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Collection: Paul A. Volcker Papers
Call Number: MC279
Box 9
Preferred Citation: Congressional Correspondence, 1979 December; Paul A. Volcker Papers, Box
II
I
II
9; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University
Library
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December 31, 1979
The loaorablo JobsJ. fikedloo
Miserity Leader
Comes of isgoesestatives
Ceshiestme, I. C. 20515
osier Mr. Rhodes:
1 ma pleased to respond to year Lofton a Deesmber It, Ca
you **pros, disappoiorsmat that year amehmest Mi. C. fl. smamm.
was not *beers be 117, to some se the Demodes Commoner Adviser,
Council.
As you know, osly thirtoos new mosibers wore sppoiated to
the Cassell is 1979, fros o total et nearly 400 lodtwideels *he 'ors
voessoondod for membership* Immesmeh as the Cassell'. nmebersbip
collestively reproonsto the interests of our estlwo slalom in the
area of semeamor credit vegetation, many Mighty qualified eed interested sesames/ lihs Mr. penbmo will mot hoot so opportunity to serve
at this tige.
Ten eay beam:OW that Mr* pioltoswill wilt be cossiderod
vhse sew member* to the Coma are selected is 19110.
Slew:rely,
SZEaul A.
JPirsed (UV-146)
bee: Mrs. Mellardi (2)L.7
Janet Cart
Ana Maris Bray (for follev-up)
JOHN J. RHODES
1ST DISTRICT, ARIZONA
f
O
H-232. THE CAPITOL
WASHINGTON. DC.
2310 RAYBURN HOUSE °MC,. BUILDING
WASHINGTON. D.C.
20515
JOHN J. WILLIAMS
20515
Office of die
JAMES R. FELTHAM
DENNIS J. TAYLOR
ILeaber
GERALD LIPSON
CLARA POSEY
Unita, tqatef5j.boursc of lArpregentatibto
Zilasl)inqton. D.C. 20313
December 11, 1979
f
f.l(
(
4f,
The Honorable G. William Miller
Chairman
Federal Reserve System
Washington, D. C. 20551
Dear Mr. Chairman:
Understandably, I was most disappointed that my
recommendee, Mr. R. D. Dunham, President and Chief Executive
Officer of the Wells Fargo Credit Corporation, was not named
to the Federal Reserve Consumer Advisory Council.
It is possible, however, that at a later date a
member of the Council may resign or be otherwise incapacitated.
In that event, I urge that Mr. Dunham be considered for appointment as a replacement. Knowing as I do of his excellent qualifications, I am pleased to once again recommend him to you.
urs
incerely,
4,
r**44L
SIN
John J.
odes, M. C.
Minority Leader
Am;
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BOARD OF GOVERNORS
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OF THE
FEDERAL RESERVE SYSTEM
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WASHINGTON,0 C. 20551
44, ••
PAUL A. VOLCKER
• IQAL
•... • •
CHAIRMAN
December 21, 1979
The Honorable J. William Stanton
House of Representatives
Washington, D. C. 20515
Dear Bill:
Your point about the ceiling on Bank "give
aways" is well taken.
The staff has this matter under
study and it is expected to be considered by the Board
in the near future.
We will keep you informed of any
developments.
Best wishes,
J. WILLIAM STANTON
11TH DISTRICT, OHIO
•
Action assignei to 0. Petersen
ft! f T
2466 1tArilifin4 Dun twari
WASHINGTON, D C.
Pilopar
20515
PHONE: AREA Coor 202, 225-5306
Congre5.5 of the aniteb ikate5
COMMITTEE ON
BANKING. EINANGU: AND
Ar+p A (..oDE 216, 3,
12-6 in/
MANfon Prr,T Or t Irr.
10746 NORTH MAIN STREET
3f)otuse of Ikepre5entatibt5
Oino
URBAN AFFAIRS
Ulatsbingtott, ;3.e. 20515
COMMITTEE ON
SMALL BUSINESS
December 11, 1979
Hon. Paul A. Volcker
Chairman, Board of Governors
Federal Reserve Board
Washington, D. C. 20551
Dear Chairman Volcker:
It has recently come to my attention that under the Federal
Reserve Board's regulation Sec. 217.2(b) of Regulation Q, the dollar
value of so-called "give away" items which an institution provides in
promotional campaigns is limited to $5 for investments of less than
$5,000, and $10 for investments of $5,000 or more.
I understand that this limitation was established in 1970.
Since 1970, however, the value of the dollar has been continuously
eroded by inflation to the point where a 1970 dollar is only worth
52ct today. In light of this situation, I would hope the Board and
the other members of the Coordinating Committee would consider reviewing the current limitations. Possibly, the $5 limit could be
increased to $10, and the $10 limit to $20.
Please keep me informed of any plan for reviewing this issue.
Sincerely,
S. William Stanton
JWS:jsn
411:C1
Am A C..00r 216. 274 11444
December 18, 1919
The Senewible Peva Sotainia
Chairmen
Subcommittee en Comm,faskill
44mmdttee es Staking, Moues end
Sams Affairs
limns of Representative
Indelngton, D. C. 20515
Deer Chair--m Amemesio:
Thcik yen for year letter of Sivelber 2$ requesties t formpl
Do‘rd interpretstiom me the definition of suneutherised eteetronic fund
unetutheft
transfer" in Reemlittiee Si. Specifically, you iingeire mhethet en
rimed electronic fuad treader has occurred in the following mese: An
employee fureishes his mennotary with his cl.bctremic fund trmseder assess
device (includieg the peesenel identificatins sember) sad iestrmets her
for
te withdrew $50 for him. She imstead vithdtmes '100, beeping On
herself.
It is your opteies that the empleyeres ammonia' institution
because
'said met be limbic for sew enema withheld by the secretary,
(k)
the definition of lowolherieed electronic teed triumpher* Le 1 203.2
iated by e
of Sepulaties I speeifiselly elladodes my trawlers "init
ow farnisendwith the access devise
pewee ether the. the awassomr
has metia
to the 411110.1110198 INISINIMS by the coMomOrt unless the coolkombir
fled the fimemelal institsties involved that trawlers by that person
furniebed
ere me larger authorised.* Vies bottom that slime the employer
the secretary with the seises device, any transfers made by her autos
setically fall within the quitted exclusionary prowieima of 11 205.2(k).
The staff of the Division af Consumer and Community Affairs
agrees with your position. It is their unofficial opinioe that the
transfers by the secretary in theee particular eircumstamess see met
umeutharined transfers within' Obe 'easing of the Act mod tamolotioe,
end that the eopleyer weld be fully liable for any lessee towelled
es a result of her ese et the *cc.** device, until be notifies the
instifttion.
The limmumMble ft.* Alemotie
hiers
Although pee 'requested a fermi Board interpretation ot Sega.
letter 11, I de net believe that eseh ea interpretation is esseesery in
light 44 the ittaft's Wads& that the statutory provision is elegy.
Staastrely,
ioickg
:11114:vcd (#V-131)
bcc:
Ma. Barr
Mrs. Mallardi (2)
AMMala
-
.0.41111••••..
FRANK ANNUNZIO. ILL., CHAIRMAN
GLADYS NOON SPELLMAN. MD.
BRUCE F. VENT°. MINN.
WALTER E. FAUNTROY. D.C.
PARREN J. MITCHELL. MD.
CURTIS A. PRINS.
STAFF DIRECTOR
TELEPHONE: 225-9181
Action assignei to Janet Harlirth info
copy to Gov. Teeters
THOMAS B. EVANS, JR., DEl .
CHALMERS P. WYLIE, OHIO
DON RITTER, PA.
U.S. HOUSE OF REPRESENTATIVES
NINETY-SIXTH CONGRESS
SUBCOMMITTEE ON CONSUMER AFFAIRS
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
ROOM 212 HOUSE OFFICE BUILDING ANNEX
WASHINGTON, D.C. 20515
November 28, 1979
1
1/1 3/
Honorable Paul A. Volcker
Chairman
Federal Reserve Board
20th St. & Constitution Ave., N.W.
Washington, D.C.
20551
Dear Mr. Chairman:
Misunderstanding of an important provision of Regulation E has resulted
from an article in the October 17, 1979, issue of the American Banker entitled
"EFT Act Legal Snarl Seen."
The article indicates that if an employer furnished his secretary with
his electronic fund transfer access device and told his secretary to go to an
automated teller machine and withdraw $50 and she withdrew $100, keeping the
extra $50, that this would be an unauthorized transfer and consequently the
bank would be liable for the $50 loss. This is not true. Under the Electronic
Fund Transfer Act (Section 903(11)) and Regulation E (Section 205.2(k)) the
definition of an "unauthorized electronic fund transfer" clearly makes the employer liable in such circumstances.
Consumer legislation is often criticized for being so pro-consumer that
it is unfair to financial institutions. As a result, Congress made a special
effort to provide in this law that a bank would not be liable in the circumstances
described above because it would be unfair to impose liability on a bank since
the loss was a direct result of the employer furnishing his access device to
another person.
I do not want this misunderstanding to go uncorrected because it is so
serious. Accordingly, I would appreciate it if the Board would issue a formal
Board interpretation with respect to section 205.2(k) of Regulation E to clarify
that the definition of an "unauthorized electronic fund transfer" excludes any
electronic fund transfer initiated by a person who was furnished with the access
device to the consumer's account by the consumer, unless the consumer has notified
the financial institution involved that transfers by that person are no longer
authorized.
Thank you for your cooperation in this matter.
Sincerely,
sI
Frank Annunzio
Chairman
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• • • •.• • •
PAUL A
VOLCKER
CHAIR MAN
December 18, 1979
The Honorable Harrison A. Williams, Jr.
United States Senate
Washington, D. C. 20510
Dear Senator Williams:
I have now had an opportunity to review in greater depth the
issues raised in your exchange of letters with Chairman Williams of the
SEC. The problems that have emerged in markets for mortgage-b
acked securities seem to suggest, as you point out, the wisdom of detailed consi
deration
of the need for Federal legislation, or other Federal actic
n, to support or
complement efforts at self-regulation. Questions at issue relat
e to the
scope of possible regulatory action, the role of self
-regulation, and the
appropriate regulatory relationship of the government and
its interested
agencies to markets for government-guaranteed securities
and possibly also
maTets for closely related securities, such as issues of
governmentsponsored agencies.
As you know, tho market is now attempting to develop a frame
work
for self-regulation through PSA Self-Regulation, Incorporated.
One cannot
be certain at this point how well this effort will succeed.
However, operating rules and standards of fair practice for trading mortgage
-backed
securities have now been adopted, and similar rules and standards
for
trading government-guaranteed loans are expected shortly. PSA
Self-Regulation
recently launched a promotional campaign designed to extend membe
rship to at
least the major firms that trade these instruments. In addit
ion, both GNMA
and the federil regulators of financial institutions have inaugurate
d certain
reforms and are planning others, with a view to imposing additional
constraints
on the types of market abuses that prompted your concerns.
The rules adepted by PSA Self-Regulation attempt to address the
key problems of customer suitability standards and margin for forward
tr:asactions--the areas of industry practice that appeared to be most in
need of
upgrading. Nevertheless, there is still a question whether a stric
tly private
organization can encourage membership from enough of the firmsactiv
e in the
market to insure that these strengthened self-regulatory standards
will be
effective. Moreover, in seeking to skirt potential violations
of the antitrust laws the PSA rules simply encourage individual firms to
establish
"'
• `40,4 .44- • •
4111P
The Honorable
Page Two
arrison A. William;, Jr.
4
,;
•
prudent constraints on risks, including maintenance margins. They do not
seek to enforce any uniform industry-wide mark-to-market requirement.
At this pint it is too early to say whether the combination of
actions being taken by the federal regulatory agencies and PSA SelfRegulation, Inc., will prove sufficient to curb the abuses Oat have
emerged in markets for government-guaranteed debt. Both types of action
do seem promising, however, and the PSA effort represents an encouraging
step toward the assumption of greater responsibility by market participants for policing themselves. For these reasons it would seem desirable
before considering any additional government regulation to monitor closely
the progress of steps already in train, until their viability can be
reasonably tested.
At the same time, it would seem desirable to begin a more general
study of markets for government-guaranteed securities. Such a study would
probably also have to consider other closely related markets--such as the
market for federal agency securities. This study would consider, among
other things, the details of trading and delivery of these securities as
well as other operational characteristics of these markets. Its purpose
would be to identify the scope and relative significance of problems that
may have emerged in each market, along with any differences in the nature
and extent of such problems from one market to another. The study would
consider courses of action--including the specification of trading practices
and other operating characteristics of markets—that might be used to supplement or reinforce efforts at reform already in train, if this seemed
warranted. If the analysis did suggest that further regulation were needed,
the study would consider alternative approaches to meeting the problems
detected in the study. We would have in mind forwarding this study to the
Congress early in the next session.
To date no detailed study of this type has been made. The earlier
study prepared by R. Shriver Associates for the Department of Housing and
Urban Development—while very useful--focused essentially on forward transactions in markets for mortgage -backed securities. Moreover, it was concerned more with exploring the prospects for private self-regulation than
with evaluating the possible need for and techniques of public regulation.
I have discussed in a preliminary way the possibility of organizing
the type of study outlined above with both Deputy Secretary Carswell of the
Treasury and Chairman Williams of the SEC. They have responded favorably to
the idea. Other interested agencies will, of course, have to be involved
on a consulting basis, but primary responsibility should be limited to our
three agencies if the study is to be completed reasonably early. We contemplate a report by April.
Tittraffor•Iri
The Honorable Harrison A. Williams. Jr.
Page Three
We are prepared to proceed in this way and would welcome your
comments on this approach. In the neanwhile, the attachments provide
the specific information you requested on our current regulations and
procedures.
Siplerely,
ki
ed
Enclosures
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rs
1 et ter
state member banks
gu:ird aga I nst. quest ion ab 1 e
1•.11;!.ac t.
Ions.
sup.iry isory let ter :$1Z-171 dated Ju 1 y 7 ,
197s
I ()I- \%a rt1 i nr, the "Preliminary Exam i ners '
toniri i
Fut ury!,
chn nge Tri d(.'(1 Interest Rate
)ii1 ton V I s
•
rwa rd Contracts, a id St'and-
cnpy a ttached ).
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SR-471
ins t. rue t cd
(.omplet e a quest i 0 TIfla ire, to t
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comme re i a I
;t1) 1e ,
311 con junc t. ion w 1 111 each
,x am i nat. i on conduc I ed during the
rma incHr o!
.(111( Ai I Iv
1978.
(Use of this quest i onna i re was
lit )1 j zed
thruur,Th Jun
'30, 1979. )
•
- , rv
,1
. 14`1•`,
c
;111-‘ , ) Wit ‘...1
letter Slt- -t (and en -
February
1.1 ,
19.79 speci ly ing slaf f 's
jrcquinLing' treatment of "standby" con
t
rt . 11;- 4'
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th:t t
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',thrall to re 1 (;t:-;P
t%ilh
con jtinc
ic)ri
re::u!;,.torv agencies.
!orrial !:,oard enforcement proceedings have
\!th-.;n
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lt‘s.
th.. "Policy Statement
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;17.
1 ()I.v.-ard (pt.
mil
:tndby con L rat.' s invol v i
govern-nt-ruarant-..d or F. S. Treasury securit es, four state
throurh the
member hailL, lia\f. received supervisory attention
:; because ol
hanl;
(i:,;!1A secil r
w.
third !!::111
losses resulting from
in
in
lrom the bank
t() imrchase securities.
bank was Founi lo he enrared
transactions in
to standby
question has been workin
liquidity probtem resultin
•
, ontrar
11, morini:
Two
bank was found to be speculating
lurv.:Ird contracts, the bank
its way .)111
WO
to charge ()It.
"put" t() the banks pursuant
t
A
(i:;!.1A
intructed
such contract activities.
A
Fourth small
in speculative..securitios
and U. S. government securities; these
transactions were critici;:ed by Federal Reserve examiners as
unsat . and un:-;ound and
similar tran!--;;Icti.ms
bolieved
with
that
in
the bank has agreed not to engage in
tlw
future.
In all cases, it is
lhe examination process was adequate to deal
th.. prohlf=; involved.
January 3, 1980
The demerablo Thaws P. 0416111, Jr.
Spesbor of the lioso of Isproseatotivas
Washington, D. C. 20515
.lesr it. *Peaks"
the board of Governors is plowed to submit its
olormstaiiressaal Upon as Troth to Loadimg. The report
01041111 Wooditsa ismeileage, sato-moment, logislative recce
nemdstiose, sad the Seores administrative femstioss umler
the Troth is Leading Act for the year
Sincerely,
Eagleson*
Speaker of the House of loprosostattves received
Speaker of the House of Reproseatstivos by
DJW:vcd
bcc: Mrs. Mallsrdi (2) --
•
lieseMber 13, 1979
The ileesseble wiliLen 144 Arestrases
united State. Sestets
Washington, D. c. 2t510
Deer Senator Ammetrsft.
on urit.ing to you is reepemes to the vestige* seised in
ye,r recent tatter about Senator rover'S vispeaed memeterf impeeeement
legislation (S. 353). At the outsets ellen es to reiteenta the essence
of or peettles as L outlined it to you duties or recent essiereeties.
