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JAM 2 319/y REMARKS BY THE HONORABLE STEPHEN S G A R D N E R / VICE CHAIRMAN OF THE FEDERAL RESE BEFORE THE CREDIT UNION NATIONAL ASSOCIATION M O N D A Y , FEBRUARY 2 3 , 1976 / Good Afternoon: It is a pleasure for me to be here today on the occasion of the opening of y o u r 1976 Governmental Affairs Conference. As your President stated in his i n t r o d u c t i o n , I have b e e n deeply involved in the Administration's Financial Institutions A c t , and as part of that effort h a d to become increasingly aware of the important role credit unions play in our complex financial system. In reviewing the impressive program for your C o n f e r e n c e , I note that during the next several days you w i l l be considering various aspects of the changing financial environment in this country. This is a most appropriate subject, for there is indeed a climate of change here in W a s h i n g t o n , one which has given rise to a number of dramatic Congressional initiatives of particular interest to you as members of the financial c o m m u n i t y . Before touching specifically on some of these Congressional a c t i o n s , I w o u l d like to share w i t h you a few thoughts the growing clamor for change not only w i t h i n our institutions but also w i t h i n our society at concerning financial large. You have seen the polls allegedly establishing the low regard in w h i c h the country h o l d s the G o v e r n m e n t , the A d m i n i s t r a t i o n , -2the Congress and b u s i n e s s . Six years ago, 58 percent of the people polled by the Lou Harris organization expressed confidence in major c o m p a n i e s . Last y e a r , that figure dropped to 29 percent -- and in the 1.8-20 year old category only fifteen percent (or 1 in 7) expressed any confidence in the way business is r u n . know the figures for financial i n s t i t u t i o n s . Maybe you I'm not sure I want to. This is more than the legacy of h o s t i l i t y and suspicion and despair that the events of Watergate and the more recent incidents of improper corporate behavior have e n g e n d e r e d . It is the result of massive and continuing social change brought on literally by our success in this country in terms of economic g a i n s , the freedom of speech and action inherent in a d e m o c r a c y , and the social sensitivities of a great n a t i o n . I think it has gone too far in fragmenting our people and polarizing d i s s e n t , but that's the w a y change operates -cyclically. In this new w o r l d , the marvelous electronic tele- communication system assures that trends develop faster and recede more q u i c k l y , and that they are global in n a t u r e . And castigating the media is an exercise of futility. The media is popular and it s e l l s . In a free society people get the kind of media they support. Let's get to the basic p r o b l e m s . Behind the lack of confidence in government and business and our institutions is the presumption that government can make all things right in a private economy -- a presumption ingrained for three decades -3in America's conscience and a contradictory idea at b e s t . But one that can't be judged objectively in the socio-politicaleconomic climate of t o d a y . After thirty years of generally good g r o w t h , increasing w e a l t h , modest i n f l a t i o n , and reasonable level of e m p l o y m e n t , w e have gone through change that stuns us -- change that w i l l have to upset our routine and fairly perceived social g o a l s . And the bulk of our citizens are poorly prepared to deal with the issues. In fact, the issues outweigh our experience of the post-war years -- and all of them haven't even surfaced y e t . First and foremost, if you w i s h to retain a social system you must maintain a generally acceptable economic s y s t e m , and that is going to be difficult to do in the short run in the United S t a t e s . The stated reasons are the persistent of inflation and energy s h o r t a g e s . threats The actual reason is that during the b o u n t i f u l years when our private sector roared a h e a d , suffering all the restraints and regulations that we imposed on it, we established by e d i c t , law, and common c o n s e n t , some very worthwhile and unassailable national goals w h i c h are still in the full swing of implementation. These goals are easy to identify generally -- an expanded Social Security program and benefits to the underprivileged and v e t e r a n s , a more liberal view of unemployment a s s i s t a n c e , m e d i c a l support for the elderly and indigent, proper housing for all our p e o p l e , better and more education for a l l , protection of the environment. The list is very long and you know it w e l l . -4I take issue w i t h none of these g o a l s , and I assume you do not e i t h e r . But a few simple statistics w i l l show you how successful we have b e e n in increasing these transfer payments in our s o c i e t y . For Fiscal Year 1977 existing laws have