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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CONGRESSIONAL January and February 1983 Collection: Paul A. Volcker Papers Call Number: MC279 Box 12 Preferred Citation: Congressional Correspondence,January-February 1983; Paul A. Volcker Papers, Box 12; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c458 and https://fraser.stlouisfed.org/archival/5297 The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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Mudd Manuscript Library .lden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) muddaprinceton.edu https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Congressional January & February 1983 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis February 25, 1983 The Honorable Alan Cranston United States Senate Washington, D. C. 20510 Dear Senator Cranston: I am pleased to furnish you with a copy of my responses to the written questions you submitted in connection with the hearing held on February 16 before the Senate Banking Committee. I have also furnished a copy of these responses to the Committee for inclusion in the record of the hearing. Please let me know if I can be of further assistance. Sincerely, Enclosures CC: Committee on Banking, Housing and Urban Affairs United States Senate CO:vcd bcc: Mr. Prell Mrs. Mallardi (2) e iv https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Question 1: I note your mention (page 22) of the lack of "tools" to influence closely total flows of credit. Does this imply that you may be reconsidering the usefulness of credit control legislation? No. I think credit controls are too cumbersome for use in general economic stabilization policy; indeed, as we learned in 1980, they can provide a shock to the economy that makes the proper conduct of traditional monetary and fiscal policies more complicated. Moreover, credit controls are costly to implement and potentially very costly in terms of their undesirable distortive effects on financial and economic decisionmaking at the "micro" level. There may be emergency circumstances in which a credit controls approach would be useful, but I do not foresee such use as a matter of general economic policy. g% t D e'l https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Question 2: You have described a situation in which cash-liquidity is a better investment than capital assets. Is this good for the economy? I don't think so. How long can we keep this up and still remain competitive? Clearly, a circumstance in which businesses generally perceive it to be more desirable to invest in liquid assets than in new plant and equipment is not one that serves the interests of economic growth and international competitiveness. At the present time, in light of the deterioration of balance sheet strength that has occurred over the past few years and in light of the low levels of industrial capacity utilization, it would be understandable if many firms were to be inclined to devote ally a good part of any gains in cash flow to the repayment of debt and the accumulation of liquid assets; however, this can not be the major thrust of corporate strategy for long it we are to have a strong, well-balanced economic expansion. The chances of a prolongation of such hesitance on the part If businesses are much greater if they feel uncertain about the future stability of the economy and financial markets and thus see investment in real assets as unduly risky; this is the reason I put so much stress In the need to pursue monetary and fiscal policies that provide reasonable hope that the disinflationary process will be sustained and that the S ressures of the federal government on financial markets will be alleviated. I. AMO https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis February 25, 1983 The Honorable William Proxmire United States Senate 20510 Washington, D.C. Dear Senator Proxmire: During the hearing before. the Joint Economic Committee on January 27, 1983, you requested details supporting the argument that the kind of policies the Federal Reserve is advocating with regard to international lending will not result in a greater demand on the limited credit that is available. For your information, I am pleased to enclose a copy of the response I submitted to the JEC for inclusion in the record of the hearing. Please let me know if I c.an be of further assistance. Sincerely., Enclosure CO:NS:pjt bcc: Sam Pizer Mrs. Mallardi (2) • • Insert page 140 (JEC hearing of January 27, 1983) Chairman Volcker subsequently submitted the following information in response to a request by Senator Proxmire that he "furnish the Committee with details supporting the argument that he's made that the kind of policies he's advocating will not result in a greater demand on the limited credit that we have available." There are a number of ways to assess the effects on domestic credit markets of the increase in international bank lending that has been suggested in connection with the adjustment programs of the major international borrowers among the non-OPEC developing countries Argentina, Mexico, and Brazil. One approach is in the context of the overall balance of payments; a second is in terms of the specific amounts involved for these countries; and a third is in terms of the repercussions on domestic credit markets of a breakdown of private international credit flows. In the context of the overall balance of payments, any increase in private bank credit has only limited domestic credit implications in the short run. The outflow's first effect would be to tend to lower the exchange value of the dollar, which would lead in time to larger net U.S. exports. But the effect on the trade balance would take some time to develop, and until it did the borrowed funds would have to be held, either by the original borrowers or by others, in U.S. credit markets. 1 https://fraser.stlouisfed.org 11.1nerggr, • Tr•.,...Federal Reserve Bank of St. Louis ••••••••••••••• - -- • ••••••-••• ••"•-••••••-e.e• • ^ ' -2For instance, dollar credits extended to foreigners and not spent immediately for U.S. exports would usually be converted into local currency to finance domestic business. The purchaser of the dollars could be a private party or a government that wants to avoid appreciation of its currency or add to its reserves. In the latter case, we would quite often see that government buying U.S. Treasury obligations. Cutting through the intermediary stages, the additional lending to foreigners (or a large part of it) tends to return to some sector of the U.S. credit market. In this example, the U.S. banking system may hold larger claims on foreigners, but it has had to finance less Government debt, so that the amount of credit available to private domestic borrowers would not change much. In other cases, the capital inflow precedes the capital outflow. In the longer run, if there is a large persistent increase in net capital outflows from the United States the dollar will be lower in the market, our net exports will be larger, and the effect on U.S. business would be the same as if the credit had gone directly to U.S. exporters to finance their foreign sales. Thus, even if the incremental bank lending in connection with these programs were quite large, it would not in itself create any difficulties for domestic borrowers. How- ever, the additional bank lending contemplated under the various arrangements between banks and major debtors is in fact a considerable reduction from the rate of lending over the past few years. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -3In the negotiations that have taken place between commercial banks and the authorities of Mexico, Brazil and Argentina, the banks have agreed that, if the borrowers are following the adjustment programs agreed with the IMF, the banks would provide net new financing of about $11 billion. In addition, repayments on existing debt have been postponed. That amount of new financing would be less than half of the average annual increase in bank claims on these countries in the 1979-81 period (see table). It would represent a 7-1/2 percent increase over the amount outstanding at the middle of 1982, compared with average rates of increase of nearly 30 percent in the 1979-81 period. U.S. banks account for about 35 percent of total bank claims on these three countries, and it may be assumed that their share of the $11 billion of new financing would be roughly in that proportion, or about $4 billion. That amount is less than half the amount loaned to these countries on average in 1980-81, and represents a considerable deceleration from the 25 percent rate at which U.S. banks were increasing their claims on these countries in 1980-81. As an indicator of the relative scale of lending to these countries by U.S. banks, such lending can be compared to total assets. That comparison for the largest banks is made in the attached table, which shows the ratio rising from 1979 to mid-1982, and reaching 5.4 percent at that date. These largest banks account for about 60 percent of all lending to these countries by U.S. banks, and most likely would account for a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -4somewhat larger portion of the $4 billion increase in prospective U.S. bank lending to these countries. At that rate, the increase indicated for 1983 would represent not more than 6 percent of the likely increase in the assets of the banks for the year. In the 1979-82 (June) period the increase in claims on these countries by the nine banks represented about 15 percent of the total increase in their assets. Finally, the moderate further extensions of foreign credit that are involved in these programs may very well be essential for the maintenance of a healthy flow of bank credit in our domestic credit market. A sudden cut off of lending by U.S. and foreign banks to the countries with severe liquidity problems could force them to suspend all servicing of their debts. That event would trigger write-offs of a large amount of banks' assets, weakening their capital base and most likely causing them to slow down the expansion and raise the cost of domestic credit that would normally be taking place. It would be a serious error to take a risk of that kind of blow to our recovery efforts when there is a good chance that the liquidity problems of these countries can be overcome with careful management. A more general point may be added. There are very significant feedbacks from the economies of other countries to the pace of economic activity in the United States. Should a sudden contraction of foreign lending occur, the economies of some of our important trading partners would be forced to contract abruptly. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis This could mean another year of declining U.S. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -5exports, after a year in which the weakness of the external sector was a major factor in the slowdown of the U.S. economy. In that perspective, a relatively small financing flow may well have a widespread positive effect on the U.S. economy. Attachment • Bank Claims on Argentina, Brazil and Mexico (amounts in billions of dollars; end of period) 1975 1976 1977 1978 1979 1980 1981 June 1982 Total U.S. banks Non-U.S. banks U.S. banks % of total 31.5 18.7 12.8 54.5 42.5 24.7 17.8 53.3 50.2 25.8 24.4 49.7 63.2 26.8 36.4 39.8 83.0 29.9 53.1 36.1 108.1 37.0 71.1 35.9 134.5 46.7 87.8 36.6 145.0 52.4 92.6 36.7 Increase, total U.S. banks Non-U.S. banks n.a. n.a. n.a. 11.0 6.0 5.0 7.7 1.1 6.6 13.0 1.0 12.0 19.8 3.1 16.7 25.1 7.1 18.0 26.4 9.7 16.7 10.5 5.7 4.8 Increase, percent, total U.S. banks Non-U.S. banks n.a. n.a. n.a. 34.9 32.1 39.1 18.1 4.5 37.1 25.9 3.9 49.2 31.3 11.6 45.9 30.2 23.8 33.9 24.4 26.2 23.5 7.8 12.2 5.5 15.6 16.4 18.2 22.7 27.4 30.5 372.5 422.5 486.1 531.0 564.6 566.3 4.2 3.9 3.7 4.3 4.9 5.4 Claims of nine largest U.S. banks Total assets of nine largest U.S. banks Ratio: Claims on three • countries to total assets of the nine banks • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SWIM https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis February 25, 1983 The Honorable Steve Neal Bethesda Naval Medical Center Room 22, Ward GE Bethesda, Maryland 20014 Dear Steve: I'm delighted to learn that your surgery was successful, and I send you my best wishes for a complete and speedy recovery. Sincerely, cc .• https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis February 22, 1983 The Honorable Edward Zorinsky United States Senate 20510 Washington, D.C. Dear Senator Zorinsky: Thank you for your recent letter recommending Mr. P. J. Morgan as a possible director of the Omaha Branch of the Federal Reserve Bank of Kansas City. We maintain a constant search for talented individuals for possible service in these positions, and we certainly appreciate having his biographical information to draw on in the future. I have also taken the liberty of sending a copy of your letter to Mr. Roger Guffey, the President of the Federal Reserve Bank of Kansas City, so that he too will be familiar with Mr. Morgan's qualifications. Sincerely, RER:pjt (#V-19) bcc: Ms. RMI6MXKXMN Robinson Mr. Allison " , Mrs. Mallardi (2)t- • Action assigned Mr. Allison; info copy to V. C. Martin MM. FOREIGN RELATIONS COMMITTEE EDWARD ZORINSKY NEBRASKA SUBCOMMITTEES, 431 RUSSELL SENATE OFFICE BUILDING RANKING MINORI TY MEMBER WESTERN HEMISPHERE AFFAIRS 'I (202) 224-6551 'Zenifeb ,Sfafez Zonate COMMITTEE: ARMS CONTROL AND INTERNATIONAL OPERATIONS EUROPEAN AFFAIRS AGRICULTURE, NUTRITION. AND FORESTRY WASHINGTON, D.C. 20510 DISTRICT OFFICES. SUBCOMMITTEES: 8311 FEDERAL BUILDING RANKING MINORITY MEMBER 215 NORTH 17TH STREET AGRICULTURAL CREDIT AND RURAL ELECTRIFICATION OMAHA. NEBR. 68102 (402) 221-4381 AGRICULTURAL PRODUCTION, MARKETING AND STABILIZATION OF PRICES 100 CENTENNIAL MALL, NORTH LINCOLN. NEBR. 68508 (402) 471-5246 FOREIGN AGRICULTURAL POLICY 1811 WEST 2ND STREET GRAND ISLAND, NEBR. 68801 (308) 381-7251 February 2, 1983 The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System 2055 Washington, DC Dear Mr. Vol 77) er: I am writing today to respectfully request your consideration regarding the appointment of Mr. P.J. Morgan to the Omaha branch of the Kansas City Federal Reserve Bank Board. Mr. Morgan is president of the P.J. Morgan Company based in Omaha, Nebraska. I have known P.J. Morgan for many years both personally and professionally and feel his knowledge and expertise in the extenarea of finance would be an asset to the Board. He has an communisive background in finance, administration, management and us cations. His memberships to service organizations are numero ted and he is highly respected in his community for his dedica service. I feel you He would be totally committed to the Board's goals and give him would benefit from his service. Any assistance you can y appreciated. in his effort to obtain an appointment will be greatl or if I would welcome an opportunity to discuss his credentials, me. I can assist in any way, please feel free to call on n. Thank you very much for your time and consideratio Since l -4,/,',/ Zor sky Edwa UnAed St es Senat EZ/jam/ac Enclosures https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 personally identifiable information. Citation Information Document Type: Resume Citations: Number of Pages Removed: 2 Resume, P.J. Morgan, 1983. Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org S Pehruary 17, 1q93 The Honorable Frank Annunzio Chairman Subcommittee on Consumer Affairs and Coinage Committee on Banking, Finance and urban Affairs House of Peoresentatives uashington, D. C. 20515 near Chairman Annunzio! Thank you for your letter of February 8 concerning the advertisement of money market deposit accounts ("W1DAs") and "Super NOW" accounts by depository institutions. You indicated that several depository institutions are not clearly disclosing the terms of these accounts in that they are not including information concerning the minimum balance requirements in the "fine print" of their advertisements. You asked for information concerning any steps the Federal Reserve may have taken concerning any advertisements of this type. The Board's Regulation 9 currently provides that member bank advertisements for deposit accounts must be accurate and not misleading. In addition, the Roard has issued an interpretation which requires member banks to fully disclose the method by which interest on a deposit account will he calculated, including any service charges and a description of any conditions under which the depositor will not earn interest. The staff has been reviewing these advertising regulations to determine whether any changes are necessary in light of an environment where most accounts are deregulated. I have asked the staff to survey the Reserve Banks in order to determine the extent to which any advertisements of the type you have described have been made by member banks and to determine the types of actions that have been taken. I will be pleased to forward the results of the survey to you as soon as possible. Sincerely, PSP:vcd (V-23) bcc: Mr. Bradfield Mr. Pilecki Mr. Schwartz Legal Records (2) Mr. McAfee (w/incoming to be forwarded to Reserve Banks) Mrs. Mallardi (2), https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Action assigned Mr. Bradfield FtON PAUL. TEX. THOMAS B. EVANS, JR.. DEL. CHALmERS P. WYLIE, OHIO GREGORY W. CARMAN, N.Y. FRAIIK ANNUNZIO. ILL., CHAIRMAN FERNAND J. ST GERMAIN, R.I. rIENRY B. GONZALEZ, TEX. JOSEPH G MINISH, N.J. ' 'BILL PATMAN. TEX. STENY H. HOVER. MD. U.S. HOUSE OF REPRESENTATIVES NINETY—SEVENTH CONGRESS CURTIS A. PRINS, STAFF DIRECTOR SUBCOMMITTEE ON CONSUMER AFFAIRS AND COINAGE OF THE TELEPHONE 226-3280 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS ROOM 212 HOUSE OFFICE BUILDING ANNEX No. 1 WASHINGTON, D.C. 20515 I February 8, 1983 Honorable Paul A. Volcker Chairman Federal Reserve Board 20th Street amd Constitution Avenue, N.W. Washington, D.C. 20551 Dear Mr. Chairman: The introduction of money market savings accounts on December 14, 1962, and super NOW accounts on January 5, 1963, have been announced with great fanfare and much advertising by financial institutions. Unfortunately, some of those advertisements require the consumer to read them with a close eye on the small print. The majority of the advertisements announce above-market interest rates in large type. The consumer needs to read the smell print very carefully to learn the restrictions and limitations on the high interest. In some cases the high rates are offered for only a short period. In other cases the rates only apply there to balances over certain amounts. Still cther advertisements mention that may be service charges in some circumstances without mentioning the amount of these fees or the conditions under which they will be imposed. Such advertisements would appear to be unfair, misleading, and deceptive. I fear that these advertisements may be doing a serious disservice to ry consumers. It is the obligation of the Federal financial institution regulato agencies to assure that consumers are not misled by advertisements for the new accounts. Please inform me of the steps your agency has taken to monitor the advertisements and assure that they are not deceiving consumers. If you have taken any actions, either formally or at the staff level regarding certain advertisements, please send me copies of the advertisements and the actions your agency has taken. With every best wish, Sincerely, i4;40,04?"4/ Frank Annunzio Chairman (-1 0 February 16, 1983 The Honorable Jim Wright Malority Leader House of Representatives 20515 Washington, P.C. Dear Mr. Wright: The Board of Governors of the Federal Reserve System is pleased to forward to you its Monetary Policy Report to the h Congress pursuant to the Full Employment and Balanced Growt Act of 1978. Sincerely, A Volcket Fnclosure https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis DJW:pjt bcc: Mrs. Mallardi (2) 7 Identical letters also sent to the attached list. House Jim Wright Majority Leader (H-148 Capitol Bldg.) Robert H. Michel, III Minority Leader (H-230 Capitol Bldg.) Thomas S. Foley Majority Whip (H-114 Capitol Bldg.) Trent Lott Minority Whip (1622 LHOB) Fernand J. St Germain, Chairman Committee on Banking, Finance and Urban Affairs (2129 RHOB) Chalmers P. Wylie, Ranking Minority Member Committee on Banking, Finance and Urban Affairs (2129 RHOB) James R. Jones, Chairman Committee on the Budget (214 House Annex I) Delbert L. Latta, Ranking Minority Member Committee on the Budget (214 House Annex I) Lee H. Hamilton, Vice Chairman Joint Economic Committee (G-133 DSOB) iny Mrr1o±tyMer 13_3 ipLe.B Walter E. Fauntroy, Chairman Subcommittee on Domestic Monetary Policy (H2-109 HOB Annex II) of House Banking Dan Rostenkowski, Chairman Committee on Ways and Means (1102 LHOB) Barber B. Conable, Ranking Minority Member Committee on Ways and Means (1102 LHOB) Doug Barnard, Jr., Chairman Subcommittee on Commerce, Consumer and Monetary Affairs of House Gov't. Operations (B-377 RHOB) Jamie L. Whitten, Chairman Committee on Appropriations (H-218 Capitol Bldg.) Silvio 0. Conte, Ranking Minority Member Committee on Appropriations (H-218 Capitol Bldg.) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e ‘MINIIIMIIM. . go Senate Howard H. Baker, Jr. Majority Leader (S-233 Capitol Bldg.) Robert C. Byrd Minority Leader Ted Stevens Majority Whip (S-208 Capitol Bldg.) (S-229 Capitol Bldg.) Alan Cranston Minority Whip (S-148 Capitol Bldg.) Strom Thurmond President Pro Tempore (209 RSOB) Jake Garn, Chairman Committee on Banking, Housing and Urban Affairs (5300 DSOB) William Proxmire, Ranking Minority Member Committee on Banking, Housing and Urban Affairs (5300 DSOB) Robert Dole, Chairman Committee on Finance (2227 DSOB) Russell B. Long, Ranking Minority Member Committee on Finance (2227 DSOB) Pete V. Domenici, Chairman Committee on the Budget (203 Carroll Arms Annex) Lawton Chiles, Ranking Minority Member Committee on the Budget (203 Carroll Arms Annex) Roger W. Jepsen, Chairman Joint Economic Committee (G-133 DSOB) Lloyd Bentsen, Senate Ranking Minority Member Joint Economic Committee (G-133 DSOB) Mark 0. Hatfield, Chairman Committee on Appropriations (S-128 Capitol Bldg.) John C. Stennis, Ranking Minority Member Committee on Appropriations (S-128 Capitol Bldg.) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis GILLIS W. LONG CHAIRMAN FORMER CHAIRMEN THOMAS S. FOLEY (WASH.) PHILLIP BURTON (CALIF.) OLIN TEAGUE (TEX.) DAN ROSTENKOWSKI (ILL.) EUGENE KEOGH (N.Y.) ALBERT THOMAS (TEX.) FRANCIS WALTER (PA.) MELVIN PRICE (ILL.) JOHN ROONEY (N.Y.) WILBUR MILLS (ARK.) pentorratir Caucus 'pause of GERALDINE A. FERRARO SECRETARY '1.eynsrxttatives 718 ANNEX #1 HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 (202) 226-3210 FORMER SECRETARIES ALV ROM STAF .."ECT011t February 16, 1983 Mr. Paul Volcker, Chairman Federal Reserve System 20th & Constitution, N. W. B2046 Washington, D. C. 20551 Dear Mr. Volcker: Thank you very much for participating in the recent Democratic Caucus Issues Conference. Your assistance made the conference a much more interesting and helpful exercise for us all. I appreciate your taking the time to give us the benefit of your knowledge. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (N.Y.) SHIRLEY CHISHOLM PATSY MINK (HAWAII) LEONOR K. SULLIVAN(MO.) EDNA F. KELLY (N.Y.) With very best wishes, I am February 16, 1983 The Honorable George Rush President of the United States Senate 2n510 Washington, D.C. Dear Mr. Vice President: The Board is pleased to submit its Monetary Policy Report to the Congress pursuant to the rull rmployment and Balanced Growth Act of 1978. Sincerely, SiPaul A. Volcker Enclosure DJW:pjt 1 bcc: Mrs. Mallardi (2) / Identical ltr. also sent to Thomas P. O'Neill, Jr. Speaker of the House of Representatives https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .. A. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis February 15, 1983 The Honorable William Roth United States Senate Washington, D. C. 20510 Dear Senator Roth: I am pleased to furnish you with a copy of my responses to the written questions you submitted in connection with the hearing held before the Joint Economic Committee on January 27. I have also furnished a copy of these responses to the Committee for inclusion in the record of the hearing. Please let me know if I can be of further assistance. Sincerely, Enclosure Mr. Bruce Bartlett Executive Director Joint Economic Committee CO:vcd (#V-16) bcc: Mike Prell Mrs. Mallardi (2) ,// cc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1. Why does the Fed give so much attention to the size of the defici t in setting its policies when the real problems in the economy are so acute? 1. 2. 3. 4. high unemployment widespread business and farm failures severe foreign trade problems need for international liquidity 1. The Board and the Federal Open Market Committee attempt to give due attention to all significant developments in the economy and financial markets when setting policy. cite. We are certainly mindful of the serious problems you The question is what mix of policies will be most conducive to resolving them, and specifically, what can monetary policy do, given everything else that is going on. As we consider credit market conditions, however, and the continuing high level of interest rates that is inhibiting satisfactory economic performance, we see the massive federal presence as a borrow er as a particularly serious concern. Achievement of a sound, balanced economic recovery that will be sustained in the years ahead--something that is needed to solve many of our economic ills--would seem to require decisive action to turn back the tide of federal red ink. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2- 2. Why are you so afraid of inflation today when all evidence suggests that deflation is possibly more of a threat? 1. 2. 3. 4. 5. 6. the oil glut and declining oil prices crop surpluses and weak farm prices low utilization of industrial capacity soaring imports the effect of unemployment on wage rates absence of speculation in real estate 2. To be sure, there are points of vulnerability in the world economy, and prices in some markets remain weak, but there appears to be little threat of actual deflation--that is, an appreciable decline in the general price level. Certainly, the Federal Reserve would not permit the sort of monetary contraction that was an ingredient in the last significant deflation in the 1930s. As for inflation, although we have made real progress in reducing the pace of wage and price increases, we can't say that inflation is dead. In the past few decades sustained disinflation has not been achieved in an environment of economic expansion, and as a consequence there is a widespread skepticism about whether inflation will in fact be held down in the period ahead as labor and product markets show renewed vigor. This is another factor holding interest rates higher than they would otherwise be. A sense that governmental policies will maintain needed financial discipline is crucial to overcoming that skepticism and thereby removing a key obstacle to the kind of prosperity we all would like to achieve. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3- 3. Why do you believe that any move toward easier credit must inevitably be followed by more and more monetary stimulation and that there is no other way to reverse such a move? Why not assume that others in your position sometime in the future will act responsibly if there should be a need to tighten credit again? 3. I would not assert that some "easing" move today would necessarily imply excessive monetary stimulus over the longer run. However, we must recog- nize that the ability of the Federal Reserve to pursue successfully a policy of "fine-tuning" is limited by the lags and uncertainties characterizing the linkages in the economy. Furthermore, there is always the possibility--particularly in the environment of skepticism, if not cyncism, about governmental policies I noted above--that policy actions may be misinterpreted, with unintended and counterproductive market reactions. All things considered, it seems to me that a premium must be placed on achieving a reasonably stable, longer-range thrust to monetary policy that is consistent with sustainable economic growth over time along with diminished inflation. in the years ahead. I would hope that the System would maintain such a policy But, in terms of immediate market reaction it does not matter so much what you or I might hope, but what the market will expect. Market expectations of an upsurge in inflation or continued pressure on the Federal Reserve to permit more rapid money growth to take care of the budget deficit would lead to a market reaction in exactly the opposite direction of what you and I want. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -4- 4. Have you considered the possible benefits from a dramatic move to bring Interest rates down substantially? 1. 2. 3. 4. 5. 6. a much more vigorous housing recovery stronger auto sales a return to inventory rebuilding a lower dollar which would expand exports and reduce imports a more rapid increase in jobs increased federal revenues and a smaller deficit 4. A reduction in interest rates--particularly a durable reduction-- would have many desirable effects. I believe that the Federal Reserve has been pursuing policies that contribute to the achievement of such a sustained reduction, but there is a major obstacle in the fiscal policies that have put the federal government in direct competition with private borrowers for a limited pool of savings. A "dramatic move" by the Federal Reserve to push down rates in these circumstances likly would find its force dissipated before long in heightened inflation expectations and no improvement--and perhaps a deterioration-in the balance of pressures in the market for credit. A "dramatic move" on the fiscal front, with monetary policy unchanged, could have a much more salutary effect on the interest rate outlook. % • . -5- 5. Have you considered that time may now be against you in your efforts to reduce interest rates gradually? Our economic problems may be reinforcing each other rather than diminishing? 5. It must be remembered that satisfactory economic performance, not any particular level of interest rates, is the ultimate objective of policy. The Federal Reserve seeks to foster a financial environment conducive over time to rising economic activity and price stability. I believe there are signs of progress on both those fronts, with evidence mounting that business activity has turned upward--partly in response to the sizable interest rate declines to date--and that underlying trends of inflation are moderating. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I would expect that as we make further progress in the disinflationary process--as we must if we are to have a strong and sustained economic expansion in the years ahead-interest rates will tend to fall further. % 6 D https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6. Why are you concerned about the reaction from the financial markets if you moved more vigorously to reduce interest rates? Any adverse reaction would have to be temporary because you control the supply of credit, they don't. 6. One certainly can't ignore the reaes of market perceptions and psychology, but there are other fundamental reasons over the longer run for being wary of moving excessively vigorously to push interest rates down. If, for example, the Federal Reserve were to pour reserves into the banking system in an effort to force interest rates downward, there would be a tendency for those reserves to be translated into faster monetary expansion-which, if pushed too far, would result in inflationary monetary growth. In any event, it is not entirely accurate to say that the Federal Reserve controls the overall supply of credit. We can influence indirectly developments in both the supply and demand for credit through our reserve supplying and absorbing actions and use of our other policy instruments, but ultimately it is the borrowing and lending decisions of households, businesses, governments, operating directly or through financial intermediaries that determine the structure of interest rates. Action assigned Mr. Axilrod SENATE • HOUSE Of REPRUENTATTVES ROGER WiliPSEN, IOWA. CHAIRM WILUAM V ROTH. JR . DEL JAMES ABDNOR S OAK STEVEN 0 SYMMS IDAHO PAULA HAWKINS FLA MACK ts.ATTINGLY. GA LLOYD BENTSEN TEX WILLIAM PROXMIRE WIS EDWARD H KENNEDY MASS. PAUL S SARBANES, MO Congresz of the liniteb litateg CHALMERS P WIftJE. 0410 JOINT ECONOMIC COMMITTEE ICREATED PURSUANT TO SEC Bo)Of PUBLIC LAW 304, 75TH CONGRESS) iiiassbington, 33.C. 20510 BRUCE R BARTLETT, EXECUTIVE DiRECTOR https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis LEE H HAMILTON. IND., VICE CHAIRMAN GILIJS W LONG LA PARREN J MITCHELL MD AUGUSTLIS F HAWKINS. CALIF January 27, 1983 The Honorable Paul A. Volcker, Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20551 Dear Chairman Volcker: -71 Senator William Roth, a member of the Joint Economic Committee, asked that the following questions be submitted to you to be answered in writing and included in the printed record of today's Joint Economic Committee hearing: 1. Why does the Fed give so much attention to the size of the deficit in setting its policies when the real problems in the economy are so acute? 1. 2. 3. 4. 2 e.0 high unemployment widespread business and farm failures severe foreign trade problems need for international liquidity Why are you so afraid of inflation today when all evidence suggests that deflation is possibly more of a threat? 1. 2. 3. 4. 5. 6. the oil glut and declining oil prices crop surpluses and weak farm prices low utilization of industrial capacity soaring imports the effect of unemployment on wage rates absence of speculation in real estate 3 Why do you believe that any move toward easier credit must inevitably be followed by more and more monetary stimulation and that there is no other way to reverse such a move? Why not assume that others in your position sometime in the future will act responsibly if there should be a need to tighten credit again? 4 Have you considered the possible benefits from a dramatic move to bring interest rates down substantially? 1. 2. 3. 4. 5. 6 .a much more vigorous housing recovery stronger auto sales a return to inventory rebuilding a lower dollar which would expand exports and reduce imports a more rapid increase in jobs increased federal revenues and a smaller deficit % II. --, 0 I . Paul A. Volcker page 2 5. Have you considered that time may now be against you in your efforts to reduce interest rates gradually? Our economic problems may be reinforcing each other rather than diminishing? 6. Why are you concerned about the reaction from the financial markets if you moved more vigorously to reduce interest rates? Any adverse reaction would have to be temporary because you control the supply of credit, they don't. Please submit your answers to these questions as soon as possible. erel.y, Bruce Bartlett Executive Director https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6, % February 14, 1983 The Honorable Jake Garn Chairman Committee on Banking, Housing and Urban Affairs United States Senate 20510 Washington, D.C. Dear Chairman Garn: 10 Thank you for your letter of February the international concerning the oversight hearing on the International financial situation and the role of Monetary Fund. before the I am looking forward to Appearing e and Monetary Policy Subcommittee on International Financ a.m. on Thursday, February 17, at 9:30 Sincerely, • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CO:pjt (V-24) l bcc: Messrs. Truman, Ryan and Dah Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis HOUSE OF REPRESEN TATIVES WASHINGTON, D C 20515 16, Rua walciuta ouel flu (4)2142a/1 VA AM eutAtuotti 1 tie tie 4-to t • ettAILtokt6, ots vita . lou kti a upou.4144.11 ?eA t sie , OW k Atitutittm t 1 . : k°14 we t'dm It I- tile atu iv, Mw IA itA , .14iti eAt(4 riled; (jou VI ttl. 44 you OCIA • TIMOTHY E WIRTH 21,Ali6.5. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis UNITED STATES SENATE Washington, D.C. 20510 PUBLIC DOCUMENT OFFICIAL BUSINESS 2/10/83 Paul: Thanks for being with us for THE AGRI-ENERGY ROUNDTABLE luncheon in honor of Bob Anderson. Plans are progressing well for Geneva, May 23-26. WEST VIRGINIA. 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: 2 Rosenblatt, Robert A. "Arco Chairman Warns Against Deficit Pitfalls." Los Angeles Times, February 1, 1983. Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER February 10, 1983 CHAIRMAN The Honorable Carl D. Perkins Chairman Committee on Education and Labor House of Representatives Washington, D.C. 20515 Dear Chairman Perkins! Thank you for your letter expressing concern about how the high interest rates over the past several years have added to debt burdens of borrowers, and suggesting that these could be relieved by direct controls on interest rates. Debt service obligations certainly have risen over but also recent years, reflecting not only higher interest rates, diffiincreased borrowing. Meeting these obligations has been cult for many borrowers, especially when a weak economy has constrained their ability to generate needed cash. However, ols to efforts to alleviate debt burdens by using government contr Interreduce interest rates artificially would be ill-advised. sitors est rates represent returns to lenders (including the depo to in banks or other depository institutions) as well as costs es these borrowers. Keeping interest rates artificially low reduc e less returns to depositors and other lenders, who would becom that willing to save and make funds available, at the same time a situborrowers would be induced to seek more credit. In such scarce ation, government would have to step in to distribute rary credit supplies through necessarily complicated and arbit them. rules and a burgeoning federal bureaucracy to enforce In large measure, the rising interest rates of the late elves from 1970s represented attempts by lenders to protect thems power of the effects of accelerating inflation on the purchasing est rates the dollars they advanced. Lasting reductions in inter bringing down cannot be mandated, rather they must be earned by have had inflation rates and preventing their reacceleration. We interest considerable success in curbing price increases, and as I would rates have dropped considerably, though not as much is a fear like. One factor keeping rates from falling further may again among lenders that, as so often in the past, inflation n. We at the be ignited as the economy recovers from the recessio en, and I Federal Reserve are determined that this will not happ those am confident that our actions over time will reassure lower sharing such concerns. Rut the scope for sustaining ry faces the interest rate levels is limited so long as the count y to persist prospect of massive federal deficits that seem likel https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • The Honorable Carl D. Perkins Page Two even as the economy recovers. Actions by Congress and the administration to reduce those deficits will heln tn lower interest rates, both by signaling investors that all sectors of the aovernment are determined not to allow inflation to get out of hand again, and by reducinl the very considerable direct nressures on credit markets produced by outsized Treasury borrowing. I hope these comments will be useful to your Committee. Please let me know if I can be of further assistance. Sincerely, DLK:JLK:CO:pjt (#V-15) bcc: Mr. Kohn Mr. Kichline Mrs. Mallardi https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MAJORITY MEMBERS CARL D. PERKINS, KY., CHAIRMAN AUG4TU$ F. HAWKINS, CALIF. VilL.LIAM D. FORD. MICH. PHILLIP BURTON, CALIF. JOSEPH M. GAYDOS, PA. WILLIAM (BILL) CLAY, MO. MARIO BIAGGI, N.Y. IKE ANDREWS, N.C. PAUL SIMON, ILL. GEORGE MILLER. CALIF. AUSTIN J. MURPHY, PA, TED WEISS, N.Y. BALTASAR CORRADA, P.R. DALE E. KILDEE, MICH. PETER A, PEYSER, N Y. PAT WILLIAMS, MONT. WILLIAM R. RATCHFORD, CONN, RAY KOGOVSEK, COLO. HAFtou, WASHINGTON, ILL. OCNNIS I. =KART,OHIO https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Action assigned Mr. is.ichline ; Winn will discuss P. S. with Chairman after draft received MINORITY MEMBERS JOHN N. ERLENISORN, ILL. JAMES M JEFFORDS, VT. WILLIAM F. GOODLING, PA. E. THOMAS COLEMAN, MO. KEN KRAMER, COLO. ARLEN ERDAHL. MINN. THOMAS E. PETRI. WIS. MILLICENT FENWICK, N.J. MARGE ROUKEMA, N.J. ElniENE JOHNSTON, N.C. LAWRENCE J. DE NARDIS, CONN. LARRY CRAIG. IDAHO WENDELL BAILEY. MO. STEVE GUNDERSON, WIS. CONGRESS OF THE UNITED STATES HOUSE OF REPRESENTATIVES COMMITTEE ON EDUCATION AND LABOR 2181 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 TELEPHONES, MAJORITY-223-4S27 MINORITY-7137211 January 28, 1983 Mr. Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Federal Reserve Building Constitution Avenue Washington, D. C. — Dear Mr. Volcker: For some time now, the escalation in interest rates over the past few years have been a subject of constant discussion, regardless of whether the persons involved believed or didnot believe they were necessary to lower inflation. But, in these discussions, an aspect seems to me to have been neglected. It is the increase in interest charges caused by uncontrolled interest rates, building and building, year after year, because as debt is unpaid, and must be refinanced at higher rates, the debt burden becomes that much heavier solely because interest rates have gone up. The way I calculate it, if we had continued the controls on interest placed into effect by President Nixon and Treasury Secretary John Connolly, we would have saved at least $175 billion in computed annual interest charges over the past nine years. That is $175 billion which could have gone into job creation, all over the country, so I would like to ask you, in the light of catastrophic unemployment today, aren't these figures a perfect proof of the need to control interest rates? Sincer Chairman CDP/sm I would be very glad to have you before the Committee because the Fed's policies directly affect employment.CDP https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Per Neal Soss and Don no written responses will go on the attached two letters. Please remove pif 1*-1,12-47 JAKE GARN, UTAH, CHAIRMAN JOHN TOWER. TEXAS JOHN HEINZ. PENNSYLVANIA WILLIAM L ARMSTRONG. COLORADO ALFONSE M DAMATO. NEW YORK SLADE GORTON, WASHINGTON PAULA HAWKINS, FLORIDA MACK MATTINGLY, GEORGIA CHIC HECHT, NEVADA PAUL TRIBLE, VIRGINIA WILLIAM PROXMIRE, WISCONSIN ALAN CRANSTON, CALIFORNIA DONALD W RIEGLE, JR., MICHIGAN PAUL S SARBANES, MARYLAND CHRISTOPHER J DODD. CONNECTICUT ALAN J. DIXON. ILLINOIS JIM SASSER. TENNESSEE FRANK R. LAUTENBERG, NEW JERSEY _1 United eStatts eSenatel M DANNY WALL, STAFF DIRECTOR KENNETH k McLEAN, MINORITY STAFF DIRECTOR t COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS r '7 WASHINGTON, D.C. 20510 , .• February 10, 1983 The Honorable Paul Volcker Chairman Federal Reserve Board Washington, DC 20551 Dear Mr. Chairman: I have asked the staff of the Senate Committee on Banking, Housing and Urban Affairs to examin e and report to me the specific ratings assigned to foreig n countries by the Interagency Country Exposure Review Committee since its inception, together with the analyses prepar ed for the usf of this Committee. The reason I am seeking this inf ormation is twc,fold: (i) to gain some insight into how adequa tely the Committee anticipated some of the financial difficulties faced by foreign countries in repaying their external debt; and (ii) to judge the accuracy of the assertion that U.S. banks received no warnings from U.S. officials that these countries might experience repayment difficulties. I believe the answers to both of these questions have an important bearin g on actions the Banking Committee may take in considering legislation to increase the lendable resources of the IMF. I understand the sensitivity of thi s information and I am not asking for an actual copy of the material. Nor would it be my intention to quote verbatim any narrative materials that were prepared solely for the intern al use of the Committee. I would intend, however, to discuss this information in a general way with respect to individual countries and to discuss the specific ratings assigned to tha t country. I would also feel free to quote any analytical inform ation, advice, etc., which the Committee may have furnished dir ectly to commercial banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Please let me know if these arrang ements are satisfactory. ere -# IS girt' MIDE Ranking Minority Member Committee on Banking, Housing and Urban Affairs rim• filj'xritieLd Congress of the United eStates JACK KEMP 31IST DISTRICT OF NEW YORK APPROPRIATIONS • tout of fRtpreStiltatiDES gashington,2095 FOREIGN OPERATIONS RANKING MEMBER April 7, 13 98 BUDGET https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2252 RAYBURN OFFICE BUILDING WASHINGTON, D.C. 20515 COMMITTEES: SUBCOMMITTEE: PLEASE RESPOND 0 WASHINGTON OFFICE: (202) 225.5265 DISTRICT OFFICES: 0 „01 (9‘ (716)046-4123 0 484 II• MAIN STREET cmGENEVA.35W YOg 14456 ▪ our% The Honorable Paul A. Volcke Office of the Chairman Federal Reserve System 20 & 21st Streets N.W. Washington,20551 04110804„1 , CO. CD =A c=.r Xl... A c=:)._,_, n.— ... rn „--1: •-• rrl t = ANIONNo :en 1=2" _4:::) rn CID 4•111••• == ..1.=C' C: Dear Paul: FEDERAL BUILDING 111 WEST HURON STREET •UFFALO• NEW YORK 14202 = 3C ).... ...... ,--, ▪, = c.,,. --‹ , c.„) 45 rri co = Thank you for your lengthy response to my last letter. In general, I think it is helpful in illuminating our differences and agreements on three major issues: the usefulness of the monetary aggregates, your attitude toward fiscal policy, and the shape of future reforms of the domestic and international monetary system. I think we will have to continue to disagree about the usefulness of the monetary aggregates as the primary guiI- for Federal Reserve policy. It's one thing to see a nexus" between money and prices "over time," without considering cause and effect and the definition of money. It's another thing to use the aggregates as your primary operational target. I am struck, though, that all of your arguments for using the aggregates are political ones -that a consensus of the academic community is supposed to favor them, and that the Congress requires you to report them. You reserve your economic arguments for explag why they must be taken with a grain of salt -- the variability of velocity, etc. Concerning the merits of a price rule, I have never considered it a panacea -- merely a transitional policy superior to aggregate-targeting until we can fix the system. Second, what bothers me about your pronouncements on fiscal policy is not so much your bringing it up at all, but that I don't see the balance which you protest to have maintained. True, you mention now and then that spending cuts are preferable to tax increases in the abstract; but nearly all of your specific comments have been in favor of tax increases. You opposed President Reagan's tax cuts, favor the repeal of indexing, and endorse the imposition of an oil import fee. I have been unable to find any balancing specc advice on where to cut spending. Perhaps you can Sirect me, to some statements I may have missed. • . A • .40P A Page Two Aside from the question of balance, I would merely say that your estimates of the size of the so-called "structural" deficit,'like OMB's, differ dramatically from those of the Commerce Department, which puts the high employment deficit in the $50 billion range and declining. Only time will tell who is right, but I must say that so far I have been corre ct in predicting a more normal economic recovery than forec ast by either the Administration or the Federal Reserve. Finally, I am encouraged by your saying that you would recognize the relevance . . . of factors such as sensitive commodity price indicators (not excluding prices of precious metals as a barometer of expectational considerations) and exchange rates" in formulating polic y; and that you are receptive to "reforms of the internatio nal monetary system looking toward greater stability of excha nge rates" and perhaps "some international unit of accou nt." One question that occurs to me is why you don't put some of these observations into your testimony to Congress -- for example your upcoming Banking Committee appearance -- or your discussions with the Administration. I can appreciate the politics of your situation. But I believe you underestim ate the sentiment in favor of monetary reform. When Lewis Lehrman Henry Kissinger, Valery Giscard d'Estaing, Helmut Schmi dt and Felix Rohatyn can agree on something, don't you think something has happened to the climate of opinion on this issue? You have been pretty explicit in your views on measu res for dealing with the symptoms of the world financial crisis -- dealing with national deficits and refinancing the loans of shaky debtors. Why not some specifics on curing the basic cause of the crisis -- the loss of a stable and viable international monetary system? Suppose, as you say, the time is not ripe for a full blown plan; what are your suggestion s for modest and pragmatic steps in the right direction? There is a time to whisper your opinions and a time to procl aim them from the housetops. In view of the seriousness of the international situation, and the almost unparalleled recep tivity to change, why don't you use your experience and your bully pulpit to incline the Administration toward making some constructive proposals, perhaps as early as Williamsbu rg? be https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis F. ofAtttf 0;47 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis HOUSE OF REPRESENTATIVES WASHINGTON, D C 20515 BILL MCCOLLUM FIFTH DISTRICT FLORIDA CD February 9, 1983 • -r -; ) 77-1 Honorable Paul A. Volcker Chairman Federal Reserve Board Federal Reserve Building Room B-2046 Constitution Avenue, N.W. Washington, D.C. 20551 Dear Paul: It was nice of you to send your note recognizing that we missed the chance to talk to each other during your visit with the Council of 100 in Tampa a few days ago. By circumstances, we got together for the breakfast you suggested a lot sooner than either of us would have imagined. I thoroughly enjoyed your hospitality and the good discussions had with my colleagues and yourself Tuesday morning. In a great many ways, such informal opportunities to chat are far more productive than the formal hearings which we have of necessity. Sinc ely, BILL McCOLLUM Member of Congress /ak WASHINGTON ADDRESS: SILVIO O. CONTE FIRST DISTRICT. MASSACHUSETTS 2300 RAYBURN OFFICE BUILDING WASHINGTON. D.C. 20515 PHONE: 202-225-5335 COMMITTEE ON APPROPRIATIONS RANKING tVIINORITY MEMBER SUBCOMMITTEES: TRANSPORTATION LABOR-HEW LEGISLATIVE EX OFFICIO MEmsER CT ALL SUBCOMMITTEES Congre5E; of tbe Elniteb tato DISTRICT OFFICES: FEDERAL BUILDING 78 CENTER STREET ARTERIAL PITTSFIELD, M A SSACHUSETTS 01201 ji)ou5e of Repretentatitie PHONE: 413-442-0946 Magbington, ae. 20515 200 HIGH STREET COMMITTEE ON SMALL B USINESS SUBCOMMITTEE ON ENERGY. ENVIRONMENT, SAFETY, AND RESEARCH CENTURY PLAZA 11 HOLYOKE. MASSACHUSETTS 01040 PHONE: 413-532-7010 MIGRATORY BIRD CONSERVATION COMMISSION BOARD OF REGENTS SMITHSONIAN INSTITUTION February 8, 1983 Mr. Paul A. Volcker, Chairman Board of Governors of the Federal Reserve System Federal Reserve Building Washington, D.C. 20551 Dear Chairman Volcker: I am pleased that you have accepted my luncheon invitation to meet with the Minority Members of the House Committee on Appropriations for an off-the-record discussion of current issues of mutual interest. We will meet at 12:30 pm on Wednesday, April 20, 19.83 in room H 139 of the Capitol. Should thefe be any further questions about these arrangements, please contact Mr. F. Michael Hugo, Minority Counsel of the Appropriations Committee staff, at 225-3481. I am looking forward to meeting with you at the luncheon and with continued best wishes, I am https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Cordially you s, 20 Silvio 0. Conte Ranking Minority Member, House Committee on Appropriations • WASHINGTON ADDRESS: SILVIO O. CONTE FIRST DISTRICT, MASSACHUSETTS 2300 RAYBURN OFFICE BUILDING WASHINGTON, D.C. 20515 COMMITTEE ON APPROPRIATIONS RANKING MINORITY M EMBER SUI3COMMITTE_ES: TRP.NSFORTATION PHONE: 202-225-5335 Congre55 of tbe Elniteb LABoR-HEW LEcIsLATIVE Ex OFFICIO MEMBER OF ALL SUBCOMMITTEES tate5 DISTRICT OFFICES: FEDERAL BUILDING 78 CENTER STREET ARTERIAL 31)oto5e of ReproentatibuS PITTSFICLD, MASSACHUSETTS 01201 PHONE: 413-442-0946 tatusbington,;IC. 20515 ZOO HIGH STREET COMMITTEE ON SMALL BUSINESS CENTURY PLAZA 11 SUBCOMMITTEE ON ENERGY, ENVIRONMENT, SAFETY, AND RESEARCH HOLYOKE, MASSACHUSETTS 01040 PHONE: 413-532-7010 MIGRATORY BIRD CONSERVATION COMMISSION BOARD OF REGENTS SMITHSONIAN INSTITUTION https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis February 3, 1983 Mr. Paul A. Volcker, Chairman Board of Governors of the Federal Reserve System Federal Reserve Building Washington, D.C. 20551 Dear Chairman Volcker: It is once again my honor to invite you to meet for an off-the-record discussion of current issues of mutual interest over lunch with the Minority Members of the House Committee on Appropriations. We will meet at noon on Wednesday, April 20, 1983 in room H 139 of the Capitol. ) 9 ( 4/1 If you can accept this invitation, would you please calL. Michael Hugo, Committee Minority Counse1,4t - 225-3481. With best wishes, I am Cordially yours, 2 , 4 , 140 Silvio O. Conte Ranking Minority Member House Committee on Appropriations https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis February 8, 198 3 The Honorable Doug Barnard, Jr. Chairman Subcommittee on Co and Monetary Af mmerce, Consumer Committee on Go fairs ve House of Repres rnment Operations entatives Washington, D. C. 20515 Dear Chairman B arnard: This is in furt her res Chairman Rosent hal's request f ponse to the late or a legal anal concerning the y applicability o f the Bank Hold sis Company Act (BH ing CA their agencies. ) to foreign governments and was prompted by Chairman Rosenthal's request t 1982, approving he Board's Order of June 9, t by Banca Commer he application under the BHCA c become a bank h iale Italiana, Milan, Italy, t olding company by acquiring LI o Bancorporation TC of New York, Inc ., Garden City O New York. , In resp request, I am pl onse to Chairman Rosenthal's e memorandum prep ased to transmit the enclosed ared by the Boa rd's Legal Divis ion . Sincerely, Donald J. Winn Assistant to th e Boa Enclosure AFC:vcd (V-255) bcc: Mr. Bradfi eld Ms. Jacklin Mrs. Mallardi rd LEGAL MEMORANDUM: STATUS OF FOREIGN GOVERNMENTS AND FOREIGN GOVERNMENT-OWNED CORPORATIONS UNDER THE BANK HOLDING COMPANY ACT. In its Order of June 9, 1982, approving the application under the Bank Holding Company Act ("BHCA") by Banca Commerciale Italiana, Milan, Italy ("BCI"), to become a bank holding company by acquiring LITCO Bancorporation of New York Inc., Garden City, New ("LITCO"), the Board considered the question of whether Government or York the Italian the Government-owned holding company, Istituto per la Recostruzione Industriale ("IRI"), which owns BCI, should be subject to the provisions of the BHCA. The Board also considered the general question of the applicability of the BHCA to foreign governments and their agencies. The Board's order regarding the BCI application, as well as Governor Henry Wallich's testimony of September 30, 1982, before the Subcommittee on Commerce, Consumer and Monetary Affairs highlight several of the issues and policy considerations involved in applying the BHCA to provides a foreign government-owned entities. This memorandum brief legal review of the considerations relevant to a determination whether the BHCA should be interpreted to apply to foreign government-owned entities, or to the foreign government owners themselves, and with a banking presence in the United States. A. Analysis of the BHCA. Section 2(b) of the BHCA defines a "company" as "any corporation, partnership, business . . ., association or similar https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2organization . . . but shall not include any corporation the majority by any of the shares of which are owned by the United States or State." 