Region Focus, Winter 2009
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RF_FULL Covers_WIN_09_Rev4.27:Spring 05 Cover FINAL v.5 4/27/09 6:00 PM Page 1 WINTER 2009 THE FEDERAL RESERVE BANK OF RICHMOND RF_FULL Covers_WIN_09_Rev4.27:Spring 05 Cover FINAL v.5 4/27/09 6:00 PM Page 2 VOLUME 13 NUMBER 1 COVER STORY WINTER 2009 1 4 Our mission is to provide Know When to Fold ’Em: How the corporate bankruptcy authoritative information system benefits and hinders the economy and analysis about the It’s important to distinguish between firms that are merely distressed Fifth Federal Reserve District and those that are no longer viable. Does the current corporate economy and the Federal Reserve System. The Fifth bankruptcy system provide the most efficient means to this end? District consists of the District of Columbia, FEATURES Maryland, North Carolina, 1 8 South Carolina, Virginia, The Language of Local: Community papers survive and most of West Virginia. by sweating the small stuff The material appearing in Region Focus is collected and While many big metro dailies are floundering, community newspapers developed by the Research seem to be weathering the storm. Department of the Federal 2 2 Reserve Bank of Richmond. DIRECTOR OF RESEARCH Science Panel May Study Virginia Uranium Plan John A. Weinberg Uranium found in Virginia’s rural Pittsylvania County opens up a new EDITOR front in the national debate over the future of nuclear energy. Aaron Steelman 2 4 SENIOR EDITOR Stephen Slivinski Ballpark Boom: New minor league stadiums spring up MANAGING EDITOR across the region Kathy Constant Since 2005, four minor league baseball parks have been built in the STAFF WRITERS Renee Courtois Fifth District. Are they really engines of economic growth? Betty Joyce Nash 2 8 David van den Berg EDITORIAL ASSOCIATE Learning Curves: The economics behind high school Julia Ralston Forneris economic education REGIONAL ANALYST Standards for how Fifth District students learn about supply and Sonya Ravindranath Waddell demand have been established. But a debate remains about the CONTRIBUTORS Matthew Conner effectiveness of economic education and personal finance programs. Robert Greene Sarah Watt 3 3 DESIGN Housing Cools State-to-State Migration: But Carolinas Beatley Gravitt Communications remain a magnet CIRCULATION Alice Broaddus People aren’t moving as much these days. But that hasn’t stopped Shannell McCall the Carolinas from ranking among the fastest-growing states in the Published quarterly by United States last year. the Federal Reserve Bank of Richmond 3 6 P.O. Box 27622 Richmond, VA 23261 The Banking Landscape in the Fifth District www.richmondfed.org A look at the size and scope of the region’s depository institutions. Subscriptions and additional copies: Available free of charge through our Web site at www.richmondfed.org/publications DEPARTMENTS or by calling Research Publications at (800) 322-0565. 1 President’s Message/Time to Rethink “Too Big To Fail” Reprints: Text may be reprinted 2 Upfront/Economic News Across the Region with the disclaimer in italics below. Permission from the editor 6 Federal Reserve/Last Stop Lending is required before reprinting photos, charts, and tables. Credit 10 Jargon Alert/National Debt Region Focus and send the editor a copy of the publication in which 11 Research Spotlight/Does Democracy Lead to Economic Growth? the reprinted material appears. 12 Policy Update/States Receive Funding from Stimulus Bill The views expressed in Region Focus are those of the contributors and not 13 Around the Fed/How Consumers Use Plastic — and Why necessarily those of the Federal Reserve Bank of Richmond or the Federal 38 Interview/George Selgin Reserve System. 43 Economic History/West Virginia Glass Houses ISSN 1093-1767 47 Book Review/When Altruism Isn’t Enough 48 District Digest/Economic Trends Across the Region 56 Opinion/No Time for Protectionist Impulses RF_WINTER_2009 4/23/09 9:58 AM Page 1 PRESIDENT’SMESSAGE Time to Rethink “Too Big To Fail” he cover story of this There are several reasons, to be sure, but a significant factor issue of Region Focus was that many of them believed they were “too big to fail” — Tdiscusses the U.S. cor- that is, they were willing to take excessive risks because they porate bankruptcy system. The were confident they enjoyed either explicit or implicit pub- article points out some of the lic support. And, of course, such support has been strengths and weaknesses of forthcoming in numerous cases. that system, from the stand- As a result, some people have called for the creation of a point of economic efficiency. systemic risk regulator to oversee all financial institutions. The system is not perfect. Ultimately, such a regulator could prove useful, though I am For instance, firms that are no generally skeptical of the idea. One thing seems clear, longer economically viable may however. Redesigning our financial regulatory system be able to find