mandated Government payments for individuals estimated at $170 billion -- a sum larger than the entire Federal budget outlay of only eight years a g o . In 1967, these same programs totalled $41.8 b i l l i o n . In f a c t , approximately 75 percent of the Federal budget estimate recently submitted by the President consisted of relatively uncontrollable o u t l a y s , and two-thirds of this amount transfer payments for i n d i v i d u a l s . represented Whatever the virtue of the p r o g r a m s , we are clearly succeeding in funding these national g o a l s . Now w h e n we b e g a n the exercise to assist in stimulating the country in a sharp and dangerous recession last y e a r , we began it w i t h hardly any maneuverability in terms of Government o u t l a y s . For all practical p u r p o s e s , the idea that the Government can stimulate the private economy in periods of recession and control and reduce its expenditures below receipts in periods of prosperity has no basis in the fact or experience in the last half of the thirty years since World War I I . T o d a y , our National goals must also include stimulating employment in the private s e c t o r , increasing capital formation to meet the extraordinary capital requirements of the next d e c a d e , and managing a quantum jump in energy costs -- the greatest challenge our economy has faced. -5How does one b e g i n this process? Thoughtful people have quietly said that we must reorder our priorities a n d , i n d e e d , there is no a l t e r n a t i v e . But I suggest it w i l l be a terribly painful and difficult process for this s o c i e t y , w h i c h has b e e n led by its hopes and experience to expect the Government to continue to fund its social g o a l s . And the constituents of each and every program have the leverage with the Congress (and, for that m a t t e r , with the A d m i n i s t r a t i o n ) to make the process of adjusting priorities a social V i e t n a m . Examples are easy to come b y . O f f i c i a l studies and reports about the Social Security System indicate a major imbalance in receipts and expenditures under certain rather routine demographic assumptions for the future. This is exhausting the balances in the trust funds (normally one year's retirement benefits) and in a few years w i l l force the use of general r e v e n u e s . A v o i d i n g that trap could also mean 15 to 20 percent Social Security wage d e d u c t i o n , possibly a w o r s e a n s w e r . We must have some objective support for a c o n s c i e n t i o u s , factual overview of the System to correct its deficiencies and balance its c o s t s . Similarly and more s p e c i f i c a l l y , there must be a massive overhaul of the w e l f a r e s y s t e m , a collection of federal and state programs which are so inefficient and so extensively abused that they b e g a n a l y s i s . In this c o n n e c t i o n , you know what happened in the President's recent proposals to reform our food stamp practices. A substantial effort must be made to control the mindless -6escalation to recipients w h o neither deserve n o r were intended to receive the s t a m p s . In another a r e a , we have all b e e n talking querulously about the massive Federal deficits and what they will eventually do to*the capital m a r k e t . Our capital formation process is already too small for the demands placed upon it -- smaller than any of the other industrialized nations by relative measure in the free world. Gains in productivity are also grinding to a halt in the United S t a t e s , There has never been a time w h e n we more desperately needed to reverse these trends. But I suggest that reversal has to begin w i t h a new understanding and objectivity about our economy; and if we can get such a discussion moving in a democratic society, it w i l l affect all of the micro-issues w h i c h concern our economic world. It is w i t h i n this context that we should examine the changes likely to occur in our private financial intermediaries, for traditionally these institutions have reacted to and been significantly affected by social and economic c h a n g e . The kind of change I think most likely to occur in the short run is suggested b y the Financial Institutions Act of 1975, which this past December passed the Senate by a vote of 7 9 - 1 4 . The issues presented by the FIA have also been the subject of extensive hearings and discussion before the House B a n k i n g , Currency and Housing Committee in its study entitled Financial Institutions and the Nation's E c o n o m y . A principal and important thrust of FIA is to enlarge competition. Our u n i q u e system of private financial institutions has tended to be h e a v i l y specialized a n d , in fact, the Government through legislation and regulation has b e e n a party to that p r o c e s s . But crur economy is c h a n g i n g , o u r society has grown more affluent, people's financial needs are indeed more diverse than they were in e a r l i e r , simpler d a y s . If more and dramatic