12 U.S.C. S 1841(b). are "company" trusts corporations of the of Excepted out of the broad definition of limited Federal and duration State and majority governments organizations that are to be exempt from coverage. as owned the There only is no similar statutory exemption for corporations that are owned by foreign governments, nor does the legislative history discuss exempting such corporations. On one hand, the position may be taken that because no specc exclusion is made for foreign-government-owned corporations, 1/ they are intended to be covered by the Act. On the other hand, it may be argued that policy considerations that may have led to the exemption of domestic government-controlled corporations also apply to corporations controlled by foreign governments -- that Congress may not have intended that economic regulations should sovereign or governmental functions. interfere with ../ The act is also silent on the issue of applying the BHCA to a foreign government itself and there is no legislative history directly on point. I/ Looking solely at the language of the statute, it can be The Senate Report states: The exemptions . . . are the only ones given by this bill from the definition of company and bank holding company. All other such organizations are required by the bill to subject themselves to such regulation as the bill prescribes. S. Rep. No. 1095, 84th Cong., 1st Sess. 7 (1955). The legislative history of the federal and State government . 2/ ILIE. S. Rep. 84-1095, exclusion sheds little light on this 1st Sess. 6-7 (1955). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -3argued that governments are not among the organizations listed as On the other covered by the Act nor similar to such organizations. hand, the list of entities covered would appear to be intended to encompass any entity that can acquire and maintain control of a bank in perpetuity. Moreover, the specific exclusion of U.S. and State government-owned corporations from the definition of "company" would ves appear implicitly to exclude Federal and State governments themsel as from coverage since, if Congress had intended to treat governments bank holding companies, it is unlikely that the governments' corporate instrumentalities would have been exempted. Since there is no similar exemption for a foreign government-owned entity, the argument may be made that a foreign government is a "similar organization" to a corporation, and thus is a "company" for purposes of the BHCA. This latter interpretation examining analogous statutes and may be further the reasoning of supported by courts in the 2/ applying those laws to governments or governmental entities. In that addition, it is well recognized in U.S. and international law claim when a government acts in a commercial capacity, it may lose its to sovereignty and thus immunity from the law. This principle has Cooper, 312 U.S. 600 (1941); Georgia v. Evans, 2/ United States v. were not 316 U.S. 159 (1942) in which the Court found that if a State which a "person" within the meaning of section 8 of the Sherman Act, defines person to include corporations, the State would be left without remedies for injuries caused by violations of that Act. entitled Similarly, the Court found that a foreign State is a "person" "person" to sue for damages under the Clayton Act, which also defines It was found that Congress evidenced no to include corporations. suffered as intent to exclude foreign nations from redress of injuries ent of the result of anticompetitive behavior. Pfizer, Inc. v. Governm India, 434 U.S. 308 (1978). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -4been codified by the Foreign Sovereign Immunities Act (28 U.S.C. § 1602 et seq.) which provides that a foreign state is not considered immune from suit where an action is based on commercial activity in the United Thus, States. foreign and governments foreign government-owned corporations need not be excluded from the provisions of the BHCA solely because of their sovereign status. The purposes of the BHCA can be considered as an additional aid in interpreting the intended scope of coverage of the Act. Sutherland, Statutory Construction Sec. 45.09 (1973)). (IIA As the Board stated in the BCI order, where the applicant is owned by a government agency, or by a government directly, that is engaged in a wide range of banking and commercial-industrial activities, there may be problems of compatibility of these cross-industry links with one of the stated purposes of the BHCA -- maintaining a separation between commerce and banking in the United separation of banking interests and undue States. and The BHCA commerce seek concentration of provisions to requiring prevent conflicts resources by a of prohibiting situations where the potentiality for abuse appears likely -- common ownership of banking and nonbanking enterprises. Thus, even where a foreign government owner in fact operates commonly-owned enterprises as independent entities, a question of consistency with the purposes of the BHCA nonetheless may arise. Common ownership by a government or its agencies of multiple banking organizations, even though under separate corporate and management structures, but operating in this country in different States, also could raise issues of compatibility with the interstate banking limitations of the Act. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis •• -5B. Additional considerations affecting a determination that foreign governments or foreign government-controlled corporations are "companies" under the BHCA. In 1978, the International Banking Act ("IBA") incorporated, into U.S. law, principles of national treatment for foreign banking organizations engaged in banking in the United States. This principle reflects a judgment that foreign-owned organizations should be treated similarly to U.S.-owned organizations with respect to their activities in the United Thus, if foreign States. organizations may engage in nonbanking government-owned activities and banking interstate banking to an extent not permitted U.S.-owned banking organizations, the issue of national treatment arises. In addition, questions of competitive equality arise where a foreign government owner is subject to fewer restrictions on its activities than a foreign private owner similarly situated. An issue presented by the BCI application is whether the difference in treatment reflected in past Board practice continues to be appropriate in light of current U.S. bank regulatory policy, as reflected in the IBA. In the BCI order, the Board also expressed the view that a decision as to the appropriate application of the BHCA to foreign governmental entities must also take account of other U.S. laws -- and the policies they reflect -- relating to U.S. foreign economic and political relations. Where a statute is ambiguous, it should not, if at all possible, be construed in a manner that may be at fundamental variance https://fraser.stlouisfed.org Federal 0 Reserve Bank of St. Louis with other U.S. laws and policies. Because of these % -6questions regarding the broader policy implications of treating foreign governments as "companies" under the BHCA, the Board sought a broader public dialogue of the issues before a conclusion was reached as to the proper interpretation of the Act in the present context. 4/ The Board concluded that in view of past decisions,-- and without prior notice, it was not appropriate to apply the act in the circumstances of the BCI case. that application of the BHCA Moreover, the Board was of the view to foreign official entities should essentially be resolved definitively as a matter of policy and, for this reason, has sought Congressional consideration of the issues raised. In several cases since the 1970 amendments to the Act, the Board has approved applications in which foreign government ownership of the applicant was noted but the Board did not apply the Act to the applicant's government owners. Societe Generale/Sogelease Corp., 67 Federal Reserve Bulletin 453 (1981); Banco Exterior de Espana, S.A., 66 Federal Reserve Bulletin 504 (1980); Banco Exterior de Espana, S.A., 63 Federal Reserve Bulletin 1079 (1977); Korea Exchange Bank, 39 Federal Register 20,423 (1972); and Banco di Roma, 58 Federal Reserve Bulletin 930 (1972). A/ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Board of Governors Federal Reserve System Legal Division February 7, 1983 tiv4 tk\6.043AIL 4. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20 551 February 7, 1983 PAUL A. VOLCKER CHAIRMAN The Honorable Newt Gingrich House of Representatives Washington, D.C. 20515 Dear Mr. Gingrich: Thank you for your recent letter concerning your budget freeze proposal. As you know, I strongly share your concern with the hazards of large projected deficits. Although sizable deficits can be accommodated in the current period of recession, large, persistent deficits during recovery should be avoided. Unrestrained federal deficits would imply large federal government demands on the limited private supply of savings, and, as a result, the threat of future upward interest rate pressures. Despite our agreement that there is a link between interest rates and long-term expectations of large budget deficits, I am afraid that I cannot help you with the specific questions you asked; the Board does not have long-term forecasts of interest rates. Indeed, the value of even quite short-term forecasts is highly questionable since interest rate movements are the result of many factors affecting the supply and demand for credit as well as unquantifiable forces affecting market expectations. The precise quantification of the relationship between alternative budget deficits and interest rates is even more difficult and perhaps impossible. Part of the difficulty arises from the fact that there is little past experience with changes in federal spending and deficits of the magnitude that would occur if no substantial budget actions are taken. But, more important, much of the potential pressure on interest rates is related to the lack of confidence in the government's carrying through on disciplined and coordinated fiscal and monetary policies and thereby on its anti-inflation program. I am convinced that a return of such confidence could result in a considerable relaxation of interest rate pressures, although I cannot offer a prediction of the exact magnitude and timing of this effect. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 411. The Honorable Newt Gingrich Page Two In conclusion, while I to your specific questions, let your concern with an issue that I hope that efforts to restrain ful. cannot respond quantitatively me repeat that I appreciate I also find very troubling, and the deficits will be success- Sincerely, DC:SL:JLK:WRM:DJW:pjt (#V-10) bcc: Ms. Lepper Mr. Cohen Ms. Wing Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SUITE 9, PHOENIX CENTER 1635 PHOENIX BOULEVARD NEWT GINGRICH SIXTH DISTRICT, GEORGIA COLLEGE PARK. GEORGIA 30349 (404) 221-3854 COMMITTEES: PUBLIC WORKS AND TRANSPORTATION POST OFFICE Box 848 GRIFFIN FEDERAL BUILDING HOUSE ADMINISTRATION GRIFFIN, GEORGIA 30224 (404) 228-0389 WASHINGTON OFFICE: 1005 LONGwORTH HOUSE OFFICE BLDG. WASHINGTON, D.C. 20515 (202) 225-4501 tales Caugress of tip Pniteb Pause of arprestritatifues January 19, 1983 Paul Volcker, Chairman Federal Reserve Board 20th and Constitution Ave., NW Washington, D.C. 20551 CARROLL COUNTY COURTHOUSG CARROLLTON, GEORGIA 30117 (404) 834-6398 COUNTY OFFICE BUILDING 22 EAST BROAD STREET NEWNAN. GEORGIA 30263 (404) 253-8355 z- Dear Paul: A few weeks ago I sent you a copy of a budget freeze proposal that I'm working on. Since then, I've been working out the details of how to actually implement the freeze. One of the things that I need to know is the effect of the budget freeze on interest rates. I would really appreciate it if, in the next week or so, you could give me two pieces of information: 1) What is your current projection for interest rates through FY88, assuming a current services type budget? 2) How would your projection change assuming a budget freeze? (Please indicate the economic assumptions you're using.) Feel free to contact Janis Kerrigan in my office at 225-4501 if you have any questions. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Thanks very much for your help. Sincerely, Newt Gingrich S DRAFT - 1/13/83 THE BUDGET FREEZE - A SUMMARY I. The Basic Proposals +) Freeze the spending level of each functional category in the budget at FY83 outlay levels. +) Freeze the current tax law. +) Pass a 2-year budget to allow time for wide-spread programmatic reform. II. Further Details of the Basic Proposals +) Either freeze defense spending at FY83 outlay level (current projection is $208.8 billion) or, because of NATO diplomatic agreements, accept Senator Hollings' proposal to freeze defense spending at a 3% real growth level. +) Freeze non-defense discretionary programs (e.g. foreign aid, transportation). +) Freeze civilian and military pay. +) Freeze income entitlement programs (e.g. Social security, unemployment compensation). This means suspend COLAs, but allow an increase due to additional caseload so that the per capita benefits are held at FY83 levels. The estimated spending increase due to this exception amounts to about $5-6 billion. +) Freeze service entitlement program outlays (e.g. Medicare). Because of uncontrollable costs in the services provided (e.g. medical care), restructuring of the programs is necessary to ensure that the benefit levels aren't reduced. +) Interest payments on the national debt would not be frozen. These payments would decline after the budget was balanced. +) Freeze the current tax law. This means that the scheduled July tak cut and. the scheduled FICA tax increases would go through. For further information: Contact Janis Kerrigan in Newt Gingrich's office at 225-4501 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -5- Table 1: The Budget Choice FY83 FY84 FY85 FY86 FY87 FY89 Without Freeze 0 R D 784 596 -188 858 658 -200 940 730 -210 1017 802 -215 1094 887 -207 1170 986 -184 With Freeze 0 R D 784 596 -188 795 658 -137 802 730 -72 804 802 -2 798 887 +89 786 986 +200 +63 +138 +213 +296 +384 Difference: Aggregate difference of 2 year freeze budget = $201 billion For further information, contact Janis Kerrigan in Newt Gingrich's office, 225-4501 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis % i I BOARD OF GOVERNORS I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 February 7, 1983 PAUL A. VOLCKER CHAIRMAN The Honorable Robert H. Michel House of Representatives Washington, D. C. 20515 Dear Mr. chel: Thank you for your letter concerning the visit to Washington by the Illinois agricultural leaders. I will be glad to meet with the group on March 4. In the event that I an unable to do so for any unforeseen reason, I have arranged for Vice Chairman Martin to substitute for me. My staff has been in direct contact with the Illinois Agricultural Leadership Foundation as you suggested in your letter. With kind regards. Sincerely, bcc: Mrs. Mallardi ifip JRC: tjf COPY H-232. THE CAPITOL WASHINGTON, D.C. 20515 225-0600 ROBERT H. MICHEL 18TH DISTRICT. ILLINOIS https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ftice of tbe Republican /caber Elniteb fitqatto Itiouge of Repreoentatibez 011 atbington,;13.C. 20515 (.0 January 31, 1983 Mr. Paul Volcker, Chairman Federal Reserve System Federal Reserve Building Washington, D.C. 20551 -A' 4 Dear Mr. Volcker: A delegation of agricultural leaders from the State of Illinois will be in Washington during the early part of March, and they have requested a meeting with you on Friday, March 4. I have enclosed a copy of their recent letter to me in this regard. I hope you will be able to work this into what I know is an over-burdened schedule, and would appreciate it if you could reply directly to Ms. Joyce Watson, Executive Director of the Illinois Agricultural Leadership Foundation, furnishing me with a copy of that response. Thank you for your consideration of this request. Sincer ly ours, Pibet-'H. Mic el Republican Leader RHM:lsv Ends. 3b 1 ILLINOIS AGRICULTURAL LEADERSHIP FOUNDATION 215 EAST JACKSON ST.•P.O. BOX 160•MACOMB,ILLINOIS 61455•309/837-7711 JOYCE WATSON,Executive Director BOARD OF DIRECTORS .Gtlaurn,tri H.E. Albrecht Cnrisuitant Retired Corporatinri 0,ecutore Sparta January 21, 1983 Vi < e Chairman James E. Forster Ch,tirman C E 0 The DeKalh Bank ()cacti!) Secretor), Steve Newman Chinctor (It Tfil1111119 1111,11/V. F.trni Bureau BloomingIon Dear Representative Michel: easi ire, W.H. Longley President Longley Far Ms Iil Alecto As you know from our previous visit, the Illinois Agricultural Leadership Program is planning its national trip to Washington, D.C., Maryland, New Jersey, New York, Rhode Island, and Massachusetts on March 3-12, 1983. 'Newt)°,s (PI the f3o.nr1 Jean A. Ibeadahl IliflfliS Wnmen tnr ArnimMote Tiimarod Warren Lebeck Consonant Fiume! President Chicago 8third of Chicago The Honorable Robert H. Michel H232 Capitol Bldg. Washington, D.C. 20515 Trade J. Dan Lehmann. Ph.D 'Manager Special Proiects. DiiKalti Pliier. Genetic S. Sycamore Jim Lilly Eador Piiiirie Oak B/C1(),4 Kenneth McMillan Slate Senator 47th District Bushued Orion Samuelson Vict• President Agi icuitaat.Ser vices Direr- tin On Friday, March 4, we would like to speak with Paul Volcker of the Federal Reserve. We would appreciate insight on the background of the Federal Reserve and how the decision making process works. I am enclosing a biographical sketch of our thirty participants and a brochure of our purposes to better acquaint Mr. Volcker with the audience he will address. There will be thirty-two of us in the group, including the Chairman of our board, Hilmer Albrecht, and myself. Once again, I appreciate your help in bettering leadership for Illinois agriculture and for our country. Sincerely, Chicago R. Gerald Saylor Marmger Agricultural Econothic!Research Deese,& Company • Enid Schlipt pft.wde.ril Schiipt F,Irms Joyce Watson JW/vf rittdlev Richard P. Slone President Stone tieed Farm Springfield Enclosures (2) III David H Stroud died Nowspisuei & hillgaeine Columneo Chicago 0. Glenn Webb CtI,Ii1/11,01 It Mt Eit)Of & f1",1(11.11t (ilk.,1A111,i414 Ii Tonne/Min https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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: Brochure Citations: Number of Pages Removed: 10 Illinois Agricultural Leadership Program: 1984 Brochure and Class of 84-I: Biographical Sketches, 1983. Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis February 2, 1983 The Honorable Pete V. Domenici Chairman Committee on the Budget United States Senate Washington, D. C. 20510 The Honorable Lawton Chiles Ranking Minority Member Committee on the Budget United States Senate Washington, D. C. 20510 Dear Chairman Domenici and Senator Chiles: Thank you for your joint .letter of January 28 regarding my testimony before your Committee on the First Concurrent Budget Resolution for FY 1984. I am looking forward to being with you on February 24 at 10:00 a.m. Sincerely, CO:vcd (#V-17) bcc: Mr. Kichline Mrs. Mallardi (2) L/ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis January 31, 1983 The Honorable Jake Garn Chairman Committee on Banking, Housing, and Urban Affairs United States Senate Washington, D. C. 20510 Dear Chairman Garn: Thank you for your letter of January 25 inviting me to appear before your Committee on the conduct of monetary policy pursuant to The Full Employment and Balanced Growth Act of 1978. I am looking forward to being with you on Wednesday, February 16, at 9:30 a.m. Sincerely, CO:vcd (V-12) bcc: Messrs. Axilrod and Kichline (w/copy of incoming) Mrs. Mallardi (2) January 70, 1qP1 The Fonorable William Proxmire United States Senate Washington, P. C. 20510 Dear Senator Proxmire. In the light of our earlier exchange of letters concerning the Federal Reserve's plan to accelerate the collection of checks, I wanted to bring you up to late on developments in that regard. As you know, the proaram was issued for public comment late in the summer. The Board received in excess of 500 comments on the proposal. In addition, during and immediately after the public comment period, a series of meetings were held between Federal Reserve officials and representatives of all segments of the banking industry, their trade associations and with representatives of the private air courier industry. Those processes have provided the opportunity for a most constructive dialogue and have, T think, resulted in modifications to our plans which advance the public interest and are broadly acceptable to the private sector parties affected by Federal Reserve activities in the checl, collection area. On the basis of those meetings and a complete analysis of the public comments received, a somewhat modified nrogram was reviewed and approved by the Board of rovernors on December 17. The program as approved by the Board will be implemented durina the first quarter of 13. The full documentation associated with the program—including an analysis of related issues raised in the public comments—is enclosed for your information. T am also enclosing for your information a cony of informal remarks made by 1r. F. Cerall Corrigan, President of the Federal Reserve Rank of !blinneapolis and Chairman of the Federal Reserve's Pricina Policy Committee, at the time of the Board meeting on the sublect. I believe Mr. CorrirTan's remarks capture rather well the rationale and public benefits associated with this particular program as well as some of the more general, if not philosophical, elements of the Federal Reserve's thinking as it relates to the pricing of its payments services. We will keep you and your staff informed of developments in this area. EMcE:WRM:NS:pjt Sincerely, bcc: Mr. McEntee SL DIA Mrs. Mallardi (2)j Identical letters sent to: Chairmen Garn & Minish Senators Chafee, Lugar, Dixon, Dodd, Cranston, Riegle, & Cong. Barnard. Fnclosures : (Pres. Corrigan's remarks dtd. 12/17/82, & Memo to Board dtd. 12/14/82) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis January 21, 1983 The Honorable Roger W. Jepsen Chairman Joint Economic Committee 20510 Washington, D.C. Dear Chairman Jepsen: This is in reply to your recent letter regarding my suggestions as to ampropriate target ranges for the monetary and credit aggregates for 1983. I think it would be best for me to defer comment on these matters until consulting with my colleagues on the Federal Open Market Committee in February. Shortly thereafter, we will be releasing our semi-annual Report to the Congress on Monetary Policy, and I will be testifying before the relevant committees in the two Houses. The Report and my testimony will cover these matters in some detail. I look forward to seeing you at the Joint Economic Committee hearing next week. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, SiPaul k Volcket NMS:pjt (#V-6) bcc: Mrs. Mallardi (2) -14 • BOARD OF GOVERNORS OF TNE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER January 20, 1983 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: In view of your interest in the Federal Reserve's plan to accelerate the collection of checks, I wanted to bring you up to date on developments in that regard. As you know, the program was issued for public comment late in the summer. The Board received in excess of 500 comments on the proposal. In addon, during and immediately after the public comment period, a series of meetings were held between Federal Reserve officials and representatives of all segments of the banking industry, their trade associations and with representatives of the private air courier industry. On the basis of these meetings and a complete analysis of the public comments received, a somewhat modified program was reviewed and approved by the Board of Governors on December 17. The program as approved by the Board will be implemented during the first quarter of 1983. The full documentation associated with the program--including an analysis of related issues raised in the public comments--is enclosed for your information. I am also enclosing for your information a copy of informal remarks made byGerald Corrigan, President of the Federal Reserve Bank of Minneapolis and Chairman of the Federal Reserve's Pricing Policy Committee, at the time of the Board meeting on the subject. I believe Mr. Corrigan's remarks capture rather well the rationale and public benefits associated with this particular program as well as some of the more general, if not philosophical, elements of the Federal Reserve's thinking as it relates to the pricing of its payments services. We will keep you and your staff informed of developments in this area. Sincerely, EMcE:WRM:pjt bcc: Mr. McEntee Mrs. Mallardi (2)1/ Enclosures (Pres. Corrigan's remarks dtd. 12/17/83, & Memo to Board dtd. 12/14/82) Identical letters sent to: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ate Chrmn. Fauntroy & Cong. Wylie & Wright. s' BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, C. C. 20551 PAUL A. VOLCKER January 20, 1983 The Honorable Robert J. Dole Chairman Subcommittee on Courts Committee on the Judiciary United States Senate Washington, D.C. 20510 Dear Chairman Dole: I wrote to you on September 29 and December 13 of last year concerning certain proposed technical amendments to the Bankruptcy Reform Act of 1978 ("Code") that would stabilize the market for repurchase agreements ("repos"). I am writing to reiterate the Board's support for legislation that would exempt repurchase agreements from the automatic stay imposed by the Code. This exemption would ensure that parties holding securities subject to repurchase agreements with entities that are bankrupt could liquidate those securities and protect themselves from the risks of capital loss and illiquidity. A court decision in the bankruptcy case of Lombard-Wall, a government securities dealer, has cast some doubt on the ability of repo particiS.. nts to liquidate the securities that they hold subject to the agreement. The decision casts doubt on the liquidity and safety of repo agreements because the holder is subject both to unexpected quidity and risk of capital loss should unfavorable interest rate changes occur. The failure of a major market participant and the inabty of other parties to liS uidate their investment promptly could ripple outward through the securities market and cause an otherwise isolated problem to spread to other financial markets. Further, if the repo market were to become less attractive, its usefulness as an instrument of monetary policy would decline. For these two major reasons, the Board recognizes the importance of assuring proper functioning of the repo market. The Board believes that a legislative solution of this problem is the best method of -.'clarifying, the law and avoiding possible structural The proposed amendments would resolve problems in the financial markets. this potential problem by exempting repos from the automatic stay in bankruptcy, thus providing repos with the same legal treatment as market The participants believed they had prior to the Lombard-Wall decision. amendments are drawn narrowly, so as to protect the markets and transactions https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ilk The Honorable Robert J. Dole -2- that are large enough to create system-wide problems if disrupted, without They extend to undermng the structure of existing bankruptcy law. repurchase agreements the protections already granted to dealers in equity securities by the 1981 technical amendments to the Code enacted last July. The Board requests that Congress enact the proposed amendments in order to diminish any potential problem for the stability of the nation's financial markets and to preserve repurchase agreements as an effective tool of monetary policy. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sin erely, a1/1 all- BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM P-t• WASHINGTON, D. C. 20551 PAUL A. VOLCKER CHAIRMAN January 20, 1983 The Honorable Peter W. Rodino, Jr. Chairman Committee on the Judiciary U. S. House of Representatives Washington, D.C. 20510 Dear Chairman Rodino: I am writing to you to express the support of the Board of Governors of the Federal Reserve System for a change in the Bankruptcy Reform Act of 1978 ("Code") to remove a possible technical impediment to the effective functioning of the market for repurchase transactions. ("repos"). A recent development in the repo market--the bankruptcy of an active dealer in that market--has raised the possibility that in the future the financial problems of a particular institution could impair the liquidity of other firms. Because of the magnitude of the market--over $100 billion outstanding each day--and the importance of repos as an instrument of monetary policy, it is desirable to restore an environment that will assure smooth functioning of this financial market and avoid the potential for a serious effect on other financial markets as well. A repurchase transaction represents a transfer of a financial instrument of some kind--often a government security--and a simultaneous agreement requiring a return of the security at a fixed date and at a price which reflects a rate of interest to be paid by the transferee. The term of repos usually ranges from one day to one week, although they sometimes Repo transactions are attractive to market extend for longer periods. participants because they provide a high degree of flexibility as to term and amount to be invested, and they are used by a wide range of entities to Market participants include earn interest on temporarily idle funds. government securitis dealers, states, municipalities and other public bodies, financial fristitutions, pension funds, and money market mutual funds. It had been thought by the market that these transactions were botl) highly liquid and secure beyond question. However, the bench opinion of the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Peter W. Rodino, Jr. -2- United States Bankruptcy Court for the Southern District of New York in September, 1982, in the bankruptcy case of Lombard-Wall, Inc., held that the automatic stay against creditor action prevents the holder of securities acquired under a repurchase agreement from liquidating those securities and closing out its transaction with the debtor. The decision casts doubt on the safety and liquidity of repo transactions because it subjects the holder both to unexpected inability to liquidate securities it holds and to the risk of capital loss should unfavorable interest rate changes occur; these risks impair the qualities that are the essence of the appeal of repo agreements. Because the securities cannot be liquidated without permission of the court, the investor bears the risk of changes in interest rates that may decrease the value of the underlying securities, with a final determination as to the distribution of the securities often delayed for at least two months and possibly years. In a market in which prices may fluctuate widely, such a delay could result in substantial losses to investors. If this decision becomes the law governing these transactions, the failure of one market participant and the inability of other parties promptly to liquidate their investments to obtain cash to meet obligations could have a ripple effect throughout the securities market, causing an otherwise isolated financial problem to spread to many other entities. Participants would not receive their funds as expected and would either have to default on their commitments to third parties or borrow funds, if they could, to fulfill these commitments, thus incurring additional expenses. The proposed amendments would resolve the potential structural problem by exempting certain repos from the automatic stay in bankruptcy. The Board believes that the protection provided by the proposed legislation should be limited to those markets which are so large as to raise potential systemic problems in situations in which a bankruptcy could affect the liquidity and solvency of a large number of other entities, particularly fiduciary entities. This will protect the threatened markets without disturbing the existing structure of existing bankruptcy law. Accordingly, the Board supports limiting the scope of the legislation to the repo markets in U.S. government and agency securities, bankers' acceptances, and certificates of deposit and to repo transactions of $1 million or more. The legislation, however, should not be regarded as affecting the legal status of repos on other types of assets, such as commercial paper or commodities. The Federal, Reserve uses the repo market to affect the supply of reserves. For example, in 1981, the System entered into over $110 billion of repo transactions for monetary policy purposes. Such transactions are useful in helping to smooth out short-term swings in bank reserves that • would otherwise increase the volatility of interest rates. A repo market that has been narrowed by the withdrawal of participants that are unprepared to accept the risks inherent in the Lombard-Wall decision, could limit the ability of the Federal Reserve to act promptly and in the large volumes necessary to achieve monetary policy objectives. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis •1 The Honorable Peter W. Rodin°, Jr. -3- It would be desirable if market mechanisms could be used to avoid the risks inherent in the court's construction of the Bankruptcy Code. However, a detailed examination of this problem indicates that there are no really effective methods for hedging against these risks, leaving legislative action as the best method of clarifying the law and avoiding a structural problem for the financial markets. The proposed Code amendments are designed to protect the repo market, rather than any particular group or class of market participants. In this way, they are parallel to a similar action by Congress last July that exempted securities and commodities dealers from the automatic stay in order to minimize the "ripple effect" that would take place in the commodities or securities market should a large securities or commodities firm file a case under the Code. The Board requests that the amendments proposed be enacted in order to diminish any potential problem for the nation's financial markets and to preserve the repurchase agreement as a tool of monetary policy. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis January 14, 1983 The Honorable Roger W. Jepsen Chairman Joint Economic Committee Washington, D.C. 20510 Dear Chairman Jepsen: Thank you for your letteg, of January 11 regarding your Committee's hearing on the current state of the economy and economic policy for 1983. I am looking forward to heing with you on January 27 at 10:00 a.m. Sincexely, CO:pjt (V-5) bcc: Mr. Kichline Mrs. Mallardi (2) NA/3 nattAAL BOARD OF GOVERNORS (V-- OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 January 14, 1983 PAUL A. VOLCKER CHAIRMAN The Honorable Denny Smith House of Representatives Washington, D.C. 20515 Dear Mr. Smith: Thank you for your letter of December 29 pertaining to your proposal for a "freeze" in federal spending. As you know, I have repeatedly noted over the past few years my concern with the sizable, and it appears growing, structural budget-deficit problem. We all know that federal receipts fall off, and some outlays grow more rapidly, when economic conditions are weak. That is not the part of the current budget situation that bothers me. Rather, I am deeply concerned by the prospect of continued and rising budget deficits, persisting over the next several years, even when those deficits are estimated assuming a reasonably prosperous level of economic activity. It is this prospect of budget deficits that would Continue in the event of economic recovery that is troublesome since it holds the threat of the federal government preempting much too large a portion of private saving, to the detriment of private investment. Indeed, these future prospects are a factor holding up longer-run interest rates, and hence inhibiting recovery, today. Thus, I am very sympathetic with the objectives of your proposal to bring the deficit under better control. In your proposal, you correctly note that outlays committed by prior contracts and interest on the public debt (which is also contractual) cannot be frozen. Furthermore, caseloads cannot be frozen in major benefit programs without major changes in the structure of those programs. Thus, aggregate outlays would not be literally frozen under your proposal although their growth would be substantially slowed. Just how rapidly revenue growth would catch up with such slowed growth of receipts -- and thus, whether this approach would address our budget problem in a timely manner -- I am not in a position to say. More fundamentally, I am disinclined to say whether this is a desirable approach to the problem because it, just as any other, has definite implications for such important issues as the relative priority of spending for defense and for domestic social programs. These issues go far beyond the purview of the Federal Reserve. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Denny Smith Page Two Let me repeat that I am sympathetic with your objective of bringing the federal deficit problem under control. I admire your initiative in developing an approach; this will certainly assist the dialogue and hasten action on this important matter. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, SL:JLK:NS:pjt (#V-1) bcc: Ms. Lepper Ms. Wing Mrs. Mallardi (2) Action assigned Mr. Kichline COMM ITTE E DENNY SMITH 2D DISTRICT, OREGON INTERIOR AND INSULAR AFFAIRS WASHINGTON ADDRESS 1207 LONGWORTH HOUSE OFFICE BUILDING (202) 225-5711 SUBCOM M ITTEES: Concgrefs5 of the Einiteb j[lotuSe of Reprefientatib0 SALEM ADDRESS: 4035 12TH S.E. 020 P.O. Box 13089 SALEM, OREGON 97309 Ilitusbington, 31D.C. 20515 (503) 399-5756 tatez ENERGY AND ENVIRONMENT INSULAR AFFAIRS VETERANS' AFFAIRS SUSCOM U TiTEr: EMPLOYMENT. EDUCATION AND TRAINING December 29, 1982 -7* Un CO r^ C-- 17-7' 4 The Hon. Paul A. Volcker Chairman Federal Reserve System 20th Street & Constitution Ave., NW Washington, D.C. 20551 Dear ' The concept of a freeze on Federal spending is gaining attention in Congress and throughout the nation. It is a budget that elicits support across the broad political spectrum and support from to American people. For almost two years I've discussed the merits of an across-the-board spending freeze. Portions of the FY 1983 budget were frozen at FY 1982 levels, but we must take this further and I think you'll agree when you read the enclosed paper, "A Case for a Freeze on Federal Spending." My colleagues in Congress received copies of this paper in the closing days of the 97th Congress. Additional copies are being distributed to Administration officials, media representatives, trade associations and political action committees. I am welcoming comments or suggestions before Congress begins deliberating FY 1984 budget alternatives. Before we commit ourselves to another deadlock over a controversial budget, this concept of allowing revenues to catch up with spending deserves widespread attention and debate. An across-the-board budget freeze is the fairest and most politically doable plan we can promote, if we are sincere in pursuing a fiscally sound budget with a goal of reaching a stronger economy, lower interest rates, and a balanced budget in the foreseeable future. A Federal spending freeze is as sensible as it is simple and it provides the basis for a plan the American people can rally behind. I'd like to hear your thoughts on this. / 6 4 .. est regards, ress DS/jdh https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis it/ i https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis _ A CASE FOR A FREEZE ON FEDERAL SPENDING by Congressman Denny Smith FOREWORD This paper was prepared in December 1982 to illustrate the need for an immediate, across-the-board freeze on Federal spending as an adjunct to economic recovery for this nation. Economic projections detailed within will change with subsequent economic forecasts. Any such changes are essentially irrelevant. As the predictions for revenues, outlays and deficits move throughout the budget process in FY1983, the concept of a freeze on Federal spending at current levels stands alone as the fairest and most pragmatic approach Congress can take to enhance our chances for getting the American economy moving again. The idea for an across-the-board freeze on Federal spending was first discussed at town meetings in Oregon after I took office in 1981. Since that time, the concept of a spending freeze has gained acceptance by Members of Congress, editorial writers, and business leaders across the country who realize there is true merit to a plan that balances the Federal budget expeditiously without recommending cutting a cent from current spending programs. Senator Hollings, Ranking Minority Member on the Senate Budget Committee, fashioned a similar plan from this spending freeze concept last spring. The Senate Budget Committee reported out the FY1983 budget with several freeze measures on domestic spending incorporated within their plan. Budget freeze proposals were forwarded in the House by Democrats and Republicans. Here is a budget alternative that is fair and provides a sound basis for bi-partisan support. Legislation has not been drafted at this writing, but I am laying groundwork to have this considered as a 1984 budget alternative. I invite the reader to submit comments or suggestions on the spending freeze concept to my office at 1213 Longworth House Office Building, Washington, D.C. 20515 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A federal spending freeze is as sensible as it is simple. allows increasing federal revenues to catch up with spending. The chart below shows how federal spending consistently outpaces rising revenues. THE FEDERAL BUDGET CTRILLION) 1000 4: We have balanced the Fild,lral bud,: 4.=.t rinly 'Dr-0-.1 in 20 v,lar.r., and that war bv accident. - it: Federal lpendinc4 iz ccinziztently outpacinQ reve%ez bv enoraioul marc4 inz. 471:.F,7 T599(1,1 t 473E4 4cin 0-* P1' ,1 L7-1 ;71 P'7f1 70 I4 74 C3FEDEPFL :FENDING E:FEnERAL PEVENUES 84 85 -7•C FY CHART A QUESTION: "What is meant bv a freeze on federal spending? Six major points, discussed in more detail later in this paper briefly ex.olain the across-the-board spending freeze concept. *Federal spending would be frozen- at- the approved FY1983 level and would hold at that level until the budget is in balance or surplus. *Each functional account within the Federal budget have established as its ceiling the approved FY1983 Budget Authority (BA) level, excent for interest on the national debt (Function 900) and those functional accounts involving entitlements to allow for addition cf new annuitants as they become eligible. I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Page 4 Annual deficits of the Federal government are literally exploding. The Federal deficit next year will equal the total Federal budget for FY1967. At this rate, the national debt will near the $2 trillion mark by 1986. Our economic difficulties -- high interest rates and a stagnant economy -- are attributed in great part to the continuing high Federal deficits that: --jeopardize our chances for economic recovery and sap the economic viability of the nation --generate uncertainty about the Federal government's ability to control Federal spending which depresses financial markets and impairs the performance of the economy --erode our economic base essential for providing a strong national defense --drain the limited pool of capital necessary to finance private investment for new plants, equipment, homes and small businesses. The significance of the final point -- draining the private savings pool -- cannot be underestimated. Unrealistically high interest rates promoted by the Federal Reserve's monetarist policies over the past three years have dampened our chances for economic recovery by prolonging the current recession. A change in course by the Federal Reserve in July 1982 away from a simple targeting of the money supply (M-1) to a more realistic assessment of true market conditions and the level of prices has brought us lower interest rates. But if we are to continue along the path to lower interest rates.. if we are counting on the consumer to lead us into economic recovery... if businesses large and small are to restore our decaying industrial base to meet the technological challenges of the future, the Federal government cannot stand in their way. When our economy does begin to expand and grow its way out of the recession, there must be money there for the borrowing to purchase new homes, autos, and the expansion of small businesses. Unfortunately, at a time when interest rates are finally coming down, the Federal government threatens to drive them higher and hinder economic recovery. Chart "C" illustrates our pending plight,if we fail to curb the enormous projected Federal deficits. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Page 6 While working toward monetary reform, as well we should, we must create an atmosphere of confidence in the financial markets that the Federal government is making substantial efforts to restrain spending and high deficits. Without it, there will be no substantial economic recovery. If confidence in the financial markets could be encouraged by a predictable future, an across-the-board freeze is the strongest signal we could send. "How, as a Congress, with members of vastly differing philosophies, can we come to terms on the solution for a budget that is fiscally responsible, yet is fair to all involved?" QUESTION: We can begin by examining the merits of an across-the-board freeze. NO CUTS. NO ADDITIONS. A freeze at FY1983 approved levels of spending will bring us a balanced budget without raising taxes a' single cent sooner than any alternate budget plan set forth to date. We are not short of revenues: 1:3- ROLIITH IN FEDERAL F:Ell,s'Eli..11JES $757 BILLION *.t. Our problEm not a lark of r4,v.Inu.L. f. The 1931 ERTA lyaz a tax RATE rut, not a tax rut. i_tC1 - 4cin - 1 f 7.? 32 33 'CHART D Chart "D" illLIstrates that even with the 1981 tax rate cut in place, the Federal government will te raising more and more revenue in the years to come. The treasury is expecting to take in $619-630 billion in revenues in FY1983. By 1986, revenues to the Federal government could reach $800 billion per Year. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ii Page 8 The solution to our fiscal problems is as fair as it is simple. Freeze Federal spending at levels we're living with and allow the projected growth in revenues to catch up. FEDERAL SPENDING FPEE2E OUTLAIS f FrEez.R Federal zpendinQ acron—the-toard at approwed FY 198::: ER levEli. t Outlay-7 wi II incr,:.a7,1 -71icihtly to _Tend out ot oblkatEd prior year ER. t 450 REVENUES t Allow proisr-ct.:.d their cour.7,I. t No cut7, no addition-7 to prEti.int IpendinQ ^ : 73-10 150 T -A- 7'11 . 4 1:17,1 T 8'3 84 85 86 A budget frozen at current levels is a politically workable plan because: *No individual relying on assistance from the Federal government is denied less than current benefits during a freeze. A freeze is not a cut. A freeze is a freeze. across-the-board. *No agency/program/department is denied less than current funding. Budget functions for energy, defense, foreign aid, science, space, environment, natural resources, agriculture, housing, transportation, conmunity and regional development, education, training, em?loyment, social services health, veterans benefits, administration of justice would have access to funding at the current levels. A freeze allows department heads to engage in longer range planning, because it assures a guaranteed level of funding during the freeze period. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Page 10 INTEREST PAYMENTS ON THE NATIONAL DEBT By any standards, the interest payments on the national debt have reached absurd proportions. Interest- on the national debt is now the third largest component in the Federal budget. At the present rate it will exceed current spending on the two larger components (Social Security and defense) by 1986. NET INTEREST PAYMENTS ON NAT I ONAL DEBT 150 125 E:T 3145 4 4136:: • At thizrat.int,Irt on the national dibt could reach $2t:10 BILLICA1 a year by 19. mor.-- than we arTE !pending on defenze and Social '7;-.curity. 101 100 50 -- -st 4 CHART H With the nation's debt now well over the $1.1 trillion mark, the Congressional Budget Office (CB0) estimates the Federal government will have to collect $117 billion in taxes (almost 20% of the projected revenue) in FY1983 alone to pay the interest on the national debt. Interest payments on the national debt will rise to at least $145 billion (again 20% of the projected total revenues) by 1985. Some budget analysts are predicting that by 1986 interest on the debt will exceed $200 billion per year. An across-the-board freeze on Federal spending over the next three years would reduce the projected Federal deficit by $234 billion. The interest savings from such a freeze over the next three fiscal years would near S50 billion, which would narrow the Federal deficit considerably. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Page 12 *Reviewing legislative initiative to remove Social Security from the unified budget and set the trust funds aside as was originally intended. Suspension or restraint of cost-of-living adjustment payments are not without precedent. Civil service and military pay adjustments have been altered on numerous occasions. Moreover, Social Security benefits had not been indexed at all prior to 1975. Before 1970 only nine Federal programs were indexed. Since 1970, 49 programs have ba:cme indexed, according to CBO. All together, 70 programs comprising 50% of the total Federal budget are now indexed through COLAs. The President's bi-partisan Commission on Social Security Reform reviewed options that call for a similar restraint on future COLAs and a general consensus is building that such a course is necessary to maintain the system's solvency. New annuitants to entitlement programs would be provided for as they qualify under a Federal spending freeze. In fact, the projected savings in Social Security from a suspension of COLAs over the next three years would guarantee the system's solvency through 1987. Savings from a freeze on future COLAs through 1986 would equal $87 billion and provide ample accommodation for new beneficiaries to enter a soundly financed system. NATIONAL DEFENSE The foundation necessary for restoring and maintaining a strong national defense is a strong and stable economy. While we cannot afford to relax our commitment to a strong national defense, neither can we afford to ignore the impact a rapid sustained increase in defense spending will have on our economy. The real increase in defense spending provided since 1981, $641 billion in new Budget Authority and a $72 billion increase in actual budget outlays, has generated new inertia and momentum to restore our national defense. A freeze on Federal spending at current BA levels, including defense, would allow us to continue that momentum, if we take the necessary actions to economize in the procurement, operations and maintenance areas where common sense dictates it is necessary. There exists a $143 billion backlog in unspent prior year BA that will spend out during the freeze period. This money in the "pipeline" has been obligated on a long-term contract basis and those procurement contracts at a reasonable level of maturity should be fulfilled, in many cases on a stretched out schedule. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • Page 14 Many of our colleagues in both the House and Senate have suggested numerous other innovative ways the Department of Defense can economize while enhancing our national security. The point is clear: More money in itself will not guarantee a stronger national defense. A freeze on Federal spending, including the defense budget, will necessitate internal actions at the Pentagon to prioritize those programs essential to an adequate national defense. CONCLUSION The solution to our impending fiscal crisis must begin with the belief that our government will not be successful in any endeavor it undertakes -- whether it be balancing the budget, providing a strong national defense, or putting Americans back on the job -- if the will of the American people is not behind it. We must produce a budget that is fair, fiscally sound, and perhaps most importantly, understandable to the American people asked to support it. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A freeze on Federal spending is the answer. Oa January 14, 1983 The Honorable Bill Bradley United States Senate 20510 Washington, D.C. Dear Senator Bradley: Knowing of your interest in these matters, I thought you might like to see the enclosed letter I have sent to the Chairman of the House Banking Committee about the debt problems of developing countries and proposals to increase the resources of the IMF. Sincexely, Enclosure (Ltr. to Chrmn. St Germain from Chrmn. Volcker dtd. 1/7/83) DJW:pjt (see V-195) bcc: Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis tlk • • _ Action assigned Mr. Truman 4. A BILL BRADLEY COMMITTEES: NEW JERSEY FINANCE ENERGY AND NATURAL RESOURCES rUnifeb -.States Zertate SPECIAL COMM ITTEE ON AGING WASHINGTON. D.C. 20510 August 19, 1982 er" Honorable Paul A. Volcker Chairman Federal Reserve System 20th and Constitution Ave., N.W. Washington, D.C. 20551 Dear Mr. Chair a (1d,t/tillet-z-, For more than a year, with Poland on the brink of financial default, the Western world has become sharply aware of the potential risks posed by our lending to members of the Soviet bloc. But the debate surrounding East-West economic relations has eclipsed an equally important message of the Polish debt crisis -- the world financial system may be vulnerable to the possible repercussions of a sizeable sovereign default. The prospect of losing even a part of the estimated $27 billion in Western assets held as loans to Poland, should spur the governments of the major financial powers to plan collectively for contingencies. A contingency program should spell out possible scenarios following a Polish default and trace, step-by-step, how the system can be expected to cope with each possible danger. Unfortunately, I fear that such an exercise would expose several points of vulnerability in the world financial system. Here are some of the factors that spur my concern: 1 the huge international debt incurred by Eastern European and Third World countries which are in precarious economic health; 2) the shaky financial conditions of many major international corporations; 3) the chain reactions and systemic problems which will develop if one or more of these shaky players should start to fall, including breaks in bank lending lines; a race to call in loans; withdrawal of deposits from banks perceived as risky; and a rush of new deposits to "safe" currencies; https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1.19norable Paul A. Volcker - Page 2 4) a failure to define lines of authority among central banks for crises in overseas affiliates and consortia banks, and to change domestic laws which would inhibit effective action in a liquidity or currency crisis; 5) a lack of a mechanism to handle severe, system-wide foreign currency shortages. My impression is that during a crisis spurred by these factors several gaps in the system could develop. At best, there is uncertainty about how existing institutions would perform to close them. A contingency program to increase certainty could play an important role. If my concerns are not warranted, I hope you will detail for me how we and our major allies would effectively protect Western banking systems, and hence economies, in a crisis. If no such plans exist, or if you lack confidence in them, then I urge you to undertake a study of this problem. Assuming that adequate protections do not currently exist, I would like to offer a few steps that might be considered. First, we could create a multilateral fund from which central banks could borrow, under agreed conditions, the foreign exchange they need to cover endangered banks. The fund would need authority to borrow from the central bank of the country whose foreign exchange was in high demand in order to relend to the central bank in need. Of course, the fund would have to set rigorous conditions to deter anything but emergency use. It appears to me that the International Monetary Fund would be the appropriate agency to administer this fund, but there are other possible candidates such as the Bank for International Settlements in Geneva. In connection with this proposal, I would like to know whether the lending of dollars in any amount by the Federal Reserve to the IMF or BIS for this purpose would require Congressional authorization. We might also consider creating a financial contingency program which could include (1) a formal agreement clarifying and reaffirming the 1974 central bankers Basle declaration on the allocation of lender of last resort responsibilities; (2) preparations to stabilize a vulnerable currency; and (3) preparations to coordinate the operations of the lender of last resort facilities of major industrialized nations. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Honorable Paul A. Volcker - Page 3 These suggestions are at best partial solutions to difficult questions. I recognize that responses to the questions raised are not easily prepared. However, I know you appreciate that the matter is of great importance. While I do not intend to create undue public alarm. The desire to assure public confidence in a vulnerable financial system, will prove a shabby excuse if an uncontrollable crisis should develop. We must guarantee stability against any reasonable doubt. Equally important, allied threats to cut off credits to Poland would weigh more heavily with Poland's generals (and Soviet Politburo members) if they knew that our economies were braced against the potential repercussions of a default. Similarly, a contingency program is a prerequisite to a credible credit sanction policy. Without it, our hands are tied by our own economic vulnerability. I offer these comments and questions in a spirit of cooperation and in the belief that our country will be better off if we have a reliable framework for minimizing the vulnerability of the U.S. economy and U.S. security interests to the repercussions of large sovereign defaults. Because of the urgency of this problem, I would appreciate a timely response, at a minimum informing me of the progress being made in preparing answers and, I hope, formulating a contingency program. B/p..ct wishes, Il`l / r ( ( 4 Bill Bradley BB:afk https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis tar r r ei.i • January 11, 1983 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: Thank you for your letter. of January 7 concerning your Committee's hearing on current international financial and economic conditions and the anticipated request by the Administration to increase the U. S. commitment to the International Monetary Fund. I am looking forward to being with the Committee on February 2 at 9:30 a.m. Sincerely, S4Pagi CO:vcd (V-3) bcc: Ted Truman (w/copy of incoming) Fred Dahl (w/copy of incoming) Mrs. Mallardi --'2.841ZACIMAINIPL.:47 U4. FERNAND J. ST GER MAIN. R.I., CHAIRMAN RY S. REUSS, WIS. HENRY B. GONZALEZ, TEX. JOSEPH G. MINISH, NJ. FRANK ANNUNZIO, ILL. PARREN J. MITCHELL MD. WALTER E. FAUNTROY, D.C. STEPHEN L. NEAL. N.C. JERRY M. PATTERSON. CALIF. JAMES J. BLANCHARD. MICH. CARROLL HUBBARD. JR., KY. JOHN J LAFALCE. N.Y. DAVID W. EVANS, IND. NORMAN E. D'AMOURS. N.H. STANLEY N. LUNDINE. N.Y. MARY ROSE °AKAR. OHIO JIM MATTOX, TEX. BRUCE F. VENTO, MINN. DOUG BARNARD, JR.. GA. ROBERT GARCIA. N.Y. MIKE LOWRY. WASH. CHARLES E. SCHUMER, N.Y. BARNEY FRANK, MASS. BILL PATMAN, TEX. WILLIAM J. COYNE PA. STE-NY H. HOVER, MD. / Chairman will be testifying; copies sent Truman J. WILLIAM STANTON. OHIO CHALMERS P. WYLIE, OHIO and Dahl STEWART B. McKINNEY. CONN. U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-SEVENTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 January 7, 1983 GEORGE HANSEN, IDAHO JIM LEACH. IOWA THOMAS B. EVANS, JR., DEL. RON PAUL. TEX. ED BETHUNE, ARK. NORMAN D. SHUMWAY, CALIF. STAN PARRIS. VA. ED WEBER OHIO BILL McCOLLUM. FLA. GREGORY W. CARMAN. N.Y. GEORGE C. WORTLEY, N.Y. MARGE ROUKEMA, NJ. BILL LOWERY, CALIF. JAMES K. COYNE, PA. DOUGLAS K. BEREUTER. NEBR. DAVID DREIER, CALIF. 225-4247 Honorable Paul Volcker Chairman Federal Reserve Board Washington D.C. 20551 Dear Mr. Chairman: This letter confirms your agreement to testify on Febuary 2, 1983, before this Committee regarding current international financial and economic conditions and the anticipated request by the Administration to increase the U.S. comitment to the International Monetary Fund. The hearing will begin at 9:30 a.m., in room 2128 of the Rayburn House Office Building. A letter detailing the Committee's specific concerns and reflecting your response to our correspondence of December 16, 1982, will be sent to you in a few days. In accordance with Committee rules, you are asked to submit 150 copies of your written testimony to the Committee office, room 2129 Rayburn, 24 hours in advance of your appearance. Please limit your oral testimony to 20 minutes so that all Committee members may have adequate time for questioning. Your entire, statement, of course, will be printed in the record and made available to all members prior to the hearing. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, Fernand J. Chairman t Germain https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis January 11, 1983 The Honorable Daniel I. Inouye United States Senate Washington, D. C. 20510 Dear Senator Inouye: Thank you for your letter of December 23 concerning the effect of section 13 of S.J. Res. 271 on the exemption provided to certain depository institutions located in Hawaii under the Monetary Control Act of 1980. S.J. Res. 271 exempts from the phase-in of reserve requirements Money Market Deposit Accounts ("MMDAs") issued by depository institutions under the rules of the Depository Institutions Deregulation Committee. It is clear from the history of the Resolution that the special status of certain depository institutions located in Hawaii was not to be affected by the Resolution. Consequently, any depository institution that was engaged in business in Hawaii on August 1, 1978, and was not a member of the Federal Reserve at that time (or subsequently) is not required to maintain reserves against its MMDAs until January 2, 1986. I appreciate the opportunity to clarify our position. Sincerely, GTS:CO:vcd (V-285) bcc: Mr. Schwartz Mr. Bradfield Legal Files (2) Mrs. Mallardi (2) DANIEL K. INOUYE d PRINCE KUNIO FEDERAL BUILDING' Room 6104, 300 ALA MOANA BOULEVARD HONOLU1JJ, HAWAII 96850 (808) 546-7550 HAWAII 'Alertifeb Ziafez -Senate ROOM 722. HART SENATE BUILDING WASHINGTON, D.C. 20510 (202) 224-3934 "11 re'. December 23, 1982 c.-.7:3 ...-ro .4, r-1 7;- C--) 77- r.-:'-•:' 0. ':.f -- - C.....) CD 7-, The Honorable Paul A. Volcker Chairman Federal Reserve Board 20th and Constitution, Room B2046 Washington, D.C. 20551 •• OD Dear Mr. Chairman: Several of my concern about the exemption (8)(e) of the constituents have contacted me to express thei r the impact of Section 13 of S.J. Res. 271 on provided to Hawaii banks under Section 19(b) 1980 Depository Institutions Deregulation Act. Under the section, Hawaiian financial inst itutions will enjoy a limited five-year reserve exemption. The rationale of the exemption is that financial entities in Hawaii do not enjoy access to many services enjoyed by thei r counterparts on the Mainland. The resolution was introduced on December 13, 1982 , and was passed in the early hours of December 16, 1982, before the Hawaii banks were able to express their reservat ions. In his floor statement prior to passage, Senator Garn remarked that Section 13 was not intended to change existing law. My staff has been in communication with the Banking Comm ittee and Federal Reserve staff about the implications of this sect ion. I would appreciate your advising me whether Senator Cam 's understanding indeed is the interpretation of the Board and whet her the Board would interpret Section 19(b)(8)(e) as it currentl does y notwithstanding enactment of S.J. Res. 271. Your assistance and consideration are deeply appreciated. Alo TEL I. INOU United States DKI:ell https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis tor 7.) CD Fri el January 10, 1983 The Honorable John F. Seiberling House of Representatives Washington, D.C. 20515 Dear Mr. Seiberling: Thank you for your letter. of December 20 with respect to correspondence you received from Mr. Langdon P. Marvin, Jr., concerning the management and disposition of a trust account by the Bank of New York (the "Bank"). We have been informed thAt since the death of the trust beneficiary, Mrs. Mary V. Marvin, the Bank has referred the matter to an attorney, Mr. Larry Thompson of the firm of Emmet, Marvin & Martin, 40 Wall Street, New York, New York. Mr. Thompson, who also represents the estate of Mary Marvin, further informs us that the decedent's will has been submitted for probate and that it is the Bank's intention to seek a judicial determination as to the proper disposition of the trust corpus. As a part of this determination, the question of the validity of Mr. Marvin's power of appointment will be considered. Mr. Thompson informs us that Mr. Marvin is no longer represented by Mr. Lawrence Krieger; Mr. Marvin's present attorney is Mr. Richard Wels of the firm of Perry, Weinberg, Wels, Waldman & Rubenstein, 6 East 43rd Street, New York, New York. Mr. Thompson states that he has been in communication with Mr. Wels concerning the issues raised by Mr. Marvin. Based upon our investigation, we do not believe, at this time, that there has been a demonstration that the Bank has acted improperly. We also note that since the issue is to be the subject of a judicial determination as to the proper disposition of the trust assets, it would be inappropriate for the Federal Reserve to further intervene in this matter. Mr. Thompson has promised to report to us the court's findings once a determination has been rendered. I hope this information Will prove helpful. As further background on this matter, I am enclosing a copy of my letter to you dated November 3, 1981. Please let me know if I can be of further assistance. Sincerely, RSP:CO:cic(V- 2&-/) bcc: Mr. Plotkin Mrs. Mallard! Enclosure https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Doniald J. Winn Assistant to the Board =m u,milms .JUDICIARY INTERIOR AND INSULAR AFFAIRS Action assigned Mr. Ryan Congremlofitte 1uttcb Otateti f4oute of RepresSentatibui 12.25 LONGWORTH HOUSE OFFICE BUILDING TELEPHONE (202) 225-5231 DISTRICT OFFICE: FEDERAL BUILDING AKRON, OHIO 4408 TELXPI-IONE: (216) 375-5710 ElastingtonAD.C. 20515 T LCD December 20, 1982 C . "11 173 1:•, (") fr Tr C-) ri Paul A. Volcker, Chairman Board of Governors Federal Reserve System Washington, D.C. 20551 3C11 ";•••• •• ;-" L.) Dear Mr. Chairman: Enclosed is a copy of a letter dated July 26, 1982 to the Bank of New York from the attorneys for Mr. Langdon P. Marvin, Jr., my friend and classmate. Mr. Marvin advises me that no reply has ever been received. Without in any way passing upon the merits of Mr. M-larv in's position with respect to the trust referred to in the enclosed letter, it does seem to me that he was entitled to some response to the requests set forth in the letter. I would appreciate anything you could do within existing policy to ascertain that the Bank of New York is exerc ising its proper responsibilities in this matter. / John F. Sciberling Le Member of Congress Enclosure cc: Langdon P. MOrvin, Jr. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THIS STATIONERY PRINTED ON PAPER MADE WITH RECYC LED FIBERS : t C. ; ea 1 AVVIIT NCI.: WL!.) 1 ON 1.1?It ("LP COUNEELL0F, A- I AvS, 2Q 5 MAnISCL AVENUE NEW YORK : N.Y. 10017 SlEPHEN D WA 212 E7c0-1214 RD July 26, 1982 Mr. Douglas F. Adams, Senior Vice President The Bank of New York 48 Wall Street New York, N.Y. 10015 Re: Trust U/W of L.P. Marvin, Sr. New York County P3163/1957 Dear Mr. Adams: I am the attorney for L.P. Marvin, Jr., son of the above-named decedent. Enclosed is a copy of the death certificate of Mary Vaughn Marvin, wife of the decedent and mother of my client. On August 31, 1981, I forwarded to Mr. Averett, President of the bank, a copy of the exercise of a power Of appointment by Mary Vaughn Marvin, the beneficiary of a marital deduction trust in the, above-mentioned estate. The Bank of New York is the Trustee of said trust. My client is the appointee of the corpus of said trust, as duly indicated by the document sent to the bank last August 31st. I should appreciate being advised on behalf of my client, as .a person interested in the principal of the trust (SCPA2309(4)): a) a statement showing the principal assets of the trust, b) an approximation of the date upon which my client may expect your final account to be filed in Surrogates Court, New York County and when the corpus of trust plus accrued income will be paid to him as the recipient of his mother's exercise of her power https://fraser.stlouisfed.org ..imilifibakailh Federal Reserve Bank of St. Louis July 26, 1982 Mr. Douglas F. Adams -page 2- of appointment under the above mentioned will. I should appreciate an answer at your earliest convenience. Very truly yours, LWY:SH CC: Langdon P. Marvin, Jr. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Ammemysimmeiniimarim .44 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis January 7, 1983 The Honorable Stephen L. Neal House of Representatives Washington, D. C. 20515 Dear Mr. Neal: This is in response to your recent letter urging the Board not to pursue any legislative amendment to the definition of "bank" in the Bank Holding Company Act that would not involve complete hearings and full Congressional debate. As you know, there has recently been an increasing number of affiliations by financial and commercial nonbank firms with institutions that are chartered as banks but allegedly do not make commercial loans. The Board is concerned about this development and believes that steps should be taken to close this loophole. However, I agree with you that Congress should not be asked to deal with this problem in any manner that would not provide a thorough analysis of the problem and an opportunity for all interested parties to present their views. In order to promote a reasoned discussion of this issue, the Board soon will submit suggestions for legislative action to Congress. Thank you very much for your comments regarding this matter. Sincerely, big CVH:vcd (V-272) bcc: Carl Howard Virgil Mattingly G.C. Log 438 Legal Files (2) Mrs. Mallardi (2) S. Action assignei Mr. Bra-Mel-I Mika • ''11111 .47 Conort55 of tie Eniteb tate5 kousst of ReprecSentatibel STEVE NEAL 5TH DISTRICT, NORTH CAROLINA December 7, 1982 The Honorable Paul Volcker Chairman The Federal Reserve Board 20th Street & Constitution Avenue, N.W. Washington, D.C. 20051 Dear Mr. Chairman: us ao 0 •min rvi rn r' - UD r I have been told by a banker friend that the Fed may attempt to change the definition of banks -- established by leqislation over a long period of time -- and that the change might- be 1-3; ) 11 sought in the current Congress without hearings and full public debate. Further, I am told that should its legislative efforts fail, the Fed might attempt to establish by regulation a two-year moratorium on the question of approval of new banks which might be established under current law, but which might not meet the requirements the Fed would seek to establish by the aforementioned legislation. This is an important subject, Mr. Chairman, deserving complete hearings, full debate, and a presentation of views from all sides. I therefore respectfully request that any plans by the Fed to effect these changes be delayed until the 98th Congress convenes, so they may be subjected to the complete legislative process. Bes I ishes, PHEN AL .S. Ci gressman SLN:jt WASHINGTON 01710E: 2463 RAYBURN HOUSE Orr!cc BUILDING WASHINGTON. D.C. 20515 PHONE:(202) 225-2071 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis HOME OFFICEs 421 FEDERAL BUILDING W INSTON-S ALE M, Nonni Cnonyt...Inn 27101 PHONE:(919) 761-3125 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER CHAIRMAN January 7, 1983 The Honorable Fernand St Germain Chairman Committee on Banking, Finance and Urban Affairs House of Representatives Washington, DC 20515 Dear Chairman St Germain: Your letter of December 16 raises a number of important issues concerning the external debt problems of developing countries and their connection with international lending by banks and with proposals to increase the resources of the International Monetary Fund. I am pleased to respond to the questions that you raised. Your first question concerned the data published by the Federal Financial Institutions Examination Council on its Country Exposure Lending Survey. As you requested, copies of Table I from the surveys for Decenber 1981 and June 1982 are enclosed. Comparable figures for earlier surveys beginning with December 1977 are in Table II, copies of which are also enclosed. TWo sets of tables are provided for each date, one for all reporting banks and one for the nine largest banks as a group. Comparable data are not readily available for dates prior to December 1977. Clairs on non-oil developing countries by reporting banks (defined as banks with a foreign branch or subsidiary and more than $20 million in claims on foreign countries) increased from $47 billion in December 1977 to about $100 billion in June 1982 -- an increase of 113 percent. Some perspective on this substantial increase is provided by noting that the exports of the non-oil developing countries increased from $120 billion at an annual rate in the fourth quarter of 1977 to $210 billion at an annual rate in the fourth quarter of 1980 -- an increase of 75 percent during a period in which U.S. bank clains on these countries increased by 61 percent. As a consequence of the global recession and less rapid price increases (frequently, actual declines), these countries' exports declined during 1981 and the first half of 1982 to an estimated $191 billion at an annual rate in the second quarter of 1982. It is also interesting to note that from the end of 1977 to the end of 1980 U.S. exports to these countries increased by 