In brief, the Pedemel liseerve remains of the view that the 'Illesedaterr
41.roa h as eibedied in S. a5 is not esly the preferred but the practical
*elution to the 'Fed ossibership 'nobles. Onst general av.IroavA is beth
serkibte mad equitable sod it entails only a very emdest drain se Tresses,
revestuse.
the viewpoint of aemmeary policy, Ihove mooed that amp
legislation terve the Ped with the canacity co obtain' is large seeu.
loot of reserve balanose held at the Federal Ifteerve Smoke to memos
the effettive and offit,ieet ceedent of useeLary matey. thibe IND OW,
not be :precis* as to the theetheld Level et reserve beLencas necessary
for lelicy, we have token the view that amy issielattee Should provide
the potential, at limiest theme* as oottemel slasuraece peliQy" 7rovIstee,
for a reserve bees of about $20 billies or mere in the content of 1977
deJosit leves.
us hove alums viewed the teems at the adequacy
of the reserve beam as isle Of central famertemoe* the chow is oar
oNeretieg :reced4res Montag in ,senettion pith the Octsher It peewee
underscores this point eves MOM forcefully.
Yule
As yes Mew, that theme, is eperetins pagesnisme entails
plamfas sreater empheeis as cestsellieg the sepply of reserves as the
apaeattems4 vehicle for controlling the maw Supply. avert the wide
row of forces that con influeece the Lewd of room**--int_tudtag
large swings in fleet assetimes attributed to things as unpredictable
as enewstorms--ths smaller the reserve base the sroOtor the dietertimme
amid (operational uncertainties.
(Avon the ismortsece of the atm of the reserve base for
peeped** of monetary _enrol 1 as caneeemsd that the level of the
Meeerse ratios in S. 333 eightlosll lease eeirith as imsdequete level
lieeelble William L. Armstrong
Pees We
et reserve balamres. This priblem could be alleviated by raising the
menimum reeerve ratio avinet transactions balamwes to L3 moment. Alternatively, authority could be granted to require a sccIplemental reoerve
requireitent wiser all ty)ee of reeervable deposits. became. totemicties*, *swipes, eed ahort-term tine deposits are reservable %leder S. 333,
a provtaisa stLavii2 to 3 percent of the total of stirb deposits to be
required as enpvlemeetal reserve* uou'id appear adequate. if a reserve
requiremeet structure different from that Ln S. 333 mere to be chosen,
thee the supplemental provision might have Le be ad:oasted. As peu are
well emeee, other ontentious issues arias in .onsAeratiee se S. 353.
I Appreciate the opportunity to .oument further ea these
ieetzes.
Simmsly,
SAW A. irobAef
*GC:?AV wed (fI-134)
toce:
Mrs. Millard' (2) messrs. Corrigan, Axilrod
WILLIAM L. ARMSTRONG
COLORADO
/3V
?..1Cnifeb Zfafez Zenaie
WASHINGTON. D.C. 20510
P41
November 30, 1979
The Honorable Paul Volcker
Chairman
Board of Governors
of the Federal Reserve System
Washington, D. C. 20551
tt
Dear Mr. Chairman:
As I mentioned to you last night, I am inclined
to generally support Senator John Tower's Federal
Reserve membership proposal (S. 353).
I believe,
however, that S. 353's range on reserve requirements
does not provide the Federal Reserve with adequate
tools to implement monetary policy.
Senator Tower indicates he is willing to consider
a higher level of reserve requirements.
Therefore,
I would appreciate having the Federal Reserve's
recommendation for the most prudent range of reserve
requirements which ought to be included in S. 353.
Also, please prepare a separate recommendation, if
necessary, on the assumption that S. 353 may be amended
to include a supplemental reserve similar to that proposed by the Federal Reserve.
44kro
-
I look forward to hearing from you at your earliest
convenience.
•
Best regards.
1:".
100/iely,
L. Armstrong
WLA:bb
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4mbeft. 11, 1,79
Tht Soessable Willies ?reentry
Chairmen
Committee es Saehisli, 106,1105
am* Saban Affairs
Seised States Soesto
4ushimstoa, D.C. 20518
Amor Cimino's" rsesedret
Mesh yee fat your letter *f ftesolistr 6 regardimg you,
Cymeittoes oversight bearings en audiessemmt of fair mortgage tomolimg
Use ami riNgulattess.
1 an ploaesd to team pee that diversor low 8. teeters
.111 testify se behalf of the Soma es SessibSe 21 at 100S0 situ
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SZPaul voutei
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bec:Oev. Teeters
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Mrs, Kollardi (2) ----
WILLIAM PROXMIRE, WIS., CHAIRMAN
HARRISON A. WILLIAMS, JR., N.J.
ALAN CRANSTON, CALIF.
JOHN TOWER, T
ADLAI E. STEVENSON, ILL.
JOHN HEINZ, PA.
JAW( GARN, UTAH
RnBERT MORGAN, N.C.
WILLIAM L. ARMSTR
DONALD W. RIEGLF. JR., MICH.
NANCY LANDON KASSESAUM, KANS.
PAUL 3. SARRANES, MD.
RICHARD G. LUGAR,
NG. COLD.
D.
DONALD W. STEWART. ALA.
'11Cniteb ,Statez „Senate
PAUL E. TSONGAS, MASS.
KENNETH A. MC LEAN, STAFF DIRECTOR
M. DANNY WALL, MINORITY STAFF DIRECTOR
COMMITTEE ON BANKING. HOUSING, AND
MARY FRANCES DC LA PAVA, CHIEF CLERK
URBAN AFFAIRS
WASHINGTON. D.C.
20510
December 6, 1979
•
1
•1
Mr. Paul Volcker
Chairman
Board of Governors of the
Federal Reserve System
20th and Constitution Ave., NW
Washington, D. C. 20551
r—
Cr)
Dear Chairman Volcker:
This letter will confirm the scheduled appearance
of you or your designee on December 21, 1979 before the
Senate Committee on Banking, Housing and Urban Affairs
to testify at oversight hearings on enforcement of fair
mortgage lending laws and regulations.
ir;270,
1.111•11111110
In order to help focus your testimony, I am enclosing
a memorandum prepared by staff which poses some specific
questions. We would like you to incorporate responses
to those questions in your testimony.
The hearing will begin at 10 a.m. in room 5302,
Dirksen Senate Office Building.
Rules of the Committee
require that you submit 75 copies of your written testimony
at least 48 hours in advance of your appearance. Please
deliver these copies to the attention of Mr. Steven Rohde,
5228 Dirksen Senate Office Building. If you have any
questions, you may call Mr. Rohde at 224-9211.
The Committee greatly looks forward to your appearance
on December 21.
Sincer
W4
-rim Proxmir
Chairman
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MASS.
COMMITTEE ON E1ANKING, HOUSING. AND
KINNITh A. MC LEAN. STAFF DIA ICT0011
U.
URrIAN AFFAIRS
Aic.fr WALL. MIHOHITY STAF7 DIRICTOR
SAAR V
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D C LA PA VA, C.P11 CP C-1.-LAX
WASHINGTON. D.C. 20510
December 6, 1979
Staff Memorandum Posing Questions for Response
in Prepared Testimony of Board of Governors
of the Federal Reserve System
1.
Effects Test Under ECOA and Regulation B
The legislative history of the Equal Credit Oppertnnity
Amendments of 1976 makes clear that Congress intended Lhot the
effects test should be used in the administrative enforcement
of the Equal Credit Opportunity Act. The effects test is one
of the most significant and far reaching aspects of the ECOA.
Yet, in developing Regulation B, the Board failed almost
totally to address this issue, by relegating the effects test
to a very brief footnote (footnote 7 to section 202.6(a))
which provides no guidance at all on how the effects test is
to be implemented under the ECOA.
It appears that the effects test was not addressed in
Regulation B because the Board believed that implementation
of the concept should be left primarily to the courts.
However, subsequent to the adoption of the amendments to
Regulation B, the Board in connection with its enforcement
of fair lending laws for State member banks, has made a very
significant shift in its perspective on the effects test.
The Board's new Compliance Handbook takes an affirmative
posture on the effects test, by including an extensive
discussion of the principle of the effects test, by providing
some examples of practices which may violate the effects test,
and by making it clear to examiners that they have a responsibility to examine banks for compliance with the effects test.
Thus, it would appear that the Board no longer holds the
view of the effects test which caused it, in 1976, to refrain
from addressing the issue in Regulation B. )uestion -- Should Regulation B be amended to set forth the general concept of the effects
test, and to provide illustrative examples of policies and
practices which might violate the effects test?
2-
2.
Collection of Racial Data Under Regulation B
In order to monitor compliance with the ECOA, Regulation B provides for the recording of racial data on mortgage
loan applicants. The sole method utilized, however, is self
identification by applicants. Because this method of data
collection has resulted in substantial missing data from the
files, which severely impairs the utility of the data for
monitoring compliance, the FDIC, Bank Board and the OCC have
all found it necessary to include, as part of the substitute
monitoring systems they have adopted, a provision for backup
identification by visual observation or surname. In light of
this experience, shouldn't Regulation i be amended to provide
for such backup identification?
3.
Adoption of Substantive Fair Mortgage Lending Regulations
and Guidelines
The Federal Home Loan Bank Board has had in effect for
some time substantive regulations and ijuidelines which specify
the kinds of practices which constitute prohibited discrimination in mortgage lending. Among other things, these regulations
and guidelines 1) explicitly address neighborhood
discrimination,
2) provide guidelines on the effects test, by setting forth the
general principle of the effects test and providing a number of
specific examples of practices which may have a discriminatory
effect, and 3) address discrimination in marketing practices.
Studies of lending patterns in California have indicated that
similar regulations and guidelines adopted in ]976 by the State
of California affecting State licensed savings and loan associations had a demonstrable impact in improving the flow of credit
to historically mortgage deficient neighborhoods. Does the
Board have any plans to adopt substantive regulations and
guidelines such as described above?
4.
Treatment of -Effects Test in Compliance Handbook
a) From a review of the Compliance Handbook, it is unclear
whether effects test problems noted by examiners are supposed
to be reported in the open section of the report of examination,
as opposed to the confidential portion. In order to facilitate
the prospects of corrective action, a strong argument can be
made that effects test problems should be reported in the open
section to ensure that the bank's management and Board of
Directors are notified of the examiner's conclusions and opinions.
What is the intent of the Board on where effects test problems
are to be reported? Should the Compliance Handbook be clarified
to remove any ambiguity by providing clear instructions that
effects test problems should be discussed in the open section?
•
b) In several places (page II. 1. /. and in the examiner
checklist R-FH-2), the Compliance Handbook suggests that
instead of using age of property as a loan criterion, a lender
should consider the "remaining economic life". However, use
of "remaining economic life" generally has had a very similar
effect to the use of more explicit discrimination on the basis
of the age of the property. Traditionally, many lenders
have used an underwriting guideline that the lerm of the loan
should not exceed its "remaining economic life". A strong
argument can be made that such a guideline is a violation of
the effects test, since its effect is to discriminate against
older neighborhoods where minorities disproportionately reside,
and since there is no overriding business purpose for such a
rule. As discussed at considerable length in hearings held
by the Committee last year (FNMA-FHLMC Underwriting, December 19,
1978), estimating remaining economic life is a very highly
subjective process, and even if it could be accurately estimated
it has questionable relevance to proper underwriting considerations since the future expiration of economic life need not at
all mean that the value of the property will have declined, but
instead merely that the improvements no longer add value above
the value of the land. Indeed frequently the overall value of
the property will have substantially increased.
In recognition of problems with the use of remaining
economic life for underwriting purposes, the Federal Home Loan
Mortgage Corporation has changed its underwriting guidelines
so that remaining economic life will not be considered unless
it is documented by the appraiser to be five years or less.
The reference on page II. 1.7. of the Board's Compliance
Handbook to age of property and remaining economic life also
refers to the option of evaluating the "condition" of the
property in lieu of evaluating its age. If properly documented and implemented, the "condition" of the property can
be a legitimate underwriting consideration, and should serve
all business purposes that use of age of property and remaining
economic life have been purported to serve. Question -- Should the
Compliance Handbook be revised to delete support for use of
remaining economiC: life as an underwriting factor, and to
warn that its use may be discriminatory in effect?
5.
Monitoring Violations
a) From the information provided to the Committee, it
appears that the Board's system for monitoring violations found
by examiners focusses on total number of violations, rather
than the number of patterns of violations. For example, it
would appear that if an examiner discovers, say, ten violations
of a given type in one bank, this would be reported as ten
•
•
-4
•
violations for that category in aggregating data among banks,
instead of one pattern of violation. While this type of data
is of some interest, its significance is somewhat questionabl
e,
since the number of violations reported could merely be a
function of the number of files an examiner reviews in the
bank. Rather than the total number of violations found of
any given type, it is of much more interest to know how many
banks were found to have a violation of a particular type.
Does the Board have any plans to revise its system of monitoring
violations to focus more on the number of banks found to have
violations of various types?
b) Does the Board have any plans to revise its monitoring
system so that it can monitor the number of effects test problems
identified by examiners?
c) The Board's current system Cor monitoring violations
discovered by examiners reports violations only by Regulation B
section number (in addition, all Title VIII violations are reported
without any breakdown). This system of categorization is not
always helpful in determining the nature of the violation. By
contrast, the Bank Board and the FDIC (particularly the FDIC)
have more descriptive systems for categorizing violations, and
which therefore provide for a betterunderstanding of the nature
of the deficiency or violation. What changes, if any, are
being contemplated in the Board's system?
6.
Prescreening
a) On Page 11.1.36 of the Compliance Handbook, examiners are instructed that interviews outside the bank
(with former employees, applicants, brokers and dealers,
or community groups) should be undertaken when any of
the following conditions are present: 1) few, or nonexistent denials on file; 2) evidence of disparate treatment exists; 3) denials do not reflect bank policy or
are inadequate; 4) racial composition of the community
is not reflected in review of the bank's loan portfolio;
5) geographic disparities in mortgage lending patterns
are not reflective of economic risk; and 6) complaints
alleging discrimination are filed with Reserve Bank,
other government agencies, or bank under examination. Given these criteria, particularly numbers 4 and 5
above, it would appear that such outside interviews should
be occurring fairly often. Does the Board have any system
to monitor how often these contacts are actually taking
place, and to monitor the effectiveness of such contacts?
If not, should such a monitoring system be instituted?
b) Does the Board have any plans to utilize the
technique of "testing" to determine how potential applicants are treated when they call or visit the bank?
•
_tS
7.
Data Analysis
The OCC, FDIC, and FHLBB have all been developing
computerized data analysis systems to assist in detecting
possible discriminatory lending practices. These systems
could help target the examination process by identifying,
for examiners, particular types of discriminatory lending
patterns that may be occurring in the bank, and specific
loan files and denied loan files which manifest the possible discriminatory patterns. Without such a system,
the examiner is forced .either 1) to review a relatively
small number of files, 'which if such files are not the files
which manifest the disparity, in all likelihood the discriminatory pattern will go undetected; or 2) take the
time consuming process of reviewing a large number of files,
while still retaining a significant risk that discriminatory
patterns may go undetected.
Does the Board have any plans to reconsider its
prior decision not to develop a data analysis system such as the
ones being developed by the other three agencies?
8.
Enforcement Actions
a) What policies and procedures does the Board have
in effect or in the planning stage to ensure that violations of fair mortgage lending laws and regulations
which are discovered by examiners are halted?
b) What policies and procedures does the Board have
in effect or in the planning stage to ensure that the
effects of past violations are corrected?
c) What is the status of the uniform enforcement
guidelines proposed well over a year ago? What substantive issues, if any, need to be resolved, and what
is the timetable?
•
teselber 14, 1979
The H norable Charles 1. Seemett
H u$* of Representatives
Washington, D.C.
20515
Deer Mr. $.tt;
I am pleased to :agreed to your request for comments regarding
the issues raised in the Deemiher 3 letter to yes fromft. Earl Poiteveet.
As you knew, this letter was another in a regent series that you have
referred to us; earlier letters evidently aseseed in the mails, for the
teeelber 3 letter raises a =Mbar of cuestione to Which we responded in
reettens replies (se* letters from Chairmen Ifoloker dated *member 16 and
flemenber 30).
Chink the one rest of the Seeeiher 3 letter that might rectuire
sons further discussion is the questime seised in the first paragraph
etgardieg the role of the diseount rate. Mt. Poitevent overstates the
impertamoe Se the dieseegt rate as a detecedgmat of other interest rates.
great extent,
its role is this regard is in fact mite limited. To
the discount rata is adjusted by the Feder*/ Meemme simply to hoer it in
liee with other interest rates, in order to eteid creating imeontives for
ageber banks to rely unduly on the !federal Seeorve discount window as a
sem* of reeseves or landahla hods. It is in part the fact that the
System does attempt to maintain this alignment that accounts for the use
of the discount rata as a base for some usury ceilings, for meet states
wisely desire to avoid permitting their usliry califs's* from getting so
tow relative to prevailieg rapt* that credit ?limitability is curtailed.
tnelooad tee sem el tha Maderal batizajimmu.Nutgam,
videb oily ramie helrial to NW. Poitsoest. It explains
in &seater detail the federol Semeireese ere:otiose and their *poet on
Ohs sesmom•
Sincerely yours,
Donald J. Wise
Special Assistamt to the Board
!%ncloeure
KJP:JPIS:pjt (FV-137)
bcc: Mike Prell
Mrs. Mallardi
ALLAMIlt
AMOIMMIIMIW
•
•
stongre5goftbelinittbilotates
jDoust of iltprtrstntatiors
glastington. 3D. C.
3
December 5,
197 9
Honorable Paul A. Volcker
Chairman
Federal Reserve System
Washington, D.C. 20551
Sir:
The attached comnumication is
sent for your consideration. Please
I nvestigate the statements contained
therein and forward me the necessary
information for reply. Please refer to
the date of my letter to you in your
response.
Sincerely,
CEB:lm
Charles F. Bennett.
Enclosures
. _einIer 0..)I(:ongress
P.S. Please !%1
refer to your November 16,
1979 response to me.
Earl S. Poitevent, Jr.
