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Federal Reserve Bank of St. Louis
Collection: Paul A. Volcker Papers
Call Number: MC279
Box 11
Preferred Citation: Congressional Correspondence,July-October 1981 [Folder 2]; Paul A. Volcker
Papers, Box 11; Public Policy Papers, Department of Rare Books and Special Collections, Princeton
University Library
Find it online: http://findingaids.princeton.edu/collections/MC279/c441 and
haps://fraser.stlouisfed.org/archival/5297
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Federal Reserve Bank of St. Louis
tion assigned M . Kichline
o
MARJORIE S. HOLT
4TH1F1STRICT, MARYLAND
411)
WASHINGTON OFFICE:
2412 RAYBURN HOUSE OFFICE BUILDING
•
WASHINGTON. D C. 20515
202-225-8090
COMMITTEESt
ARMED SERVICES
DISTRICT OFFICES:
SUBCOMMITTEFS:
PROCUREMINT AND MILITARY
NUCLEAR SYSTEMS
MILITARY PERSONNEL
95 AOUAHART ROAD
n\ W "
C 9
Congo:45 of tbe Ziniteb *tate5
R00M No. 211
GLFN BURNIE, MARYLAND
301-768-8050
21061
301-261-2008
kR BUILDING
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•
3DousSe of ilepretientatibt5
6i78
OXON HILL ROAD
SUITE 303
OXON HILL, MARYLAND
Eilassbington, 13.e. 20515
20021
301-567-9212
August 24, 1981
1j)
The Honorable Paul A. Volker
Chairman, Federal Reserve Board of
Governors
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Dear Mr. Chairman:
The tight money policy being pursued by the Federal
Reserve Board is working effectively to defeat inflation, and
I commend your leadership in formulating and implementing a
policy that is as necessary as it is painful. You are correct
in your determination that the rate of monetary growth should
not accomodate inflation.
however, I am deeply concerned that the effects of the
policy are being felt unevenly. With interest rates running
so high that the term "usury" has become obsolete, thousands
of small businesses that rely on credit are experiencing
disaster. Builders and other enterprises associated with real
estate are in a depression. Many have already gone bankrupt
and many others are on the brink. Farmers are in trouble.
Retailers who depend on credit for their inventories are
hurting badly.
Bankruptcies in the first months of this year were 21
percent more than the bankruptcies during the same period last
year, and business reorganization to avoid bankruptcy increased
36 percent.
I agree with you that huge borrowing by the Federal government to finance its deficit spending has been a major source of
pressure on the capital markets and a cause of high interest rate!
You can count on me to continue my consistent work to cut spendin
and move the government toward a balanced budget.
Your anti-inflation monetary policy and the Reagan,
Administration program of spending reductions and tax cuts will
give our country a strong and prosperous economy in the future.
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Federal Reserve Bank of St. Louis
-
Page 2
August 24, 1981
Honorable Paul A. Volker
There is no doubt in my mind about it.
But many small businesses in our country will have no
future if interest rates remain at extremely lofty levels.
I appeal to you to have some consideration of how monetary
policy is affecting different sectors of the economy.
I hope that the Federal Reserve Board will review the
uneven effects of its monetary policy and diligently seek
some mechanisms that will improve the availability of credi
at reasonable terms to those sectors of our economy that are
experiencing calamity.
Sincerely,
I
1
7uLi.kli'
i
i
4""1,1,54--i
Marjori S. Holt
Memb r of Congress
MSH/rg/s
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
HOUSE OF REPRESENTATIVES
WASHINGTON, D
C 20515
BILLGRAMSON
IST DISTRICT, OHIO
September 16, 1981
Hon. Paul A. Volcker
Chairman
Board of Governors
The Federal Reserve System
Washington, D.C. 20551
Dear Mr. Chairman:
Once again your visit with our C
M/SOS
group was a high point of our breakfast programs
.
Your remarks were timely, informative and straight
forward.
touch.
Keep up the good job and let's stay in
Sincerely,
•
•
September 16, 1981
Mr. W. F. Broxterman
President
California Credit Union League
2322 South Garey Avenue
91766
Pomona, California
Dear Mr. Broxterman:
Senator Hayakawa has forwarded to the Board your letter
endorsing the nomination of Mr. Arthur L. Summers as a member of
the Board's Consumer Advisory Council.
I can assure you that Mr. Summers' qualifications will
receive full consideration when the Board selects new Council
members sometime this fall, to fill the positions of individuals
whose terms expire in December 1981.
The Board appreciates your taking the time to call our
attention to qualified individuals who could contribute to the
Council's work. The Board makes a special effort to achieve a
geographic distribution within the Council, as well as a balance
in representation among various segments of the credit industry
and consumer interests. This task is not an easy one, given the
small number of positions (usually around 10) to be filled each
year and the large number of highly qualified nominees.
Again, thank you for your interest.
Sincerely,
1Signed) Donald I. Wina
Donald J. Winn
Assistant to the Board
cc:
Senator Hayakawa
CO:pjt (#V-255)
bcc: Mrs. Bray (w/copy of incoming)
Mrs. Mallardi
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Federal Reserve Bank of St. Louis
•
•
September 16, 1981
Mr. J. J. Quinn
Senior Vice President
California Canadian Bank
700 South Flower Street
Los Angeles, California
90017
Dear Mr. Quinn:
Senator Hayakawa has forwarded to the Board your letter
endorsing the nomination of Mr. Michael E. Thomas as a member of
the Board's Consumer Advisory Council.
I can assure you that Mr. Thomas' qualifications will
receive full consideration when the Board selects new Council
members sometime this fall, to fill the positions of individuals
whose terms expire in December 1981.
The Board appreciates your taking the time to call our
attention to qualified individuals who could contribute to the
Council's work. The Board makes a special effort to achieve a
geographic distribution within the Council, as well as a balance
in representation among various segments of the credit industry
and consumer interests. This task is not an easy one, given the
small number of positions (usually around 10) to be filled each
year and the large number of highly qualified nominees.
Again, thank you for your interest.
Sincerely,
Tsionoel nnriqm
Donald J. Winn
Assistant to the Board
cc:
Senator Hayakawa
CO:pjt (#V-255)
bcc: Mrs. Bray (w/copy of incoming)
Mrs. Mallardi
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Federal Reserve Bank of St. Louis
•
•
Septerriber 16, 1981
Mr. Michael E. Thomas
Dear Mr. Thomas:
Senator Hayakawa has forwarded to the Board your letter
expressing your interest in serving as a member of the Board's
Consumer Advisory Council.
I can assure you that your qualifications will receive
full consideration when the Board selects new Council members
sometime this fall, to fill the positions of individuals whose
terms expire in December 1981.
The Board appreciates your interest in the Council.
Sincerely,
(Signed) Donald J. Winn
Donald J. Winn
Assistant to the Board
cc:
Senator Hayakawa
CO:pjt (#V-255)
bcc: Mrs. Bray (w/copy of incoming)
Mrs. Mallardi
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Federal Reserve Bank of St. Louis
S. I. HAYAKAWA
CALIFORNIA ./..RL,
G744:I
COM M ITTEES:
n
AGRICULTURE. NUTRITION.
AND FORESTRY
t!Itt$
../31 SEP i319311F)14.115, rl.!1
FOREIGN RELATIONS
Zfalez Zenctle
r4/0SHINGTON, D.C. 20510
RECrn c
0'"FiCE_ Ors ri-Arel.C,E,QF
THE CfitIRMAN
'
SMALL BUSINESS
4-7g(
September 9, 1981
Mr. Paul Volcker
Chairman, Federal Reserve System
20 21st Street
Washington, D.C. 20551
Dear Mr. Volcker:
I am herewith enclosing a resume from one of my constitu—
ents, whom I have already notified of this action.
I would
appreciate your reviewing the resume and contacting the applicant
as to whether you feel their qualifications would be beneficial
to the new Administration.
Realizing how busy you are at this time, I am most grateful
for your attention to this matter.
Sincerely,
4.067444-4"4"...
ft0A.
,
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S. I. Hayakawa
SIH:pws
Enclosure
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Federal Reserve Bank of St. Louis
•
•
•
•
ft.CALIFORNIA
CREDITi M,sTIQN
lir LEAGUE
"
August 25, 1981
Honorable S. I. Hayakawa
6217 Durkson
Senate Office Building
Washington, D.C. 20510
•
Dear Senator:
While we have contacted your office verbally, w2
feel it advisable to follow up with this letter
regarding appointments to the Federal Reserve Board's
Consumer Advisory Council.
;it- •
i • "7 '
We wish to make our support known for the nomination
of Arthur L. Summers, Manager, Marine Air Federal
Credit Union, Santa Ana, California. Mr. Summers has
extensive experience in the credit union movement and
has been very involved in the area of consumer
financial services.
We feel Mr. Summers' experience and interest in this
area would make him an excellent candidate for the
Consumer Advisory Council.
Senator, we have appreciated very much your support
of credit union issues and, hopefully you will again
be able to help on this important nomination.
Special thanks.
Sincerely/
I I
W. F. Broxterman
President
California Credit Union League
!'
X
. r
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Federal Reserve Bank of St. Louis
2322 SOUTH GAREY AVENUE / POMONA, CA 91766 / (714) 628-6044
•
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Federal Reserve Bank of St. Louis
Dear Senator HayaRawa,
411
Consumer Advisory Council
Confirmation of Nomination
Attaced is a copy of correspondence nominating me for
me77.1)ership on the Consu7er Advisory Council of the Federal
Reserve Systc:m. Being one of vour loyal constituents, I
my nc,mination to the Council
hope you will ai;r:?c.
rt towards its acceptance.
and lond it your ,c- tive s,Apo
bAs you are aware, tl:c Cons -J:7er Adviscry Counc-il was esta
lished in 1976 to i,:vdse the Board cf Governors -on the
ection
exercise of its dutics under the Co-ls -er Credit Prot
me7±,ership
Act and on other .--L-. 1 tc-d Tatters. T.::o Council's
poscibl, t.) represent all
is intc-nk:ed, to
servoes
interests in the area of consumer
regulations.
cash marr for the Fluor CorporIn mv position as
:-‘f the
monitert.!
. aticn, I
find that a menber
Board and Council f:r scveral yeal
warrantec: 'r the following reasons:
with 7:.- v
o
o
•
represents academic
7,e7lbers are not of
en]v
whether the needed
and it is a c -t
1 ;0 .- 1 -t- -3it:- in its rcic: -.:ndations can exis
sc.opL
curront
g:ven tho
A
Or 1:',2.%.—
- AF alssence - al cc:7 - rte representation
There is a:1 .: 1- X.
the Jevelopr.ent
on tl- e Ccu -- ,_13. Yet a r.jor pus
:,i.'1.1iCeS has oftc_ coTe fion the corporate
of new
-se- to and in anti,..tion cf eDployee
sector in
in :I]e identification
ti -7e has 1,cen
eA
Lee's.
of e7.11-.3,7- yie services
e77.entati
i .Tipl
c'e,zit"
anaivsi
.LntS.
for brIil Iho 1- ankin.,-z and cerorate
e to be toward
The trend I:, financial services will contiion the
autcr.,ated stfrvices. The need for individuals
is obvious.
Council well Nersed in both finance and systems
cperitng background and conceTtual experI have both
ience in tl,csc &IEAS.
illy 21, 1981
Page 2
Senator S.I. Hayata
•
Council for someone
In sunmary, there is a need on the conceptual and
Olo can address issues from both a
versed in consumer needs
experiential viewpoint. Who is
ve and can view issues
from a non-instituticnal perspecti consumer, financial and
the
representing t:-,e inteests of
concur with my nomination
corporate sectors. I h:";)e you
have a sincere desire
and give it %- olJr full s.,ITTort as I
tuents in a constructive
to serve you an3 cur fellow consti
and beneficial 7.anner.
or has ucently written
Flu
.
3.R
t
tha
e
not
to
d
ase
You may be ple
iciting additional support
Representative R.E. Badham sol
for my nomination.
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Federal Reserve Bank of St. Louis
Respectfu::
/f.
/r;.(,-/
\lichael E.
14622 Oval
Irvine, Cll.
UTS,
•-
_-14
umlIMMI=Elk
CAPON IA CANADIAN BANK
•
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•
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1.%•:3E:ES CA. 1%C.:PN.A XV7
June 26, 1961
P es nent
Board of Gicr1/4 ern ,-..,rs of the
Federal Rescrve Sstem
Washington, D.C. 20551
ar
dam
At-tention: Dolores S. Smith, Assistant Dire-0°r
Divfsiun of Consumer and Communit% Affairs
•••••
Consumer .Advisory Cou-bcil
Tcomiration for :Nlembers!-,ip Mic!-ael E. T:~-,ornas
4 -
••••
• .
z
a-.
As a merr.l.per of the consumer finance corrr'unity for oxer t‘kenf years
,
7•.:inate :Michael E. Thomas for men-,btrs)-lip on the Consumer Advisory Cc-,'..:7(
has expt.rience and knowledge 4:,•- of. wql
rarv view of c-,)- r.s.,r-;er and other ff7:-_:.;
., 1,i ir:c arca of electronic banking. .tis
kr_,c%).-ri for his. desig
7.
at:tc.,r-..afed teller serNices, etc.,
_ •
serxices and cash imarq::-- -niti-nt.
ft:, the Cry,:ncil a
V•ilh 1_,arficular
:7E.-r for ti-,e 11._ •
a -f.'if!ec in the 1: F
to
Flur_ir one c:T
plo-zased
••
•
\v'tile representing over 25,000 Fluor emplcyees natit,nwide, he ha.s1..k-c....me
with tbe ban_king services neec.',s cif the C
r and is. al-Att 4 C
4 1;( se
fr(AY.
corpo
king
-;2-1and
rate
v.ill bring to the
'he
to see sc%eral sides of an issue, 1.,as,.- .d on hfs
of practical
derree in finance and business eccr,•?- iL s and as a ;ecturer on
'cs at
in 4I,A arca, 1\lichael ic able to view iss..;(,- v.ithin a th.,refical
11:!d ex-/ensie e.xperience
F s
servic.i.s
partment, where he ‘‘as
IL this cariacity, he has learned the
data ;,rocessing and has been alle to relate its
n.s develc;
, ,:.--.,Pnt as a r.,-,er.-.1.,er
for project s.ystelr:s ir,
a•;:d c:.:-..straints of
fo the putlic and pri‘fe. enriron-
In surnn,- a-Lry, I Leartily recommend !4ichael fur a :)osifion on the Consu
mer Aevie•Dry
Co:..1ncil. He offers a unique combination of expc•rtence, knov ledge
d inferest in the
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Federal Reserve Bank of St. Louis
•
•
September 15, 1981
The Honorable Ed Bethune
House of Representatives
20515
Washington, D.C.
Dear Mr. Bethune:
Thank you for your letter of September 11 recommending
Mr. John M. Sheffey to serve on the Board's Consumer Advisory
Council.
I can assure you that Mr. Sheffey's qualifications will
ts
receive full consideration when the Board makes the appointmen
terms
to the Council to fill the positions of individuals whose
expire in December 1981.
I appreciate your taking the time to bring him to our
attention.
Sincerely,
CO:pjt (#V-254)
bcc: Mrs. Bray (w/copy of incoming)
Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
•
•
ED BETHUNE
COMMITTEES:
2ND DISTRICT, ARKANSAS
BUDGET
BANKING, FINANCE AND
URBAN AFFAIRS
Congre55 of tbe Elniteb -Dtatos
WASHINGTON OFFICE:
1535 LONGWORTH
HOUSE OFFICE BUILDING
WASHINGTON, D.C. 20515
(202) 225-2506
jOotifSe of iktpre5entatibeS
Watbington, ri.C. 20515
DISTRICT OFFICE:
1527 FEDERAL BUILDING
700 WEST CAPITOL
LITTLE ROCK, ARKANSAS 72201
(501) 378-5941
./t
**,"
September 11, 1981
-n
Honorable Paul A. Volcker
Chairman
Board of Directors
Federal Reserve System
Washington, D.C. 20551
CD
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Federal Reserve Bank of St. Louis
,
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Your efforts to ensure that Mr. Sheffey's file is
opened and that my interest in his behalf is made known
to the appropriate officials would be greatly appreciated.
Member of Congress
•••
I ')
• '
Mr. John M. Sheffey, of Little Rock, Arkansas, has
expressed an interest in serving on the Consumer Advisory
Council of the Federal Reserve Board.
