##ncies were subsiding in new york and new jersey, as they were for the nation as a whole. unfortunately, puerto rican households stand out as now having a higher delinquency rate than the mainland, new york and new jersey – and one that is continuing to rise. thus, although the financial strains on many families in the region remain severe and are very troubling to me, they do show some signs of abating slowly outside of puerto rico. impact of the great recession on public schools in the region now, i will turn to our special topic. in an important sense, schools constitute the backbone of our national and regional economy. yet, this backbone can be vulnerable during recessions. schools teach our citizens skills, including how to read, write, do math, create art or music and work in teams. economists call these skills “ human capital ” because they are an important input that fuels a nation ’ s or region ’ s economic growth and development. in this way, schools play a key role in shaping our future. therefore, it is essential to understand how the great recession has affected our ability to educate the next generations of students. thus, today, we will examine how the recession has affected funding levels for schools in our region. as you know, there is an ongoing vigorous debate about how to most effectively organize public education and provide incentives to teachers, students and administrators. such inquiry is key to any effort to ensure the best possible education for our citizens, but it is beyond the scope of this briefing. for a more information, see “ an introduction to the frbny consumer credit panel, ” new york fed staff report no. 479, november 2010. for the recent releases from the panel, see u. s. credit conditions. bis central bankers ’ speeches the housing bust and the onset of the recession in 2007 strained state and local government finances. most local governments rely heavily on property tax revenue to fund their schools and other activities. this was particularly true during the first half of the decade, when the housing boom strongly supported property tax revenues. then came the bust ; steep declines in the housing market led to corresponding drops in local property tax revenue. state governments ’ revenues also fell, as rising unemployment cut income tax revenue and reduced consumption shrank sales tax revenues. since most state and local governments spend at least half of their budgets on education, these developments have constrained funding for our primary and secondary schools. to stave off drastic state and local government spending

when a domestic economy is battered, weak financial systems amplify the scope and reach of the problems, making bad situations worse. while important progress has been made in rehabilitating asia ’ s financial systems, a great deal remains to be done to continue the strengthening of weakened financial and corporate sectors, and improve the region ’ s resistance to future problems. i am well aware that universal policy prescriptions are difficult to draw, given the wide range of experience and initial conditions. indeed, individual countries in asia have followed differing reform strategies, and the results of these efforts will help to inform the ongoing debate. nonetheless, international experience with financial sector reform suggests a number of cautionary lessons. let me cite a few : • restructuring and reform must adequately address both the current “ stock ” of problem assets as well as the potential “ flow ” of new problems attributable to deficiencies in the broader financial system infrastructure. lack of adequate action on either front can lead to a continuation of the substantial costs of weak banking sectors, sometimes well beyond the immediate crisis itself. • clean - up efforts must be sufficient to the task. half - done measures that leave financial institutions with significant levels of impaired assets at best postpone the reckoning and potentially create incentives for excessive risk - taking. • fundamental improvements in bank corporate governance are critical. just as risk management and internal control processes usually need to be thoroughly overhauled in weak institutions, more often than not, so too does management. • protracted forbearance to preserve the appearance of solvency is not a solution. while some degree of forbearance may be unavoidable and even appropriate under the right conditions, it is at best a temporary measure. it is critical that forbearance does not become institutionalized, but is tied directly to actions by both bankers and supervisors to address underlying problems. • governments are not good long - term asset managers. prolonged government holding of impaired assets is not likely to enhance their value nor aid in the restoration of market liquidity. • governments are not good commercial bankers. delayed privatization of nationalized banks always means higher future costs and usually inhibits fundamental reform. • government - directed lending means future fiscal losses. similarly, efforts to stimulate credit growth by non - market forces in the context of a banking crisis at best buy additional time and usually dig a deeper hole. • foreign investment in domestic financial sectors can yield important benefits. foreign direct investment in the banking sector can provide much - needed