4301 Venetia Blvd.
Jacksonville. Florida 32210
(904) 389-5446
December
The Honorable Charles
House of Representatives
Washington, D.C.
3,
1979
ennett
Dear Charlie:
Thanks for sending Yr. Volcker:s letter of Nov. 16th.
Fie downplays the significance of the Fed's discount rate
on interest rates. Everyone in the money lending business;
banks, insurance companies, savings and loans, etc. all
tie their rates, either directly or indirectly, to the Fed's
discount rate. That is why I feel Congress should establish
the Fed's discount rate as it controls the national economy.
The State of Florida has had to raise it's usury rate from
1O fo 18 to accom'Odate the Fed's 12% discount rate.
It is true that the banks Are paying more interest to
their savings depositors and also some interest on checking
accounts but this is a direct result of the Fed's tight money
high interest rate policy.
The Fed's policy seems to be oriented to protect the
holders of the t916.5 billion Eurodollars outstanding. In
fact all of the Fed's moves have been anti borrower And pro
lender. Whereas my encyclopedia says the Fed was formed to
protect the borrowers of the nation by insuring ample funds
at competitive non usurous rates.
Mr. Volcker admits the Fed has increased it's assets by
.100 billion in the last nineteen years to t150 billion.
The Fed has milked this money out of the economy by manipulating the Government bond market by running interest rates
up and down on various pretexts. These Federal securities
and/or cash, in my opinion, should now /turned
t
over to tie
Treasury because with V965 billion Eurodollars outstanding
there is no longer any reason to protect the value of U.S.
Government bonds. As a matter of fact the Government is
now floating bond issues in Europe.
I do not understand Mr. Volcker's comment on balance
of payments. It is hard for me to believe with ,965 billion
4.
-2-
Eurodollars outstanding our national banks would be
loaning money to foreigners and especially so since the
article I sent to you indicates we are borrowing the
Eurodollars back everyway we can to keep our own economy
going.
As for protecting the international value of the
dollar this can only be done by the holders of the Eurodollars, and it is to their vital interest to do so.
Actually, they are more "over the barPel" than we are.
The only mistake we can make is to borrow the Eurodollars
back at any rate other than a bargain rate (say
For the more interest we pay for Eurodollars the more
they are debased. Congress can strike a blow for the
Eurodollars by getting interest rates down in this country
and, as stated before, this can only be done by Congress
stepping in and setting the Fed's discount rate as the
Fed's Board of Governors are oriented to lenders not borrowers.
With best wishes and assuring you of my deep appreciation
for your help, I remain,
Sincerely,
•
FEDERAL RESERVE SYSTEM
tpt4 ()
•
PA.1,
A
voicKrn
CHAIRMAN
November 16, 1979
The Honorable Charles E. Bennett
House of Representatives
20515
Washington, D.C.
Dear Mr. Bennett:
to comment on the recent
I appreciate having the opportunity
Earl S. Poitevent. Mr. Poitevent is
letter from your constituent, Mr.
interest rates on inflation and the
concerned about the effect of high
international value of the dollar.
is central to the Comestic
Dealing with the sources of inflation
ed States. Among the many problems
and international objectives of the Unit
n is that high interest rates tend to
associated with high rates of inflatio
in the form of an inflationary
result, as lenders require compensation
value of the loans. Recent Federal
premium for the depreciating real
that with more effective control over
Reserve actions offer the promise
s
egates and bark credit, inflation pressure
the growth of the monetary aggr
run. Over the short run, however,
can be better countered over the long
expansion are likely to be accompanied
slower rates of monetary and credit
rates, at least short-term rates, to
by a natural tendency for interest
interest rates, however, serve evenrise higher than otherwise. Higher
ging the use of credit for less
tually to moderate inflation by discoura
, an attempt by the Federal Reserve
productive expenditures. In contrast
ng,
d be short-lived and largely self-defeati
to hold down interest rates woul
and
to a more rapid increase in money
since such a policy would only lead
credit and ultimately higher inflation.
of the pervasive influence
We have recently seen clear evidence
ar
ctations on the value of the doll
of inflation and inflationary expe
ral position in the international
internationally. Given the dollar's cent
its external value is particularly
financial system, we must recognize that
about our economic policy.
sensitive to perceptions and expectations
inflation is essential to improve
Consequently, our ability to deal with
long-term stability of the dollar.
concerning the balance
Regarding Mr. Poitevent's observations
last year nearly $18 billion
that
note
to
vant
rele
is
it
,
ents
of paym
and
foreign residents in interest
was received by U.S. residents from
me
d the amount we paid out. Inco
other income payments, which erivalle
accounted for more than $25 billion
from U.S. direct investments abroad
foreigners.
the $4 billion we paid out to
of receipts, which far exceeded
JI•
oir
•
ihe Honorable
Page Two
larles E. Bennett
•
Neither the Federal Reserve nor the "Fed's membe
r banks" necessarily profit by hiy,h interest rates. The interest
rates charged by banks
on loans are mainly influenced by the costs of ohtai
niv additional deposit
and non -deposit funds to lend, which have recently incre
ased markedly.
The impact of the discount rate on bank lending rates
is much less significant, since wember bank borrowing from Federal Reser
ve's discount
window remains a small fraction of their liabilitie
s. The Federal Reserve
doe.; nnt profit from high interest rates, since the
surplus earnings•of
the Federal Reserve arc, as a matter of course, trans
ferred to the Treasury.
Federal ReseLve assets, which Mr. Poitevent asks about
, increased from
$50 billion in 1960 to $150 billion today. This expan
sion consists almost
entirely of increased holdings of U.S. government securities
, and is
primarily the counterpart on the assets side of the Federal Reser
ve's
balance sheet of expansien of desired currency holdings by the
public.
The recent actions taken by the Federal Reserve should haste the
n
day when interest rates can decline and more stable conditions can be
restored to credit and capital markets, thus pInviding a foundation
for
rentwed and sustained economic growth. In the meantime, these actions
are not intended to, and will not, cut off the supply of money and credi
t
to the economy. Failure to deal with inflation would carry long-term
risks that far outweigli the short-term costs associated with
these actions.
Sincerely,
'44)1/0/4-u-
beeeelbee 14. 1911
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Mallardi (2) L,/,'
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Ø
S. ROSENTHAL. N.Y.. CHAIRMAN
-FIT T. MATSUI, CALIF.
ENE V. ATKiNSON, PA.
P 1.14NAND J. ST GERMAIN. R.I.
JOHN CONY(RS. JR., MICH.
ELLIOTT H. LEVITAS. GA.
Copies sent to Messrs. Petersen an-1
Ryan for cooriOtion of response
•
OHIO
a
.
ANS.
NINE
IND.
Coitgres' of tbe triniteb a)tate5
m &Kw rre —WO Z25-4407
3E)oti5e of 1epre5entatitie55
COMMERCE, CONSUMER, AND MONETARY AFFAIRS
SUBCOMMITTEE
OF THE
COMMITTEE ON GOVERNMENT OPERATIONS
RAYBURN HOUSE OFFICE BUILDING. ROOM 0-377
WASHINGTON, DC. 20515
December 3, 1979
Hon. Paul A. Volcker
Chairman
Board of Governors
Federal Reserve System
Washington, D. C. 20551
Dear Mr. Chairman:
The Commerce, Consumer, and Monetary Affairs Subcommittee is currently
reviewing the Federal Reserve Board's approval last March of the bank holding company application of the Hongkong and Shanghai Banking Corp. The subcommittee is particularly interested in how the Board treated the overseas nonfinancial activities of HSBC in reaching its decision to approve. In connection
with this review, I am writing to request certain Board staff memoranda that
were prepared for the Board in 1971 at the time the Board was considering staff
proposals for the portions of Regulation Y dealing with overseas nonbanking
activities.
The particular memoranda requested are as follows:
1.
Three memoranda dated May 14, June 11, and October 29, 1971, with
attachments, by Paul Gardner, Jr.; and
2
A memorandum by Messrs. Dahl and Gemmill referenced on page 2 of the
June 11 Gardner memorandum.
I understand that certain passages of these memoranda report the views
expressed by certain other central banks and that these passages may be regarded
as sensitive. While the subcommittee reserves the right to request complete
copies of the above memoranda at some later time, for the purposes of the present
request it would be acceptable to send copies from which the particular passages
reporting the views of certain central banks have been deleted.
In addition, I would appreciate having copies of any other memoranda to
the Board by Mr. Dahl, Mr. Gemmill, or other staff that analyze or discuss the
treatment under the Bank Holding Company Act of overseas nonbanking activities
.„
•
Hon. Paul A. Volcker
2
December 3, 1979
owned or controlled by foreign bank holding companies and that were prepared
for the Board in connection with its 1971 regulations on this subject. Memoranda whose sole purpose is to summarize public comments on the proposed regulations need not be supplied at this time.
SiTerel
/
i
(
Benj min S.
Chal man
BSR:tv
osenthal
A*,
•
lemesiber 13, ii79
rho denorable Richard A. Gephardt
.0 of Repsomentatives
.4hingtes, B. C. 2013
• 1r Mr. fephowdt:
I eppre.,iste the opportunity of .onnenties is the interesting
yeu love offered as am alteraative to the inpositiom of a rigid
Unit en federal apendies. Like you, 1 hews been conrerned Chet the vario s mechanistic teabelques that have been susseeted for lioitiag federal
aiiendle" cetIld introduce eatteuely destabilising elongate to the budgetie"
'rectos, and La ?articular could sigaifieantly impede the severameat's
ability to react effe,:tively to unfolding econseic deoeLooneets.
I totally agree with whet I perceive is the thrust of your
proposal—that is, in the prok_ees of *acidic' es sseedieg Levels, the
Googrese moot be ever alert to the economic stabilisation implications
of its decisions. Budget decisions profoundly affect the outlook for
e gagenL- activity and inflation. end I believe that the Censuses would
be Nokias 4 serious error is obsadontes its asehority te ad* Shoes
isperteat decisions as tiesibly ao possible. let recemniaies Oho plobLees with rigid speeding limits, I am not certain that your poopseal
Mee mot Lateedup!le rigidities of its own.
As I understand it, 'roar psepeselimmuld have the Censuses
a)prewe revenue eed expenditure tarots esmeiseemt with a surplus or
deficit total at anigarly stage Le the budiet preseee. leboompont
decisions by the Budget Committees and the Ceagreseusuld be constrained
by those totals. This is Lamm ways aa attra4- tive peepseal. Sets I
ale afraid that suLh a peacesa would tend to deprive the existies budget
process of sone of its value as • forum in whiA net ielrequently cenflictins 'pais of reoeur:74, allocation on the eoe heed mod stabilisation
policy on the other are debated mad reseived. The census that derives
Coen such a pewees is, it mess to me, highly desirable free both a
political sod econoni, stomdpoint.
As yoe correctly point out, the /*derma Reserve- as well as
other eteesals esemclos mad the iefoomel publiw—has an important role
to play in adivisteis on the ocsoonic hoplicetisee of fiscal Pcolicy. gut.
The Memesuble Richard A. Gephardt
Page Dee
e
the Budget Committees in their osasidotetleas currestly do receive advic
iefrom the Federal Beier,* ee well se May ether severemeet agemcies-t
cludieg the council of Beemend4 Advtsers and the Gengressismal Budge
r stance
Offi e--as well, ma from missy private groups, regarding the prope
dures
of fiscal policy. Mile your proposal. would formalise these proce
ment of
and perhaps immure the presentation of a more quantified state
that it
the fiscal policy kapiicatiew of budget totals, I an comeerned
the
eir be at a cost that transeseds the benefits. I am semetased that
impettaat
400410sa currently gives esteeidereile weight to this advice as an
*pot in the budget process. Mut meat importantly, I ma persuaded that
the ultimate respossibility for balanciag the imolai amd ec000mic claims
on the budget, amd deciding as a specific *poodles target, must 'Amasses
to As is the heads of elected officials.
I usdersteed sad share your cower's* about the seed to restrain
federal *presiding. The ap_bievenest sad eabstemesce of discielime over
ht
federal mooed/ft is an absolute ositessity if inflatios is to be broug
under control. But I ma afraid that wy faith in achieving this sad
through ostabliehmeat of "constraints"'--however epecific and however
retienall•—has weakened through the years. imperience indi:;ates that
ways cask &tarp be fouled by imaginative patsies to ciremmeest any formal
liaitatien when there is a desire to de as It is, after all, the desire
that will be boy to the action,
Is these difficult times, it is reassuring to know that individual Osugreeenee like yourself are seriously addressing thee* eamolex
budgetary issues in en innovative way. Thank you again for giving as
the 04-)ortuaity to calmest on your prooisal.
Siacerely,
See;11 A. Volcker
.11F:IMB:JI:JLK:vcd (V-133)
Fralick
bcc: Messrs. Kiddies, Zeta'', Struble,
Mrs. Mallardi (2)
RICHARD A. GEPHARDT
3D DISTRICT. MISSOURI
•
•
wAsmiNGToNarrim
218 CANON HOUSE OrricK ButuDIN1
WASHINGTON, D.C. 20515
PHONE:(202) 225-2671
WAYS AND MEANS COMMITTEE
BUDGET COMMITTEE
CONGRESS OF THE UNITED STATES
HOUSE OF REPRESENTATIVES
WASHINGTON, D.C. 20515
DISTRICT OCTICEs
3.470 HAMPTON AVENUE
ST. Louis. MISSOURI 63139
PHONE (314) 351-5100
November 27, 1979
41(5
Honorable Paul Volcker, Chairman
Board of Governors of the Federal Reserve
System
Federal Reserve Building
Washington, D. C. 20551
Dear Mr. Chairman:
As you are no doubt aware, the House is beginning active consideration
of spending limitation legislation, As an alternative, I have beeff
working on a proposal that I believe would help depoliticize Congressional
budget decisions but offer the flexibility needed to develop fiscal policy
in accordance with changing economic conditions. I want to bring this
bill to your attention since it has significant implications for the
Federal Reserve Board.
The enclosed material provides a complete explanation of my proposal
as well as the reasons why I believe it represents.a more reasonable
and workable alternative to spending limits.
Basically, my proposal is for the Congress to develop and approve a
concurrent resolution on fiscal policy before the Budget Committee
begins mark-up of functional spending limits in the First and Second
Budget Resolutons. By a specified date (February 1 in the case of the
First Resolution and July 15 in the case of the Second) the Federal
Reserve Board would submit to the Budget Committees its recommendations
for the appropriate surplus or deficit level, in light of economic conditions, to pursue a successful economy for the following Fiscal Year.
On the basis of the Fed's recommendations as well as hearings to receive
testimony by economists in and outside the governemnt, the Budget Committees would report a concurrent resolution setting total outlays,
revenues and subsequent surplus or deficit. The resolution would have
to be approved by both Houses of Congress by a specified date prior to
the time when mark-up of the regular concurrent budget resolution would
begin.
This procedure, in my view, offers a number of advantages. Above all,
it would enable the Congress to set budget totals on the basis of
economics before special interests bring their cases to the Congress.
With total outlays and deficit numbers in place, the Congress would
have to make the hard choices between programs competing for a share
of a limited sum of money. I think this procedure would permit us to
make reasoned economic decisions without relinquishing any of our power
over the purse. It would also allow for improved coordination of monetary
and fiscal policies.
I
-2-
I would be interested in your comments on this legislation, not only
with respect to its impact on the Fed but also the effect it could have
on the nation's economic policy. I look forward to hearings from you
and would be happy to discuss this proposal with you if you have any
questions about it.
Yours v,ry truly,
Richard A. Gephardt
3rd District, Missouri
RAG:fs
•
Concurrent Resolution on Yl.scal Policy
Honorable Richard A. Gephardt
of Missouri
The attached dit.cuqsion paper was prepared
tae assistaace C1 01-2 Congressional
Office.
rah
r1r,There is anothi.J- way to app.soach this proticm. As l understand it,
the move7q7.nt to at!oot a ficcal policy. rule is mot'svated by the belief that
political preso-os chronicAlly bias thejudyet toward deficit. Thus,
Congress is con -,idcring
„lutority over budget balance to a
mechanicel rule in order to inyJi3trt ficel policy from political pressures.
Ho.,.;ever, thv
such a rulE would - be its in;ibility to exercise
jud771c.nt about Cianging ecchcmic conditions'.
Thern
rniltive
both 511()ds Conores:
rhc_;-!
per17:its
1— •
(;s1,(1:Tsc could
requir
Peserv Boarc:. to ,-ecerriv.-:nd a surpius (deficit) for the
cuilpj fiscal
Ir. TWs r- corruicndatinn would be suliwitted ic the Housp
and Seaate Vodott.. Ccrejttees e.it least one mohth beforc the first and Secood
UOnn otner cconomir Ota
Upir disusal,
the
Con'::rGst-jorio.1
OMB, c..crrirr,s1.s, etc.,
gei.
4%
-c!-;:ritt;-(y would
revemP.i, c°,:tidY 3nd
1,11‘,1s within whiro the budyet wcu'id be (i,tablished.
no".
i.(.
of the
ef!ty
W
4 Ln
, 0%•
r,1
C'.T .
I!!
1 !.
rOlV
re(TvrivrApri tv
et
havf. the iilocrtrit.'f:Yit,
ryoliey
...snonsibl.? for fisca -1 ar.d
r,
'.:.;-clus or di!,fir:it.
er,(1
cn
'rfoufj
before d:,(..idino on actual, specific outlays.
17):2 th
recorrsti7vciation on fisci
help clari fy the major
Off 94.
t..1-)
fr.sch;.-i-i'.k.:11 cjit'?
ri; fif';
•
,
•
.
.