Thank you for your cooperation in these affairs.
•
-71
CA)
C.40
Dear Mr. Chairman:
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September 14, 1981
The honorable Robert W. Kastenmeier
Rouse of hepresentatives
Washington, D. C. 20515
Dear nr. .Lastenmeier:
I am writing to provide further information regarding
your AuL'ust 18 letter which included correspondence you had received from your constituent, Dr. Frank F. Gollin. Dr. Gollin
was offended by an address form that was mailed to him with
Tre:isury Lill tender from the Federal Veserve Lank of Chicago.
Upon contactin8 management at the Federal Reserve
Ban:.. of Chicago, we. were told that the form in question is used
by Bank staff to inscribe the name and address of individuals
requu.stin6 tenders, and then inserted into a window envelope
with the tender. :lanagement at the Bank was upset with the
scril)blir.,
1 on Dr. Gollin's address form and reprimanded the
employee L..o had 2repared the form. The elf,ployee, as
as
Bank mana6ement, extend their sincere apologies to Dr. Collin.
Sincerely,
Donald J. Vinn
Assistant to the Board
CLL:FMY:CO:vcd UV -233)
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Federal Reserve Bank of St. Louis
Ns. Egan
Young
Nrs. nallardi
vi.
E'.:2.3 KASTENMEICR
Actioessigned Mr. Allison
STE.IC* VViSCONSiN
2232 riouf:t Orr Inv EIIIIL.DING
PHONE. Awro Corr rd. 2Z.5-2906
11',MI OF I' Ir..E
SIJITr r ‘5
kir.t,0•••A AVENUE
WICCCNSIN
PEIVUE
AP,A
•
Congt555 of the Unita Rpotato
•
JUDICIARY
CHAIRMAN. SUBCOMm,T-rrE ON
COURTS CIVIL LIBEriTit S AND
THE ADMINISTRATioN Of JUSTICE
SUBCOMMITTI E ON CIVIL AND
CONSTITUTIONAL. RIGHTS
A')oti5e of ikepre5entatiM
SUBCONIMITTEE ON CrnmE
bliatffinton, D.C. 20515
COMMITTEE ON
INTERIOR AND INSULAR AFFAIRS
517071
6r;F3,
E016.4•Atrrrr ON
SUBCOMMITTEE ON PUBLIC LANDS
AND NATIONAL rAnKs
August 18, 1981
)k
Mr. Paul A. Volcker
Chairman
Federal Reserve Board
Washington, D.C. 20551
(7;77
;
aka
•
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•,
Dear Mr. Volcker:
32:2
-
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Enclosed is some correspondence I recently recei
ved from one of my constitugpts,
Dr. Frank F. Gollin, which I think you will find
to be self-explanatory. cq
Any comments you might have on the issue he raise
s about forms currently in
use by the Board would be greatly appreciated.
Thank you for your assistance in this matter, and
I look forward to hearing from you.
With kind regards,
Sincerely,
RWK:ml
Enclosure
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Federal Reserve Bank of St. Louis
//.
Crd
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ember of Congfess
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Federal Reserve Bank of St. Louis
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BOARD OF GOVERNORS
.co
OFTHE
FEDERAL RESERVE SYSTEM
•0
• -n
•
WASHINGTON, D. C. 20SSI
••
•
<v:
IYALRES
PAUL A. VOLCKER
CHAIRMAN
September 10, 1981
The Honorable William V. Roth, Jr.
Chairman
Committee on Governmental Affairs
United States Senate
Washington, D. C. 20510
Dear Chairman Roth:
I am pleased to submit views regarding the executive oversight
provisions in S. 1080, the "Regulatory Reform Act," as you requested
in your letter dated July 30, 1981.
The executive oversight provisions of S. 1080 (new section
624 of Title 5 of the United States Code) would authorize the President,
or an officer to whom he delegated this authority, to monitor, review,
and ensure agency implementation of the "major rule" procedural requirements of S. 1080 (new sections 621 and 622 of Title 5) and to report
annually to Congress on agencies' compliance with these requirements.
The President's exercise or nonexercise of this oversight authority
would not be judicially reviewable.
"Major rule" is defined in S. 1080 as a rule that causes or
is likely to cause "an annual effect on the economy of $100 million
or more in direct or indirect enforcement and compliance costs"; or
likely to result in a substantial increase in costs or prices or cause
"significant adverse effects on competition, employment, investment,
productivity, innovation, the environment, public health or safety,
or the ability of enterprises where principal places of business are
in the United States to compete in domestic or export markets," or
"other effects that warrant subjecting the rule to a regulatory analysis. . . ."
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Federal Reserve Bank of St. Louis
,
•
The Honorable William V. Roth, Jr.
•
-2-
The "regulatory analysis" that would be required for all major
rules must contain a complex, detailed description and comparison of
the benefits and costs of the rule, and of reasonable alternatives to
the rule, based upon a detailed record. In addition, except where a
statute directs otherwise, the analysis must also explain why the benefits of the rule justify its costs, and why the rule is more costeffective than the alternatives in achieving the objectives of the rule.
Since the executive oversight provisions would apply to implementation of the "major rule" concept, I believe it would be appropriate
to review the necessity for adopting this proposal. As I understand
it, when the major rule concept applied, it would require the addition
to the regulatory process of a series of detailed and complex cost
benefit analyses. I am concerned that these new requirements will
result in a substantial increase in paperwork, additional costly informational burdens on both the agency involved and the public, judicial
challenges, and, most important, lengthy delays in administrative action.
It is my judgment that the objectives of regulatory simplification and
avoidance of unnecessary regulation would not be accomplished by an
additional layer of administrative requirements.
Executive oversight as applied to this "major rule" concept
would add still another unnecessary complexity. However, there is an
additional reason to be concerned about the provisions for executive
oversight in the rulemaking process, particularly with respect to the
operations of the Federal Reserve System. As I know you are aware,
the Congress created the Federal Reserve System in 1913 as an independent entity in order to emphasize the insulation of the credit regulation process from the function of financing the government. Long
experience demonstrates that the separation of these two functions can
make a vital contribution to a more stable and effective domestic monetary system. Therefore, I would be particularly concerned about executive oversight as applied to the functions of the Federal Reserve
System.
This is not only true because of the broad policy considerations
I have just outlined, but also because of the fact that this would run
directly counter to one of the major objectives that Congress sought
to achieve in creating specialized agencies. The significant mandate
that the President would receive under the executive oversight concept
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Federal Reserve Bank of St. Louis
•
The Honorable William V. Roth, Jr.
•
-3-
to interfere in the regulatory process could significantly defeat the
purpose of assuring regulation based on expert judgment on the merits
of both general policy and particular cases.
This is not to say, of course, that the regulatory process
should not be subject to Congressional scrutiny and to the requirement
of the adoption of every step feasible to lighten and simplify the
existing regulatory burden as well as the avoidance of unnecessary
regulation in the future. These objectives, I wish to reemphasize,
can be achieved most efficiently by analysis of individual agency functions rather than through the adoption of new, across-the-board requirements that rigidify and expand regulatory burdens as well as impair
basic Congressional policies calling for regulatory independence and
expertise through the multiplication of decision-making layers.
I appreciate having had this opportunity to offer these comments
on S. 1080.
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Federal Reserve Bank of St. Louis
Sincerely,
•
ILLIAM
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MACK MA TT,NGLT. GA.
JOAN M
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MC TNTEF, STAFF DIRCCTOR
COM M I TTEE ON
GOVERNMENTAL AFFAIRS
WASHINGTON. D.C.
20510
July 30, 1981
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The Honorable Paul A. Volcker
Chairman
Board of Governors of the
Federal Reserve System
20th & Constitution, N.W.
Washington, D.C. 20551
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Dear Mr. Volcker:
Immediately after the Senate reconvenes from its August
recess, this Committee will take up consideration of S. 1080,
the Regulatory Reform Act. In this regard, the Committee would
like to have the views of the Board of Governors of the Federal
Reserve System on the provisions of the bill relating to Executive
Branch oversight.
Specifically, as reported from the Judiciary Committee,
Section 624 of S. 1080 provides that the President shall have
"authority to establish procedures for agency compliance" with
the bill's new requirements for major rulemakings, including the
preparation of regulatory analyses. This authority could permit
the President to implement oversight provisions similar to those
found in section 3 of Executive Order 12299. As reported by the
Judiciary Committee, such executive oversight arrangements would
apply equally to executive branch agencies and the independent
regulatory commissions.
The Committee will be considering the inclusion of executive
oversight provisions in S. 1080 at the Committee's markup in early
September. For this reason, it is essential that we have the
views of the System on this important issue no later than September
4, 1981.
Sincerely,
William V. Roth,
Chairman
WVR/jlm
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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BOARD OF GOVERNORS
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September 4, 1981
The Honorable Leon E. Panetta
House of Representatives
Washington, D.C.
20515
Dear Mr. Panetta:
Thank you for your letter of August 10, inquiring
about a banking practice described by your constituent,
Mr. Donald L. Thomas.
The accounting procedure described by Mr. Thomas
varies among banks and is an unregulated competitive banking
practice. Based on the description provided by Mr. Thomas, it
appears that his bank, Wells Fargo, performs the accounting
function of charging and crediting customer accounts at the
end of each day rather than immediately as deposits or withdrawals are made.
Other banks and financial institutions may have "online" computer systems which can accommodate immediate accounting. Such systems would be quite expensive, however, and each
institution would carefully weigh the value of this type of
service in the context of its overall marketing program before
instituting it.
While Mr. Thomas is not specific as to whether he
deposited a check or cash, it would certainly be reasonable
to allow some time--at least a day--for a check to be collected.
When a check drawn on one bank is deposited in another bank,
the check must be physically transported to the bank on which
it is drawn before the bank in which it is deposited can obtain
funds. If a bank releases funds before it receives funds it is
essentially making an interest free loan, secured only by the
check which may ultimately be returned.
Normally account terms and conditions, including all
relevant charges and banking practices affecting the customer's
use of a bank account, would be expected to be communicated
to the customer at the time the account is opened. It is
ab
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Federal Reserve Bank of St. Louis
•
•
The honorable Leon E. Panetta
Page Two
unfortunate that advance knowledge of the posting proc
edure
we,s apparently not provided to Mr. Thomns in this inst
ance.
If it had been, he could have adapted his company'
s payroll
transaction in light of the bank's practice or, in
the alternative, he could have shopped at other banks for acco
unt terms
that were more to his liking.
I hope the foregoing information is helpful to you.
Please let me know if I can be of further assi
stance.
Sincerely,
(Signed) Donald J. Winn
Donald J. Winn
Assistant to the Board
LCM:TEA:AFC:sep Of V-232)
bcc: Mr. Allison
Mr. Meeder (2)
Mrs. Mallardi
LEON E. PANETTA
Action assigned Mr. Allison
•
16TH DISTR.CT, CALIFORNIA
WASHINGTON orr'cr.
431 CANNON Housc OFFICE BUILDING
WASHINGTON, D.0
BUDGET
CHAIRMAN
TASK F:
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oN REcoNcILIATION
AND BUDtiET EAVoRCEMENT
BUDGET COMMITTEE
Congre5 of tiie Einiteb f:potatc5
DISTRICT OFFICES,
380 ALVARADO STREET
MONTEREY, CALIFORNIA
31)otte of ileprecSentatibeZ
(Ott k
HOLLISTER, CALIFORNIA
Musbinclton, :1).C. 20515
(408) 637-0500
SALINAS, CALIFORNIA
•
•
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MAJORITY REGIONAL WHIP
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
93940
(408) 649-3555
AGRICULTURE
HOUSE "11 111%4!NI ST RATION
20515
(202.) 225-2861
COMm ITTE ES s
(408) 424-2229
SAN LUIS OBISPO, CALIFORNIA
August 10, 1981 le
;
(8o5) SA3-0154
SANTA CRUZ, CA LIFORN
(408) 429-1978
Honorable Paul A. Volcker
Chairman
Board of Governors of the Federal Reserve System
Federal Reserve Building
Constitution Avenue and 20th Street, N.W.
Washington, D.C. 20551
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Dear Mr
•-•1
Enclose is a copy of a letter I recently received froM a
constituent. In it, the constituent expresses concern'
about the practices of banks (and other financial
institutions) which permit the bank to make use of a
depositor's assets before the depositor receives credit
for a transaction. I realize that these are not
illegal actions, but I would appreciate your letting
me know the rationale for permitting such procedures.
I look forward to hearing from you.
Thank you for your attention to this matter.
Since
PANETTA
,Meinber of Congress
LEP:btd
Enclosure
2:31
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
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Dear Con6rer;cmLin PrincIttn:
our sm7.11 busine es being
It's a sad st -Jte of ,Iff.,irs when I
continu:tlly over-liowered by the hicrarchic%1 Lure ucracy of lar6e
11 busineJsman
corlIorrItions, or in est3•.nce, Lig bucines::;.
kr:: inorfotive
,Ach
Niy...]1, 1 1 ,uc,m,.Lins" in
sml] cmpany becomes as he tries tt) tzAce on the
F•Ir6o 17.:Int'. made the
Ruce:Aly, an incident with
inecpity seem intolerable.
To bc more L.;ecific, I recently mNde a lflri;0 b:Ink deposit in the
Fnrgo ;- ank in Capitol -1, only to discover
our locrtl
morninf;
;Ales° s!T:.e funds v:ere not available to mu fur u:,e until the folloAn u
to my chn,Tin, T found all other banks on this
busine:J: dny.
dul..yed poztin i. system, it seemed to me there was certainly SOMQt.in6 vironc ;‘ii.th a sy. te:., that su favored the larce corporAtion;
F.:rtr,o obviously mkes lovls nnd investments against
sine , ,
my fund:; when they are deposited, while my own options are frozen
until th,. ni.xt 1)usiness d y. The liAri:e corporation with techilology
,t its :isposD1, then proceeds to hide behind a cloak of red ta.pe
and co::;.uter errors, while my busine.;; continu , :; tu functic,n on a
'iccordinr, to the ncwis of !r,y m.r;tomors anci my
dly tu
ability to Provi3e jouds and serviceL;.
needed to cover
tht funds in (post:ion, .:. ere
1,,' to :.orsen
Yy emnloyee wunt'Lo the bnk to cash his check 'only
my
11:;0 the mornin t;'s dei:osit would not
n v(: it di:;nonored
l'ortunr_ltely, my e:Lployee came to
:1:(!.,r until the folJuv.in6
1;e; Lut hai he _one to Lhc Labor (;o1Lis:_jon, I woul'I hate to thin
of the consequences!
con Lir :-d.
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Federal Reserve Bank of St. Louis
•
•
September 3, 1981
The Honorable Doug Barnard, Jr.
Houuc of Representativeu
Washington, D.C.
20515
Dear Mr. Barnard:
During tho hearing on Juno 25 you askod
for my comments on H.1Z. 4040.
I am pleased to
enclose a copy of tho information I provided for the
record of the hearing.
Sincorely,
Sgaul
Vpicket
Enclosure
bcc: Carl MintZ
(House Banking Subcom.
on Domestic Monetary Policy)
CO:pjt
bcc: Don Kohn
ov.4.0,04-4LL
•
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Federal Reserve Bank of St. Louis
insert page 63 Mr-Ming before Su;' (nrnittee on
Dangaic Monetary Policy,
liodillnanking held 1 June 25, 1981711,
Chairrian Volcker subsoil! ‘ntly furnished the
folloaing information:
'40'40 calls for far-reaching changes in the
laws governing the
separation of investment and commercial banking.
As I mentioned above, the
Board has in the past supported bank underwriting
of municipal revenue bonds,
but it has not considered the role of banks in
the market for corporate bonds
and it has been a number of years since it addr
essed the issues surrounding
full bank participation in the business of offe
ring and distributing shares
of investment companies.
In light of the magnitude and importance of the
changes-implied by your proposals, I would like to
withhold final judgement
on them pending a fresh look at these issues in the
context of the evolution
of the financial system and its regulation since
the early 1930s.
The Board's
staff is preparing background material for such an
evaluation, which I expcct
to occur some time this fall.
Whatever views might be developed about the prop
er division of
commercial and investment banking over the long
run, I would like you to know
that I have serious reservations about the wisdom
of allowing banks and other
depository institutions Lo offer money market
mutual funds at this time.
