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In the past few years, the pace of consolidation in the banking industry
has accelerated, and combinations between banks and other financial service providers have
become increasingly prevalent. In some countries, consolidation has resulted from the need
to eliminate weak or problem institutions. More generally, however, the unprecedented wave
of merger activity in financial services is being driven by powerful changes in
telecommunications and information technology and by the removal of legal and regulatory
barriers to national and international linkages. An important recent development is a
change in the scale of financial industry mergers. Indeed, the size of these business
combinations has increased to the point that, both in the United States and Europe,
"megamergers" are reshaping the structure of the financial services industry.
Financial megamergers raise a number of important public policy issues.
Some of these issues are very familiar and apply equally to megamergers and to more
traditional mergers between financial service providers. For example, regulatory approval
of megamergers may depend on antitrust implications and industry concentration.
However, the rise of banking and financial industry conglomerates brings into sharper
focus a long-standing concern not addressed in existing merger guidelines. In a world
dominated by mega financial institutions, governments could be reluctant to close those
that become troubled for fear of systemic effects on the financial system. To the extent
these institutions become "too big to fail," and where uninsured depositors and
other creditors are protected by implicit government guarantees, the consequences can be
quite serious. Indeed, the result may be a less stable and a less efficient financial
system.
In a speech before the European Banking and Financial Forum in Prague, Mr. Hoenig
discussed the challenges posed by financial industry megamergers and examined some
possible policy options currently under study.
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In the United States, there are two broad indexes of consumer prices:
the consumer price index, or CPI, and the chain price index for personal consumption
expenditures, or PCEPI. Because the indexes are similar in many respects, the inflation
rates measured with them often move in parallel. There are, however, some important
differences, which, at times, can lead to large gaps between CPI and PCEPI inflation
rates. In 1998, for example, the CPI rose 1.5 percent, while the PCEPI increased just 0.7
percent. The discrepancy was even larger excluding food and energy prices: the core CPI
grew 2.4 percent in 1998, while the core PCEPI rose just 1.2 percent.
Such gaps between CPI and PCEPI inflation rates raise a simple question: Is one index
better than the other? From a monetary policy perspective, an index could be superior in
two respects. First, one of the price indexes might be a more accurate measure of
inflation today and in the very recent past. To gauge progress toward price stability over
the past year, for example, a policymaker would like to know if either the CPI or PCEPI
more accurately measures consumer price inflation today. Second, one of the indexes could
be a superior measure of historical inflation rates. A policymaker would probably want to
use the better historical indicator for gauging long-term price trends and developing
inflation forecasting models.
Because some observers have recently suggested the PCEPI may be a better price index,
Clark examines whether the PCEPI is truly superior to the CPI. He reviews the differences
in the construction of the indexes and examines the advantages and disadvantages of the
CPI and PCEPI. He concludes that, while some observers might weigh the many pros and cons
of the indexes differently, with recent improvements the CPI is the better price index.
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Earlier this year, several bills were introduced in Congress to curb
what many consumer advocates have described as abusive credit card practices. These bills
were intended to keep credit card issuers from penalizing consumers for paying their card
balances in full each month. In unveiling one of the measures, Congressman John LaFalce
declared, "[Consumers] should not be tricked or trapped into escalating interest
rates and unnecessary fees. And they clearly deserve better than to be punished for paying
off debt and for responsibly using their credit cards."
Apparently, many consumers agree. According to a November 1996 survey by Money magazine,
79 percent of respondents supported legislation to restrict how credit card issuers set
fees and account terms.
With such strong consumer support for credit card reform, it is not surprising that
Congress responded. In fact, Congress has repeatedly considered similar measures, some
even more restrictive, such as proposals to cap the interest rate charged on credit card
accounts. These measures have in common one potentially disturbing feature: if passed into
law, they each would impose price controls on credit card accounts.
Combs and Schreft address whether such legislative efforts can achieve the stated
objective of benefiting consumers. They find that consumers as a whole generally do not
benefit from reform measures of the type studied. The effective price of a credit card
account might not fall for many---or any---consumers as a result of such pricing
restrictions, and credit availability is likely to be reduced, at least to some consumers.
Thus, consumers should think twice before asking for pricing restrictions on credit cards.
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Most central banks conduct monetary policy by setting
targets for overnight interest rates. During the 1990s, central banks have tended to move
these interest rates in small steps without reversing direction quickly, a practice called
interest rate smoothing. For example, the majority of Federal Reserve policy moves in the
last decade and a half have come in a sequence of 25 basis point moves, in striking
contrast to the early 1980s, when short-term interest rates fluctuated widely. In light of
this historical contrast, it is natural to ask whether interest rate smoothing is a
desirable way to conduct monetary policy.
Amato and Laubach argue that interest rate smoothing is beneficial because the private
sector is forward-looking. The private sector bases its decisions on expectations of the
future. Thus, a monetary policy move today will be more effective if it is expected to
persist over time. By smoothing interest rates, the size of changes in interest rates
required to reduce fluctuations in the economy can be smaller than would otherwise be
necessary.
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The meat industry is an economic powerhouse for rural
America---accounting for roughly one of every 16 rural manufacturing jobs. Moreover, this
rural powerhouse is adding jobs at a fast clip, with recent growth of 8.5 percent a year
versus just 1.2 percent a year for all rural manufacturing industries. Finally, rural
America has captured a commanding 52 percent of all meat industry jobs, far above the
level of a decade ago.
While all these figures are welcome news to rural areas eager to expand employment,
geographic shifts under way in the industry raise fresh doubts over which rural
communities will land new meat plants. Once concentrated in midwestern urban centers like
Chicago, the meat industry is now most often found in rural towns and hamlets---and often
far from the Midwest. Poultry-processing has moved to the Southeast. Beef packing plants
have moved to the Great Plains. And pork packing plants have begun moving out of the Corn
Belt to the Southeast and Great Plains, but where they go next is highly uncertain, with
the future location of hog production itself very much in question.
What geographic shifts lie ahead for the meat-processing industry? And what do the shifts
in this powerhouse industry mean for the future of the rural economy? Drabenstott, Henry,
and Mitchell review some critical trends in the meat industry by examining for the first
time a special database on the industry, the Longitudinal Research Database (LRD)
maintained by the Bureau of the Census. They conclude that the meat industry is likely to
concentrate geographically even more in the future, promising a new source of economic
growth for some rural communities while leaving many others behind. Yet even in areas
where the industry does locate, a sharp drop in industry wages raises new questions about
its local economic impact.
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