4•
i
r•
;" • , ..)rf
.
det.c;r';niltion oi the applopriatc! fiscal policy requires
jipio!ent in the interprPtatior, of !Ale available dat?, and
such judt
writtE.:f.; into a mechanical rule.
9reat rare bel'oro it cives up any of itS
adup%ing a mechdriical culr!, it must
:iy V;!.!1%.1
This rule
t.i0PfitS of
og,...iost its cost.:..
tpdr:.;11 7..iii- fH( it to be ;:),Ie separately
(.:r1(crn .ino
S!!Daratimt t'12 decision
a!id hcicif
the specifics of thc.
in th,i ,
al!iw the C, mgress to # .:01at.t. itsg?lf s;Tit, at from
co!!.,ideratins 5y (=,, Ivinu VINP5er!, tho pxilse that thry favor a
1
ln
proccss
ot the prior impnscd
r
$,Ailt to cyercis
S
00.0•
BALANC1,23
FE fl.11):,iiT EASED Oh FISCAL
rot ICY
RECOMMENDED BY THE
FVUERAL RLSERVE 1301.) AqD ACTELI UPON We 1 IE CCNGRESS
MR. GEPHARDT
Amend the Congressional Budget Act to require tie Federal Reserve Board
rInd 1 1,n
,.n
n
n
r ivetwr drld outlays and
wol!irl
le4t fl%cd1
f
respectivei
r-r,p
a t.t, runerr-f?ndtior'7
ict by vx1c, rrPnt-. RoIution or otnerf'vc, CC( ,
!I°
31H
y
he submitted
and St-cond
any other ar
ecti
r'endd 1"vel
te a
;Ind rw..,!s
L.Iprcpriate
inP2N5
t) levels to bc
lo th2 '; , igrerion?.1 Bw!net Procoss
9iSCUSSVJN:
A rigid balanced budget rule likely would have a destabilizing effect
on the economy. It would require fiscal policy to be restrictive in
cH Y,i-:1,1:1..!vr? in i
-0,-.T,71r,plic model Om119tion done
,by
ht;(1(-1F-t rile would
reccssion, re!.ulting in
, •,
„
1975 and rc'iaining
C/
!"?
1 ,1
clven
be destabilizing.
f1exftle rcle mav
ar l eprtn siic or trie budnet
r-ile
i't(-)plillv
surpiJ';
.7Jr:rr.%r(!la( tc tre dcgree of c1a6, existing in the economy.
sk,!!Id
Thu
is!;rplus vhrn ntili7.etiol is high ind in deficit when
t, th su:7h a contingency rule is that it reouires a reliable
low.
inCi:ator of er:c,,,omic slack woose reaninf; does not change over time. And we
indicator.
simply do not I,Fi.r!
hard f;.- rt
it reT;ires jud-; 7nt to assess current economic
tichtness of the ecrlomy. Ani2 there is oo way to
date and detormiNc
write judgm,::nt into .1 c:chr.nical budnet d 13rce rule.
•
•
ive
r
1
•:t
VI
n, •
'
i
LI
.1P; 1 t) V. I
'Alen
t".'4 . 1.‘ 11
I1
1
•
1.
:
.i i
.i 1 , 1A
•
1 i •! i 1,1-•.
C,-t:.
.,:l.•
nt ....
...,I • t.
l'il(!.
i••Q ion rrant.;
fe•r el : '.:1!t ::
tc, • e!i.. .
:•",•1 Lz t 0 ••••,lei ..1 e '1,;• i r t Ili t i,•0 f — t s at: th..i.....11‘. t fl .
'
t.
:' C
r7,.(1i,;11 ,;("1,001s. The p-,, p.,c.al was b:-.:-zed on
0 ril- 0 1 1 1; (I.!' t
in
the filWIng tbat hvalth manywwer is no longer in short supply and
1 r,..ro ,rint r rolo fcr the Forieral government would be "beefed
!
I.-, l•-.• •,,,
,!iii-t.,..-; -it t • 1-;;;1•,• ' li ,.al
; i ; r• ',. !'„, i
; l. s s
j 1 '.', ..3
2.''
''• i 11. , 1 7,
l''' :
'•
:
I '.
'I
i!.
n
I
1 ....."!
';
•I",
:
r• •;•,‘
il .?
( 11 :
11
t I (
r
•••,!.1,,..._ !', ,1 1...
<, ; o, !,
1 n1:1 t
l
Nf
•
•
I • 't •
•tt
•1!
1.rr• !d„, !:lys iteihts to parents
:•••• t'• it (•'.1.1dri•n beLan to
t hat Fc third]
••').
t''t:::•,-:•!-; i‘e e:.:7,•-,•,,!.;! to heir rrfd(1.1e income
t !Ian choosing
ard hi •,111•r e:hicat ;on.
r(' t•1
1;011'.;•.
tr‘:!‘
•'• It I r::.'
i t.. iad "
nror'te t 11cri ir;
tuit :r•n: t
bi
Ocnt z,ssi::tance. Only failure of t- he two Eouses of Conress to
r(ach agreemnt on tax credits for clementrPrv rd secondary education prevented the duplication frcm becoMing public law.
3.
As the HOPSV Ways pnd Itean3 Committee has
bons.
_
dcbated legiFIation to control tax expenditures resulting from
Lax exempt bonds to finance mortgages, two competing lobbies
seem to be gaining benefits. The bill now under consideration in
Committee would continue some tax exempt mortgage bonds, as one
Froup t.int , ,Thd e::.empt from taxation interest en savings accounts,
a -lvocated.. If (cl'greFt; 1-111s to
as roriAe hr 6 oimononts
proviions
break.-; and
choo,,o
•
repeLents of melt5;otljt to
L. the
rrevr:it,
p.aye l)otH reform ie•.is1.-Ition ww_lid be efff:ctivelv ellminated.
,
!lOrt^;WO
If Congri
proc_es
regnirco tc
1,1d •-•et a (!ef'icit level '),-fr-J- c
produe71,1!:ea
t!1P5,0 "decisions", the Congress would have been
chcice.
polite 1.%-tIld be violated.
irto the budget
)therwise
the buciFet resolution on fiscal
•
•
•
Unfcrtunately, cvtn a rore flexible spending limitation rule may
ultimately FP &itabili/ing.
the approprizte s!'..?ndinc
An eptimd.ily designed rule would determine
?.rd, ulti,flately, the
:7C
S.
of the budget
surplus or deficit, according to the degree of slack existing in the
economy.
The buJget should be in surplus when utilization is high and
in deficit whcn l:yq.
A urot)lem with suzh a continocncy rula is that it
We simply do not have such an indicator.
change over time.
rhs hard fact
is
that it rcquires judoment to assess current econo;lic
data ant c(termine thc tightness of th2 economy.
to wri2 ju6Ti1-nt irtn
ThJJ.E.
nc.lt
me:tn;r.1
requir2s a r!iaoit: i!Idicator of econc)mic
Vnwever, there is no N'ay
Pleilanical badi-Ffq balance cr spending rule.
thz..t both allows Congress
lit(3,ne.ive to a m7chanicel
s
to in ul?.tc f- 1sr:11 rolic: ircm short-tecm poliLical pressures and permit
judrent to he ..-Kercised in budget decisiors Oven ctkl:;ging economic
conditions.
recomm!)ne
file Conc)r
could ri.T;ire the redlri Rcserve Board to
This recommen-
s cr d2F1cit for the •(Irt,ing fiscal year.
!..urp,u
de I on
(ird Se1.3t:: E1Id3t. Ci)Tmittees at
to tk;c,
;Id
: Jr's,
i
Us ing
other economic data at their disposal, e.g. the reoommendations of the
CougressioN41 BudrA Office s OMB, economists, etc., the respective
Cormitts wiuld recomend and the House and Senate would then set surplus
ished.
or deficit *levels vi thin whith the bud1:2t wr:old be establ
Ihe5e :9vels would not rIcessarily be the same an those iecommended
by the fLdPral Reserve floarcl, but at least wf-!
hive the indepcnnt
judgrit of tir2 governmental entity m:)st reponsible fo- fiscal and
for
monrAary Wicy On 'Lhe 1,dte of ihe economy i-trid the relative need
nur.olus or e(?ficit.
2
•••
EXTENSION OF REMARKS
Richard
A.
Gephardt
CO1OURRFNT RESOLUTION ON FISCAL,POLICY
hON. RICHARD A. GEPHARDT
Of Missouri
In The House Of Representatives
Friday, November 2, 1979 •
-No
Sr.-:;er., I am tod-iy itro&cing legi!.-lation that
Conyr.ess;iel.1 3uljet Act -to r?(;uire tha Federal Reserve
w:uld
PrJard to suinit tc th.2 House of Representatives and the Senate a
recommended levc! of surplus or deficit, bascd on anticipated levels of
revenue .74nd outlay
and ether cc;:morric data tc) purue a successful eccnemy
for the no.i.t fif-c!ll year.
This data would be submitted at least one month
before thr! First ,1!1:1 Sec:ond Budg2t. PPso!utions, respectively.
Using the
submitted reconvcrThtions and any other apprepniate r..2cormcw!ationf„ each
HCUSP wcu:d then act by Concurrent resolution to establish the surplus or
deficit level to be utilized by the House and Senate 3udget Committees in
the Congressional Budget Process.
r.c.Kis to find a new proposal being offered to
i:)7siro
hil1,7tncr.
or,
)
,s
tYese dre noble
rN7-.ogq
limit Federal spending.
t. pf
ai Ii'Kspe we
While
ar:hir.vr! someday, we should
. tilt a -1,jid ti.71ced buCcjLt rule lqcly would have a
cff.2t cr. the econmy.
It wou1c! require fiscal policy to
LP restrictive in reeesions and stirdulative in boGms.
A macroeconomic
ro1c:1 sisruiation u3ne Cy Data Resources, Inc., indicates that a rigid
balancer] buduet ru12 would lilv
greatly deepened and pro1on9ed the 1974-
both
19.75 recessicin, resulting in unemployment rates ahuut 11 percent in
1975 anl 17f, end refraining above 9 percent as late as 1977.
The important point i5 th t Cong -es,, would take into consideration and
decide on the ov, -L11 si7e of tho hudcet before deciding on actual,
specific outlays.
'r.ral Reserve roard recucrendltion on
In sum, cor.sif:eiaLion of
fiscil policy as an a ternative to a p.e,:hanical rule does help clarify
the wajor issues in the debate:
The movement of Congress toward ceding its authority over
policy fro.:1 short.t,-- rm
rrcssures.
The 6,
.qerrvinaL.ion of the appropriate fiscal policy requires
, nt in the iotorpretatior, of the availi, 12 dat?.. and
judgm,,
..ch jujrjr.J:rt cannot Le written into a mechanical rule.
Connress should want to exercise great care before it gives uo
of its authority mer fiscal polIcy.
it must carQfully weigh
This rulP viould
Before
all)/
iloptinj a 11:2cIlarical rJle,
benefits of such a change against its costs.
a derision concerning the Federal deficit to be
made separately and before addressing the specifics of the budget.
I recommend teSncurren
Resolution on Fiscal Policy to you.
0
AIIIIIIIIIIIIMPNINIO
•
•
CM
771/-- / 13
.•
.••
BOARD OF GOVERNORS
OF THE
• -n
'42 •
•
•-Arrfrr
•
•• A'
•
•
FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20SSI
•
(,) •
•
1?A L tif-5;•
• •• • • •
PAUL A. VOLCK ER
CHAIRMAN
December 6, 1979
The Honorable Jacob K. Javits
United States Senate
Washington, D. C. 20510
Dear Jack:
For some time I have had in mind the issues raised
in your
recent letter concerning the appropriate unemploy
ment target for 1980
and beyond. Thus, your letter provides me the oppo
rtunity to put these
thoughts together in a more orderly fashion. Havi
ng said this, let me
emphasize at the outset, I don't see any easy answ
ers to the questions
you have raised.
In considering the many facets of this issue, several
things
are clear. First, it is apparent that the "thresho
ld" unemployment rate
referred to in your letter is higher than it was
in the past few decades
and, indeed, higher than the 4 percent rate
contained in the Humphrey Hawkins Act. In January of this year, the Pres
ident's Council of Economic
Advisers, for example, placed the unemployment
rate consistent with the
economy operating at its full potential at 5.1
percent. Some would argue,
and convincingly so, that the rate is even high
er. Second, whatever the
"threshold" level of unemployment, the experien
ce of the past few years
has illustrated all too vividly that exogenous pric
e shocks can have a
devastating impact on the rate of inflation. Oil pric
es are the most
visible example, but the phenomenon has also been appa
rent in agriculture
and other commodity markets.
Another point that is highly relevant to the questions raised
in your letter is an analytical one. Implicit in much of our thin
king
about national goals for inflation and unemployment is the conc
ept of
the so-called "trade-off" between inflation and unemployment. At
the
risk of confronting head-on an element of economic theory which
seemed
to many of us to be both convenient and convincing, I simply am not
sure
that this "either-or" doctrine is a valid guide to public policy
in the
current circumstances. Inflation may have gone too far for too
long and
inflationary expectations may have become too deeply embedded
for there
to be any material trade-off in the current setting. That
is, high and
accelerating rates of inflation may have induced such
distortions and
dislocations in the economy--as, for example, in the plan
ning and execution of capital spending programs--that any effort to "buy
" less unemployment by "accepting" more inflation may ultimately result
in more, not
less, unemployment.
.•••=m•=•1=11,
.
S
•
The Honorable Jacob K. Javits
Page Two
This line of reasoning might, to some, suggest that the national
goals embodied in the Humphrey-Hawkins Act are simply too ambitious and that
such goals should, at least temporarily, be modified. I am not inclined to
that view. But, I must acknowledge that the prospects for realizing the
interim goals for 1980, and perhaps even the 1983 goals, appear slim at the
present time. But, if we follow prudent and disciplined public policies
over a reasonable period of time, we may find that behavior can be changed
in such a way that the ambitious goals of Humphrey-Hawkins will again seem
attainable. To scrap or to prematurely compromise these long-term national
objectives would run the risk of licensing public and private actions that
would ensure more instability and distortions in our economic conditions
that could only be a prelude to even more serious problems. My point is
simply that we must give ourselves the opportunity, in the context of current structural realities, to test the viability of these goals against
the standards of sustained, innovative and disciplined public policy. If
we fail that rigorous test, then perhaps some adjustments in the goals
would be appropriate and justified.
All of this underscores, in my mind, the need for a firmly
disciplined monetary policy that centers on achieving, over time, moderate non-inflationary growth in money and credit and for the continued
reduction and ultimate elimination of federal deficits except when warranted by overall economic conditions. Within that framework, there is
ample opportunity to use other elements of public policy in a constructive
fashion.
For example, I have argued on many occasions that at the appropriate time we seize the opportunity to implement changes in tax policy
that will stimulate investment and productivity and lower cost structures.
I regard initiatives in this direction--properly structured and timed--as
one of the most essential priorities of public policy. Having said this,
let me emphasize that in my view the time is not yet at hand when such a
tax change would be appropriate.
Such initiatives will not produce immediate results. Indeed,
even if there is a modest deceleration in the rate of inflation in the
near term--something I think we can reasonably expect absent another massive oil price increase--unemployment may well rise further as the longanticipated adjustment in overall economic activity materializes. In
these circumstances, I can see a legitimate role for well-structured
employment programs of the types referred to in your letter. In considering such programs, I would place a considerable premium on efforts that
will not result in permanent additions to government spending that would
push further into the future the day when we can achieve a balanced budget.
The aseerahle Jae* K. Jevits
Page three
do mot clots saficient Ersverties to raider jokes*a es to
the castrem
es
theee programs that would be the most effecttve.
inpreeeed with the greet difficulties of desigining and administering
edgective peewees in this ores. But, &believe that the Congress,
seeperotien vith the appropriate ofOlOtOS of the
La it* wisdom. NA
IMMeutive Bram* coned* beperteet etridee is this area.
I appreciate your giving ea the lopartsoity to agoallne on
them impertent imenee•
Sincerely *
Sgaul A. Volcker
ZGZ:vcd (#V-123)
)
-44,-1;
bcc: Hesars. Corti&aa, Ztickler, Zsisel, Lichliast,(t
Mrs. nailer& (2)
JACOB K.
JAVITS
NEW YORK
•
REGIONAL
COMMITTEES:
FOREIGN RE
LATIONS
HUMAN RE
SOURCES
GOVERNMENT
AL AFFAIRS
JOINT ECON
OMIC
Room 511
110 EAST 45r)4
STREET
NEw YORK, NE
W YORK 1001
7
Cniteb Ztafez Zen
ate
Room 222
FEDERAL OFFI
CE BUILDING
111 WEST HURO
N STREET
BUFFALO. NEW
YORK 14202
WASHINGTON
. D.C. 2051
0
November 13
OFFICES:
1979
Room 420
LEO W. O'BRIE
N FEDERAL BU
ILDING
CLINTON SQUA
RE
ALBANY, NEW
YORX 12207
Dear Mr. Volc
ker:
The onset
with six per of persistent double-dig
i
c
about the va ent unemployment raises q t inflation
l
u
our thinking idity of the assumptions estions
un
a
employment" u bout the maximum sustaina derlying
bl
n
country in 1 employment rate appropria e "full
980.
te for our
The interim g
oal of four p
as codified
ercent unempl
in the Humphr
oyment,
e
y-Hawkins Ac
unrealistical
t,
ly
uing changes i low, given the recent an may be
d continn the demogr
aphic composi
the U.S. labo
tion of
r force.
• If true, th
is could have
reaching eff
profound and
ects on our n
farational econo
in the decad
mic policy
e which begin
s next year.
there be acc
eptance of a
higher numeri Should
old for the
cal threshso
unemployment, -called "full employment"
r
both for our it would have important im ate of
understanding
pl
current high
of and respon ications
r
s
sures to be a ate of inflation and for t e to the
h
d
high rate of opted to reduce further t e meahe current
unemployment.
