Publications

Central Banker | Winter 2008

Views

St. Louis Fed President Jim Bullard Discusses Systemic Risk

Systemic risk can be a tricky term to define, but it’s one that is getting much attention following the recent shake-ups in our economy, St. Louis Fed President Jim Bullard said Oct. 2 in a speech to faculty members and graduate students in economics at Indiana University—Bloomington.

“Systemic risk is often associated with incomplete information,” Bullard said. “In the case of a banking system, systemic risk can arise when a bank’s depositors—even relatively sophisticated depositors, such as other banks—become unsure about the condition of the bank in which they hold their funds.” (Read the full text or watch a video of the speech. Bullard’s remarks start about 11 minutes into the clip.)

Greater supervision of financial firms, Federal Reserve oversight of the payments and settlement system, and creation of an orderly framework to liquidate investment banks and other securities firms might decrease systemic risk, Bullard said. No firm, though, should be considered too big or too connected to fail because of systemic concerns, he said.

“Bailouts are expensive—not just because they commit taxpayer funds, but because they can encourage behavior that increases subsequent systemic risk,” Bullard said. “A firm that expects government protection if its investments go awry may take bigger gambles than a firm that expects no protection.”

For more from Bullard, see his speeches and “Worry Less about Systemic Risk, More about Inflation” in the October 2008 Regional Economist.

New Fed Study Examines Crime Rates at the City Level

Whether a community is perceived as a desirable place to live and visit is determined, in part, by its crime rates. Naturally, crime rates are important to a community’s economic success and have been the topic of numerous academic studies. Most of these have used data at the county, state or national level to explore long-term relationships between economic conditions and crime and between deterrence and crime.

A new study from the Federal Reserve Bank of St. Louis, Local Crime and Local Business Cycles, narrows the data down to the city level and looks at whether economic conditions and deterrence affect the short-term growth rates of seven major crimes: murder, rape, assault, robbery, burglary, larceny and motor vehicle theft. Authors Tom Garrett, St. Louis Fed economist, and Lesli S. Ott, senior research associate, zero in on monthly data for 23 large cities in the United States, including St. Louis, Memphis, Little Rock and Louisville.

Overall, Garrett and Ott found little evidence that changes in a city’s economic conditions or its number of arrests significantly affected short-term crime rates. This suggests that short-run changes in economic conditions do not induce individuals to commit crimes. That being said, the authors did find that short-term economic changes in some of the cities influenced crimes against property. “This likely reflects the fact that nonviolent property crimes are more likely to result in financial gain than violent crimes,” the study says.

The authors also found strong evidence that law enforcement reallocates its resources in response to increases in crime, especially those that are more visible to businesses and tourists, such as robbery, vehicle theft and assault.

Finally, the study revealed that relationships between economic conditions and crime and between deterrence and crime are not likely to be the same across cities or regions. This suggests that, to implement effective public policy at the local level, it is important to conduct local analyses, using more disaggregated data.

The report is available at www.stlouisfed.org/community. For a print copy, call the Fed’s Cynthia Davis at 314-444-8761. Garrett is making presentations on the report in the Eighth District. The next meeting is Dec. 9 in Memphis.