St. Louis Fed's Review: Federal Credit and Insurance Programs

ST. LOUIS — What role does the federal government play in the private credit and insurance markets today? And, perhaps more importantly, what role should it play? A distinguished group of scholars and policymakers came together to explore answers to those questions at the Federal Reserve Bank of St. Louis' 30th annual economic policy conference.

The July/August issue of Review, the St. Louis Fed's bimonthly publication of economic and business issues, features papers from the conference. The publication is also available on the Bank's web site: www.stlouisfed.org.

"The discussion took on added importance because virtually all the federal programs at issue were under active legislative consideration at the time of the conference," wrote St. Louis Fed senior economists William R. Emmons and Anthony N.M. Pennington-Cross, who served as conference co-chairs.

The titles and authors of the papers are:

• "Is the United States Bankrupt?" by Lawrence J. Kotlikoff, professor of economics at Boston University. While most people would scoff at the question, Kotlikoff argued that when a comprehensive, forward-looking accrual framework is applied to the current and likely future financial revenues and obligations of the U.S. government, the nation's fiscal picture is dire.
• "On the Importance of the Plumber: The Intersection of Theory and Practice in Policymaking for Federal Financial Institutions," by Douglas J. Elliott, president and founder of the Center on Federal Financial Institutions. The federal government's role as lender and insurer is very important, with more than $1.4 trillion of loans and guarantees and at least $7 trillion of insured risk, such as housing and student loans and flood insurance, among others. The federal institutions established to run these activities, however, are often created as an afterthought. Elliott emphasized the crucial importance of ending this neglect and recognizing how proper structure can help avoid major failures.
• "Federal Credit and Insurance Programs: Housing," by John M. Quigley, professor of economics at the University of California, Berkeley. Quigley reviewed the evolution of the major credit and insurance programs undertaken by the U.S. government in support of urban housing. The private sector plays a much larger role in mortgage lending and securitization than it did a few decades ago. This suggests that federal subsidies of mortgage market activities could be reduced with little effect on homeownership, which is the principal goal of federal housing policy. In general, Quigley believes that focusing FHA and GSE (government-sponsored enterprises) on first-time homebuyers would reduce federal risk exposure while preserving the economic rationale for government activity.
• "On Asset-Liability Matching and Federal Deposit and Pension Insurance," by Zvi Bodie, professor of finance and economics at the Boston University School of Management. The mismatch of assets to liabilities was a principal cause of the savings and loan crisis of the 1980s. Bodie believes that in dealing with the problems now facing the defined-benefit pension system and the Pension Benefit Guaranty Corporation (PBGC), the government seems to be making some of the same mistakes. He explored some of the ways to limit the costs of a potential PBGC bailout.
• "Should the Government Provide Insurance for Catastrophes?" by J. David Cummins, the Harry J. Loman professor of insurance and risk management at the Wharton School of the University of Pennsylvania. Although insurance markets have been stressed by major natural catastrophes such as Hurricane Katrina, Cummins said that government involvement in the market for insurance to cover those situations should be minimized to avoid crowding out more efficient private market solutions, such as catastrophe bonds. Instead, Cummins argued, government should facilitate the development of the private market by reducing regulatory barriers.
• "Panel Discussion: What is the Appropriate Role of the Federal Government in the Private Market for Credit and Insurance? What Is the Outlook?" Panelists were: Kenneth J. Arrow, professor of economics at Stanford University and winner of the 1972 Nobel Prize in economics; Robert E. Litan, vice president for research and policy at the Kauffman Foundation and a senior fellow in the economic studies program at The Brookings Institution; and Joseph E. Stiglitz, professor of economics at Columbia University and winner of the 2001 Nobel Prize in economics.

Authors offering commentaries were:

• Anjan Thakor, the John E. Simon professor of finance at the Olin School of Business at Washington University in St. Louis;
• George J. Benston, the John H. Harland professor of finance, accounting and economics at Goizuetta Business School at Emory University;
• John C. Weicher, director of the Center for Housing and Financial Markets at the Hudson Institute;
• Deborah J. Lucas, professor of finance at Northwestern University; and
• Dwight M. Jaffee, professor of finance and real estate at the Haas School of Business at the University of California, Berkeley.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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