If, as some a
rgue, we are p
even slightly
resently at below -- the
- or
"full employm
ployment rate
en
stimulative a for our country, then adop t" unemtion of
gg
could be most regate fiscal and moneta
ry p
im
the unemployme prudent; and further redu olicies
ct
nt rate would
through more
have to be ac ions in
ta
hi
CETA, local pu rgeted employment policies eved
blic works an
d job trainin like
g, etc.
I would deep
ly appreciate
this question
and making rec your considering
ommendations
respect to th
e policies th
at might be p with
roper.
The Honorable Paul A. Volcker
November 13, 1979
Page 2
I hope you may be able to act expeditiously on
request and look forward to hearing from you
shortly.
With best wishes,
The Honorable Paul A. Volcker
ChaiLman
Board of Governors of the
Federal Reserve
Federal Reserve Building
Room B-2046
20th and Constitution Avenue, N.W.
Washington, D.C. 20551
•
•
-0'
c
BOARD OF GOVERNORS
OFTHE
FEDERAL RESERVE SYSTEM
WASHINGTON, O. E. 205SI
•
•
•
•
<<
e,'":.^.•
est. .
- It'4L
'• . . .. •'
PAUL A. VOLCK ER
•
CHAIRMAN
December 11, 1979
The Honorable Henry J. Nowak
Chairman
Subcommittee on Access to Equity
Gapital and Business Opportunities
Committee on Small Business
House of Representatives
Washington, D. C.
20515
Dear Chairman Nowak:
Enclosed are answers to the questions raised in your letter
of November 13, 1979, in connection with your Subcommittee's recent
hearings on "Monetary Policy and its Effect on Small Business." I
have tried to be as responsive as possible but, as I am sure you will
understand, it is extremely dcult to answer questions about future
monetary policy actions except in general terms. The policy response
of the Board or the Federal Open Market Committee to specific adverse
developments must in any event reflect consideration of those developments in the context of the overall economic and financial environment
at the time.
Sincerely,
ataVaititt
Enclosures
4
QUESTION 1
Question. Under the Credit Control Act of 1969, the President may authorize
the Federal Reserve Board to regulate extensions of credit "...for the purpose of preventing or controlling inflation generated by the extension of
credit in an excessive volume...."
**
Does the Board have contingency plans in the instance that the President
invokes this authority?
**
What actions would be taken to insure that small business receives
favorable treatment in such a situation?
Answer.
The Board does not have any such plans at present.
Control Act of 1969 is very broad.
The Credit
It permits the Board--but only upon
authorization by the President--to regulate any or all aspects of any or
all kinds of credit transactions.
be invoked.
We have no expectation that the Act will
In any case, there is no way of anticipating which aspects
of which types of credit the President might at some time in the future
authorize the Board to control.
Nor is it clear what degree or method of
control would be most appropriate to the specific situation.
Under these
circumstances, development of contingency plans to cover an almost infinite
number of possibilities does not seem feasible.
For the same reasons, it is almost impossible to decide in advance
what actions would be appropriate and necessary, in the event that the President
activated the Credit Control Act some time in the future, to insure that
small business borrowers were not treated unfairly.
•
QUESTION 2
Question. The international position of the dollar has firmed since the
actions of October 6, 1979, but the record trade deficit reported for
September will put pressure on it in the coming mon•ths.
Will the Board maintain a stance of restraint in order to support the
dollar if the domestic economy weakens severely?
Answer.
Current projections of thetrade deficit generally indicate
that the U.S. position is likely to improve over coming months, even if crude
oil prices rise significantly further.
If the domestic economy were to
"weaken severely" as you suggest, U.S. imports would weaken
S.
This
woulI strengthentrade picture and should help to sustain the
dollar's international value.
Consequently, under the conditions you
postulate, the international and domestic objectives of monetary policy
would not be likely to come into conflict.
a,
QUESTION 3
Question. Given the fact that a significant portion (one-third to one-half)
of the current inflation rate is attributable to increases in crude oil
prices, is it likely that inflationary expectations can be relieved if the
OPEC countries continue to increase their petroleum prices at high rates
during 1980?
**
Will the Board act to accommodate credit needs brought about by higher
cost oil imports by raising the monetary growth targets?
Answer.
There is little doubt that continued very rapid increases in
petroleum prices would hamper our efforts to achieve an early, substantial
reduction in inflationary expectations.
But I think such price increases
would more likely delay and moderate, rather than prevent, such a reduction.
The steps the Federal Reserve has taken should temper people's expectations
of future increases in other prices, and contain the secondary impact of oil
price increases on the general price level.
I hope we will not see another
year of huge increases in OPEC oil prices, but if they do occur, we should
be better able to absorb them than in the past.
There is no way of knowing, at this point, how the growth targets
for the monetary aggregates might be affected next year by sharply higher
costs of imported oil.
sidered.
Too many other factors would also need to be con-
The oil-price situation might or might not be a crucial factor.
petroleum
As I pointed out on another occasion, the larger the increase in
is
prices and the morq, inflationary pressure it exerts, the more need there
for transactions balances.
The extent to which money' demand might need to
be accommodated would depend, at least in part, on general economic and
financial conditions.
It is clear, however, that any significant degree of
such accommodation would limit the success of our efforts to contain inflation.
QUESTION 4
Question. Will the discount window continue to be as freely available to
banks over the next several months, or is a tightening anticipated here as
well, if growth in the aggregate pick up?
Answer.
The Federal Reserve System has developed standard guidelines that
govern member bank access to the discount window.
These rules do not change
with the general stance of monetary policy; they remain constant in all
phases of the economic cycle and are not affected by changes in the monetary
aggregates.
Only in this way is there assurance that member banks facing
similar needs for Federal Reserve credit are treated similarly by the twelve
different Federal Reserve Banks.
When changes in monetary policy are desired,
the instruments used by the Federal Reserve are open-market operations,
adjustments in the discount rate (but not in the rules of access to the
discount window), and changes in member bank reserve requirements.
QUESTION 5
j
Question. How will the widespread use of alternate sources of loanable funds
(e.g., money market certificates, Eurodollar borrowings, etc.) and the outflow of time deposits into higher yield instruments not subject to reserve
requirements, affect the Board's ability to control the monetary aggregates?
**
What effects, if any, will the new policy emphasis have on the shift
of deposits, subject to reserve requirements, into other instruments?
Answer.
It is not clear that bank issuance of nondeposit liabilities in the
aggregate has a significant impact on growth of the monetary aggregates.
But
it is clear that such issuance contributed to rapid growth of bank credit in
the first three quarters of 1979.
In order to help reduce expansion of bank
credit, the Federal Reserve on October 6 imposed on member banks, Edge Act
corporations, and agencies and branches of foreign banks an 8 percent marginal
reserve requirement on the excess of these institutions' total managed liabilities over a base amount.
The affected liabilities include large time deposits
($100,000 and over, with maturities of less than one year), net Eurodollar
borrowings, repurchase agreements against U.S. government and federal agency
securities, and federal funds borrowed from institutions not subject to
federal reserve requirements.
In order to improve control of bank credit
further, marginal reserve requirements were also imposed on loans made by
• 1
foreign offices of member banks to U.S. residents, and on assets sold by
affected institutions to related offices abroad.'
The existence of money market certificates (MMCs) does not appear
1.1
:1
1
11
,,
to pose a serious problem for control of the monetary aggregates.
Member
bank MMCs are subject to reserve requirements similar to those applied to
other small time deposits and savings accounts; thus, the MMC neither permits
' member banks to escape reserve requirements nor impairs Federal Reserve control
over the volume of member bank deposit liabilities.
Moreover, bank MMCs are
included in M-2 and, together with MMCs issued by thrift institutions, in
the broader aggregates.
Therefore, growth of the monetary aggregates is
unaffected by shifts of the public's funds between MMCs and other small time
deposits and savings accounts--which are also included in M-2 and broader
aggregates--in response to changes in the difference between the yield on
MMCs and fixed, regulated, interest rate ceilings on those other accounts.
In contrast, difficulty in measuring and controlling the volume of monetary
assets could arise from the availability at nondepositary institutions of
highly liquid assets that bear market yields, are not subject to reserve
requirements, and are not currently included in the definitions of the monetary aggregates.
The new emphasis on controlling reserve aggregates, rather than
confining short-term movements of the federal funds rate, may have opposite
impacts over the short versus the long run on the volume of funds shifted
out of deposits and into other instruments.
The new strategy is expected
to allow the Federal Reserve to attain more closely its objectives for
growth of the monetary aggregates and bank credit and at the same time to
make short-term market interest rates more responsive to changes in credit
demands.
Consequently, under recent economic conditions, market yields
likely have risen more rapidly than they would have done under the former
policy, and for a time funds may shift more quickly from deposits subject
to fixed interest rate ceilings into instruments bearing market yields.
However, over the long run, as inflation is more effectively restrained than
it would have been under the former policy, and as growth of nominal credit
demands therefore slackens to a larger extent, short-term market interest
rates are likely to decline faster and further under the new strategy.
If
so, shifts of funds out of deposits subject to fixed rate ceilings would in
the future tend to slow or to be reversed both more promptly and to a larger
extent.
QUESTION 6
Question. How can the small business community and the SBA become more
involved in the policy making process at the Federal Reserve?
Answer.
There already exist a number of channels through which the small-
business community and the SBA can provide inputs to Federal Reserve decisionmaking:
the Federal Reserve consults with trade associations during
development of Board rules or regulations that are likely to have direct
effects on small-business operations; officials of small banks and other
small businesses serve on the boards of directors of Federal Reserve
district banks and branches; represultatives of state bankers' associations
(many of whose members are small) meet annually with the Board; and informal
contacts are maintained between SBA and Board staff and between SBA officials and Board members.
Some of these channels are undoubtedly not utilized as fully as
they could be.
In particular, senior staff throughout the System would, I
am sure, be happy to have more opportunities to meet with small-business
representatives to discuss matters of mutual concern.
QUESTION 7
Question. Mr. Schultz mentioned in testimony before our Subcommittee that:
"individual bankers have told us that they will be making particular efforts
to hold down the rates charged on loans to small businesses."
**
Haw many banks have indicated that they follow a dual prime arrangement?
**
What is the geographic distribution of the participants?
**
What is the average interest rate differential participant banks charge
on their larger and small loans?
Answer.
Unfortunately, we know of no current hard information on the number
of banks with some kind of dual prime arrangement.
The latest data we have
derive
from a survey conducted by the Small Business Administration back in
April.
At that time, 107 commercial banks reported they were offering special
small business rates tied to the prime rate.
That group included 21 of the
100 largest banks in the country, and 41 of the 300 largest banks.
In
addition, many small banks have indicated that they do not typically lend
at the prevailing prime rate but rather lend at rates below the national
prime rate.
Banks that reported having a "two-tiered" prime rate arrangement
were somewhat dispersed across the country.
According to the Small Business
Administration's list of participants, all but one of the New England states
were represented,along with many other states along the eastern seaboard, in
the north central part of the country and in the southwest; only one west
coast bank was a participant, however.
In their initial announcements, many participating banks specified
a fixed differential between the prevailing prime rate and the small business
base rate.
For most banks, the small business rate would be 125 or 150 basis
points below the prevailing prime rate.
The average interest rate charged on business loans of small size
acquired by commercial banks has increased far less than that on large business loans.
While that pattern may not necessarily reflect the impact of
"twS -tiered" prime rate programs, it nevertheless does suggest that interest
cS sts for small businesses have not increased in step with the prime rate.
For example, responses to the Federal Reserve's Survey of the Terms of Bank
Lending indicated that the average rate on business loans of $25,000 or less
increased by only three-fourths as much, between February 1977 and August
1979, as the average rate on business loans of more than $100,000.
Se.
QUESTION 8
Question. Please supply any and all information regarding the Federal
Reserve's involvement in the dual prime interest rate. This information
should include: (a) the activities of the Committee on Interest and Dividends
during the July 1972 - September 1974 period; and (b) the activities of the
Federal Advisory Council during the same period.
Answer.
Information on this subject was provided to the Subcommittee by
Vice Chairman Schultz as an insertion in his testimony of October 30.
QUESTION 9
Question. Please update the attached chart on "Long-Term Commercial and
Industrial Bank Loans (Other Than Construction and Land Development)".
Answer.
The updated chart is attached.
•-,
•
LONG-TERM COMERCIAL AND INDUSTRIAL BANK LOANS (OTHER THAN CONSTRUCTION AND LAND DEVELOPMENT)
August 6-11, 1979
Percentage Distribution by
Size of Loan ($000)
Total - All Banks
Number of loans
Amount of loans ($000)
Percent of change
from August 7-12, 1978
Number
Amount
48 Large Banks
Number of loans
Amount of loans ($000)
Percent of change
from August 7-12, 1978
Number
Amount
Smaller Banks
Number of loans
Amount of loans ($000)
Percent of change
from August 7-12, 1978
Number
Amount
Source:
All
Sizes
$1-$99
$100-$4Q9
$500-$(499
$1,000
and Over
29,692
$1,888,703
94.6
19.0
2.8
8.9
6.4
65.7
64.8
46.2
75.3
49.0
-50.3
-41.0
20.4
24.2
298.0
85.9
2,455
$748,157
78.3
5.6
12.6
8.6
3.8
8.7
5.3
77.1
-2.8
6.5
-6.6
3.6
0
7.1
49.2
51.1
33.0
3.2
27,237
$1,140,551
96.1
27.8
2.0
9.2
0.3
4.9
1.6
58.1
75.8
93.6
87.4
58.0
-61.5
-53.8
2.8
804.0
514.1
.
Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release, E.2.
•
•
usL:ember 12, 19/9
The flemerable Thomas
P. o'Neill, Jr.
Spelher of the douse of Seprosentativea
iftehtegton, u. u. 20315
Dear Mr. Speaker:
Pursuant to your staff's request, I au writing to inform you
of our position on pending legislation which, for tax purposes, would
exclude from gimes income certain interest earned on savings. The
legislative proposal attesots to increase saviage by raising the aftertau rate of return on oavlilge accounts at meet depository institutions.
The impact of the proposal on totil household savings is
likely to be small .lartly lissome the after-tax rates of return would
be raised for only a mall portion of total savings. The maximum amount
of interest that can be excluded is relatively small, and the exclusion
would apply be exiatimg as well as new deposits. This means that individuals already aerates the menkroo would have me incentive to save
additional amounts under the proposal, to thee* savers the ex.lision
serety would represent a tax cut. Sven for those individuals earning
less Chan $100 in eligible interest, the T'assibis incenti4e to save
veuld diminish ever time as deposit belam.es increosod--which could
occur with shifts of existing assets or through additiees1 saving*
dire ted to eaviags accounts.
The ,rormsal in general dmes not seen to be a particularly
cast-effective way to en.ourage increased ?rivets saving. Moreover,
even if aggregate savings, were increased, Unlacing the resulting
larger federal budget deficit would absorb some of these resources
mh1,71) might have been available for private investment. The enlarged
budget deficit itself mould tend to exacerbate the problem of inflation.
I hope these comments will be iseful,.
Sincerely
(FF:
bcc:
JLK) KAG:RIX:vcd z
Mrs. Mallardi (2) v'
Mogramber 29, 1979
The MaramObla Jaen T. hroybill
Seen of lepronetattwas
Vaalikthatagi .C.
2051S
Dear Mg. BroAllis
This is is reepeeme te peer roKmest am behstf ad sew of yens
sosetitents, Mt. Seemey neer* semsersing the desire of the Lions
Clob of Merth Corollas to ellotaie 908 tiserfamor silver dollars to be
distribsted at a Christen party he the Wed.
As pout nett is mere, the *oars staff cootasted the
iherlotte $unoth 0 the Madero& iseerre Bea at Righuom4 as issenhos 21,
awl wronged for the faiikiery et Stoonhower 4sUar soles to the First
Wetiesal Ink of Lemarimileverfier 2ö. Stare 'Wesel Mown Soho
amity sbip seismsisosaadard nate, we lhossiaload a bag
WAN vadmir
thee the Me reseeetedA
Tau memtimusi that the L4sue Club would prefer Plenehower
calm he.the SOWS S. Ardor. eels is diffieelt for the blind
*Mom to reeesulftwo Canaliaraties was given to this igen is the
&mime of the Mathew sada. Seissessestileee ad the listless/ redowetion
Mhe Nino se well ee its Mirth Cerelim diMpear, wogs sigitested 111
the ant to !tosses the dmeiss, tactile Ihresteeristios, else sod *their
feetwee of the Asthma, 414111 Wets it was hineedueed. It we. as
remelt of dissuasions wok as this that the Me ausisms4 the Asthea.
sees with as elevest04110d Wog ber4er to dietimisigib it from the
astrter.
wa were happy fobs 4400iStaa00 SO meals' the delivery
of the silver dollars eartiet they slight be seeildble tee the Christmas
party•
StIMMktei7,
WINtMLSOLS:WW:Ot (PV-125)
bec: Mr. Wallace
P14.1.safrudA;
JAMES T. BROYHILL
10714 DISTRICT, NORTH CAROLINA
ROOM 2340
RAYBURN HOUSE OFFICE BUILDING
WASHINGTON, D.C. 20515
202-225-2576
S
•
Congre
DISTRICT OFFICES:
318 SOUTH STREET
GASTONIA, NORTH CAROLINA
(7041 864-992.2
of tbe Ziniteb 6tateg
224 MULBERRY STREET, SW.
LENOIR, NORTH DAROUNA 28645
(704) 758-4247
30ouiSe of ileprefSentatibei
COMMITTEES:
BUDGET
INTERSTATE AND FOREIGN
COMMERCE
Room 310
POST OFFICE BUILDING
HICKORY, NORTH CAROLINA 28601
tilassbington, D.C. 20315
(70.4) 328-8718
November 19, 1979
ROSA/
Uonorable Paul A. Volcker
Lliairman
Board of Governors of the Federal Reserve System
Federal Reserve Building
Washington, D.C. 20551
Dear Chairman Volcker:
I have been contacted by Mr. Barney Cloer and the Lions
Club of Lenoir, North Carolina, concerning their desire to
obtain 500 Eisenhower silver dollars to he distributed at
a Christmas party for the blind to be held in early December.