The convenience of purchasing these very liquid instrume
nts at local offices
of depository institutions, as well as Lhe aura of safe
ty and soundness that
they would acquire by being associated with such an inst
itution, could make
them very attractive lo people currently holding savings
and smaller denomination time deposits.
Outflows from these deposits would have to be
met either
by acquisition. of higher-cost funds through markei-r
elated instruments or by
reductions in earning assets.
Further, because of InvesLment Company Act
restrictions on self-dealing, the investment
company's assets could not be
reinvested in the CDs of the bank or S&L advi
ser without an exempting order
•
•
•
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Federal Reserve Bank of St. Louis
from the SEC.
a
•
Thus, purchases of shares in a money mark
et fund sponsored by -
or S:.1. would not necessarily keep these funds from
being invested out-
side the service area of the sponsoring inst
itution.
Depository institutions
would benefit from offering fund shares by
maintaining a financial relationship with customers who might otherwise have
moved their savings to an existing money market fund, and they would gain a small
amount of income from servicing and advising the funds.
However, smaller banks and thrifts could
find
that. offering such funds, or having them offe
red by other depository institutions, would significantly erode deposits and
reduce earnings at a time when
the profitability of these institutions is
already under considerable pressure.
A more direct way of approaching the prob
lem would be to permit
banks and thrifts a deposit instrument
that would compete more directly with
money market funds, a matter within the prov
ince of the DIDC, upon which I
serve.
In considering that possibility, we have
needed to take account of
the strong concerns of depository institut
ions about maintaining current,
relatively low cost, sources of funds.
To put the point directly, the heavy
pressures on earnings of many depository inst
itutions limit flexibility in
taking steps that otherwise, and at the appr
opriate time, would appear desirable.
•
•
September 3, 1981
The Honorable Jake Garn
Chairman
Corrunittee on Banking, Housing
and Urban Affairs
United States Senate
Washington, D:C.
20510
Dear Chairman Garn:
I am transmitting the enclosed Board staff report on
the impact of high interest rates on the houaing, automobile,
agriculture, and small business sectors. You will recall such
a study was requested by Senator Riegle during my testimony before
the Banking Committee on July 22. As waa agreed, the study brings
together data and other sources of information that could be made
available in a short period of time and does not reflect original
research specifically undertaken for this purpose.
Sincerely,
Wool A. Volcker
Enclosure
cc:
The Honorable Donald W. Riegle, Jr.
JLK:PAV:pjt
bcc: Mr. Kichline
Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
it •
i
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September 1, 1981
THE IMPACT OF HIGH INTEREST RATES ON THE HOUSING, AUTOMOBILE,
AGRICULTURE, AND SMALL BUSINESS SECTORS
1
A Study by the Staff of the Board of Governors
of the Federal Reserve System
i
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P .
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Federal Reserve Bank of St. Louis
•
•
CONTENTS
Page
I.
II.
III.
IV.
V.
VI.
Background
1
Summary and Conclusions
2
Housing Sector
6
Automobile Sector
17
Farm Sector
28
Small Business Sector
39
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Federal Reserve Bank of St. Louis
•
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THE IMPACT OF HIGH INTEREST RATES ON THE HOUSING, AUTOMOBILE,
AGRICULTURE, AND SMALL BUSINESS SECTORS
I.
Background
In response to a Congressional request, the Board staff prepared
the following study on the impact of high interest rates on four sectors of
the economy: housing, automobile, agriculture, and small business.
Given
the time constraints, the study was prepared with information from already
available sources.
There are distinct limitations in the precision with which the
impacts of high interest rates on the named sectors can be pinned down
quantitatively.
These limitations are the result partly of the normal diffi-
culties in sorting out causal influences in a complex economy; they also are
related to the paucity of hard data pertaining to some areas of activity,
especially small businesses.
Moreover, there is the more fundamental question
of distinguishing in the performance of these sectors between the direct effects
of high borrowing costs and the effects of the general sluggishness of growth
in real income and output over the past two years--a development that can be
related to a complex of factors, including the interaction of strong inflationary pressures and monetary restraint.
Within the practical constraints
imposed by these problems, an effort has been made to assess the dimensions
of the difficulties encountered by the four selected sectors and the role of
high interest rates in those developments.
:
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II.
Summary and Conclusions
(1) It is clear that homebuilding, auto, and agricultural indus-
tries have fared poorly during the past year or two.
The pace of housing
starts has fallen by more than half from the cyclical peak rate of 1979;
domestic auto sales have declined a third from the 1979 pace; and net farm
sector income has fallen 40 percent, in real terms, since 1979.
It is less
clear that the performance of small businesses as a group has been disproportionately bad during this period when the economy as a whole has recorded
rather small gains in real output on balance; there are no aggregate data
upon which to base a firm judgment.
However, the small business sector
cuts across industrial categories; in some lines of business small enterprises
likely have prospered (for example, in growth industries such as energy and
advanced technology), while in others (including the three already mentioned)
they have encountered great difficulty.
(2) The restraint on credit markets is reflected mainly in the
level of interest costs rather than in the availability of credit.
For ex-
ample, in both the farm and small business sectors concern generally is expressed over the cost of credit but not over its availability.
This is in
distinct contrast to earlier episodes of monetary restraint when widespread
problems of credit availability were encountered by sound enterprises.
(3) Interest rates have contributed more substantially to the falloff in activity in some sectors than in others.
The change in credit con-
ditions certainly has taken a major toll in the homebuilding industry.
The
demand for goods that are, in essence, investments yielding a flow of services
or income over a period of years will tend to be comparatively sensitive to
movements in interest rates; to the extent that they represent large outlays,
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Federal Reserve Bank of St. Louis
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-3-
which typically require credit financing, or are deferable, that sensitivity
will be further enhanced.
(4) As interest costs have climbed to record levels, a number of
innovations or market developments have evolved to ease the burdens of potential borrowers.
For example, in the housing market means have developed to
provide "below market rate" loans--such as through state and local government
mortgage revenue bonds--or a variety of creative techniques have been employed
to minimize the mortgage payment burden, especially in the early years of the
mortgage contract.
In the business sector, evidence indicates that rates on
small loans at banks have risen less in recent years than rates on large loans.
(5) Inflation itself has taken an appreciable toll on activity.
The current slump in homebuilding reflects in part an inevitable unwinding of
some of the inflationary excesses of recent years, which saw house prices spiral
upward to the point that many potential homebuyers would have been forced out
of the market even if interest rates had not risen so much.
Higher prices
also have been a significant factor depressing demand for automobiles; higher
car prices account for nearly 5 times as much as higher interest rates in the
rise of average monthly payments for a typical new car loan since late 1979.
(6) In the farm sector, factors other than interest rates dominate
the forces generating reductions in farm income.
The slump in farm income
since 1979 is attributable more to persistent drought conditions in some
regions, and to the changing tastes of consumers and their resistance to rising
meat prices in a period of constrained real income growth.
High interest rates,
however, have created stresses for some farm businesses, especially those that
have invested substantially in land and machinery in recent years--leveraging
themselves heavily with short-term debt.
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Federal Reserve Bank of St. Louis
•
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(7) In the small business sector, rising interest rates likely have
been a more serious problem than for large-sized firms because smaller firms
on average are characterized by higher debt-to-equity ratios and heavier
reliance on shorter-term or variable-rate loans.
Business failure rates are
up substantially, but this may reflect general product demand conditions
rather than interest rate-related cash flow problems per se.
Moreover,
rising bankruptcy figures may exaggerate the deterioration in the fortunes
of small businesses, because a liberalization of federal statutes has made
it more attractive to seek the legal shelter of bankruptcy status.
(8) On the whole, high interest rates are imposing considerable
restraint on the economy, with some sectors inevitably experiencing greater
stress than others owing to the nature of the goods or services they produce
and their particular financial characteristics.
However, the difficulties of
the sectors examined reflect as well a variety of factors apart from high interest rates; the distortions and imbalances created by the escalation of
inflation and inflationary expectations are important among these.
High
interest rates do apply pressures inducing greater cost and wage efficiencies,
assisting in the process of achieving a noninflationary environment.
It is
clear that this process is uncomfortable, but a failure to address the problem
of inflation would, over the long haul, impose far greater costs on the
economy than do the current high interest rates.
(9) Recognition of the unevenness of the impact of monetary restraint does raise the issue of whether excessive reliance is being placed
on monetary policy in fighting inflation.
While a moderation of the growth
trend of money is an essential ingredient in an anti-inflation strategy, the
pressures on the private business sector arising from interest rates could
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Federal Reserve Bank of St. Louis
s
.
.
.
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be alleviated by reduced federal government demands on the credit markets.
This underscores the importance of further progress in the effort to move
the federal budget toward balance.
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Federal Reserve Bank of St. Louis
•
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•
-6III.
The Housing Sector
Housing activity typically has fluctuated more widely than the
economy in general.
This instability primarily can be attributed to the
fact that housing transactions involve the sale of a long-lived asset and
typically are dependent on outside financing.
These characteristics--
along with the fact that a home purchase often can be temporarily delayed-make the effective demand for housing highly sensitive to the cost and the
availability of credit.
Owing to fluctuations in effective demand for
shelter, the housing industry has been characterized by large swings in
output and employment as well as by the entrance and exit of many small,
weakly capitalized firms from the market as economic conditions dictate.
The Current Downturn
Housing production and sales have been greatly reduced in recent
years, reversing a strong rebound in the mid-1970s.
Total private housing
starts declined from over 2 million units in 1978, to 1.8 million units in
1979, and to less than 1.3 million units last year.
In the past two months,
starts have fallen to about 1 million units, at an annual rate.
Home sales
also have declined sharply; in June 1981 sales of existing homes were down
almost a third from the record pace registered in 1978.
Likewise, June
sales of new homes were at their second lowest monthly level since 1970.
Thus far, the current housing downturn has about equaled the
_
length of the slowdown that started late in 1972 and continued through early
1975.
During that period private housing starts fell to around a million
unit annual rate and hovered at that level for three consecutive quarters--a
severity that has yet to be sustained in the current slump.
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Federal Reserve Bank of St. Louis
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The diminution of activity has been accompanied by an appreciable
slowing in the rate of increase of home prices.
During 1978, the average
price of an existing home sold rose 19 percent, and the average price of a
new home (adjusted for quality changes) was up almost 14 percent.
These
unsustainable rates of inflation have come down sharply as market activity
has softened (chart on page 8).
During the year ending in the second quarter
of 1981, the average price of existing homes sold rose 9-1/2 percent while
the new home price series, after quality adjustments, was up 8-1/2 percent.1
Elements Contributing to the Current Housing Downswing
Perhaps the single most important cause of the currently depressed
state of the housing market is the increased cost of acquiring housing services.
While this is true throughout the industry, it is most evident in the singlefamily sector.
The average monthly payment for principal and interest on
newly purchased homes has increased dramatically in recent years.
For instance,
the carrying cost on an average new home actually financed in July 1981 was
175 percent above the level only five years earlier.
As shown in the chart
on page 9, the increased financial burden of a home purchase has far outstripped
growth in average disposable income.
Skyrocketing monthly payments have reflected two factors: increased
mortgage interest rates and elevated home prices.
The relative contributions
of these factors are illustrated in the table on page 11, in which both historical data and some hypothetical comparisons are presented.
As a frame of
reference, average monthly payments on a typical new home purchase rose almost
1. Recorded price increases, in fact, understate the true deceleration
in home prices. The widespread use of below market "creative financing" for
both new and existing home sales means that net proceeds from a sale are
less than the selling price would indicate.
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Federal Reserve Bank of St. Louis
I
RECENT CHANGES IN AVERAGE HOME PRICES
Percent change from
year earlier
---' 22
1.11•1=•••••••••
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Federal Reserve Bank of St. Louis
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\ Average sales price
%
of existing
1
homes sold
%
14
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%
%
•
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New homes
(quality adjusted index)
— 10
•
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OMIIMIIIII4
1978
1
1979
t
1
1980
t
I
1981
i
6
•
•
-9
TYPICAL MONTHLY PAYMENTS FOR NEW HOMES AS COMPARED
TO AVERAGE DISPOSABLE INCOME PER HOUSEHOLD
(Percent change from a year earlier)
Percent
VIE•••••
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•
Federal Reserve Bank of St. Louis
Average Monthly Payments for
Principal and Interest
35
Disposable Income Per
Household
30
25
20
15
10
5
1978
1979
1980
1981
.Source: Monthly payments for conventional mortgages from the
Federal Home Loan Bank Board. The 1981 numbers are for the
second quarter.
•
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-10-
four-fold during the decade of the 1970s from $220 to the current level of
just over $850.1
Higher interest rates have contributed to the increase
in carrying costs, but, if home prices had remained at 1970 levels, the
sharp increase in mortgage interest rates during the ensuing decade would
have raised average monthly payments only to about $340.
Instead, prices of
homes purchased have escalated much more rapidly than inflation in general
during recent years, with the national average price of a new home sold
currently approaching $90,000.
This compares with an average price of $35,000
in 1970 and of $65,000 as recently as three years ago.
When home prices in-
crease, downpayments rise and the larger loan amounts result in larger monthly
payments.
Even if mortgage interest rates had not risen at all since 1970,
at current home prices an average monthly payment would be almost $570.2
Of course, the effect of high mortgage interest rates are not
necessarily permanent burdens for homeowners.
Since households are generally
quite mobile, most mortgages are not held for the full term of 25 or 30 years.
Even if a family were to remain in the same house, a very high rate mortgage
could be refinanced--albeit at some cost--when interest rates fell.
In
addition, homebuyers have not had to absorb the full force of the increase in
monthly payments.
Most new homebuyers deduct the interest portion of their
mortgage payments in computing income subject to federal income taxes.
1. The average interest rate on conventional loans actually closed in
July was well below the rate usually reported for new, fixed-rate conventional loans. This reflects normal lags in financial markets as well as
the fact that many loans are made at lower contracted mortgage interest
rates. Indeed, if measured at the 17 percent average commitment rate
for fixed-rate, conventional loans that has been reached this summer, the
average monthly payment for a typical home would have exceeded $1000.
2. The full increase in monthly payments is the product of the
individual interest rate and price effects plus the joint effect of
concurrent changes in these factors.
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Federal Reserve Bank of St. Louis
•
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-11-
CHANGES IN THE TYPICAL MORTGAGE
PAYMENT ON A NEW HOME PURCHASED
Period
1970
Mortgage
Interest Rate
8-1/4
Downpayment
Monthly
Payment
$ 35,000
$ 7,000
$ 221
New Home
Prices
1979
10
65,000
13,000
473
Recent
14
90,000
18,000
867
14
35,000
7,000
337
90,000
18,000
568
Illustrative
Calculations
Recent Interest
Rates, 1970
House Prices
Recent Home
Prices, 1970
Interest Rates
8-1/4
Note: Illustrative figures for level-payment fixed-rate 25-year 80 percent conventional
mortgage loan, largely reflecting Federal Home Loan Bank Board data for loans closed.
The recent interest rate is based on data from the FHLBB which show the average contract
rate for new home loans closed in July was 14.05 percent; the effective rate--including
points and charges--was somewhat higher at 14.65 percent.
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Federal Reserve Bank of St. Louis
.
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During the 1970s inflation raised the marginal tax bracket of many families,
lowering the after-tax cost of mortgage payments.
Notwithstanding the damping influence of high carrying costs on
new home purchases and construction, the slowing of activity in recent
periods has been in some part a reaction to earlier inflationary developments.
During the late 1970s, when home prices increased more rapidly than
the general rate of inflation, large capital gains accrued to homeowners.
These high returns encouraged many households to purchase a home as a residence with a view toward obtaining a hedge against inflation and spurred
others to buy houses for speculative purposes.
Such investment motives were
encouraged by the fact that the bulk of monthly payments in the early years
of most mortgages--as well as property taxes--are deductible for federal
tax purposes.
Price increases of almost 20 percent per annum could not be sustained indefinitely, and, in part, the current slowdown in activity no
doubt has reflected that reality.
As buyers anticipated further price in-
creases, purchase prices rose to "capture" expected future appreciation.
Thus, unanticipated capital gains became harder to garner.
This, in turn,
had a depressing influence on real estate market activity.
The production of rental housing also has been depressed.
While
high construction and permanent financing costs have contributed to profitability problems in this sector, contractors also have faced other difficulties.
In an inflationary environment, prospective costs are highly uncertain
for real estate ventures that take considerable time to complete--as is the
case with apartment buildings.
