jobs.

The U.S. economy has performed remarkably well over the last few years. Real output has grown at a pace that is noticeably above average, while inflation has declined somewhat.

A recent poll indicated that there is considerable confusion about the state and the fate of the Social Security system (NPR 1999). While most Americans are aware of Social Security’s impending financial crisis, confusion over the dimensions of the program’s problems appears to be undermining support for the measures required to resolve them.