I realize that this coin is difficult to obtain in
such a large quantity; however, the Club would appreciate
any assistance which you can provide in this regard.
The new Susan B. Anthony coin is difficult for the blind
citizens to recoanize and for that reason, the Club would
prefer obtaining the Eisenhower coins.
If possible, the Club would like to have the 500 coins
arrive at the First Union National Bank of Lenoir before
November 26th.
I realize the time involved may present
g'problem; however, I would appreciate any assistance
which you can provide.
Thank you in advance for your time and cooperation.
best r
VVeN
(7
rds,
s T. Broyh
1
I.laj
jber of Congress
JTB:sa
28052
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Patteroos
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leseideigtes, p.C. MU
am Mr. lhotterooet
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fiefosiss with total susses of NO aillies or lees from the bill'. prow
*Wow prohibitive hankb.lfl
soposise Inemeagegiss is Leeman.
setivitioe. Yang.* (2) ei ay bettor *tells& shot the emeoptieseesid
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lase it world imstbaciss web balk WM* eangondss to sell ineoneues
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bite: Mhoilefer
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22,5.
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dissaisesis heortme
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sod asilie She some imSemeet rose em Immo as isetleeol beds*
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beat Goo. Schultz
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Mo. 1641.4nrdl (2)
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The Meneesido Chew
1979
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s MAW vied (IN-129)
Ix:et Itames. Munn and Henry
saeumaar ilanardi (2)
s/Paul A. VolckeE
"Mr
111
CHARLES E. BENNETT
MEMBER
3D IDISTR,-7T FLORIDA
ARMED SERVICES COMMITTEE
CHAIRMAN OF SEAPOWER
SUBCOMMITTEE
JOHN W. FARLEY
ADMINISTRATIVE ASSISTANT
THOMAS J. MILLER
LEGISLATIVE ASSISTANT
Congre5 of tbe Unitcb fitatO
SHARON H. SIEGEL
LAURA M. BISHOP
SARAH J. SCOTT
CHERYL L. WRIGHT
iDoufSe of leprefSentatibeg
JACKSONVILLE OFFICE
352 FEDERAL BUILDING 32202
Mactington, D.C. 20515
TELEPHONE 904-791-2587
TERI A. WOLF
PATRICIA A. CAHILL
SECRETARIES
November 26, 1979
JOHN W. POLLARD, JR.
BRENDA DONALDSON
Honorable Paul A. Volcker
Chairman, Federal Reserve Board
Room P 2046
20th Street & Constitution Avenue, N.W.
Washington, D. C. 20551
ammEn.--
Pfr
Dear Mr. Chairman:
I refer to my October 29 letter and the October 20 letter which
stimulated this, copies of which are enclosed herein. I have now
received the enclosed November 12 letter from my constituent and a
copy of a clipping from the Wall Street Journal. I am not a master of
matters of this type, but know that you are and would appreciate your
consideration of what Mr. Poitevent has said and any observations that
you might pass on to me that I could pass on to him.
With kindest regards, I am
Sin erely,
Charles E. Bennett
CEB:clw
Enclosures
cc: Honorable Frederick H. Schultz
w/enclosures
-
October 29 an-I 20 letters were resnoniei
t, y Chairman Volcker on 11/16-International Oivision is in the process
of preparing response to November 12
constituent letter.
THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS
•
•'
:
- 1.4,
FieX,
October 29, 1979
Honorable Paul A. Volcker
Chairman, Federal Reserve Board
Room B 2046
NW
20th Street and Constitution Avenue
Washington, D.C. 20551
Dear Mr. Chairman:
ter from Mr. Poitevent,
I received the enclosed Oc6ober 20 let
I would appreciate
andouts!.anding man in my home community and
to make with regard to
an observations that Trn might bet able
enough of an expert in
the things that he has said. I am not
solutions may be.
the handling of money to know that the
With kindest regards, I am
Sincerely,
Charles E. Bennett
CE3:js
cc: Honorable Frederick H. 6chultz
w/enclosure
•
Earl S. Poitevent, Jak
October 20, 1979
The Honorable Charles E. Bennett
2107 Rayburn Building
Washington, D.C. 20515
Re: U. S. Federal Reserve
Inflation Policy
Dear Charlie:
There is an old saying, "In business you hire
men and you hire money." How in the world the Federal
Reserve can fight inflation by making money more expensive defies reasonable deduction. If it Is true,
then the AFL - CIO is remiss (if not unpatriotic) In
not demanding 15t-20% wage increases to fight Inflation.
Of ell people, Jimmy Carter should know high interest
rates create inflation. After all, he used to borrow
two to three million dollars a year to conduct his
business. How much would the price of peanuts have to
be raised to accommodate 10% additional interest costs?
However, the damage to the home front of high
interest rates is possibly surpassed by the long term
damage to the dollars' international value. It is
estimated there is now, or soon will be, seven hundred
billion dollars overseas. We are expected to borrow
this money back at approximately the rediscount rate,
or some 12+%. So we pay out some seventy billion in
interest to further debase the dollar. Our balance of
trade deficit and foreign aid debases It even further.
If this trend is not reversed there will be two trilliun
dollars overseas in less than ten years.
Now what would happen if the rediscount rate
was lowered to 50 The foreign money lenders would
yell bloody murder. The dollar would temporarily dip
against the foreign currencies, our manufacturers
could modernize their plants, and balance of trade would
develop In our favor. Our trading partners would suffer
some temporary disruption to their economies. They
1
would probably have to resort to deficit spending to
shore up their economies. Their currencies would
ultimately be somewhat debased. Our dollar would be
strengthened. The Arabs would stop buying gold and
raising oil prices.
Who profits by high interest rates? The
al
Federal Reserve does by its manipulation of the feder
bond market. The Fed's member banks do by using the
rediscount rate as a basis for loaning out their money
(legal usury). The foreign lenders do.
Who gets hurt? The general public from grocery
and auto buyers to home buyers --- also, the Federal
Reserve Banks chief competitors (the Savings and Loan
Associations).
It is certainly hoped that you and your
colleagues can put a rein on the Fed's unbridled power
to put the economy of this country on its knees at the
whim of a few unelected officials espousing esoteric
views. After all good times and their accompanying s'de
effects --- low unemployment, good state revenue, et
cetera --- ain't all that bad --- unless you happen to
be a masochist, an international money lender, or a
trading partner who is used to getting the better bargain.
This country sorely needs a stable economic
period of several years with reasonable interest rates
and sufficient monies to conduct manufacturing, trade,
and to rebuild the efficiency of our plants. The Federal Reserve Boards' activists policies preclude this.
So why not abolish the Federal Reserve Board --- not
the Federal Heserve --- and let Congress set the rediscount rate and the bank reserve rate. That's about
all the Board does and Congress already sets Income Tax
rates, Sociql Security rates, et cetera. Believe me,
it is not all that complicated. If the rates were set
fairly, they could easily last 20 years to everyones
advantage.
Your views on the above would be appreciated
and it would be germaine and interesting to know what
the assets of the Fed are now and what they were
20 years ago and where the money came from.
I remain,
Sincerely,
(
IX(
Earl S. Poltevent, Jr.
I might add that a 5%rediscount rate would
P.
make the prime about 7% and the average loan about
8%.
ESP:map
Earl S. Poitevent,
4301 Venetia Blvd.
Jacksonville, Florida 32210
(904) 389-5446
November 12, 1979
The Honorable Charles E. Bennett
2107 Hayburn Building
Washington, D. C. 20515
Dear Charlie:
Thanks for your letter of October 29. In it
you mentioned that you had not been too much involved
in the management of money. Please permit me to draw
you 9 rough analogy of why high interest rates result
in additional inflation. Suppose you and I are in
separate businesses, and we need to trade with each
other. We agree to accept each other's notes. Such
notes are to carry 10% interest, and we are to settle
out at the end of each year. Now further assume the
scenario remains the same for twenty years, namely you
buy .1.:1,100,000 from me and I buy ,4:1,000,000 from you.
At the end of the first year we settle up. You return
,?1,000,000 of my notes but I only return 990,000 of
yours because you had a trade deficit of ::t100,000 on
which you owe me n0,000 in interest. So I start the
second year still holding 1.10,000 worth of your notes.
I will start the following year holding 1231,000 of your
notes, the eleventh year holding $1,753,114 of your notes
(1,000,000 trade deficit plus $753,114 accumulated interest), and so on through the end of the twentieth year
et which time I will hold $6,064,441 of your notes
(2,000,000 trade deficit and 84,064,441 accumulated
interest).
Accordinw to the Wall Street Journal of 10/26/79
(article attached), we now have i$965 billion Eurodollars
(your notes) outstanding. We are borrowing these Eurodollars back at 16% or more. If we borrow 90,-2; of them
back we will ship an additional 1.39 billion overseas
for interest. Now add this to our trade deficit (say
:30
.1
billion) and there will be right at $1.13 trillion
Eurodollars outstanding this time next year.
•
Everyone gets excited when our trade deficit
goes up. And, also, when our deficit spending goes
up to run the government, and they should, those are
inflationary factors. But, I submit, they do not hold
n candle to the inflationary force of paying 16% interest to borrow back 't965 billion Eurodollars, or a
high percentage thereof. I believe it would get the
nation's attention if these interest figures were published along with the trade deficit figures as they are
the same as a trade deficit.
As far as the American economy is concerned the
monies spent for defense, welfare, etc. stay in this
country. Whereas, the monies we ship overseas for
interest on Eurodollars both reduce our national money
supply and make us just that much more dependent on
foreign lenders. This is why I think the Congress
should establish the rediscount rate. I do not believe it should be over 4% as this would allow the
banks to loan their monies out at 7; or 8%, which they
can live with and still return their stockholders a
very handsome profit.
It is ironic that with the elaborate checks and
balances built into our Constitution to protect the
populace against excesses of power we end up with an
activist Federal Reserve Board of Governors. They have
deliberately put American industry in the clutches of
foreign lenders while singing a siren song of fighting
inflation
the hoax of the century.
With best regards and hoping you have heard
something from the Fed and Rep. Reuss by this time,
I remain.
Sincerely,
Earl S. Poi event. Jr.
ESP:map
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Newspaper article
Citations:
Number of Pages Removed: 1
"Loophole Is Found In Federal Reserve's Tight-Credit Policy." Wall Street Journal, October
26, 1979.
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
•
••oofGoVt4'••
•
f2
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
•••5.
WASHINCiTON. D. C. 205I
PAUL A. VOLCK ER
CHAIRMAN
December 11, 1979
The Honorable Mario Biaggi
Member of Congress
21-77 31st Street, 2nd Floor
P. O. Box 5101
Queens, New York
11105
Dear Mr. Biaggi:
I have read the letters from two of your constituents and I understand their concerns. The real estate industry clearly faces difficulties
as a result of rapid inflation, and the monetary policy actions necessary to
contain that inflation, interest rate ceilings, and other factors.
Sharp increases in interest rates in financial markets generally,
and on residential mortgages in particular, followed in the wake of monetary
policy actions announced by the Federal Reserve on October 6. I believe that
decision and our current policy must be evaluated in the context of events
leading up to October 6. In brief, those circumstances were highlighted by
an acceleration in inflation and inflationary expectations; a burst of speculative activity in the gold, commodity and foreign exchange markets; renewed
downward pressures on the dollar in foreign exchange markets; and rates of
growth in money and credit far in excess of those compatible with achieving
noninflationary growth in the economy. If this combination of events was
permitted to persist, the results would have been still higher inflation,
still higher interest rates, and an even more difficult adjustment in economi
c
activity.
In light of this situation, the need for forceful action by the
Federal Reserve seemed clear.
But, it does not diminish the legitimacy
of your constituents' concerns about the impact on the housing market.
Certainly, I am sensitive to the credit needs of the mortgage markets, zoi well
as the needs of the small business community and the consumer. I have taken
steps to stress these needs to the banking community in letters, speeches and
personal conversations.
I very much look forward to the day when we can have substantially
lower interest rates. A sustained reduction in the levels of interest rates
would foster the orderly distribution of credit throughout various sectors
and regions of the economy and reduce hardships of which your constituents
write. Achieving that environment will mean that we have succeeded in damping
inflation and inflationary expectations.
Si
it
erely,
7
Ct,a0alt&t"
BOARD OF GOVERNORS OF THE FEDERAISERVE SYSTEM
•(",
Date
To:
From:
JAY BRENNEMA
( 1 Per Conversation
( ) For com ents and suggestions
( 1 For your information ( ) Phone me re attached
The attache0 letter has been
rered to Jim Kichline on this date,
for response by next Friday, Nov. 30.
http://fraser.stlouisfed.org/
t
Federal Reserve Bank of St. Louis
( 1 Over
•
MARIO BIAGGI
COMMITTEES,
mfOOTH DISTRICT. NEW YORK
EDUCATION AND LABOR
SUOCOMMITT EC S•
LABOR MANAGEMENT RELATIONS
POST SECONDARY EDUCATION
WASHINGTON OFFICE:
2428 RAYRURN NOUSE OFFICE BUILDING
WASHINGTON. D C.
20515
(202) 225-2464
Congres'of tfic Ziniteb ptatc5
3ipti5e
DISTRICT orricrs
of ilepregentatibesS
SELECT EDUCATION
ft"fo
MclicHANI -MARINE
AND
FISHERIEV
BRONX
2004 WILLIAMSBRIDGE ROAD
BRoNx. Nrw Yogic
Washington, D.C. 20515
SUEICOMMITTEESI
CHAIRMAN,
COAST GUARD AND NAVIGATION
10461
(212) 931-0100
MERCHANT MARINE
QUEENS
PANAMA CANAL
SrcoNo FLOOR
21-77 31ST STREET
November 16, 1979
P.O. Box 5101
QUEENS. NEW YORK
1
SELECT COMMITTEE ON AGING
SUBCOMMITTEE:
11105
CHAIRMAN. HUMAN SERVICES
(212) 932-4448
DEMOCRATIC STEERING AND
POLICY COMMITTEE
Paul Volcker, Chairman
Federal Reserve Board
Washington D.C. 20551
SELECT COMMITTEE ON
NARCOTICS ABUSE AND CONTROL
(EX-OFFICIO)
CHAIRMAN, AD HOC
CONGRESSIONAL COMMITTEE
FOR IRISH AFFAIRS
Dear Mr. Volcker:
ammoom.—
I am enclosing copies of two letters I have received from
Mr. Bill Karsonis and Mr. Willard Rose, both real Estate
Brokers in my Queens District Constituency. The letters
explain their grievances in full detail.
I would appreciate your looking into this situation for
these brokers and advising them of the results of your
inquiries. I am certain that my office will be receiving
further communications from other businessmen in the area,
therefore, any correspondence you may acquire on this problem should be forwarded to my Queens District offfice. In
this way I will be able to properly respond to my constituents
should the need arise again in the future.
Thank you for your cons
matter.
ion and assistance i. this
ely Yours
MA IOBIAGGI, M.C.
MB:mm
Enc.
THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED F BERS
•
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•
KARTSONIS REALTY
REAL ESTATE SALES- RENTALS - MORTGAGES
43 08 BROADWAY
ASTORIA LI NY 11103
TEL(PHONE 278 8500
November 2, 1979
Dear Representative Biaggi:
It is unfair for the federal government to fight inflation by making mortgage
money virtually unavailable for the buyers and sellers of home As a matter of
fact, in the long run, this apprcach only adds to inflation.
In addition to getting the executive branch to change its ill-considered policy,
Congress can do a number of things to alleviate the situation.
In the field of FHA mortgages, you should force HUD to authorize a more
realistic interest rate. Right now, the amount of "points" required at FHA closings
is bringing financial hardship to the parties involved and even causing cancellation
of many sales.
More money for conventional mortgages can be provided through the New York
mortgage agency ("Sonny May") and similar progiams, but this won't happen until
Congress clarifies the status of tax-exempt bonds used for this purpose.
Realtors support other measures to attract more money to thrift institutions,
such as exempting savings accounts from income tax.
New York State has another problem in the form of an outmoded usury law.
However, even if we get this changed at the state level, a major part of the
difficulty is being caused by Washington.
On be;lall of your constituents who are unable to buy or sell a home, I urge
you to do something to reverse the disastrous federal policies that are harming the
housing market in this state and throughout the nation.
Sincerely,
Bill K. Kartsonis
•
f ltr„
STaAile
WEBER & ROSE REALTY, INC.