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Federal Reserve Bank of St. Louis
Further, rent increases have lagged behind
•
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rising operating costs.
During the last five years average rents advanced
just over 40 percent, while costs of operation rose almost 70 percent.
The
risk of undertaking new rental construction also has been aggravated, in
some areas, by the existence or threat of rent control laws.
Responses to High Mortgage Interest Rates
As mortgage interest rates have climbed to record levels, a number
of innovations have evolved to ease the burdens on potential homebuyers.
Deregulation of the thrift industry and the continued development of secondary
mortgage markets have helped to break the pattern of past periods of high
interest rates, when housing was virtually cut off from funds.
Also, means
have developed to provide "below market rate" loans, including, prominently,
state and local government mortgage revenue bonds.
Many new developments in mortgage finance attempt to overcome the
disproportionate financial burden imposed during the first years of a standard
contract.
High monthly payments relative to family budgets--or to lender
qualification standards--have discouraged homebuying even when buyers still
feel that purchasing a home would be a prudent investment.
This is especially
true with a standard, level-payment mortgage which concentrates the real burden of monthly payments in the first years of the contract when buyers' incomes are low relative to longer-term prospects.
Graduated payment mortgages now are available in which payments
are designed to increase more in line with income growth.
have been helped by seller financing concessions.
Many purchasers
Builders have offered
"buydowns," in which they pay part of the buyer's mortgage for the first
several years.
Similarly, many sales of existing homes involve the assump-
tion of existing, low-interest mortgages and/or a "second" mortgage--often
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Federal Reserve Bank of St. Louis
•
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-14-
at below-market rates.
Finally, financial institutions have offered many of
their new adjustable or renegotiable mortgage loans at initial interest
rates below the rate for standard, fixed-rate mortgages; lower rates early
in such mortgages often come, however, at the expense of uncertainty about
mortgage costs in the future.
The Effect of High Interest Rates on Home Builders
The primary effect on home builders of high interest rates is the
diminution of demand for their product.
But high interest rates also have
discouraged the output of new housing by pushing up construction loan rates
and increasing the cost of production.
Further, while the number of unsold
new homes on the market has remained low in historical perspective, the cost
of carrying these inventories has been quite high.
Weakened housing demand
makes the builder's ability to pass on these costs more difficult than would
otherwise be the case.
Data for business failures are not available for the residential
construction sector alone.
However, for the entire construction industry,
failures have increased more sharply in the last three years than in previous
downturns.
Dun & Bradstreet reports an increase of 160 percent in the number
of such failures since early 1978; this compares to just over 110 percent in
the 1972-1975 period.
Some of this increase may be explained by recent
liberalization of the bankruptcy laws, which has made it more attractive for
businesses--as well as individuals--to seek the shelter of the courts than
formerly was the case.
In any event, the level of failures relative to the
number of operating builders has continued to be quite low.
Current financial difficulties probably have fallen most heavily on
small home builders, who often are at a competitive disadvantage in periods
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Federal Reserve Bank of St. Louis
•
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-15-
of high interest rates.
Their sales are not so broad in terms of numbers or
geography as larger competitors, so that a given downturn in sales may be
more likely to cause extreme financial distress.
Moreover, small builders
are typically less well capitalized than larger producers and, thus, are
more exposed financially to cyclical downturns.
Finally, because of their
more uncertain prospects, small builders are more likely to be squeezed out
of financial markets when money is tight and lenders become more selective.
These problems were confirmed in a recent survey by the National Federation
of Independent Business which found that more than two-fifths of small
business respondents in the construction industry indicated that interest
rates and financing was their most important problem; in the same survey,
fewer than one-fourth of other small businesses responded similarly.
Coping with High Housing Costs
While construction of housing units has been curtailed sharply,
households have made numerous adjustments in an effort to meet their shelter
needs.
home.
Some households have looked for alternatives to buying a "traditional"
For instance, manufactured (mobile) homes have been providing a lower-
cost form of shelter for many households.
In May of this year--the most
recent reading available--mobile home shipments were running 15 percent
above the average 1980 pace, despite the fact that financing costs for such
units were running at record levels.
In addition, many households have im-
proved and/or expanded their existing living quarters.
While spending on
new housing units declined 16 percent between 1978 and 1980, outlays on additions and alterations rose more than a third.
Even households seeking new housing units have made adjustments to
limit their monthly mortgage payments.
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Federal Reserve Bank of St. Louis
During the late 1970s the average
•
•
-16-
price of a new home sold rose more than construction costs, as homebuyers
were upgrading the units being bought.
Besides reflecting a desire for
increased amenities, many buyers apparently purchased larger and more expensive homes to enhance the investment value of the unit.
That is to say,
many homebuyers bought "all the house they could afford," expecting to maximize their capital gains.
Since late 1979 this pattern has been reversed,
with the average price of new homes sold rising less than basic costs.
Also,
condominiums and cooperatives--a generally less expensive form of ownership-have increased in popularity.
In the first quarter of 1981, such units in
multifamily structures were started at an annual rate of 233,000--the fastest
pace since such data has been reported (1974).
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Federal Reserve Bank of St. Louis
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IV.
The Automobile Sector
Sales of domestic autos in the first half of 1981 were at a 6.5
million unit annual rate, about the same as the 1980 average but down nearly
25 percent from the average selling pace during the 1970s.
Sales of domesti-
cally produced trucks have been even more hard-hit recently, off more than
one-third from the peak selling rate in 1979.
At the same time, employment
and profits at auto makers and related industries have suffered.
These difficulties in the motor vehicle sector of the economy are
related to a number of factors.
In part, the drop in sales and production
is due to the typical cyclical volatility in auto and truck demand.
The
problems in the motor vehicle sector also are related to recent credit market
conditions, which have affected the cost of financing new car and truck purchases.
However, the current problems in the industry appear to be related
mainly to longer-term trends in automotive demand.
These include: the high
cost of buying and operating a new car, sluggish household income growth,
and the squeeze on family budgets over the past few years arising from rapid
increases in the prices of necessities such as food and energy.
Moreover,
the industry has been plagued by intense foreign competition and by government
regulations that have necessitated large investments to comply with emission
control standards and improved fuel efficiency requirements.
Current financing conditions for autos at retail
Interest rates on new consumer auto loans are at record levels,
although they still are well below the prime rate charged by banks on
business loans or the best available commercial paper rate.
Interest rates
on new auto loans averaged 16 percent in May for 36-month loans financed by
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Federal Reserve Bank of St. Louis
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-18-
commercial banks.
This compares with an interest charge of about 13 percent
at the end of 1979 and a rate generally around 10 percent in the early
seventies.
In recent years, commercial banks have held almost 60 percent
of automobile credit outstanding, although their market share dropped to
52 percent in 1980.
Finance companies--primarily the subsidiaries of the
auto manufacturers--expanded their share in 1980 by an equivalent amount,
to about 30 percent of the market.
New-car interest rates have risen over
the past two years at these lenders as well, though not so steeply as at
banks.
In contrast to the usual 1-to-2 percentage point spread of finance
company over bank rates, the average rate on a new-car loan at finance companies was also 16 percent in May.
Despite the high level of interest rates, the effect on average
monthly payments has been relatively small.
The 3 percentage point rise in
interest rates for automobile loans since the end of 1979 has added about $9
to the average monthly payment rate for a typical car loan (see the lower
panel of the table on page 19).1
At the same time, the sticker price of
a typical new domestic car has gone up about $1,900, adding about $44 to
monthly payments--five times the amount added by higher rates.
An increase
in the average new car loan maturity to 45 months has provided a small offset,
reducing typical monthly carrying costs by $2.50.
There have been reports of reduced availability of auto loans at
commercial banks, and auto installment credit outstanding has contracted a
bit at banks over the past year and a half.
However, finance companies have
helped maintain an ample flow of credit to the auto market, with the finance
1. These figures are based on an assumed 20 percent downpayment with an average
loan balance of $5,600 financed in late 1979.
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Federal Reserve Bank of St. Louis
•
•
-19NEW-AUTO LOANS
Typical Prices and Loan Terms
Period
Price of
new carsl
(dollars)
Amount
financed 2
(dollars)
Interest
rate3
(percent)
Maturity4
(months)
1979-Nov.
7,000
5,600
12.85
44.3
159.42
1980-Feb.
May
Aug.
Nov.
7,254
7,507
7,821
8,646
5,803
6,006
6,257
6,917
13.28
15.72
13.91
14.29
44.5
44.4
45.0
44.8
165.84
179.26
179.24
200.13
1981-May
8,936
7,149
16.04
45.2
211.79
Monthly
payment
(dollars)
1. Initial price of $7,000 has been rounded for computational ease; the
estimated average price of a domestic auto in the GNP accounts in November
1979 was $7,190. Price in subsequent months is determined by multiplying
the initial price by an index reflecting percentage changes in the unweighted
average of manufacturer's suggested list price for base car of four popular
models: Oldsmobile Cutlass, Chevrolet, Ford Fairmont, and Toyota Corolla.
2. Calculated as 80 percent of price from first column.
3. Average most common finance rate on 36-month new car loans at a sample
of commercial banks.
4. Weighted average maturity on all new-car loans at finance company subsidiaries of the domestic auto manufacturers. Data on loan maturities at
commercial banks are not available; however, qualitative evidence suggests
that the maturity structure of auto loans is similar at commercial banks and
finance companies.
5. Calculated from Board's Regulation Z tables on annual percentage rates.
Change in Monthly Payment From November 1979
And Distribution By Source of Change
Period
Total change in
monthly payment
from November 1979
(dollars)
Dollar amount of change in monthly payment
due to change in
Car
Interest
price
rate
Maturity
Interactionl
1980-Feb
May
Aug.
Nov.
+6.42
+19.84
+19.82
+40.71
+5.78
+11.55
+18.70
+37.49
+1.18
+1.18
+2.94
+3.99
-.56
-.56
-2.24
-1.40
+.02
+.02
+.42
+.63
1981-May
+52.37
+44.09
+8.93
-2.46
+1.81
1. Reflects concurrent changes in price, interest rate, and maturity.
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Federal Reserve Bank of St. Louis
:
•
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-20-
affiliates of the major auto makers playing a major role and at times offering
major interest rate concessions to car buyers.
Evidence from consumer surveys on respondents' views about credit
conditions is mixed.
On the one hand, the University of Michigan Survey
Research Center reported in July 1981 that 25 percent of those surveyed who
answered that the market condition for autos was poor gave as a rationale:
"High interest rates; credit is tight."
response.
This is a near-record high for this
On the other hand in response to a separate question, "tight"
credit has been mentioned by less than 10 percent of respondents who gave an
economic factor as an item of unfavorable news for the past several months.
This compares with 25 percent of the respondents complaining about tight
credit during the credit control program in April of last year.
Nonfinancial Factors Affecting Household New Auto Demand
The high cost of buying and operating a new car, relatively sluggish
growth of real personal income, and rapid increases in the prices of necessities are probably the main factors depressing the demand for autos.
factors, perhaps the most important is the high cost of autos.
Of these
Throughout
most of the fifties and sixties, car prices were on a downtrend relative
both to other prices and to disposable personal income.
This downtrend was
interrupted in 1974 and for the next five years the ratio of new car prices
to other prices and income was more or less stable.
However, since 1979 the
price paid for a typical new domestic auto has moved up quite sharply.
top panel of the table on page 19.)
(See
The 27 percent increase in the sticker
price of four popular domestic models over the past two years compares with
only a 16 percent increase in nominal disposable personal income.
Reflecting
these movements, households responding to the University of Michigan's consumer
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Federal Reserve Bank of St. Louis
•
•
-21-
attitude survey have consistently reported over the last few years that high
car prices are the major deterrent to purchasing a new auto.1
As a result of the rapid increases in car prices--and the high average
prices paid for domestic units--households increasingly have chosen to hold on
to their used cars, making repairs when needed, rather than buying new ones.
For example, in 1970 less than 12 percent of registered passenger cars were
more than 10 years old; by 1980 the figure had climbed to almost 21 percent.
This behavior is not surprising, since it is estimated that last year it was
40 percent cheaper to drive a typical used car than a new 1980 mode1.2
Con-
sequently, the average age of the passenger car fleet has increased from 5.5
years in 1970 to 6.6 years in 1980--the highest level since the mid-1950s
(chart on page 22).
The high costs of operating a car have led to less intensive use of
the auto stock, and this has reduced replacement demand.
The near tripling
of gasoline prices in recent years has resulted in increased annual fuel costs
of about $500 per passenger car.
Reflecting these higher costs, the average
number of miles driven per year has dropped from 10,184 miles in 1972 to an
estimated 9,400 miles in 1980.
Rising operating costs also were a factor in
the shift toward smaller cars--a market where foreign producers play a large
role.
A study by the Hertz Corporation shows that the average cost to own
and operate a subcompact car was just over 38 cents a mile in 1980; this
compares with a cost of 44 cents for mid-size cars and 48 cents for larger
cars.3
1. Only in May 1980, during the period of credit controls, were high interest
rates and credit conditions mentioned nearly as often as high prices.
2. Estimate is from Hertz Corporation.
3. This differential reflects depreciation and insurance in addition to
gasoline per mile expenses.
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Federal Reserve Bank of St. Louis
.,
•
•
-22-
Sluggish growth of real disposable personal income also has been a
major factor in the poor sales performance of the auto industry.
Since 1973,
gains in real disposable income per household have averaged only 0.6 percent
per year, compared with a 1.9 percent trend over the preceding two decades
(chart on page 23).
Moreover, most family budgets have been under extreme
pressure from increases in the prices of necessities--such as food and energy-relative to income growth.
In the 1959 to 1973 period, outlays for necessities
decreased as a share of family disposable income from 30 percent to less than
25 percent.
This trend was reversed in 1974, however, and most families must
now allocate about the same share of disposable income to these necessities
as they did in the early sixties (chart on page 24).
Thus, with income growth
slow and prices of necessities rising rapidly, households have found less
room available to purchase discretionary goods such as new cars.
Truck sales
The sharp decline in truck sales over the past 1-1/2 years reflects
a number of factors: high interest rates, the general slowdown in economic
activity last year, and a reluctance by business to invest in plant and
equipment in an uncertain inflationary environment.
In addition, demand for
vans and smaller trucks--many of which are purchased for consumers' use--continued to be sensitive to the relatively low fuel economy of these vehicles.
Moreover, foreign competition has been even more intense for trucks than in
the passenger car market.
Recognizing this problem, in August 1980 the
tariff on imported light-duty trucks was raised from 4 to 25 percent.
Economic Health of the Industry
Reflecting the weakness in auto and truck demand, firms in the
motor vehicle industry posted losses of more than $4 billion in 1980, and
they still were running in the red during the first quarter of this year
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Federal Reserve Bank of St. Louis
REAL DISPOSABLE INCOME PER HOUSEHOLD
IIMMEINIMMIII
---* 16,000
simmoill
eie
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e
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e
....... 14,000
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--- 12,000
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01.1....
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55
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I
57
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I
59
Trend Fitted 1955-1973
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Federal Reserve Bank of St. Louis
I
61
I
I
63
I
I
65
I
I
67
i
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69
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I
71
I
1
73
I
I
75
I
I
77
[
I
79
8,000
I
81
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Federal Reserve Bank of St. Louis
FOOD, GASOLINE, AND UTILITIES AS A PERCENTAGE OF DISPOSABLE PERSONAL INCOME
---. 32
—30
•
28
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63
67
69
71
73
75
77
79
81
65
Trend Fitted 1959-1973
20
•
•
•
.
-25-
(table on page 26).1
During the years 1976 through 1978, the motor vehicle
industry accounted for more than 10 percent of all profits in manufacturing.
The rubber and plastic products industry (not shown on the table) is an
important supplier to the auto industry.
This industry reported lower profits
in 1980 than in 1979, with net profits per dollar of sales around 2 percent.
According to industry reports, profits improved substantially in the first
quarter of this year, rising to 3.6 cents per dollar of sales.
Weak profits also have affected retailers.
Although the number of
dealerships has been declining steadily since 1956, last year 1,600 dealerships
handling domestic makes of passenger cars went out of business--the largest
one-year decline in retail outlets since 1966 when Studebaker left the car
business.
Another 220 dealerships folded in the first quarter of this year.
High inventory carrying costs and the marked slowdown in automotive sales
have played an important role in the troubles facing dealers.