evidence is needed for my a r g u m e n t s , I can refer you to the painful disintermediation of the recent p a s t , the net outflows of funds from savings b a l a n c e s , and the havoc that inflation has visited on the small s a v e r . Hie FIA is designed to increase the strength of a number of financial institutions b y permitting and equipping them to respond more readily to these instances of e c o n o m i c , financial and institutional c h a n g e . be the c o n s u m e r . A clear b e n e f i c i a r y of this change w i l l The bill encourages greater competition and provides new opportunities for savers to receive a competitive rate on their investment while providing homeowners with greater assurance that the flow of funds for home mortgages w i l l not be disrupted during periods of high interest r a t e s . If Congress enacts FIA into l a w , our financial institutions w i l l benefit from the ability to offer new services and enter new markets; and their c u s t o m e r s , both depositors and b o r r o w e r s , w i l l share these b e n e f i t s . Under the provisions of the F I A , savings and loans and mutual savings b a n k s w i l l be permitted to offer checking accounts and negotiable order of w i t h d r a w a l accounts to individuals and -8b u s i n e s s e s , while diversifying a portion of their investments into consumer loans, unsecured construction loans, commercial paper and certain high-grade private debt s e c u r i t i e s . Commercial banks w i l l be permitted to offer savings accounts and NOW a c c o u n t s . To improve the availability of mortgage c r e d i t , commercial b a n k s , savings and loan a s s o c i a t i o n s , mutual savings banks and other taxable financial institutions will be granted a tax credit incentive to enlarge their voLume of mortgage loans. The tax credit is presently based on an accelerating formula in the A c t , moving from 1.5 to 3.83 p e r c e n t , depending upon the proportion of assets held in residential m o r t g a g e s . In a further effort to aid all banking institutions in the financing of the housing i n d u s t r y , the FIA envisions the elimination of Regulation 0 5-1/2 years after the effective date of the A c t . Prior to this d a t e , Regulation Q authority is to bs exercised by the regulators in a manner "which prevents disintermediation and maintains appropriate levels of mortgage credit." S i g n i f i c a n t l y , the FIA provides for a substantial expansion of the asset and liability powers of credit u n i o n s . Among these are the granting of checking account p o w e r s , the establishment of a central discount fund to obtain funds for short-term liquidity purposes by issuing obligations in the capital m a r k e t , and the power to make a w i d e r range of loans, including mortgage loans, at more varied interest r a t e s . Credit unions are also granted expanded investment authority with regard to F e d e r a l , state and local -9obligations and are permitted to s e l l , purchase or handle any money transfer instrument for benefit of their m e m b e r s . It should be apparent that I believe the FIA to be important legislation which provides a clear statement of national policy on financial r e f o r m . It represents a plan for the implementation of balanced reform over the next several y e a r s , is comprehensive and I think fair, and should assure the opportunity for sound growth of all affected financial institutions in our changing s o c i e t y . C l e a r l y , the FIA grants to credit unions a number of powers necessary to better serve the interests of your ever-growing constituency. The FINE Study discussion principles currently under consideration by the House B a n k i n g , Currency and H o u s i n g Committee incorporate w i t h a few minor variations the provisions of the F I A . But the FINE Study goes w e l l beyond FIA-type reforms in its proposals to support h o u s i n g , consolidate the regulatory a g e n c i e s , restructure the Federal Reserve S y s t e m , and establish new regulation of foreign banking in the United States and U . S . banks operating a b r o a d . Representative Henry R e u s s , Chairman of the House B a n k i n g , Currency and Housing C o m m i t t e e , hopes to b e g i n hearings in two w e e k s on these sweeping p r o p o s a l s , and has publicly announced his intention to see financial reform enacted into law before the first of J u l y . I sense that M r . Reuss' timetable is r e a l i s t i c , and although I personally do not believe w e will have radical change w i t h i n the banking industry this y e a r , I believe we will indeed have change-perhaps even aggressive change. -10With these changes w i l l come new challenges for all financial i n s t i t u t i o n s , including credit u n i o n s . But if past performance is any barometer of future a c c o m p l i s h m e n t , and I think it i s , then credit unions surely possess the dedication and dbility to meet these new c h a l l e n g e s . The last decade has materially changed