18-22 College Point Blvd
College Point, New York 11356
(212) 939-4200
•
November 1, 1979
Congressman Mario Biaggi
21-77 31st Street
Flushing, New York 11352
Dear Congressman Biaggi:
making
ment to fight inflation by
ern
gov
l
era
fed
the
for
air
unf
It is
of
le for the buyers and sellers
lab
vai
una
lly
tua
vir
ey
mon
ge
mortga
adds
long run, this approach only
the
in
t,
fac
of
ter
mat
a
As
homes.
to inflation.
branch to change its ill-conive
cut
exe
the
g
tin
get
to
on
In additi
ber of things to alleviate the
num
a
do
can
ss
gre
Con
,
icy
sidered Pol
situation.
a
should force HUD to authorize
you
,
ges
tga
mor
FHA
of
ld
In the fie
now, the amount of "points"
ht
Rig
e.
rat
st
ere
int
tic
more realis
ties
financial hardship to the par
ng
ngi
bri
is
gs
sin
clo
FHA
required at
cellation of many sales.
involved and even causing can
can be provided through the
ges
tga
mor
nal
tio
ven
con
More money for
and similar programs, but
")
May
y
onn
("S
ncy
age
ge
New York mortga
ies the status of tax-exempt
rif
cla
ss
gre
Con
il
unt
pen
this won't hap
bonds used for this purpose.
t more money to thrift inrac
att
to
es
sur
mea
er
oth
Realtors support
tax.
savings accounts from income
ing
mpt
exe
as
h
suc
s,
ion
tut
sti
form of an outmoded usury
the
in
m
ble
pro
r
the
ano
New York State has
at the state level, a
d
nge
cha
s
thi
get
we
if
n
law. However, eve
n.
being caused by Washingto
major part of the difficulty is
e,
unable to buy or sell a hom
are
who
nts
tue
sti
con
r
you
On behalf of
disastrous federal policies
the
e
ers
rev
to
ing
eth
som
do
I urge you to
this state and throughout the
in
ket
mar
g
sin
hou
the
g
that are harmin
nation.
Sincerely,
LTY, INC.
CENTURY 21 WEBER & ROSE REA
Willard L. Rose, Jr.
Lic. Real Estate Broker
,•••••••••••••
.•
• of GOVe'
•
•
.6
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON,. O. C. 20551
&AL REs..-
PAUL A. VOLCKER
CHAIRMAN
November 30, 1979
The Honorable J. William Stanton
House of Representatives
Washington, D. C. 20515
Dear Bill:
In your letter of November 21, 1979, you aske
d for Federal
Reserve views on the amendment to H. R. 4986
by Senator Heinz that would
place a moratorium on foreign acquisitions
of U. S. banks and would require a study by the Board, in consultation
with other supervisory agencies, of issues raised by such acquisit
ions.
Bank supervisory agencies and the Cong
ress have in the past
devoted considerable attention to the
operation of foreign banks in the
United States. In the course of implementing
the International Banking
Act, the Federal Reserve has been reviewin
g a number of aspects of foreign banks' operations in this country.
This review has included, importantly, issues concerned with the acqu
isition of existing U. S. banks
by foreign bank holding companies and
supervisory problems that might be
associated with such acquisitions. Last
February, the Board adopted a
statement of policy setting forth several
of the steps it is taking to
ensure effective supervision of foreign-owne
d banks. I enclose a copy
of that statement.
Study of foreign banks' operations in
this country is necessary
on a continuing basis as an integral part
of our supervisory and regulatory
responsibilities. Federal Reserve staff is enga
ged in examining our experience with foreign bank holding companies,
and I understand that work
is also in progress at other supervisory agen
cies. There is no evidence
at the present time that foreign ownershi
p has produced harmful consequences for our banking system or for bank
customers. However, we need
to monitor the situation closely. In this conn
ection, we recently issued
for public comment a proposed reporting syst
em for foreign banks and bank
holding companies that will improve considerably
our information on them
and on their transactions with their U. S. bank
ing offices. The Federal
Reserve would be happy to report to Congress
on the results of our ongoing
efforts in this area.
•
•
The Honorable J. William St
anton
Page Two
A moratorium would no
t aid in the continuing
and evaluation in which we
process of review
and the other bank supe
rvisors are and will
engaged. It would restri
be
ct the ability of U. S.
banks to strengthen
capital base through sale
their
s of stock to foreign
banks. More genera
there is always the danger
ll
y,
that such a step coul
d mistakenly be cons
as a reversal of this
tr
ued
country's long-standin
g policy regarding fore
investment—namely, "nei
ig
n
ther promote nor di
scourage inward or ou
investment flows or ac
tw
ar
d
tivities." As always
in measures of this ki
there is also the poss
nd,
ibility of foreign re
taliation which in this
could affect U. S. bank
cane
s' overseas operatio
ns.
For these reasons
on foreign acquisitions of the Federal Reserve believes that a moratorium
U. S. banks is unnecess
haps as an alternative,
ary and undesirable.
any legislative lang
Perua
ge deemed appropriate by
Congress could provide th
at the Federal Rese
the
rve and other interested
cies initiate a fresh st
ag
udy of the question
enand report back to the
on the results of the
Congress
study. Such a repo
rt to the Congress could
to coincide with the ap
be timed
praisal of experien
ce with th*, Internatio
Act which, under that
nal Banking
law, is to be suppli
ed to the Congress in
1980.
September
I very much appreciate
the opportunity to comm
ent on this important
issue.
Sincerely,
,
Enclosure
RFG:FRD:TEA:EGC:vcd
bcc:
(#V-126)
Messrs. Gemmill, Dahl
, Allison, Corrigan
Mrs. Mallardi (2)
BOARD OF GOVERNORS OF THE FEDERA
ERVE SYSTEM
Date
To:
From:
JAY BRENNEMANL
( ) Per Conversation
( ) For comments and suggestions
() For your information ( ) Phone me re attached
2he attached letter has been
assigned to Robert Gemmill in International
Finnnce for a response by next Friday,
December 7. It will reflect support of the
study proposed in the Heinz amendment,
but not of a moratorium on foreign acquisitions.
( ) Over
•
HENRY S. REUSS, WIS., CHAIRMAN
MAS L. ASHLEY. OHIO
. LIAM S. MoORHEAD, PA.
FERNAND ). ST GERmAIN, R.I.
HENR e B. GONZALEZ, TEX.
JOSEPH G. MINISH, NJ.
FRANK ANNUNz10. ILL.
JAMES M. HANLEY, N Y.
PARREN J. MITCHELL. MD.
WALTER E. PALPNTROY, D.C.
STEPHEN L. NEAL. N.C.
JERRY M. PATTERSON, CALIF.
JAMES J. BLANCHARD, MICH.
CARROLL HUBBARD, JR.. KY.
JOHN J. LAFALEE. N.Y.
GLADYS NOON SPELLMAN. MD.
LES AuCOIN. OREG.
DAVID W. EVANS. IN).
NORMAN E. D'AmOuRS. N.H.
STANLEY N. LUNDINE. N.Y.
JOHN J. CAVANAUGH. NEBR.
MARY ROSE OAKAR, OHIO
JIM MATTOX, TEX.
BRUCE
VENT°, MINN.
DOUG BARNARD. GA.
WES WATKINS. OKLA.
ROBERT GARCIA, N.Y.
MIKE LOwRY, WASH.
TX
•
•
U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
NINETY-SIXTH CONGRESS
2129 RAYBURN
F.
HOUSE
OFFICE BUILDING
WASHINGTON, D.C. 20515
Iv,
J. WILIEIAM STANTON, OHIO
CHALmErts P. %Vt. tr. OHIO
sTEwART B. mcKINNEY, CONN.
GEORGE HANsEN, IDAHO
HENRY J. HYDE. ILL.
RICHARD KELLY. FLA.
Jim LEACH. IOWA
THOMAS B. EVANS. JR.. DEL.
S. WILLIAM G‘zEEN. N.Y.
RON PAUL. TEX.
ED BETHUNE. ARK.
NORMAN D. SHuMWAY. CALIF.
CARROLL A. CAMPBELL, JP.. S C.
DON RITTER, PA.
JON HINSON. MISS.
US-47.0
November 21, 1979
Hon. Paul A. Volcker
Cheirman, Board of Governors
Federal Reserve Board
Washington, D. C. 20551
Dear Paul:
I was personally disturbed by the Senate's action on H.R. 4986
when it adopted an amendment by Senator Heinz that would place a
moratorium on the foreign acquisition of U.S. banks.
This summer the Federal Reserve testified against such a proposal at hearings before the Senate Banking Committee. I would appreciate
your current thoughts on the Heinz amendment before we go to conference
with the Senate on H.R. 4986.
Sincerely,
•
J. William Stanton
JWS:gwn
•
•
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OF GOVtii...•
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BOA1RO OF GOVERNORS
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WA -o-4INGTON.D.C. ,21351
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December 19, 1979
AL RO'.•
• •..• •
The Honorable Howard H. Baker, Jr.
United States Senate
Washington, D.C.
20510
Dear Senator Baker:
Thank you for your letter of November 30, in which you enclose
a request for information from a constituent, Mr. Jacobs H. Doyle.
Mr. Doyle asks for a copy of Regulation Z and all interpretations of that
regulation. He also requests information about court interpretations of
the Federal Trade Commission's rule on the Preservation of Consumers'
Claims and Defenses (16 CFR Part 433).
I am enclosing a Regulation Z pamphlet which contains the
Board's official interpretations of Truth in Lending. There is no digest
available, however, of the more than 1500 staff interpretations of the
regulation. Mr. Doyle may wish to consult the Consumer Credit Guide, a
loose-leaf publication issued by Commerce Clearing House, Inc., 4025 W.
Peterson Avenue, Chicago, Illinois 60646. This CCH Guide contains all
the staff interpretations together with a topical index; no such index
is available from the Board. It may be that a public library in Nashville
subscribes to this reporting service, and Mr. Doyle may not need to
purchase the publication. The staff of the Board's Division of Consumer
and Community Affairs would be happy, of course, to answer any particular
questions Mr. Doyle may have about Regulation Z.
The staff is not aware of any court decisions concerning the
Federal Trade Commission's rule entitled Preservation of Consumers' Claims
and Defenses (the "Holder in Due Course" rule). That rule, which has been
in effect since May 14, 1976, imposes requirements upon sellers of consumer goods and services. The FTC has recently indicated its intent to
broaden the rule to cover creditors who finance these consumer purchases.
(Enclosed is a copy of the Federal Register notice discussing the Commission's
proposal.) The Board has certain responsibilities under § 18(f) of the
Federal Trade Commission Act (15 U.S.C. § 57(a)) to promulgate a substantially similar rule applicable to banks, and will be considering how to
best fulfill its responsibilities in the near future.
I hope you will find this information helpful.
Sincerely yours,
Donald J. Winn
Special Assistant to the Board
Enclosures
\occ.
I
Hart.
Response beiniireparei by Ms.
JOHN SPARKMA.N, ALA.. CHAIRMAN
FRANK CHURCH, IDAHO
CLAIBORNE PELL, R.I.
GEORGE MC GOVERN, S. OAK.
HUBERT H. HUMPHREY, MINN.
DICK CLARK, IOWA
JOSEPH R. BIDEN. .IR.. DEL.
JOHN GLENN, OHIO
RICHARD (DICK) STONE, FLA.
PAULCSARDANES,MO.
CLIFFORD P. CASE. N.J.
JACOB K. JAVITS, N.Y.
JAMES M. PEARSON. KANS.
CHARLES H. PERCY, ILL.
ROBERT P. GRIFFIN, MICH.
HOWARD H. MAKER, JR., TENN.
11Cnifeb Ziafez Zertate
COMMITTEE ON FOREIGN RELATIONS
WASHINGTON, D.C.
NORVILL JONES, CHIEF OF STAFF
AVNER E. KENDRICK.
CLARK
CHIEF
20510
415
November 30, 1979
Mr. G. William Miller
Chairman
Federal Reserve Building
Constitution Avenue between
20th and 21st Streets
Washington, D.C. 20551
Dear Mr. Miller:
have enclosed correspondence fro
m Mr. Jacobs H. Doyle,
which I believe is self-explanator
y. I am grateful for
your review of this matter, and
for any information you
might provide that will assist me in
responding to this
inquiry. Please respond to the att
ention of my Staff Assistant,
Ms. Lee Hunt.
Sincerely
ard H
HHBJr:rdt
Enclosure
r
r,
r.
a
O
JACOBS H. DOYL E
ATTORNEY•AT-LAW
428 STAHLM AN BUILDING
19i9 NOV -s
Ali 10: 39
PHONE 26-4169 ARK'. 415
NASHVILLE, TENNE.•;SEE 37201
November 2, 1979
Senator Howard Baker
U. S. Senate Office Buildi
ng
Washington, D. C. 20510
Dear Senator Baker:
The Federal Reserve Board and
the Federal Trade Commission are putting out regula
tions governing negotiable
instruments, warranties, an
d other trade practices. Wh
at
I would like to have is a co
py of Regulation Z and all
the
interpretations with referenc
e to same (like a digest).
The holder in due course for
warranties are covered in
Volume 16, Federal Regulation
s. Are there any interpretations and decisions of the Co
urt? I would appreciate a
copy of those or, if not, te
ll me where I can obtain it.
With the best of wishes.
Sincerely yours,
)
11,
(
-
C
Jacobs H. Doyle
,/
JHD/djm
BOARD OF GOVERNORS
OFTHE
//--
FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
c_
•TAL RES
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• .. • • •
PAUL A. VOLCKER
CHAI R MAN
December 18, 1979
The Honorable Harrison A. Williams, Jr.
United States Senate
Washington, D. C. 20510
Dear Senator Williams:
I have now had an opportunity to review in greater depth the
issues raised in your exchange of letters with Chairman Williams of the
SEC. The problems that have emerged in markets for mortgage-backed securities seem to suggest, as you point out, the wisdom of detailed consideration
of the need for Federal legislation, or other Federal action, to support or
complement efforts at self-regulation. Questions at issue relate to the
scope of possible regulatory action, the role of self-regulation, and the
appropriate regulatory relationship of the government and its interested
agencies to markets for government-guaranteed securities and possibly also
markets for closely related securities, such as issues of governmentsponsored agencies.
As you know, the market is now attempting to develop a framework
for self-regulation through PSA Self-Regulation, IncorporaLed. One cannot
be certain at this point how well this effort will succeed. However, operating rules and standards of fair practice for trading mortgage-backed
securities have now been adopted, and similar rules and standards for
trading government-guaranteed loans are expected shortly. PSA Self-Regulation
recently launched a promotional campaign designed to extend membership to at
least the major firms that trade these instruments. In addition, both GNMA
and the federal regulators of financial institutions have Inaugurated certain
reforms and are planning others, with a view to imposing additional constraints
on the types of market abuses that prompted your concerns.
The rules adopted by PSA Self-Regulation attempt to address the
key problems of customer suitability standards and margin for forward transactions--the areas of industry practice that appeared to be most in need of
upgrading. Nevertheless, there is still a question whether a strictly private
organization can encourage membership from enough of the firmsactive in the
market to insure that these strengthened self-regulatory standards will be
effective. Moreover, in seeking to skirt potential violations of the antitrust laws the PSA rules simply encourage individual firms to establish
The Honorable Harrison A. Williams, Jr.
Page Two
prudent constraints on risks, including maintenance margins. They do not
seek to enforce any uniform industry-wide mark-to-market requirement.
At this point it is too early to say whether the combination of
actions being taken by the federal regulatory agencies and PSA SelfRegulation, Inc., will prove sufficient to curb the abuses that have
emerged in markets for government-guaranteed debt. Both types of action
do seem promising, however, and the PSA effort represents an encouraging
step toward the assumption of greater responsibility by market participants for policing themselves. For these reasons it would seem desirable
before considering any additional government regulation to monitor closely
the progress of steps already in train, until their viability can be
reasonably tested.
At the same time, it would seem desirable to begin a more general
study of markets for government-guaranteed securities. Such a study would
probably also have to consider other closely related markets--such as the
market for federal agency securities. This study would consider, among
other things, the details of trading and delivery of these securities as
well as other operational characteristics of these markets. Its purpose
would be to identify the scope and relative significance of problems that
may have emerged in each market, along with any differences in the nature
and extent of such problems from one market to another. The study would
consider courses of action--including the specification of trading practices
and other operating characteristics of markets--that might be used to supplement or reinforce efforts at reform already in train, if this seemed
warranted. If the analysis did suggest that further regulation were needed,
the study would consider alternative approaches to meeting the problems
detected in the study. We would have in mind forwarding this study to the
Congress early in the next session.
To date no detailed study of this type has been made. The earlier
study prepared by R. Shriver Associates for the Department of Housing and
Urban Development--while very useful--focused essentially on forward transactions in markets for mortgage-backed securities. Moreover, it was concerned more with exploring the prospects for private self-regulation than
with evaluating the possible need for and techniques of public regulation.
I have discussed in a preliminary way the possibility of organizing
the type of study outlined above with both Deputy Secretary Carswell of the
Treasury and Chairman Williams of the SEC. They have responded favorably to
the idea. Other interested agencies will, of course, have to be involved
on a consulting basis, but primary responsibility should be limited to our
three agencies if the study is to be completed reasonably early. We contemplate a report by April.
The Honorable Harrison A. Williams, Jr.
Page Three
We are prepared to proceed in this way and would welcome your
comments on this approach. In the meanwhile, the attachments provide
the specific information you requested on our current regulations and
procedures.
S27erely,
1
,hY/
Enclosures
•
Attachment
:;t.quested
Attached, as requested, are copies ol existing and
pending Federal Reserve regulations applicable to the marketing,
purchase, and sale of GNMA and other federally guaranteed
securities.
They
I.
include:
Mrs. Homer's letter dated April 12, 1978
pertainin
to the purchase of GNMA securities on
a delayed delivery basis through a broker subject
to Rewilation T.
Board letter Z-8255 dated May 4, 1978
setting lorth an interim Board position with
respect to forward contracts, announcing a
forthcoming questionnaire for use by examiners,
and sugosting that Reserve Banks sendsa letter
(draft enclosed in Z-8255) to state member banks
alerting them to guard against questionable
securities transactions.
3.