However, part
of the problem for automotive dealers is related to the used car market.
It
is estimated that about 20 percent of most new car dealers' dollar volume is
accounted for by used cars.
But used vehicle sales by car dealers have been
declining in recent years, putting a further squeeze on profit positions.
With a more stable price environment and the associated easing in
credit market conditions over the longer-term, the automotive and related
industries should be in a good position to benefit from renewed prosperity.
Indeed, part of the improvement should be attributable to changes which have
contributed to recent losses--e.g., the substantial retooling and other costs
1. Second quarter data on profits in the motor vehicle industry are not yet
available in the National Income and Product Accounts. Industry reports,
however, indicate that the three largest auto makers posted small profits in
the second quarter.
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Federal Reserve Bank of St. Louis
••
a
•
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Federal Reserve Bank of St. Louis
•
•
-26-
MANUFACTURING AND MOTOR VEHICLES AND PARTS
BEFORE-TAX PROFITS WITH INVENTORY VALUATION ADJUSTMENT
Total Manufacturing
Motor Vehicles
Billions of Dollars, SAAR
19761977197819791980-
69.2
76.1
85.3
88.9
74.5
7.2
9.2
8.9
4.3
-4.3
1980-Q1
-Q2
-Q3
-Q4
92.1
61.3
68.5
76.2
-2.9
-8.8
-4.8
-0.8
1981-Q1
91.4
-1.7
---Percent Change from Preceding Period, SAAR--19761977197819791980-
31.7
10.0
12.0
4.2
-16.1
278.9
27.8
-3.3
-51.4
n.a.
1980-Q1
-Q2
-Q3
-Q4
73.9
-80.4
55.9
53.1
n.a.
n.a.
n.a.
n.a.
1981-Q1
107.0
n.a.
n.a. = Not applicable; level of profits is negative in the period.
Source:
National Income and Product
Accounts, Bureau of Economic
Analysis.
e.
•
•
•
•
-27-
associated with the production of small, fuel efficient cars that meet government regulations and are also more competitive with imported units.
Moreover,
movements within the industry to consolidate production of key products and
an increasing willingness to make joint-ventures--both with domestic producers
and foreign companies--should lead to increased productivity.
Two factors that have put domestic automakers at a disadvantage with
foreign competitors are their high average labor costs and a perception by
the public that foreign made autos are higher in quality.
However, U.S. manu-
facturers have taken steps to try to reduce these disadvantages.
Workers at
Chrysler agreed early this year to a pay cut that returned their straight time
wage rate to the level prevailing at the end of 1979; they also agreed to forgo
any additional wage hikes for the duration of the current contract (due to
expire September 1982).
Actions such as this should help to narrow the 70
percent compensation differential between U.S. and Japanese automakers.1
In addition to controlling labor costs, domestic manufacturers have undertaken
strenuous efforts to improve the quality of their products--especially those
that compete most directly with foreign models.
Despite the recent wage con-
cessions and quality improvements, the domestic industry still faces strong
competitive pressures from abroad.
The situation for dealers should improve.
They are becoming more
involved with the distribution of foreign units and their profits should
benefit from this increased volume, although most industry experts expect the
market share of foreign units to fall back with the increased competition of
better designed U.S.-made smaller cars.
Also, the manufacturers are actively
working with dealers in developing lucrative "after-sale" business, which at
present mainly consists of service still under warranty.
1. New York Times, June 3, 1981, page D-1.
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Federal Reserve Bank of St. Louis
..,
•,
II
•
•
-28-
V.
The Farm Sector
The farm sector is now experiencing its seventh consecutive quarter
of relatively low profitability (see table on page 29).
Although this slump
has occurred during a period when interest rates have risen to historically
high levels, a glance at the data on farm income for the past decade would
suggest a need for caution in drawing conclusions about causal linkages.
For instance, the last period of relatively weak farm profitability, 1976-77,
occurred during a period of lower interest rates.
Farm income then rose
rapidly in 1978-79 even though interest rates had started to climb.
And
earlier, in 1973, the highest farm income in history was recorded while
market interest rates were rising sharply.
As these historical references indicate, the farm sector has experienced relatively severe income cycles over the past ten years.
First
came the extraordinarily profitable years of 1972-73, then an income slide
that by 1976 had carried the real earnings on farm assets below their longerterm trend of annual increases averaging 4 percent since the mid-1950s.
This longer-term profit growth had been accompanied by an equivalent average
annual increase in the real price of farm real estate; furthermore, the
relatively high price/earnings ratio placed on farm assets--averag4 ng about
25--reflected expectations that such real growth in asset earnings would be
sustained.
The income recovery of 1978-79 returned farm profitability to
approximately the longer-term trend to which farm real estate values were
evidently related.
The swift return to lower earnings that ensued seemingly
was an unexpected shock.
Higher interest rates could have cut into net farm income in four
ways: (1) by increasing production expenses directly, through higher interest
:
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..
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Federal Reserve Bank of St. Louis
•
•
-29-
Table 1.
Farm income and expenses (quarterly, seasonally adjusted
annual rate, billions of dollars)
Gross farm
income
Farm production
expenses
Q3
Q4
120.4
124.1
126.9
138.9
97.7
99.1
100.4
107.2
22.7
25.0
26.5
31.7
1979-Q1
Q2
Q3
Q4
148.2
152.8
152.5
154.1
114.8
116.9
120.2
124.9
33.4
35.9
32.3
29.2
1980-Q1
Q2
Q3
Q4
149.3
146.0
151.9
155.1
126.0
129.0
132.2
135.6
23.4
16.9
19.7
19.5
1981-Q1
Q2
157.7
165.2
139.4
142.2
18.3
23.0
Quarter
1978-Q1
Q2
Source:
U.S. Department of Agriculture.
Net farm income
of farm operators
•
•
•
•
-30-
charges on debt owed by the farm sector; (2) by increasing production expenses indirectly, as higher interest charges paid by nonfarm manufacturers
and suppliers of goods and services to the farm sector are passed along in
the form of higher prices of these farm inputs; (3) by reducing gross income
through adverse effects on the demand for farm output; and (4) by changing
the time-path of gross income if higher rates cause producers to alter their
marketing patterns.
Data available permit rough empirical estimates of the first two of
these effects.
To establish a perspective for such estimates, it is first
useful to quantify the extent to which farm income has fallen below its 1979
level.
As such income is to be compared with interest expense, it must in-
clude the net rent of farm landlords as well as the net income of farm operators, because landlords owe part of the farm debt and thus pay part of the
interest included in farm production expenses.
The table on page 31 shows
that the combined net farm income of operators and landlords, labeled "net
income of farm sector," totaled $38.1 billion in 1979.
Between 1979 and the
first half of 1981 (1981-H1), the price deflator for personal consumption
expenditures rose 17.1 percent; thus, to provide the same purchasing power,
such income would have had to total $44.6 billion (annual rate) in the latter
period.
As also shown in in the table, actual sector net income totaled $26.5
billion (annual rate).
Thus the reduction in annual net income, in terms of
current purchasing power, was approximately $18 billion as of the first half
of 1981.
The rise in interest rates on outstanding farm sector debt is estimated to have accounted for $2.4 billion, or 13 percent, of this drop in
real net income.
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Thus, so far, for the farm sector as a whole, the direct
Table 2.
Farm income and expenses (annual, billions of dollars)
-
Gross farm
income
Year
Farm
production
expenses
Net farm
income of
farm operators
Net farm
income of
farm sector
Farm cash
flow of
farm sector
Farm cash flow of farm
sector plus farm operators' off-farm income
1977
108.7
90.3
18.4
22.4
37.8
63.1
1978
127.5
101.1
26.5
31.4
48.7
76.8
1979
151.9
119.2
32.7
38.1
57.8
91.0
1980
150.5
130.7
19.9
25.7
47.4
83.4
1981-Hla
161.4
140.8
20.6
26.5e
49.0e
87.0e
a - Annual rate.
e - Estimated for this report.
Source:
Notes:
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Federal Reserve Bank of St. Louis
U.S. Department of Agriculture.
Data for the first half of 1981 (1981-H1) are shown at annual rates.
Gross farm income includes cash receipts from farm marketings, government payments, net change
in inventory of livestock and stored crops, home consumption of farm output, and the rental
value of operators' dwellings. Share rents and government payments received by landlords are
also included.
Farm production expenses are as reported by the USDA.
expenses as well as net rent paid to farm landlords.
They include landlords' farm production
Net farm income of farm operators is gross farm income less farm production expenses.
Net farm income of farm sector is net farm income of farm operators plus net rental income of
farm landlords.
Farm cash flow of farm sector is net farm income of farm sector plus the capital consumption
allowances that were included in farm production expenses.
Table 3.
Outstanding farm debt, interest paid, and interest rates
Year
Average
outstanding
debt (billions
of dollars)
Annual interest
paid (billions
of dollars)
Implicit
I Addendum: Average interest rate on loans made (percent)
average
Production
Federal
interest rate
Commercial
credit
(percent)
associations
banks
11
=s
Non-real-estate debt
1976
1977
1978
1979
1980
43.1
51.2
60.3
70.4
80.1
3.2
4.0
4.9
6.6
8.5
7.39
7.76
8.13
9.34
10.62
n.a.
8.8
9.6
11.8
15.1
8.4
8.1
9.0
10.9
13.0
1981-H1
86.5e
9.9a,e
11.50e
17.9
14.3
•
Real estate debt
1976
1977
1978
1979
1980
53.7
60.3
67.4
77.3
88.2
3.9
4.4
5.1
6.1
7.3
7.18
7.24
7.60
7.96
8.29
8.6
8.3
8.4
9.2
10.4
1981-H1
95.0e
8.1a,e
8.55e
11.0
Total debt
1976
1977
1978
1979
1980
96.8
111.5
127.7
147.7
168.3
7.0
8.3
10.0
12.7
15.8
7.27
7.48
7.85
8.62
9.40
1981-H1
181.5e
18.1a,e
9.96e
a - Annual rate.
e - Estimated for this report.
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N.)
•
Table 3.
.
Debt and annual interest paid, U.S. Department of Agriculture; interest rate on loans made by commercial
banks, Federal Reserve survey of terms of bank lending to farmers (dollar-weighted average of effective
rates on non-real-estate farm loans of $1,000 or more made in the first full business week of the second
month of each quarter); interest rate on loans made by production credit associations and Federal land
banks, computed for this report as the unweighted average of quoted rates on the first day of each quarter,
as compiled by the Farm Credit Administration (stock purchases and loan fees required of borrowers from
these cooperatives are not taken into account in the average rates shown).
Source:
Note:
(continued)
Average outstanding debt was computed for this report as follows, in order that the seasonal pattern of debt
outstanding be reflected in the annual average: (1) quarterly average institutional debt (compiled in Federal
Reserve Board Statistical Release E.15, "Agricultural Finance Databook--Quarterly Series") was estimated by
averaging amounts outstanding at the beginning and end of each quarter; (2) annual average of institutional
debt was estimated by averaging the quarterly averages computed in step 1; (3) annual average institutional
debt was alternatively estimated by averaging amounts outstanding at the beginning and end of each year; (4)
annual average total debt was first approximated by averaging amounts outstanding at the beginning and end of
each year (USDA estimates of noninstitutional debt are made only as of January 1); and (5) the amount obtained
in step 4 was adjusted by multiplying by the ratio of the amount obtained in step 2 to the amount obtained in
step 3. These computations were performed separately for non-real-estate and real estate debt, and the results
were summed to obtain average total debt.
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Federal Reserve Bank of St. Louis
411
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cost impact of higher interest rates has been small.
The key factor is that
a relatively large amount of outstanding intermediate- and long-term farm
debt was incurred in earlier years at lower fixed rates; also, a significant
amount of recent new debt consisted of drought-related Farmers Home Administration disaster loans bearing an interest rate of 5 percent.
Consequently,
the average rate on all outstanding debt rose relatively slowly toward the
new higher level of rates on most other new loans.
As shown in the table on
page 32, the average rate paid on all outstanding farm debt in the first half
of 1981 is estimated to have been 9.96 percent, up from 8.62 percent in 1979.
Total interest paid rose from $12.7 billion to an estimated $18.1 billion
(annual rate).
But much of this increase resulted from a sizable growth in
the amount of outstanding debt, from $147.7 billion to $181.5 billion.
Thus
even if the average interest rate had remained at its 1979 level, interest
paid would have risen to $15.6 billion.
Only the remaining $2.4 billion of
the total increase is attributable to the higher rate.
Some individual farm operators, of course, have experienced a much
greater relative increase in their average interest rate--in particular,
those highly leveraged operators who have employed significant short-term
financing.
Because short-term borrowing often tends to minimize immediate
interest expense while maximizing financial flexibility, persons seeking
rapid financial progress may choose such financing in spite of the obvious
risk of greater susceptibility to cash-flow problems should interest rates
subsequently rise.
In effect, some individuals chose to take above-average
risks in the hope of above-average short-term gains, and their timing proved,
in retrospect, unfortunate.
Data on the number of these or other cases of
individual farm financial distress are limited, however.
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Federal Reserve Bank of St. Louis
Foreclosures, which
%
,
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would tend to be a lagging indicator of severe problems, in 1980 accounted
for 0.13 percent of farm transfers, about the same as the average proportion
over the past two decades.
Average interest rates being paid by nonfarm businesses also have
lagged behind advances in rates on new loans, thus holding down the size of
the indirect impact of higher rates on farm expenses for nonfarm inputs. If
firms supplying farm inputs had credit experience similar to that of nonfinancial corporate business in general, a full pass-through of their own cost
increases attributable to higher interest rates paid since 1979--which may
not have been possible, given demand conditions--would have raised the price
of their final sales by about 1.0 percent.
Annual farm sector purchases of
such inputs have recently totaled about $60 billion; thus, at most only
about $0.6 billion, or 3 percent, of the reduction in real net farm income
resulted from this indirect impact of higher rates.
The third avenue through which, as was noted above, higher interest
rates might have reduced net farm income was by reducing demand for farm
commodities.
Stagnant gross farm income has been the proximate cause of the
decline in net income.
After rising above $150 billion in the second quarter
of 1979, gross farm income failed to advance significantly further until the
second quarter of this year (table on page 29).
In an environment of general
price inflation approaching 10 percent annually, two years of stalled growth
in gross income had a devastating effect on net income.
High interest rates undoubtedly have had some effect on the growth
path of gross farm income.
However, these effects have worked mainly through
indirect channels and are thus hard to disentangle from other causal factors-such as the impact of languishing labor productivity on real consumer income-that have probably been more important in limiting farm income growth.
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Federal Reserve Bank of St. Louis
More than
•
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-36-
likely, the direct effect of high interest rates in limiting the demand for
farm output has been quite small since, by and large, final consumer purchases
of farm output are neither credit-financed nor highly postponable.
Thus an
increase in rates should have relatively little influence on either the
level or timing of consumer food purchases.
While the direct effects are probably small, many observers have
argued that high interest rates have restricted farm income growth indire
ctly
through exchange rate effects that limit farm export demand.
According to
this argument, high U.S. interest rates contribute to the strength of the
dollar in exchange markets and thereby make U.S. goods more costly relative
to those of other countries.
Conceptually, there is merit to this argument;
however, the magnitude of the exchange rate effect on recent farm income
developments could easily be exaggerated.
Although exports of the major U.S.
crops in the 1980-81 marketing year will apparently fall short of earlier expectations, these exports are still at very high levels by historical standards.
Moreover, the cash receipts of farmers producing our major export
crops have in general held up better than the incomes of livestock producers,
who--in the short run--should not be much affected by exchange rate developments.
Yet another way in which interest rates might affect farm prices
and farm incomes is through their effect on the pattern of crop and livestock
marketings.
Rising interest rates make it more costly to finance inventories
and thus encourage increased near-term marketings at the expense of long
-run
supplies.
This argument has been cited especially often in the popular press
as a factor explaining the weakness in livestock prices in recent quarte
rs.
However, as with exchange rate factors, it is easy to exaggerate this effect.
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Federal Reserve Bank of St. Louis
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For example, while cattle marketings so far in 1981 have run somewhat above
earlier expectations, there has not been a massive selloff of breeding animals
that would severely limit future supplies; indeed, the nation's cattle inventory as of July 1 was 2 percent above its year-earlier level, and the pool
of animals targeted for entry into the breeding herd was up considerably
from a year earlier.