the financial environment in which credit unions must function. Growing i n f l a t i o n , resulting in part from the Vietnamese w a r and in part from o i l , raw material and agricultural s h o r t a g e s , has b e e n responsible for a series of basic increases in the levels of interest r a t e s , aggravated by attempts to halt the rise in p r i c e s . Certificates of d e p o s i t , liquid asset m u t u a l funds and an increased volume of capital market instruments resulting from the heavier financing activity of Federally-sponsored agencies have appeared as major new alternatives for the s a v e r . Charge cards and the growth of credit extensions by such nonfinancial retail firms as Sears Roebuck and J . C . Penney have greatly increased the degree of competition in consumer finance. Service c o r p o r a t i o n s , holding companies and other innovations in institutional structure have opened up new competition in the financial i n d u s t r y . The growth of Federally sponsored credit agencies and such housing-related private institutions as F N M A , have m a t e r i a l l y changed the markets for mortgage c r e d i t . On the whole there has probably b e e n a greater change in our financial institutions during the past ten years than during any comparable period since the mid-nine teen thirties. -11And there is little evidence to suggest that this trend w i l l abate in the coming post-Bicentennial d e c a d e . The modifications to the powers and responsibilities of our financial institutions as proposed in the FIA and the FINE Study w i l l b r i n g with 'them concomitant changes in the operating practices of the affected i n s t i t u t i o n s . Recent hearings on a Federal Reserve Board proposal to regulate the operations of foreign banks in the United S t a t e s , on a Senate b i l l to consolidate the examination and supervisory agencies -- the F D I C , Fed and Comptroller -- into a single a g e n c y , and on a proposal w h i c h would limit acquisitions or mergers of certain b a n k i n g i n s t i t u t i o n s , suggest that we might w e l l see substantive changes in these areas in the near future. There are many other significant challenges which w i l l confront our financial institutions in the next few y e a r s . The development of a widespread electronic funds transfer system, and the corresponding revolution in our payments systems is on the near h o r i z o n . The National Commission on Electronic Funds T r a n s f e r s , on w h i c h you are most ably represented by Herb W e g n e r , has w i t h i n the past few weeks begun to focus carefully on the multitude of new and complex financial and social questions presented by the use of such a s y s t e m . We must w i t h i n the very near future find a w a y to finance the research and development necessary to relieve our growing energy s h o r t a g e s . We must develop new and effective approaches to meet the recurring problem of housing finance, the critical challenge of increased capital formation, and the ever-growing needs and demands of customers of -12all our financial i n s t i t u t i o n s . And these are only a few of the many positive steps we must take. As you move through your discussions at this meeting to consider the changing financial e n v i r o n m e n t , and the challenges a h e a d , I hope you w i l l consider broadening your involvement to include the w i d e r economic challenges to our s o c i e t y . I don't mean expressing your views to the m a n y Administration officials to w h o m you have a c c e s s . Congress. Nor do I particularly mean only to the I refer to the broad public that credit unions s e r v i c e , to all of your c u s t o m e r s , large and s m a l l , in the multitude of communities throughout this nation where you carry on your o p e r a t i o n s . You can do a great deal b y codifying the economic risks we face, and b y explaining the technicalities that so often mystify the general p u b l i c . There is no doubt we w i l l have many challenges in the decade a h e a d , b o t h in our financial intermediaries and on a broader scale in our institutions at l a r g e . As leaders in your industry and leaders in your communities you can provide a great service by assisting your nation's policymakers in the formulation of effective and lasting solutions to these c h a l l e n g e s . And I think you should do that. Because while we are all interested inevitably in our own industry -- and the FIA and FINE legislation provide many new advantages to credit unions -none of our financial intermediaries w i l l prosper if our private economy is d i m i n i s h e d . I suggest that the Bicentennial year could be more important in our history than an a n n i v e r s a r y . It -13may w e l l be the year we determine as a nation to return to sound and moderate f i s c a l goals and as I look at the extraordinary past achievements of this nation I think that would be something to c e l e b r a t e . Thank you
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