A supervisory.leLter SR-171 dated July 7
1978 Forwarding the "Preliminary Examiners'
Questionnaite:
Exchange Traded Interest Rate
Futures Contracts, Forward Contracts, .1.in'd Standby Cont.r;lets" (copy attached).
SR-471 instructed
examiners to complete a questionnaire, to the
extent applicable, in conjunction with each
commercial examination conducted during the
remainder of 1978.
(Use of this questionnaire was
subsequently authorized through June 30, 1979.)
A supervisory letter SR-527 (and enclo.;tir
dated February 11, 19.79 specifying staff's
recommended accounting treatment of "standby" contracts to purchase securities.
5.
A copy of the "Policy Statement Con-
cerning Forward Placement or Delayed Delivery
Contracts anu Interest Rate Futures Contracts"
that the Board is about to release in conjunction
with
t!ie otlwr h:ink reulatory agencies.
Although no Formal Board enforcement proceedings have
thus kir hcen necessary on forward or standby contracts involving
government-guar:Inteed or U. S. Treasury securities, four state
member lmnks have received supervisory attention through the
examination pr, wess because of such contract activities.
Two
s:-.1.2_11 banks were instructed to chare off losses resulting from
GNMA securities being "put" to the banks pursuant to standby
contracts.
A third small bank was found to be speculating in
GNMA forward contracts; the bank in question has been working
its way out ol
liquidity problem resulting from the bank
honoring its contracts to purchase securities.
A fourth small
bank was found to be engaged in speculative securities
transactions in GNMA and U. S. government securities; these
transactions were criticized by Federal Reserve examiners as
unsafe
and unsound and the bank has agreed not to engage in
. similar transactions in the future.
In all cases, it is
believed that the examination process was adequate to deal
with the problems involved.
Deeedber 17, 19/9
1ho illemeembhe Dees 101141114, Jr.
Swim of Repramewtattues
116011d1tton, D.C. 20515
DPW
ancrterd I
I appuociete the oessero indicated Is yam mesas letter
pleas to maws. the difiereatiel on stoney
sestsardies WWI rapine
mertat sertifiormes Is Meer of thrift lustiteeiees. lho regulatory
assesias did not tab,$ea as action in edam • series of ch4nges to
adjust interest real esiiimes that vi11 so tete offset OR Jenunry 1.
Ileramar, eo iudioeSed As Ohs enclosed pees reheess, the asencies,
MOM ether action* datilmmd to aid smw11 SWOP SW increase the
ability of ell 40peeitory lustitetieme to eve., Air foods, did
suarstie• the tutrodnetten of. sew lomier-tess deposit isstrorseet
Agee selling vete is hired to uelhet yieldi ea 24/2 year itimisury
aitte. Thismew instrument does seustmee She differential in
foyer of thrifts but will mot ewes the esumeselel basks to the dia.istevardistion risky *het meld hove bees seeeeleted with reimposing
the diffoesstia se mew swarkat certificates.
Sincerely*
S/Paul A. Nag
Rnelosure (Press release dtd. 12/14/79)
SCS:DJW:pjt (PV-141)
bees W. ttin
Nre. ftllardi (2)
\
A
DOUG BARNARD, JR.
ction assignei to Steve Axillio
10TH DISTRICT, GEORGIA
p.
COMMITTEES:
BANKING, FINANCE AND
URBAN AFFAIRS
Congre5 of tbe tiniteb
SMALL BUSINESS
tate
30ouge of 1epre5entatibeg
tillatbington,;1).C. 20515
DISTRICT OFFICES:
STEPHENS FEDERAL BUILDING
Room 128
P.O. Box 687
ATHENS, GEORGIA 30603
(404) 546-2194
NEW FEDERAL BUILDING
Room 114
816 WALKER STREET
P.O. Box 10123
AUGUSTA, GEORGIA 30903
(404) 724-0739
NEWTON COUNTY
EXECUTIVE OFFICE BUILDING
COVINGTON, GEORGIA 30209
(4C)4);787-2110
December 7, 1979
//
The Honorable Paul A. Volcker
Chairman, Board of Governors of
the Federal Reserve System
Washington, D.C. 20551
•-;
Dear Mr. Chairman:
For the past several days, I have been seeing a number of stories
in the press that suggest that the Interagency Coordinating Committee is planning to reimpose the differential on money market
certificates at all interest rate levels. I strongly disapprove
of such a move, and hope that you will use your influence to oppose
the reintroduction of the differential on money market certificates bearing an interest rate of above 9%.
111.111111amil...
Not only does this come at a time when a House -Senate conference committee is considering the total phaseout of Regulation
Q and the differential it also appears to be contrary to the attempts of the Federal Reserve to reduce inflation through more
strict controls on the money supply. In such circumstances, this
would appear to be a regressive step.
While there is the arguement that reimposing the differential
would help thrift institutions to compete with money market
mutual funds, I do not believe that this competitive edge should
come at the expense of commercial banks. I am also aware that
a differential would help thrifts in certain parts of the country
which are under pressures not seen nationwide. However, in
neither case does the imposition of the differential appear to be
the best or even the only way to address these problems.
At this time, I can see no justification for reimposition
of the differential on high interest money market certificates
and I again urge you to oppose such a move. I look forward to
hearing from you on this matter.
Sincerely,
DBJr/ns
••
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.
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November 29, 1979
Ite Memorable Bill Nelson
limes of Representatives
20315
Ilachiosees. D.C.
Roar Its. ileleons
Meek you for your letter of Meveiber 7 regarding • mawspeper
article seat to you by eme of Ivor semotitoests regarding the recent
error is the money stock data.
For your imfermstion, emeleeed is a letter I sent to Chairmen
Proxmire which provides detailed bechgrommd informatics related to the
source of the error, its probable effects as flooncial markets, and
actions taken by the Federal Reserve to provost such ins unfortunate
error in the future.
The BOOT4 hos ompopod outside soomeel to provide assurance
that the errors in do now stock data more lomftortent and that as
individual or iestitutisa obtained improper sollientage from preparation,
revision or rele*se of this. figures. A private Washington, D.C. law
firm will be principally responsible for this investigation which will
cover Nmoufaeturers Hanover Trust Company, the Federal Reserve Rank of
New York, sad the Federal Reserve Board.
I au confidemt that these efforts will provide the cssursoce
that viii perult all of us to put this unfortumate episode to rest.
sianessly,
Enclosure (Ltr. dtd. 11/7/79)
DB:DLOLIC:pit (FV-122)
bcc: Messrs. Lichline, Lindsey, Beck, Jorgenson, Schwartz
Mrs. Mallardi (2)
•
BILL NELSON
FLOVIDA
.•• ycv. 714
Congre55 of tbe Zfiniteb
tateE4
NINTH DISTRICT
1513 LONGWORTH HOUSE OFFICE BUILDING
WASHINGTON. D.C. 20515
)ott}5e of ikeprecSentattbei5
(202) 225-3671
November 7, 1979
Mr. Paul- A. Volcker
Chairman
Fedral Reserve Board
Twentieth Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Dear Mr. Volcker:
811111allma.
Please find enclosed a copy of a newspaper article which was
sent to me by a concerned constitutent of mine. I would appreciate
it if you could supply me with information to adequately respond
to his coacern.
Thank you for your assistance.
Sincerely,
hsh
enclosure
MOW%
IN RESPONSE, PLEASE REPLY TO:
fl
210 BREVARD AVENUE
65 EAST NASA BOULEVARD. SUITE 202
MELBOURNE. FLORIDA 32901
Cocon. FLORIDA
(305) 724-1978
(305) 631-1978
32922
FEDERAL BUILDING. SUITE 300
ORLANDO, FLORIDA 32801
BREVARD COUNTY COURTHOUSE
TITUSVILLE, FLORIDA
32780
(305) 841-1776
(305) 268-1776
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Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Newspaper article
Citations:
Number of Pages Removed: 1
Associated Press. "Fed's $3 Billion Error Sends Financial Markets Into Chaos." 1979.
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Jeceiber 5, 1979
rable
t. Tamps
The
Chairman
Subcommittee on Cossnmer Affairs
Committee on Bashisso limeing and
Urbou Affairs
ilited States Senate
Ihmaingtoa, D.C.
20510
SSW Sharma* Tomas s
1 sm respeedins to your letter of Noveaber 26, which relweats
intermit°s relative to the scheduled hearings as the Rule of 7S's
rebate method.
Euelesed is the tale yea recuested„ which shows the calculation el differences beton,* the astuerial rebate amount mod the tule of
711's rebate emewat for beth seasoner complaints you referenced.
?lease let se hmew if 1 caa be of further assistance.
Siomerely years,
Dontld J. Winn
Special Assistant to the lewd
inelosure
TRBOMB:CO:pjt (#V-128)
bee: Tim Burniston
Mrs. Mellardiv
WILLIAM PROXMIRE, WIS.. CHAIRM
ARISON A. WILIJAMS, JR., N.J.
ALAN CRANSTON, CALJF.
ADLAI E. STEVENSON. ILL..
ROBERT MORGAN. N.C.
DONALD W. RIEGLE, JR., MICH.
PAUL S. SAREANES, MO.
DONALD W. STEWART. ALA.
PAUL E. TSONGAS, MASS.
JAKE GAR N. UTle
JOHN TOWER. TEX.
JOHN HEINZ. PA.
WILLIAM L.... ARMSTRONG, ODLO.
NANCY LANDON KASSESAUM, KANS.
RICJIAJID G. LUGAR, IND.
Action assigned to Set Hart
Allnueo eanatess e.,E)enatC
COMMITTEE ON BANKING. HOUSING. AND
URBAN AFFAIRS
KENNETH A. MC LEAN. STAFF DIRECTOR
WALL, MINORITY STAFF DIRECTOR
H.
MARY PRANCES Dg LA PAVA. CHIEF CLERK
DANNY
WASHINGTON. D.C. 20510
November 26, 1979
t?.,140
foommiw•••
The Honorable Paul A. Volcker
Chairman
Board of Governors of the
Federal Reserve System
Washington, D.C. 20037
FAA
Dear Mr. Chairman:
As you know, the Consumer Affairs Subcommittee has
scheduled hearings on December 10th and 11th on S. 2002.
Your staff has supplied the subcommittee staff with copies
of complaints and inquiries relative to the Rule of 78's.
In reviewing those complaints, it would appear that
additional assistance from your staff would be helpful
in determining the difference between an actuarial rebate
and a Rule of 78's rebate.
Pkhrd4,
momm
I believe it would be helpful to the deliberations
of the subcommittee, if your staff would provide documentation in the form indicated in the enclosure for the
following cases:
1.
2.
p.-4;g2f-
Michael Gilmore
Centerville, Ohio;
liwneRNIPP"
Control No. 09366
Received 7/13/77
I would appreciate this information by December 3, 1979.
Best wishes.
rest:'
r
44444,
-
aul E. Tsongas
Chairman
Loma.-
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ACENCY
State
Year
Contract Terms
Rebate Data
Complaint - Inquiry No.
Amt. financed:
APR:
Finance charge:
Number of payments:
Total of payments:
Monthly payments:
Date of loan:
Date of 1st payment:
Date rebate amt. quoted:
Remaining payments:
Complaint - Inquiry No.:
Amount necessary
to pay off loan
Rule of 78
Rebate
Actuarial
Rebate
Difference
•
•
•
Dessuber 19, 1.979
The nosereble Ms Glenn
gaited States Semite
Washington, D.C. 20510
neer Senator Glean:
Thank you for your letter of Deer 4 informing us of the soo.
corns of your constituents, Andre A. Mobiles sad Gerald P. Sieblieg, about
the effects of high interest rates en email businesses. The concerns they
have expressed are shared by nen, besimesomem, end the Nord fully alder*
stated* the points made in their letter. Is all of his public stetson*,
and in various contacts with the bankimg csemunity, Chairman Volcker he
urged banks to be as respeusive as possible to the eredit needs of smell
businesses and other regulpr customers for seeing kesiesse activity. We
awe attaching a sopy of his Letter to neiber bash, em this subject.
A number ell MAO hevia, in turn, responded that they have takes
special measures to deal with the needs of smell businesses, Including
looms below the regular prime rate in some comm. The smaller banks is
the country are, of course, esionted primarily toward the needs of small
business customers.
None of this, of course, makes the existing situation at all
easy for many businessmen in the Nieblinge position. We do believe,
level of interest rates fundameetally
however, that the preeeSth1
reflects, sad is au suegrewth of, the inflationary process. Only it we
succeesfully deal with inflation can we have a reasosable expectation
of lasting relief frost credit market pressures. The Federal Reserve's
present policies. whieh are aimed at getting better control over the growth
of mousy and credit, are showing sips of meeting their objectives, and
we shield not be surprised to set sem* oasing ts1 credit market pressures
usider the circumstances.
Monetary policy he. an important role is winding dews inflation,
but other measures including fiscal discipline sad rediction of costly,
excessive Federal regulations as mentioned in the Otsiblinge letter are
alas essential in this proses*. Hopefully the difficulties that the
Ilisblings described will be reduced mod a MOWO favorable climate for
business will emerge at grewtk in new moderates mod more balance is
restored to time esessny.
JH:JPB:pjt (#V-139)
bcc: Jon Hiratsuka
Mrs. Mallardi
Sisserely yews,
d‘
lir
Weald 1:" Winn
Special Assist/it to the Board
(T.tv.
AtA
1A//1,70 tn rhimf Pyiebemit4,01-^ Off4&ft1'. nf one.h Momhe,r
December 4, 1979
The Honorable William Proxmire
Chairman
Committee on Banking, Housing
and Urban Affairs
United States Senate
Washington, D.C. 20510
Dear Mr. Chairman:
Attached is an analysis of the revenue implications
of S. 85 in the original version and with the revisions
that we have talked about. In both cases, that calculation
is supplemented by a column assuming the requirements of
the bill are only applied on a voluntary basis (columns 2
and 4 marked S85V and Rev. S85V). Looking at the revised
S85 only, the revenue loss is estimated at $65 million more
than with a mandatory bill. (In all cases we assume full
charge for services.)
All these are 1977 computations. As you know, reserve
coverage is already 2 to 3 percent below the 73.1 percent
indicated on the table for the voluntary versions. It seems
clear to me that significant loss of revenue will arise in
any event if nothing is done in the relatively near term.
Ultimately, the revenue loss for the voluntary version will
depend on where the "trigger" is set for kicking in the
mandatory system. At that point revenues will rise to that
indicated by the mandatory calculation.
Our intent would clearly be to get a trigger as high
or higher than the House 67.5 percent, hut even at that
level, I would expect the trigger to be reached before too
long, particularly with a significant requirement on nonpersonal time.
Sincerely,
WiiieL
Attachment
PLAN:
Exemptions:
Ratios:
Transactions
Savings
Nonpersonal Time
Other Time
Reserves (billions)
Members
Nonmembers
Total
5/5
Actual
1977
27.3
0
27.3
Reserves Released
111
St of Reserve Recuirement Changes (millions) b/
evenue from Service Charges
Revenue from Float Charge Cl
•M• MD
Cost after Taxes (55 percent marginal rate)
3, 12
0
6
0
S. 85
17.2
3.5
20.7
5/5a/
3, 12
0
6
0
S. 85 V
17.2
10/10
3, 12
0
3
0
Rev. S. 85
10/10 a/
3, 12
0
3
0
Rev. S. 85 V
17.2
13.2
2.2
15.4
13.2
13.2
6.8
10.2
11.9
14.1
428
(410)
(247)
668
(410)
(247)
791
(410)
(247)
935
(410)
(247)
-99
5
60
125
Number of Conmercial Banks
Exempt
Members
Nonmembers
0
8868
2
109
2
8868
2
110
9
8868
With Required Reserves
Members
Nonmembers
5664
0
5662
8759
5662
0
5662
8758
5662
0
With Reserves at 7ed
net.bers
::on-embers
5587
0
3382
3467
3382
0
2350
2451
2350
0
73.1
72.9
100.0
86.7
73.1
67.8
1C0.0
77.8
73.1
62.8
Percent of Total Deposits
At Banks with Required Reserves
At Banks holding Balances at Reserve Banks
Percent of Transactions Deposits
73.7
100.0
At Banks with Required Reserves
73.7
100 0
73 7
73.5
88.5
69.1
80.1
4t Banks holding Balances at Reserve Banks
64.4
a/ nembers only.
b/ Includes vault cash shift for members. C' Based on float outstanding of $3.8 billion in
December of 1977.
4
December 4, 1979
The Honorable William Proxmire
Chairman
Committee on Banking, housing
and Urban Affairs
United States Senate
washington, D.C. 20510
Dear Mr. Chairman:
Attached is an analysis of the revenue implications
of S. 85 in the oriqinal version ant3 with the revisions
that we have talked about. In both cases, that calculation
is supplemented by a column assuming the requirements of
the bill are only applied on a voluntary basis (columns 2
and 4 marked SRSV and Rev. T435V). Looking at the reviseC
SSS only, the revenue loss is estimated at $65 million more
than with a mandatory bill. (In all cases we assume full
charge for services.)
All these are 1977 comrutations. As you know, reserve
coverage is already 2 to 3 percent below the 73.1 percent
indicated on the table for the voluntary versions. It seems
clear to re that significant loss of revenue will arise in
any event if nothing is done in the relatively near term.
Ultimately, the revenue loss for the voluntary version will
depend on where the trigger" is set for kicking in the
mandatory system. At that point revenues will rise to that
indicated by the mandatory calculation.
Our intent would clearly be to get a tri9cjer as higll
or higher than the Uouse 67.5 percent, but even at that
level, I would expect the trigger to be reached before too
long, particularly with a significant requirement on nonpersonal time.
Sincerely,
Attachment
44
@FedFRASER