In contrast, the pork industry is cutting back from
recent output levels, but these cutbacks appear to be part of the normal
cyclical process that has characterized that industry for several decades.
The marketing decisions of crop farmers may also be influenced to some extent
by high interest rates that raise carrying costs.
However, for these storable
commodities, increased marketings and lower prices in the near term would,
with all else constant, be offset by reduced marketings and higher prices
later in the marketing year.
Thus, although interest rates are affecting gross farm income in
various ways, these effects do not represent the dominant factor limiting
income growth.
Among other factors, it is notable that real per capita
incomes have grown little over the past year and a half, and that at least
temporarily the pattern of consumer spending appears to have shifted away
from red meats, particularly beef--a factor which helps explain the adverse
income developments of livestock producers.
In addition, drought and other
special forces have adversely affected the incomes of farmers in certain
regions.
Finally, past periods of high interest rates were often associated
with reduced credit availability at institutions engaged in farm lending,
particularly at the larger commercial banks.
At present, with interest-rate
ceilings on major types of deposits removed or tied to market rates at banks
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Federal Reserve Bank of St. Louis
•
•
-38-
of all sizes, the potential for credit-availability problems has been greatly
reduced; however, interest rates on bank loans necessarily have become more
responsive to movements in market rates that change banks' cost of loanable
funds.
With farm credit readily available, farm sector debt outstanding
increased by 10.6 percent in 1980 even though amounts of expenditures that
are often credit-financed rose more slowly or, in the case of machinery
purchases and real estate transfers, actually declined.
ings has continued in 1981;
The rise in borrow-
during the first half of this year, farm loans
outstanding at major lending institutions are estimated to have risen by
about $10 billion, or 7.7 percent.
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Federal Reserve Bank of St. Louis
•
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VI.
Small Business
Unlike the other three sectors on which this report focuses, that
is, agriculture, housing, and autos, the small business "sector" includes
firms operating in all parts of our economy.
Therefore, generalizing about
the impact of high interest rates on small businesses is difficult, since
the impact on such a diverse group of firms depends to a great extent on
factors specific to each industry.
There are two other major problems in any analysis of small business conditions.
First, there is no consensus on how to define small busi-
ness, although there is general agreement that small businesses account for
a very large percent of firms in the United States.
According to the report
by the White House Commission on Small Business,1 there are about 12 million
small firms in the United States, accounting for more than 97 percent of all
businesses.
The second problem, which in part reflects the definitional prob-
lem, is the lack of a comprehensive data base on small business.
There are,
however, a number of sources of information that can be used in evaluating
small-business conditions.2
1. America's Small Business Economy: Agenda for Action, Report to the
President by the White House Commission on Small Business, April 1980.
2. These sources include, but are not limited to, the following: Economic
Letter, National Small Business Association; Federal Monetary Policy and its
Effect on Small Business. Report of the Committee on Small Business, U.S.
House of Representatives, September 30, 1980 (House Report); The Heller/Roper
Small Business Barometer, Walter E. Heller International Corporation Institute
for the Advancement of Small Business Enterprises; Quarterly Economic Report
for Small Business and unpublished data, National Federation of Independent
Business (NFIB Survey); Quarterly Financial Reports of the Federal Trade
Commission (QFR); Statistics of Income compiled by the Internal Revenue
Service (SOI); Survey of Terms of Bank Lending, Board of Governors of the
Federal Reserve System (STBL).
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Federal Reserve Bank of St. Louis
•
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Small Business Financing
Despite the heterogeneity of small business, the vagueness of definition, and the limited data base, there are some relatively common financial
characteristics of small businesses that permit a rough assessment of the
impact of credit conditions on the group as a whole.
First, small business
firms tend to place a relatively heavy reliance on debt financing.
Particu-
larly for new firms, access to equity capital may be limited by the high
risk of failure.
For small businesses generally, however, fixed transactions
expenses may make equity offerings prohibitively costly.
Thus, small busi-
nesses on average have higher debt to equity ratios than larger businesses.1
Moreover, for firms that are otherwise similar, the debt-service burden relative to cash flow tends to be higher for small businesses than it is for
large companies.
Another common feature of small businesses is that, while they may
have several potential sources of credit, including trade credit, finance
companies, and the government, they do tend to rely heavily on commercial
banks for financing.
For example, according to survey data supplied by the
National Federation of Independent Business for April 1980, more than 80
percent of the responding small business borrowers list a bank as the source
of their most recent business loan.
A survey taken for the House Subcommittee
on Access to Equity, Capital and Business Opportunities yielded similar
results.
These characteristics of small business suggest that the impact of
high interest rates on this sector will depend considerably on the loan rates
charged by banks and on the small businesses' perceptions of credit availability.
1. Evidence of higher debt to equity ratios for smaller firms as compared
to larger firms can be seen in the QFR, SOI, and the House Report.
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Federal Reserve Bank of St. Louis
•
•
4
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In this regard, data suggest that current credit conditions do not appear to
be having a disproportionate effect on the level of rates paid by small businesses.
The Federal Reserve Board's May 1981 Survey of Terms of Bank Lending
shows that the weighted averages of commercial and industrial business loan
rates for all loan size classes, for all bank size classes, and for both long
and short maturities were generally over 19 percent (see table on page 42).
The smaller loans at the small banks, which likely represent loans to small
businesses, tended to have lower average rates than the loans at the large
banks.1 In addition, the historical data from the same survey show that
small loan rates have increased less than large loan rates since 1977 reversing the spread of small loan rates over large loan rates that prevailed at
that time.
These data are consistent with NFIB's two quarterly polls of its
members for 1981.
These show that small firms paid an average of 17.6 percent
on short-term loans in the first quarter of 1981 and 18.9 percent in the
second quarter.
The number of loans at rates of 18 percent or less increased
slightly to 64 percent in the first quarter of 1981 from 60 percent in the
fourth quarter of 1980, but declined substantially to 40 percent in the second
quarter.
Recent data prepared by the Small Business Administration (SBA) show
that about 45 percent of the loans made under the SBA's 7(a) loan guarantee
program for fiscal year 1981 through May 31 were at rates below 17 percent.
Thus, although interest rates are high by historical standards, small
businesses have not experienced disproportionate increases in rates they must
1. It should be noted that large businesses tend to have better access to
commercial paper and other financing vehicles, often at relatively attractive
rates, so that the comparison of bank rates does not give a complete picture.
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Federal Reserve Bank of St. Louis
•
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SURVEY OF TERMS OF BANK LENDING
WEIGHTED AVERAGE INTEREST RATE
ON LOANS MADE DURING MAY 4-9, 1981
(Rates in percent; loans in thousands)1
SHORT-TERM COMMERCIAL AND INDUSTRIAL LOANS
All banks
48 large banks
Other banks
All
Sizes
$124
$2549
$5099
$100499
$500999
$1,000
& over
19.99
20.29
19.45
19.45
20.64
19.34
19.87
20.69
19.71
19.10
20.52
18.82
19.93
20.36
19.79
19.58
20.18
19.28
20.14
20.28
19.45
LONG-TERM COMMERCIAL AND INDUSTRIAL LOANS
All banks
48 large banks
Other banks
All
Sizes
$199
$100499
$500999
$1,000
& over
19.25
19.20
19.40
19.22
19.90
19.10
19.34
19.54
19.26
19.48
19.32
19.70
19.23
19.16
19.68
CONSTRUCTION AND DEVELOPMENT LOANS2
All banks
48 large banks
Other banks
All
Sizes
$124
19.09
20.17
18.72
19.83
21.62
19.74
$2549
$5099
$100499
$500
& over
19.06
21.09
18.89
19.06
21.01
18.87
20.74
20.56
20.79
19.35
19.89
18.89
LOANS TO FARMERS
All banks
48 large banks
Other banks
All
Sizes
$19
$1024
$2549
$5099
$100249
$250
& over
17.88
19.54
17.54
17.50
18.64
17.46
17.59
18.42
17.55
17.67
18.88
17.59
17.78
19.01
17.63
17.97
19.36
17.77
18.46
19.82
17.07
1/
The approximate compounded annual interest rate on each loan is calculated
from survey data on the stated rate and other terms of the loan; then, in
computing the average of these approximate effective rates, each loan is
weighted by its dollar amount.
2/
The average interest rate calculation for the $50-99 thousand category
excludes one outlying loan record.
(Continued)
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Federal Reserve Bank of St. Louis
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(Continued)
Note:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The survey of terms of bank lending is taken of about 340 banks selected
to represent all sizes of banks. The sample data are collected over one
business week and used to estimate lending terms at all insured commercial banks. Short-term loans have original maturities of less than one
year, and long-term loans have maturities of one year or more. Construction and land development loans include both unsecured and loans
secured by real estate. Thus, some of the construction and land development loans would be reported on the statement of condition as real estate
loans and the remainder as business loans. As of 12/31/80, average
domestic assets of 48 large banks were $11.4 billion and assets of the
smallest of these banks were $2.3 billion. For all insured banks, total
domestic assets averaged $105.8 million.
The survey of terms of bank lending to farmers covers about 250 banks
selected to represent all sizes of banks. The sample data are collected
over one business week and used to estimate lending terms at all insured
commercial banks. Loans secured by real estate, purchased loans, foreign
loans, and loans of less than $1,000 are excluded from the survey.
.
•
•
,
-44-
pay for loans from one of their key credit sources.
Rising interest rates
have, however, imposed a substantial cash flow burden on many small businesses
because of their heavy reliance on debt financing.
This likely was reflected
in the finding of the March 1981 Heller/Roper Small Business Barometer that
almost 40 percent of the small businesses surveyed have put off modernization
or expansion because of high interest rates; comparable information does not
exist for large business, so it is impossible to gauge the relative severity
for small firms.
Problems of credit availability do not appear to have worsened
markedly for small businesses this year.
Forty-five percent of the respondents
to the July 1981 NFIB survey described themselves as a regular borrower; only
one fourth of these reported that money was harder to get than three months
earlier.
This proportion was about the same as in the April 1981 survey.
Inflation
High interest rates are not the only factor creating stresses for
small businesses.
Many of the troubles confronting small businesses are
directly or indirectly the product of an escalating inflation.
Indeed, from
1973 until the second quarter of 1981, when there were indications that the
rate of inflation might be slowing, the NFIB survey respondents cited inflation
most frequently as the single most important problem facing their business.
Interest rates and financing replaced taxes as the second most often cited
problem only in recent quarters and replaced inflation as the most frequently
cited problem in the second quarter of 1981.
While the House Report respon-
dents indicated that inflation was second to financing and interest rates
as the most important problem facing the business at the actual time of their
survey in April 1980 (when interest rates had just risen unusually rapidly),
:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
w
1
.
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.
-45-
the most pressing problem cited for the near term was that the business
believed it would not be able to pass through added costs to customers and
still remain competitive.
The White House Commission Report also stressed
the importance of reducing inflation as a major objective for small business.
Inflation affects small businesses in several ways.
variable price changes make business planning difficult.
Frequent and
Increases in input
prices and wage rates result in a squeeze on cash flow if the business
operates in an environment in which competitive pressures or sluggish demand
prevent it from passing along the entire increases to its customers.
To cover
cash needs, businesses are forced to borrow more--and at high interest rates
that themselves reflect inflation expectations and the effects of monetary
restraint required to damp inflation forces.
Some businesses have found that
they cannot continue to cope with the strains created by inflation.
Bankruptcy
The substantial increase in bankruptcy filings since the end of
1979 (see chart on page 46) is an indicator of the difficulties experienced
by small business.
Business bankruptcies, which ranged between 2100 to 3200
on a seasonally adjusted monthly average basis from 1976 through 1979, have
been running between 3000 and 4300 since the beginning of 1980.
The interpre-
tation of these numbers is unclear, however, since they reflect not only the
economic conditions but also the revision of the Federal Bankruptcy Code
that took effect in October 1979 as a result of the passage of the Bankruptcy
Reform Act of 1978.
Changes in the code have made filing of bankruptcy less
onerous and have provided particular relief to eligible sole proprietorships.
They are permitted to file under Chapter 13 which allows them to retain their
assets as long as they are regularly repaying debt.
If the proportion of
businesses continuing in operation, rather than liquidating, after the filing
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
BUSINESS BANKRUPTCIES
(seasonally adjusted)
Number of filings
'5,000
illnommome
--- 4,000
•
111.•••••••
1011••••=0
--- 3,000
ammonia
Illmwommo
29000
ammmoll.
•
1,000
1111=4,
0
411•••.=••
1
1
1
1
1
1
1970
1972
1974
1976
*Prior to 1974, monthly estimates are derived from quart
erly data.
Source: Administrative Office of the U.S. Courts and
Federal Reserve.
Latest data plotted: June 1981.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1
1
1978
0
1980
••
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-47-
of bankruptcy has risen as intended under the new code, the increased number
of filings may not be as serious as it appears.
Federal Reserve Board Actions
The Federal Reserve is pursuing its efforts to understand and deal
with the particular financial problems of small business.
As a matter of
continuing policy, the Board encourages commercial banks to take into consideration the special needs of their small business customers.
Also, each of
the Federal Reserve Banks has recently appointed a Community Affairs Officer
who serves as a point of contact and information exchange on issues and
problems that may be of special concern in the local area, including those
related to small businesses.
The Board, in conjunction with an interagency
task force on small business finance, has underway a project specifically
focusing on the financing needs of small businesses.
An important part of
the project is an interview survey of commercial bank small-business lending
practices at a small sample of banks throughout the country.
The results of
the survey will be available early next year and should yield further insights
into the impact of credit conditions on small businesses.
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Federal Reserve Bank of St. Louis
MEI
•
•
•
..••
GOyk-'
.
BOARD OF GOVERNORS
OF THE
"
4
- •
FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
RaLftt.s
• • •..• • •
September 3, 1981
PAUL A. VOLCKER
CHAIRMAN
The Honorable Richard Bolling
Chairman
Committee on Rules
House of Representatives
Washington, D.C.
20515
Dear Chairman Bolling:
I am writing in response to your request for the views
of the Federal Reserve Board on proposals to improve congr
essional
review of federal programs, specifically H.R. 2 and
H.R. 58.
As you know, I have emphasized in congressional testimony that a high priority must be given to slowing the
momentum
of growth in federal spending if the budget is to be broug
ht into
balance. Appropriate consideration must also be given to impro
ving
economic incentives by reducing the historically high
ratio of tax
revenues to GNP. To that end the Congress has just enact
ed a
far-reaching program of tax reductions, including index
ing personal
income taxes, that will have the effect of permanently constraini
ng
growth of federal revenues. In these circumstances it is
all the
more important that spending restraint not be a one time
effort,
but that Congress continue to build on the progress it has
made
in that direction.
Further progress by Congress in controlling government
expenditures would clearly be assisted by enhancing the congressio
nal
review of authorizations. The experience of this year indicates
that federal spending that is "uncontrollable" under curre
nt law
can be controlled if Congress is willing to change existing laws,
particularly in those areas that are not subject to effective
limitations on spending through the annual appropriations proce
ss.
A regular cycle of reauthorization of a much larger number of programs and a systematic plan for detailed review of the most
important
programs or groups of programs appears likely to assist the Congr
ess
to expand the controllability of the budget while meeting high
priority needs. It also appears entirely appropriate to extend
procedures for such systematic review to special tax provisions,
or so-called "tax expenditures," since direct spending and tax
expenditures are frequently alternative means for achieving the
same program objective.
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Federal Reserve Bank of St. Louis
The Honorable Richard Bolling
Page Two
I would note that, as recognized in the proposed legislation., there are some types of programs where success and viability
dependt on assured continuity. In these cases there would be
little to gain and possible adverse consequences from the uncertainty that would result from including them in a new review
effort. Finally, it appears desirable to integrate procedures
for program revivu and reauthorization with the existing budget
process to the maxlmum extent possible.
I do not believe that it is appropriate for the Federal
Reserve to go be-land these general observations since the detailed
provisions of these bills are concerned with congressional procedures and administration reporting, areas which are outside the
responsibilities and expertise of the Federal Reserve System.
I appreciate the opportunity to comment on these bills.
Sincerely,
Seaut A. Vol_cliec
SL:FMS:JSZ:RS:pjt (#V-190)
bcc: Mr. Zeisel
Mr. Struble
Ms. Lepper
Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
a
•
•
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RICHARD fot ING, MO.,
cHI.RIMIAN
rrrE P. FLA„
GiLL.111 w. LoN
LA.
outuin.i. Tf NN.,
JAMES
RAMAING MINORITY MEMBER
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•
Reprtilentatibt5
Committei. on Aufai
A NTHomy C. ME It ENSON, CAur.
mARTiN FROST. TEx.