sympathetic before establishing clear boundaries around the federal judges who postpone liquida- financial safety net — boundaries that I believe should be tion beyond a period that would be optimal for the much tighter than at present — would be like putting the economy as a whole. It would be better, in some of those cart before the horse. cases, to expedite the liquidation, freeing up valuable The financial crisis should lead us to think hard about the resources that could be more effectively used elsewhere. incentives that financial institutions face — and what we But, in the main, the corporate bankruptcy system, can do to reform them to bring greater stability to the which has evolved over many decades, works relatively system, while at the same time not discouraging innovation. well. It provides an opportunity for fundamentally sound At the top of the list is rethinking whether “too big to fail” companies that are experiencing temporary difficulties to protections move us toward that goal or away from it. reorganize and get back on their feet. And it includes measures that guide the orderly closing of firms which cannot effectively compete in their respective markets. An example of such a firm, which the article discusses in some detail, is the electronics retailer Circuit City, based here in Richmond. It operated in an extremely competitive environment in which consumers are highly discriminating. Ultimately, enough of those consumers opted to shop with Circuit City’s competitors that the firm could not survive. JEFFREY M. LACKER PRESIDENT For many of the former employees of Circuit City, this is no FEDERAL RESERVE BANK OF RICHMOND doubt painful. The change that results from competition is not always pleasant, but it is essential to the functioning of a healthy market economy. For most sectors of the economy, policymakers recognize that there should and will be frequent change, including the failure of some firms. And the corporate bankruptcy system helps to facilitate those closures in a way that is generally beneficial to the economy. There are, however, a few exceptions: sectors that many policymakers believe include firms which simply cannot be allowed to fail. The most obvious example is the financial sector. Financial institutions are, of course, crucial to a mar- ket system. They provide the liquidity needed by businesses across the economy. But because of their unique function in the economy, should they be protected from failure? That is a difficult question. It is possible that the failure of a particularly large firm could cause great harm to the economy. But first we should ask why so many big financial institutions came under enormous stress over the past year. Winter 2009 • Region Focus 1 RF_WINTER_2009 4/20/09 12:48 PM Page 2 PFRONT U Economic News Across the Region Silver Screen Cinemas Prosper During Recession Bow Tie Cinemas opened a 17-screen movie theater in Richmond, Va., in February. The multiplex, named Movieland at Boulevard Square, is the largest the company has ever opened. While declining to provide specific ticket sales numbers, Bow Tie Chief Operating Officer Joe Masher said the Richmond multiplex had a “phenomenal” opening weekend. In part, that’s because people seem to like going to the movies during recessions. For many, it’s seen as a relatively cheap form of entertainment. According to Patrick Corcoran, the director of media and research for the National Association of Theater Owners, from Jan. 1 through March 2, 2009, national box office receipts were 13.1 percent higher than the same period in 2007, when the economy was still growing. And from the third week of September 2008, when the stock market became volatile and the credit crisis a national discussion, through the second week of December 2008, receipts rose 15 percent over the same period in 2007. Business is up at Regal Cinemas, according to Chad Browning, marketing manager with Regal Entertainment Group, based in Knoxville, Tenn. The chain owns 30 theaters in Virginia, 24 in North Carolina, From blockbusters 16 in South Carolina, and 15 in Maryland. “I think people just kind of want to escape from the to classic films to sluggish economy,” he said. screenings of cult movies ... Movies are also making more money this year. Many moviegoers have found respite through you’ll see them stories of a dim-witted mall security guard and of a father trying to rescue his kidnapped all at Movieland. daughter. “Paul Blart: Mall Cop” and “Taken,” released in 2009, have each grossed more than $100 million. “Gran Torino,” a drama starring Clint Eastwood, released in late 2008, has made more than $100 million in 2009 alone, Corcoran said. From January through May of 2008, only one film grossed more than $100 million. In choosing where to open theaters, Bow Tie looks for communities with active arts, medical, and educational communities. “Richmond was a perfect storm for all three,” Masher said.