DAVID E. soNtort. MICH.
TONY P. HALL, 0)-410
GENC TAyLOR. MO.
JOHN J. RHo01111, ARIZ.
WILLJAMD.CW)SSY,JR.
MINORITY C.01.R4SCL
iiias'bing-ton, 0.C. 20515
SAYERS. in.
STAPP DUIt1LCT
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Federal Reserve Bank of St. Louis
Diri.J111- RT L. LATTA. OHIO
TRENT LOTT. miss
3DOUCSt of
JOHN JOSEpH moAKLEY. MASS.
SHIRLEy CHIsHoLM. N.y.
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S.C.
A. A
Action assigntl Mr. Kichtine
July 8, 1981
al
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"T1
Honorable Paul Volcker
Chairman
Federal Reserve System
Washington, D.C. 20551
LID
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Dear Mr. Chairman:
GE)
=ni
Later this yevir, the Committee on Rules, at the subcammitteeT;levdE
will hold further hearings on proposals to improve congressional !review)
of Federal programs. The legislation to be considered includes ELR. 2°1
and H.R. 58.
These hearings are a continuation of the Committee's efforts to
develop procedures for comprehensive and coordinated oversight. The
current budget reconciliation and reduction efforts point out the need
for ongoing program review to provide better information about the
performance of programs, and to enable committees to make informed
choices.
Your views on H.R. 2 and H.R. 58 are requested. Copies of these
bills are enclosed to assist you in the preparation of your remarks.
Your comments should be submitted not later than August 14. Should
you have any questions regarding this request, please contact Maggie
O'Kane in the subcommittee office at 225-1037. We would appreciate
having the name and telephone number of the person to wham primary
authority for the preparation of these materials is delegated.
Richard Bolling
Chairman
Enclosures:
2
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:-
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"T-1 rry
Sincerely,
r
•
BOARD OF GOVERNORS
•
OF THE
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FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
September 3, 1981
PAUL A. VOLCKER
CHAIRMAN
The Honorable Charles E. Schumer
House of Representatives
Washington, D.C.
20515
Dear Mr. Schumer:
Thank you for your letter of July 28 enclosing a copy
of your letter to the New York Times. The Board of Governors
shares your concern relative to the maintenance of a compe
titive
financial environment. On July 8, Governor Gramley testified
on
mergers in the financial industry before the Subcommittee
on
Monopolies and Commercial Law of the House Judiciary Commi
ttee.
Rather than repeat his testimony, I am enclosing a copy of
his
statement and will just comment briefly on the points raise
d in
your New York Times letter.
With respect to the issue of the long run effects of
deregulation, I doubt that this country would ever evolv
e a
European style financial system. We have over 14,000 comme
rcial
banks alone, and even though there are many bank mergers each
year, many new banks are formed. In addition, the antit
rust laws,
which are incorporated in the Bank Merger Act of 1960 and
the
Bank Holding Company Act of 1956, should prevent the
development
of excessive nationwide concentration.
Moreover, despite recent mergers, we believe that the
financial system has become increasingly competitive. New produ
cts
and services have been developed, existing firms have been permitted to expand their services, and new firms are offering new
financial services. The result has been an intensified
level of
competition that has benefited consumers and business firms.
We
do not believe that such competition will eliminate the small
financial entrepreneur. Our studies, one of which is mentioned
in Governor Gramley's testimony, indicate that the small bank
can
compete quite profitably with much larger banks.
The Board remains vitally concerned with the implications
ot tinancial concentration for our political and social insti
tutions, and we will continue to examine mergers and other finan
cial
changes in terms of their potential impacts on the concentrat
ion
of financial resources.
Sip9erely,
Enclosure
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
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July 28, 1981
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The Hon. Paul Volcker
Chairman, Board of Governors
Federal Reserve System
Constitution Avenue, NW
Washington, D. C. 20551
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Dear Mr. Volcker:
Within the past month, the potential failure of a number of
"thrift" institutions has elicited a spate of articles and proposals
concerning the future composition of all of our financial institutions.
Myriads of suggestions have reached Congress proposing reorganization
of not only the thrift industry, but the commercial banking,
securities, and insurance industries as well. These proposals range
from complete deregulation of financial institutions to a variety of
tighter controls than now exist.
For this reason, I will be joining Representative Fernand St.
Germain, Chairman of the Financial Institutions Subcommittee, for
hearings in Washington on this subject. The hearings begin on July 28,
1981, and continue, after the August Congressional recess, through
September and October. I hope you will contact me if you have any
suggestions about who should testify.
I am also enclosing a copy of a letter published in the New York
Times a few months ago in response to what I thought was a rather
hasty editorial in support of quick removal of many financial controls.
I welcome your comments on the letter.
Sincerely,
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CHARLES E. SCHUMER
Member of Congress
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Enclosure
THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS
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I believe that these proposals, which if enacted would have an
immense impact on the national and international economies, have
received far too little private study and public comment. And, though
many groups have made specific proposals to benefit their particular
corner of the financial world, no one has yet developed an overall
blueprint for the future of our financial institutions. Before we
begin to tamper with the law, Congress should have a clear vision of
what it hopes to achieve.
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2;515
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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
Schumer, Charles. "If Financial Darwinism Is Allowed to Prevail." New York Times, April 27,
1981.
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
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BOARD OF GOVERNORS
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• •• •• •
PAUL A. VOLCKER
CHAIRMAN
September 3, 1981
The Honorable Ed Jones
Chairman
Subcommittee on Conservation, Credit,
and Rural Development
Committee on Agriculture
House of Representatives
Washington, D.C. 20510
Dear Chairman Jones:
Thank you for your letter of August 25 inviting testimony before your Subcommittee on the report to Congress prepared
by the Commodity Futures Trading Commission concerning various
aspects of the silver market during late 1979 and early 1980.
I am pleased to designate Mr. E. Gerald Corrigan,
president of the Federal Reserve Bank of Minneapolis, to appear
before your Subcommittee. Prior to becoming president of the
Minneapolis Bank, Mr. Corrigan served as my special assistant
and in this capacity was very much involved in our deliberations
with respect to the silver market.
Please let me know if I can be of further assistance.
Sin erely,
cc:
bcc:
The Honorable James M. Jeffords
Mr. Corrigan (w/cop
Mrs. Mallardi (2) ,/
CO:sep (WV -239)
of incoming letter)
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TENN.,
CHAIRMAN
BERKLEY BEDELL, IOWA
DAN GLICKMAN. KANS.
TOM DASCHLE S. DAK.
BYRON L DORGAN N. OAK.
DAVID R. BOWEN MISS.
TOM HARKIN, IOWA
GLI-P4N ENGLISH OKLA.
FLOYD J. FITNIAN. IND.
1-10P4 IL PANETTA, CALIF.
IL THOAAAS COLEMAN, MO.
PAT ROBERTS KANS.
JOHN L. NAPIER,
jOoti5e of 11epre.s'entatibr5
(Committee
Otgriculture
BERYL ANTHONY JR., ARK.
rwror_picx w.
RICNMOND, N.Y.
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JAMES M. JETTOROS, VT..
RANKING MINORITY MEMBER
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JOE SKIIrrI. N. 14tX.
SID MORRISON. WASH.
CLINT ROBERTS. II. OAK.
STIEVI GUNDERSON. WIS.
COLIMA [VANS. IOWA
WILLIAM C.. WAMPLER. VA,
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IMOLA ALLICIr.
0.11140ItITY CONSUL.TANT
Awn 1301, tongthortb 11.1oufst Office Aluabing
IROSEIIT A. CASHOOLLAR,
BTAFT DIRECTOR
Ulastington, AC. 20515
•
August 25, 1981
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The Honorable Paul A. Volcker
Chairman, Board of Governors
of the Federal Reserve System
Federal Reserve Building
Washington, D. C.
20551
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Dear Mr. Chairman:
On October 1, 1981, at 9:30 A.M. in Room 1302, Longworth House
Office Building, the House Agriculture Subcommittee on Conservation,
Credit, and Rural Development will hold a public hearing on the
report to Congress prepared by the Commodity Futures Trading Commission concerning various aspects of the silver market during late
1979 and early 1980.
As you know, Section 7 of P.L. 96-276 required this report by
the CFTC in conjunction with the Federal Reserve Board, the Department of the Treasury, and the Securities and Exchange Commission.
The report was delivered to Congress on May 29, 1981.
We would appreciate you, or your designee, appearing as a witness
during this hearing to advise the Subcommittee of your agency's role
in preparing the report and to discuss findings and conclusions contained in it.
For further information regarding this hearing, please contact
Robert Cashdollar, Staff Director of the Subcommittee, at 225-1867.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
With kindest regards and best wishes.
incerely
James M.
Ranking M no
Ed Jon
Chairman
y Member
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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
September 3, 1981
The Honorable John Heinz
Subcommittee on International Finance
and Monetary Policy
Committee on Banking, Housing and
Urban Affairs
United States Senate
Washington, D.C.
20510
Dear Chairman Heinz;
Enclosed is a copy of a report on foreign exchange
operations by the Treasury and the Federal Reserve covering
the period from February 1981 through July 1981. The report
will be printed in the September issue of the Federal Reserve
Bulletin. It is being released to the press for use in
tomorrow morning's newspapers.
Sincerely,
SZPaul A, Volcker
Enclosure
JRC:pjt
bcc: Hrs. Eallardi (2)
Identical letters also sent to:
Sen. Proxmire (ranking minority member of Senate Bkg. Subcmte. on
International Finance)
rN,04(
Chrmn. Patterson (House Bkg. Subcmte. on International
Investment-I—and —Mcrnutary—Rallay))
Vice Chairman Roger W. Jepsen, JEC
Clarence J. Brown (ranking minority—House side--JEC)
Lloyd Bentsen (ranking minority--Senate side--JEC)
•
•
•
September 3, 1981
The Honorable Henry S. Reuss
Chairman
Joint Economic Committee
Washington, D.C.
20510
Dear Chairman Reuss:
Enclosed is a copy of a report on foreign exchange
operations by the Treasury and the Federal Reserve covering
the period from February 1981 through July 1961. The report
will be printed in the September issue of the Federal Reserve
Bulletin. It is being released to the press for use in
tomorrow morning's newspap,rs.
Copies of the report are also being sent to the
Chairmen of other interested Committees. Aaditional copies
are enclosed for the use of members and staff of your
Committee.
Sincerely,
S/Paul A. VolckeE
Enclosures (30 copies)
Identical letters to:
Chairman Jake Garn, Senate Banking, 20 copies
Chairman St Germain, House Banking, 50 copies
JRC:pjt
bcc: Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
•
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BOARD OF
.30VERNORc_.3
THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
September 2, 1981
pAuL A.
voLCKER
CHAIRMAN
The Honorable Fernand J. St Germain
Chairman
Committee on Banking, Finance
and Urban Affairs
House of Representatives
Washington, D.C.
20515
Dear Chairman St Germain:
Your letter of September 1 asks about the
present status
of thrift industry use of the discount
window. As you know, consistent with the Monetary Control Act of
1980, the Federal Reserve
System extends credit at the discount wind
ow on the same terms and
conditions to banks and other depository inst
itutions offering
transactions accounts or nonpersonal time
deposits. Credit is
available for traditional short-term adju
stment purposes and, as
circumstances warrant, to meet longer-term
needs in the interest
of assuring the sound functioning of
depository institutions at
time of strains on liquidity. These prog
rams were set forth in
the revision of the Federal Reserve Boar
d's Regulation A, published
in September 1980.
As I previously noted, almost 500 thrifts as
a matter of
contingency planning had filed, or were in
the process of filing,
the general agreement needed before credit
can be provided under
any Federal Reserve lending program. This
number has now grown to
about a thousand. Such agreements are a norm
al part of the System's
relationship with eligible depository institut
ions, whether or not
they actually borrow, and virtually all memb
er banks have long had
them in place.
In the light of several requests for extended
credit by
thrifts, the Federal Reserve recently anno
unced discount rates
applicable to extended credit for deposito
ry institutions facing
sustained liquidity pressures. Applications
for such credit thus
far have been fairly limited, but a more
sizable number of thrifts
have indicated they plan to apply. Many
have specifically asked
about the conditions under which they woul
d be eligible to borrow
under the extended credit program.
In all its lending programs, the Federal Rese
rve acts
essentially as lender of "last resort"-that is, borrowing institutions are expected to borrow from the Fede
ral Reserve for liquidity
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
'The Honorable Fernand J. St Germ:lin
Page Two
pul- i,osc..; only when other sources of funds are
not reasonably availablc. This long established principle grows,
among other considerations, out of need to reconcile Federal Res
erve lending policies
with the basic requirement that the gro
wth of Federal Reserve
credit--of which Federal Reserve loans
are one component--be
restrained to amounts appropriate to mee
t objectives with respect
to monetary and credit expansion.
Accordingly, to be eligible for discount
window credit at
the Federal Reserve, a depository instit
ution must show that it has
made reasonable efforts, under prevai
ling market circumstances, to
maintain fund flows from usual source
s, including special industry
lenders. Institutions which, despite suc
h efforts, are experiencing
sustained liquidity pressures may obtain
advances under the extended
credit program. The discount rate applic
able to such credit at
present is 14 percent for the first
60 days, 15 percent for the
next 90 days, and 16 percent thereafte
r. Advances may be outstanding
for up to 9 to 12 months, and if necess
ary, credit may be extended
beyond that period. However, as borrow
ing is more extended, more
rigorous or definite measures to assure
ultimate repayment of the
loan would be required. The credit will
be fully collaterali.zed, - "
with collateral valued at 90 percent
of its estimated market price.
The amount of funds available to an ind
ividual institution
will, of course, depend on an assessment
of its need, in consultation with the institution's primary superv
isor or special industry
lender, as appropriate. If an instit
ution is a member of the
Federal Home Loan Bank System, it is
expected that its local Home
Loan Bank will maintain its outstanding
credit to the institution
and will ordinarily also provide a portio
n of the new borrowing
need. Other borrowing institutions are
expected, as may be reasonable
under existing market circumstances, to
show evidence of a continuing
effort to maintain inflows from deposits
and other market sources,
and as appropriate to draw on existing
bank lines. Moreover, while
obtaining extended credit at the discou
nt window, bbrrowers are
expected to draw upon internal liquidity
(including Federal funds
sold) to the extent such liquidity is in
excess of their minimum
operating needs.
Borrowing under the extended credit pro
gram may also
involve a number of other asset adjust
ments by the borrower. Sales
of longer -term assets (such as Govern
ment and Government-related
securities, corporate bonds, or mortgages
) will be encouraged where
they can be accomplished without unreas
onable loss. Outstanding
loan commitments may be accommodated, and
some minimal new lending
might be needed for an institution to rem
ain viable in serving its
immediate community and existing deposi
tors or to meet requirements
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Federal Reserve Bank of St. Louis
•
•
The Honorable Fernand J. St Germatn
Page Three
-ith issuance of "All-Cavers" certificates. Maintaining
a prosonc,_: in the marhet in "mortgage banh.ing"--that is, originating
and promptly placing loans with other investors--would also be consistent with the program. However, borrowing institutions would
not be expected to undertake loan expansion programs beyond this
framework.
When the sustained liquidity pressures that caused the
institution to borrow from the Federal Reserve abate, the institution is expected promptly to begin reducing its indebtedness to
the rederal Reserve. To insure full undcrntanding and effective
administration of the program, each borrower is expected to work
out a written plan with the Federal Reserve Bank that details how
it expects to strengthen its financial position and encourage a
reflow of funds from other sources. The Federal Reserve will, in
the process, consult closely with the borrower's applicable supervisory agency.
I am enclosing the administrative guidance provided Federal
Reserve Banks as a framework for appraising individual applications
under the extended credit program. It should be understood, of
course, that discretion and judgment must necessarily be exercised
by the lending officers familiar with the circumstances of the
particular borrower.
Sincerely,
rt0,1
Saaml A. YuIcket
Enclosure
SHA:PAV:pjt (0-N-242)
bcc: Mr. Axilrod
Mrs. nallardi (2)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
Administrative Guidance To Aid Federal Reserve Banks in
Implementing Provisions of Regulation A Pertaining to
the Extended Credit Program for Depository Institutions
Facing Liquidity Strains
Eligibility.
To be eligible for extended Federal Reserve credit,
an institution will have to show that it is experiencing sustained liquidity
pressures despite reasonable efforts, under prevailing market circumstances,
to maintain fund flows from usual sources, including special industry lenders.
Operating plan.
To insure effective administration of the program,
each borrower as a condition of the loan is expected to work out a written
plan with the Federal Reserve Bank, spelling out a specific method for
strengthening its financial position and for encouraging a reflow of funds
from private sources within a reasonable period of time.
In developing this
plan, the Federal Reserve will consult closely with, and expect concurrence
from, the borrower's applicable supervisory agencies.
Among other things,
the plan will include a financial forecast that identifies the institution's
expected operating plans, its projected funding needs, the economic
assumptions on which these projections are based, and the specific steps
the institution intends to take to improve its liquidity position and
repay its borrowing.
If the urgency of a borrower's need for funds provides
insufficient time for working out the full details of the borrowing plan,
Federal Reserve credit will at the outset be advanced on a day-to-day basis
until the plan for extended borrowing can be completed.
Loan amount.
Limits on loan amounts should not be set arbitrarily,
given the need for flexibility in accommodating the specific needs of individual institutions.
However, in cases where borrowings from the Federal
Reserve are relatively heavy, monitoring of loan performance, in concert
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
- 2
with the borrower's primary supervisor and insurer, will have to be
especially rigorous.
Loan duration.
In general, advances under the extended credit
program could be expected to be renewed from time to time, but it is anticipated that these advances ordinarily would not be renewed beyond nine to twelve
months.
However, if a borrower's need justifiably continues beyond a year,
the credit may be extended.
As a matter of principle, the more protracted
the borrowing, the firmer the measures the borrower will be required to
take to insure ultimate repayment of the loan.
Loan contracts will be
drafted in the form of demand obligations, with repayments consistent with
these policy Guidelines.
Use of other sources of funds.
Institutions borrowing under this
program will be expected to evidence a continuing effort to maintain deposit
inflows.
Further, to the extent that borrowing needs result from erosion
in other than consumer deposits, borrowers will be expected to evidence a
continuing effort to refund discount window credit in these nonconsumer
deposit markets where reasonable terms can be obtained.
These other markets
include, but are not limited to, commercial bank back-up lines, repurchase
agreements, mortgage warehousing, and large denomination CD's.
Reliance on internal liquidity.
While using the discount window
for this purpose, borrowers will be expected to trim their holdings of cash
equivalents (including federal funds sold) to the minmum levels consistent
with their operating needs.
Also, to the extent practicable, they will
be expected to apply temporary excess cash balances to the reduction of
discount window loans.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
Sales of assets.
To minimize drawings of other extended credit,
borrowers will be encouraged to cover as much of their funding need as
feasible through the sale of assets (such as Government and federal agency
securities, GNMA pass-through certificates, corporate securities, and
mortages) where such sales can be accomplished without experiencing unreasonable market losses.
Limits on investment growth.
Users of the window under this
program will generally be expected to eschew any increase in security
investments while borrowing.
In addition, cash reflow from maturing
obligations should be used, to the extent feasible, to reduce reliance on
the discount window.
Limits on expansion of loan portfolio.
While obtaining discount
window credit under this program, institutions will be permitted to
accommodate outstanding loan commitments.
While some minimal new lending
might be needed for the institution to remain viable in serving the immediate
community and existing depositors or to meet requirements associated with
issuance of "all-savers" certificates, the institution will not be permitted
Renewed forward commitments may be per-
to engage in an expansion program.
mitted in the context of a prearranged plan when operating improvements
indicate clearly that an institution can repay its debt to the Federal
Reserve in the relatively near-term.
Collateral procedures.
Loan collateral should be held either
under a third party custody arrangement or, if some Reserve Banks believe
this to be necessary, at the Reserve Bank itself.
Collateral should be
valued at 90 percent of its estimated market price and revalued frequently,
perhaps monthly.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
FERNAND J. ST GERMAIN, R.I.. CHAIRMAN
HENRY S. REUSS', WIS.
HENRY D. GONZALEZ, TEX.
JOSEPH G. MINISH, N.J.
FRANK ANNUNZIO, ILL.
PARREN J. RdITCHELL, MD.
WALTER E. EAUNTROY, D.C.
ST,
.:PAEN L. NEAL, N.C.
JERRY M. PATTERSON. CALIF.
JAMES J. BLANCHARD, MIcH.
CARROLL HUBBARD. JR., KY.
JOHN J. LAFALCF, N.Y.
DAVID W. EVANS, IND.
NORMAN E. D'AMOUPg4. N
STANLEY N. LUNolt,t •
MARY ROSE OAKAR. 0$4‘(,)
JIM MATTOX, TEX.
BRUCE F. VENT°. MINN.
DOUG BARNARD, JR., GA.
ROBERT GARCIA, N.Y.
MIKE LOWRY, WASH.
CHARLES E. ScHUMER. N.Y.
BARNEY FRANK, MASS.
DILL PATMAN, TEX.
WILLIAM J. COYNE. PA.
WEENY H. HOVER, MD.
•
•
U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON BANKING,'NANCE AND URBAN AFFAIRS
NINETY-SEVENTH CONGRESS
2129 RAYBURN HOUSE OFFICE DUILDINC3
WASHINGTON. D.C. 20515
September 1, 1981
J. WILLIAM STANTON. OHIO
CHALMERS P. WYLIE. OHIO
STEWART- B. McKINNEY. CONN.
GEORGE HANSEN, IDAHO
HENRY J. HYDE, ILL.
JIM LF.ACH, IOWA
THOMAS D. EVANS, JR., DEL.
RON PAUL, TEX.
FD BETHUNE. ARK.
NORMAN D. SHUMWAY, cAur.
STAN PARRIS. VA.
ED WEBER, OHIO
BILL McCOLLUM. FLA.
GREGORY W. CARMAN. N.Y.
GEORGE C. WORTLEY, N.Y.
MARGE ROUKEMA, N.J.
DILL LOWERY. CA1_IF.
JAMES K. COYNE, PA.
DOUGLAS K. DEREUTER. NEBR.
223-42.47
Honorable Paul Volcker
Chairman, Board of Governors
Federal Reserve System
Washington, D. C. 20551
Dear Mr. Chairman:
You are aware of my intense interest in the use of the discount
window of the Federal Reserve System by the savings and loan industry
as authorized by legislation. I am most interested in receiving, as soon
as they are final, your regulations governing the use of the discount window.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Sincerely,
Fer-nand J. St Germain
Chairman
.• •• •• •
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OOARD OF -30VERNORS
m THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
September 2, 1981
PAUL A. VOLCKER
CHAIRMAN
The Honorable Jake Garn
Chairman
Committee on Banking, Housing
and Urban Affairs
United States Senate
Washington, D.C.
20510
Dear Chairman Garn:
When last I appeared before the Senate Banking
Committee
on July 22, you questioned me about thrift industry
access to the
Federal Reserve Discount Window.
In that context, I would like to update you on
the status
of thrift industry use of the discount window.
As you know, consistent with the Monetary Control Act of 1980, the
Federal Reserve
System extends credit at the discount window on
the same terms and
conditions to banks and other depository inst
itutions offering
transactions accounts or nonpersonal time deposits
. Credit is
available for traditional short-term adjustment
purposes and, as
circumstances warrant, to meet longer-term need
s in the interest
of assuring the sound functioning of depository
institutions at
time of strains on liquidity. These programs were
set forth in
the revision of the Federal Reserve Board's Regu
lation A, published
in September 1980.
As I previously noted, almost 500 thrifts as a
matter of
contingency planning had filed, or were in the
process of filing,
the general agreement needed before credit can
be provided under
any Federal Reserve lending program. This numb
er has now grown to
about a thousand. Such agreements are a normal
part of the System's
relationship with eligible depository institut
ions, whether or not
they actually borrow, and virtually all member
banks have long had
them in place.
In the light of several requests for extended
credit by
thrifts, the Federal Reserve recently announced
discount rates
applicable to extended credit for depository inst
itutions facing
sustained liquidity pressures. Applications for
such credit thus
far have been fairly limited, but a more sizable numb
er of thrifts
have indicated they plan to apply. Many have spec
ifically asked
about the conditions under which they would be eligible
to borrow
under the extended credit program.
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Federal Reserve Bank of St. Louis
•
•
The Honorable Jake Garn
Page Two
in all its lending programs, the Federal Reserve
acts
essentially as lender of "last resort"--that is, borr
owing institutions are expected to borrow from the Federal Rese
rve for liquidity
purposes only when other sources of funds are not
reasonably available. This long established principle grows, amon
g other considerations, out of need to reconcile Federal Reserve
lending policies
with the basic requirement that the growth of
Federal Reserve
credit--of which Federal Reserve loans are one
component--be
restrained to amounts appropriate to meet obje
ctives with respect
to monetary and credit expansion.
Accordingly, to be eligible for discount window
credit at
the Federal Reserve, a depository institution must
show that it has
made reasonable efforts, under prevailing market
circumstances, to
maintain fund flows from usual sources, including
special industry
lenders. Institutions which, despite such efforts,
are experiencing
sustained liquidity pressures may obtain advances unde
r the extended
credit program. The discount rate applicable to such
credit at
present is 14 percent for the first 60 days, 15 perc
ent for the
next 90 days, and 16 percent thereafter. Advances
may be outstanding
for up to 9 to 12 months, and if necessary, credit may
be extended'
beyond that period. However, as borrowing is more
extended, more
rigorous or definite measures to assure ultimate
repayment of the
loan would be required. The credit will be full
y collateralized,
with collateral valued at 90 percent of its estimate
d market price.
The amount of funds available to an individual inst
itution
will, of course, depend on an assessment of its
need, in consultation with the institution's primary supervisor
or special industry
lender, as appropriate. If an institution is a memb
er of the
Federal Home Loan Bank System, it is expected that
its local Home
Loan Bank will maintain its outstanding credit to
the institution
and will ordinarily also provide a portion of the new
borrowing
need. Other borrowing institutions are expected
, as may be reasonable
under existing market circumstances, to show evidence
of a continuing
effort to maintain inflows from deposits and other
market sources,
and as appropriate to draw on existing bank lines.
Moreover, while
obtaining extended credit at the discount window,
borrowers are
expected to draw upon internal liquidity (includi
ng Federal funds
sold) to the extent such liquidity is in excess of
their minimum
operating needs.
Borrowing under the extended credit program
may also
involve a number of other asset adjustments by the
borrower. Sales
of longer-term assets (such as Government and
Government-related
securities, corporate bonds, or mortgages) will
be encouraged where
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
"rhe Honorable Jake Garn
Page Three
accomplished without unreasonable los
s. Outr:tanding
may be accommodated, and some inini:-.11
miy;.i. be n,2e..ied for an institution to remain
viable in serving its
immediate community and existing depositors
or to meet requirements
associated with issuance Of "All-Savers"
certificates. Maintaining
a presence in the market in "mortgage bankin
g"--that is, originating
and promptly placing loans with other inv
estors--would also be consistent with the program. However, bor
rowing institutions would
not be expected to undertake loan expansion
programs beyond this
framework.
t7,1:1
When the sustained liquidity pressures
that caused the
institution to borrow from the Federal
Reserve abate, the institution is expected promptly to begin reduci
ng its indebtedness to
the Federal Reserve. To insure full unders
tanding and effective
administration of the program, each borrow
er is expected to work
out a written plan with the Federal Reserv
e Bank that details how
it expects to strengthen its financial pos
ition and encourage a
reflow of funds from other sources. The
Federal Reserve will, in
the process, consult closely with the bor
rower's applicable supervisory agency.
I am enclosing the administrative guidan
ce provided Federal
Reserve Banks as a framework for apprai
sing individual application
under the extended credit program. It
should be understood, of
course, that discretion and judgment mus
t necessarily be exercised
by the lending officers familiar with
the circumstances of the
particular borrower.
Sincerely,
S/Paul A Volcker
Enclosure
SHA:PAV:WRM:pjt 0V-3 242)
Inc: Mr. Axilrod
Mrs. Mallardi (2)
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Federal Reserve Bank of St. Louis
•
•
September 1, 1981
The ifonorahle Dale Bumpers
United States Senate
Committee on Appropriations
Vashington, D. C. 20510
Dear Senator Bumpers:
I an pleased to respond to your request for comment on a
letter that you received from Mr. A. P. Eason, President of First
Federal Savings nn,i Loan Association of Fayetteville, Arkansas. In
his letter, Mr. Eason expressed his opposition to recent prnposals by
the Depository Institutionn Deregulation Committee thnt contemplate
increasen in certain interest rate ceilings, includine those on pass—
book—type savinls accounts.
As you know, the Depository Institutions Dereeuletion Act of
1980 requires the Committee to vote by September 30 of this year on
whether to raise the rate on passbook savings nnd similar accounts by
at least one guns-ter of a percentage point. To foster public input
on this issue, the Committee decided at its June 25 meeting to ask for
public comment on a proposal to raise the ceiline by 5 percentage points.
I would stress that the proposnl represents but one of many possible
options And did not reflect
consensus of the thinking on this issue at
the June 25 neeting. I have not made up my own mind on this question,
but I am reviewing the many comments that hnve been received and the
other information thnt haa been r,enarated.
The next meeting of the Committee is scheduled for September 22.
Sincerely,
00411
UB:cak
0231
cc: Mr. Ettin
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Federal Reserve Bank of St. Louis
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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
D.C. 20510
EF.NE.1141. Arta.
D'INITCT01111
r. PA `., N1TY STAFF' DIRECTO"
[
.11
//°
Mr. Paul Volcker, Chairman
Federal Reserve Board
20th and Constitution Avenue
20551
Washington, D.C.
Dear Mr. Volcker:
Enclosed is a letter from Mr. A. P. Eason, Jr.
I am sure Mr. Eason
concerning recent DIDC proposals.
would be interested in your response to his concerns.
Thank you for your attention and assistance in this
matter.
Sincerely,
Dale Bumpers
DB:bpm
Enclosure
. Paul Volcker L.-
4)
.r
.
first fAeral savings
•
AND LOAt. A!--,!--,0c:IATION OF FAYE T
1st PLACE
▪
P O. BOX 1647
-
irvia I
FAYETTEVILLE. ARKANSAS 72701
•
501 / 521 3424
July 28, 1981
Mr. Gordon Eastburn
Acting Executive Secretary
repository Institutions Deregulation Committee
koc,-, 1954, Department of the Treasury
15th Street and Pennsylvania Avenue, N.W.
.,ishington, D. C.
20220
Re: Docket Number D-0020 and D-0021
Lear Mr. Easturn:
I am gravely concerned about the most recent proposals of the DIDC.
As I ar:.
sure you know, the savings and loan industry is in serious trouble.
If these pror9sals are enacted, it would greatly accelerate the industry's
difficulty, and
might possibly result in the elimination of the savings and
loan business as a
viable part of the financial structure of our country.
I must relate these proposals as to how they would directly affec
t our institet.ion. I organized this association and opened for business
in November of 1953.
Our current assets are slightly in excess of $90,000,000.
ln our twenty eight and
c:,e half years of operation, I feel that we have done
much to benefit the Northwest
Akarsas area. At the time we were making long-term real estat
e loans, we were
alsG conducting a conservative operation and building.our reer
ves so they have
elwy7-, been in excess of the Federal Home Loan 5ank requiremen
ts. The changes in
the interest rates over the past year and . a half have rade
it imnossible for us to
cntinue to have a profitable operation. In fact, we are curre
ntly losing over
$100,000 a month of our net worth. If the latest proposals are adopt
ed, this could
eujly double the amount of our loss.
I do not believe that increasing the passbook rate, or any of
the other prop:,sals, will do anything other than increase our cost of
money at a time we can ill
afford to have it happen. I would urge you to defer any
further rate increases
until we have had time to restructure our assets so we
can properly compete for fnnds.
Sincerely,
First Federal Savings and Loan
Association of Fayetteville
A. P. Eason, Jr., Pr sident
cc: Senator Dale Bumpers
Senator David Pryor
Congressman John Paul Hanuaerschmidt
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Federal Reserve Bank of St. Louis
MALL BPANCH
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tr,VA•4' AS 72701
14114
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