128 percent -- from $28.5 billion at an annual rate in the fourth quarter of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • Chairman St Germain 1977 to $65 billion at an annual rate in the fourth quarter of 1980. U.S. exports to these countries have declined since the end of 1980 as a consequence of the adjustment actions taken by many of them and the dollar's appreciation. Another type of comparison of the rise in U.S. banks' claims on non-oil developing countries is with banks' assets or capital. These , ouuparisons are presented in the enclosed tables. From December 1977 to June 1980 these claims were equivalent to about 6-1/2 percent of the reporting banks' total assets; this percentage subsequently increased to about 8 percent as of June 1982. The claims on the non-oil developing countries were about 115 percent of the total capital of the reporting banks from December 1977 to June 1979; after June 1979 and the percentage began to rise and reached almost 150 percent in June 1982. For the nine largest U.S. banks, which have accounted for 60-65 percent of total reported claims on the non-oil developing countries on each of the Country Exposure Lending Surveys, the rising trends in total claims and in the relationships to assets and capital have been similar to those for all reporters. However, for the nine largest banks claims on the non-oil developing countries have been somewhat larger relative to assets and capital, reflecting these banks' more extensive involvement in international lending generally. For this group of banks, claims on non-oil developing countries in June 1982 were equivalent to about 10-1/2 percent of assets and 220 percent of capital. Your second question concerned the economic situation of the developing countries that are major borrowers from U.S. banks. Most of these countries have experienced large current account deficits since 1979, although on average they were reduced somewhat during 1982. Nevertheless, serious external liquidity problems have recently arisen for three of the largest borrowers: Argentina, Brazil and Mexico. The problems of these countries -- and a number of other countries in roughly similar circuncstances -- arise from a combination of factors. Their expansionary policies gave rise to substantial external deficits during a period of risin world trade, and subsequently, as trade, economic growth, and prices weakened worldwide, their internal adjustments were either too weak or too Late to avoid even larger deficits. In some countries, the rise in oil prices in 1979 and early 1980 reversed earlier progress in narrowing imbalances. In the Argentine case, where the current account has been less unfavorable, difficulties related to the Falklands War added to financing problems. Official external reserves were not adequate under the circumstances and have been largely depleted. These countries have been unable, particularly since September, to continue to raise significant amounts of new lending from international banks to meet maturing loans as well as to finance continuing deficits. Argentina, Brazil and Mexico have adopted two lines of action to deal with their liquidity problems: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • Page 2 Chairman St Germain Page 3 (i) under stabilization programs established with the IMF, their governments have committed themselves to adjustments in fiscal, monetary, and exchange rate policies that should produce significant reductions in their current account deficits in 1983 and beyond; (ii) in cooperation with the IMF, various banking groups have been formed that are seeking to assure that international banks will collectively provide the countries with adequate financial resources in 1983 (through debt-refinancing and more limited amounts of net new lending) to complement loans from the IMF. During 1981-82, Argentina and Brazil, had already undertaken restrictive measures that resulted in sharply reduced or negative growth. Mexico took limited steps in that direction during the course of 1982, and the measures in Mexico and Brazil are currently being strongly reinforced, in line with IMF progrars, with the intent that external financing needs will be reduced and credit-worthiness maintained, in 1983 and the years beyond. The recent IMF-approved program in Argentina contemplates resumption of growth. Following are summaries of economic conditions in the six non-oil developing countries to which U.S. commercial banks collectively had a financial exposure (outstanding loans adjusted for external guarantees) exceeding $5 billion in June 1982: Argentina, Brazil, Chile, Korea, Mexico, and the Philippines. Argentina. Economic activity in Argentina dropped by about 6 percent in 1981 and is likely to have fallen a further 4 or 5 percent in 1982. Some export led economic revival of the economy is possible in 1983, although domestic demand will be restrained as Argentina seeks to achieve a reduction of the government budget deficit (from about 14 to about 8 percent of GDP) consistent with its IMF-approved program. Import volume in 1982 dropped to about half the level of 1980, when the peso had become highly overvalued. Argentina's inflation rate has been in excess of 10 percent per month recently but is planned to be reduced to about 8 percent per month in 1983 consistent with ceilings on domestic credit expansion agreed with the IMF. Argentine authorities have been negotiating for financing from the IMF and foreign banks that Would permit Argentina to cover a $1 billion current account deficit in 1983 and to pay off about $2 billion of debt service and commercial arrears that arose during 1982. IMF financing through a stand-by program and a campensatory financing loan for an export shortfall during 1982 may amount to almost $2 billion.,.A bridge loan from banks totaling $1.1 billion has been negotiated and partly disbursed, supplementary bridge financing from monetary authorities has been discussed, new medium-term financing of $1.5 billion has been largely agreed in principle, and maturing principal on medium and long-term debt will be refinanced. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chairman St Germain Page 4 This adjustment and financing program should be consistent with modest rebuilding of reserves and repayment of all bridge financing. The Argentine trade and current account positions should improve in 1983, and ratios of Argentine loans to bank capital and assets should decline slightly. Brazil. Real GDP had been growing rapidly through the 1970s and, in response to stimulative fiscal and monetary policies, rose at an 8 percent rate in 1980. Corrective policies were introduced in late 1980, leading to a 2 percent decline in GDP in 1981. Real GDP was essentially flat in 1982 and may well decline somewhat in 1983 as Brazil implements a program of relative fiscal austerity and attempts to reduce its real non-oil imports to about three-fifths of their level in 1978, which would be their lowest level in ten years. Brazil's inflation rate is now about 95 percent and has been in the range of 80-100 percent for 2-1/2 years, compared with a rate of about 40 percent during the 1974-78 period. Brazil's target for its current account deficit is about $7 billion for 1983, half the level of 1982. New foreign bank credit of about $4.5 billion and IMF credit of $2 billion have been requested for 1983. Negotiations were begun on December 20 with groups of creditor banks primarily to obtain the needed new bank financing and to restructure bank claims coming due in 1983. The need for new financing is appreciably reduced from earlier years. Chile. In attempting to adjust to the depressed world copper market and to reverse the overvaluation of the peso that emerged during 1980-81, Chile has suffered a severe decline in econamic activity. Real GDP declined by about 13 percent in 1982 and is likely to recover only slightly in 1983. Inflation had been brought down below 10 percent in the first half of 1982, but sharp depreciations of the peso in the summer and fall and the openness of Chile's economy have produced a bulge in the inflation rate. The weak activity resulted in a decline in the current account deficit in 1982 to about $2.7 billion, from $4.8 billion in 1981, and a further decline in the deficit is expected in 1983. The foreign debt of Chile's private sector is rather high, but the government and public corporations have been able to continue to arrange loans since September at a reduced rate and the central bank has significant reserves. IMF stand-by and compensatory financing credits are scheduled for consideration by the IMF Executive Board in January and would provide up to $875 million in IMF credit during 1983. Korea. Real GNP dropped by 6 percent in 1980 as the authorities adopted policies under an IMF-approved stabilization program to restrain doirestic price inflation and, at the sane time, adjust to an enormous increase in the country's oil-import bill. Growth in real GNP subsequently recovered to rates of 6-1/2 percent in 1981 and about 5-1/2 percent in 1982. Inflation was reduced fram a 35 percent rate in 1980 (December to December) to about 5 percent in 1982. Korea's current account deficit was reduced from $5.3 billion in 1980 to about $2 billion in 1982 and is likely to be about the same in 1983. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • Chairman St Germain Page 5 Mexico. Real GDP rose by more than eight percent annually during 1978-81 spurred partly by sharply increased oil exports, but declined by an estimated 2 percent in 1982 and is likely to be near zero or decline further in 1983. Irports are to be reduced from $23 billion in 1981 to about $16 billion in 1983 but will still be about one-third higher in real terns than in 1978. Inflation in 1982 rose to about 100 percent (December to December), after a 30 percent rate of increase in 1980 and 1981. A Mexican government official has recently forecast that inflation will decline to a 55 percent annual rate in 1983. Because the most recent (December 1982) devaluations of the peso are, being accompanied by strong restraints on the fiscal deficit and on expansion of domestic bank credit, they are likely to have much less inflationary impact than did the devaluations of last winter and summer. Mexico's external debt grew at an exceptional rate during 1979-81, primarily to finance a rapidly widening current account deficit. After reaching $13 billion in 1981, Mexico's current account deficit declined to about $6-1/2 billion in 1982 and, under the IMF-approved program for 1983, is expected to decline to about $3-1/2 billion. With the current account deficit at that rate, new bank loans approximating $5 billion, rollovers of existing debts, and official export and other credits, financial resources should be adequate to finance the adjustment program. That program is, in turn, designed to encourage "normalization" of ongoing financing in subsequent years adequate to cover smaller residual deficits, refinancing needs, and a rebuilding of reserves. Philippines. The Philippine economy has experienced only weak growth during the past two years due to deterioration in its export prices, weak foreign demand, and relatively slow depreciation of its exchange rate during 1979-81. The Philippine current account deficit widened during 1979-81 despite adherence to IMF-approved stabilization progrars. Because of a further deterioration in the current account deficit to about $3 billion in 1982, Philippine authorities will likely need to continue or to intensify restraints upon domestic demand and economic growth in 1983. Negotiations are now underway with the IMF on a one-year adjustment program that would be supported by stand-by and corpensatory credits of about $500 million. While increased use of short-term borrowing and a reduction in reserves have weakened the Philippine external liquidity position somewhat over the past two years, the Philippines is not as dependent upon foreign bank financing as other major borrowers have been. With the anticipated adoption of domestic austerity measures and a reduced external deficit, the Philippines should be able to obtain adequate financing from the IMF and commercial banks to avoid external payments difficulties. I believe this record suggests the extent to which the borrowing countries themselves are taking strong steps to deal with their liquidity and financing problems, which is fundamental to their continued credit-worthiness. Additional transitional bank lending is appropriate in that context and should not involve increases in exposure relative to capital and assets. I would also emphasize that success of these efforts https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • Chairman St Germain Page 6 is, over time, very ruch related to prospects for sustained growth in the industrialized countries, which in turn, in my judgement, must be consistent with continued progress toward price stability. Therein lies the larger challenge for economic policy here and abroad. Your third and fourth questions dealt with steps that might be needed in light of strains in international financial markets and with discussions of ways to handle current and potential problems of this nature. In a real sense, the problems we are dealing with today had their roots over a number of years, as the volume of international indebtedness increased. For instance, I reviewed this matter quite extensively in a talk I gave at New York University on March 1, 1980, and the concerns I expressed at that time increased subsequently. The rapid worsening in the external financial position of Mexico during 1982 was an important factor in bringing the situation to a head because of its implications for the attitudes of lenders and borrowers more generally. My concerns in this situation are not limited to the direct effects on the major borrowers and to international banks that have lent to them. The uncertainty and strains generated for the financial system more generally have direct implications for the economy of the United States and other developed countries. Specifically, failure to deal with the emerging strains effectively, because of the actual and potential effects on key interest rates and lending policies, could have strong implications on domestic markets and prospects for non-inflationary recovery in the United States and elsewhere inasmuch as we are dealing with the stability of a financial and banking system upon which we are all dependent. These considerations led me to the view that the major industrial countries, acting together, need to take concrete actions to ensure the smooth functioning of the international financial system. An active role by the United States in this effort, in conjunction with the IMF, other international institutions, and other national monetary authorities, is absolutely essential to its success. I have discussed these concerns, and steps that might be taken, on a number of occasions with members of the administration, and I outlined my thinking on this subject in a speech on November 17 in Boston. I feel confident that the problems are manageable, but such management implies a willingness by the United States to act. Briefly put, my thinking is along the following lines: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (i) Fundamental to all else is action by major borrowing countries with unsustainable external deficits and large indebtedness to change economic policies to deal with that situation 5and related internal problems. Typically, that process will be assisted by reaching agreement with the IMF on stabilization programs that justify the IMF in providing temporary financial support. (ii) Linked with such a program in some cases would be a commitment or understanding by the bank creditors of the need to avoid actions that would threaten the success of the IMF-approved stabilization Chairman St Germain Page 7 programs. In many cases that may well involve an undertaking to provide additional credits, though on a reduced scale and subject to the condition that the country is indeed carrying out the needed adjustment measures. Strong programs, adequately financed, help increase the credit-worthiness of existing and new loans. (iii) Essential to the central role of the IMF in this strategy, the effective resources of the IMF need to be increased in timely fashion. This should be achieved basically by increasing quotas, but to ensure the availability of funds to take care of urgent unexpected or extraordinary needs I also support the establishment of a reliable stand-by borrowing arrangement for the IMF as proposed by the Treasury. I believe early international agreement is important and am prepared fully to support necessary legislative action in this area. The timing is important for it would provide concrete assurance to the IMF that its resources would be replenished over time, allowing fuller use of its present resources if necessary in dealing with current problems. Such action would also demonstrate clearly the ability and willingness of countries working together to resolve the problems within the general framework of existing institutions established for that purpose. (iv) As a further, and strictly limited, measure to provide liquidity for short periods, I have supported the provision of "bridging" credits by national monetary authorities to certain large borrowers undertaking strong adjustment measures under IMF auspices. However, as I stated in November "monetary authorities have neither the capacity nor the authority to substitute short-term central bank credit for needed medium or longer-term financing." In the various meetings referred to in your letter, some of the specifics involved in this general approach and others were discussed. While no precise conclusions have been reached in international meetings with respect to increasing the IMF's resources, I believe that general agreement does exist among the major industrial countries on the need to speed the process for reaching specific agreement, differences in suggested amounts and approaches have been greatly narrowed, and there is broad consensus on the nature of the measures necessary to maintain international financial stability. Indeed, the forceful actions taken by the largest borrowing countries to deal with their economic problems, the indications that adequate financing can be arranged for an interim period, and the sense that countries are working together to strengthen the IMF's resources and to provide, in limited instances, short-term liquidity support have, I believe, been reflected in a calmer and more orderly atmospner• in financial markets, supportive of our domestic needs. Obviously, the process is incomplete, and it does seem to me essential to follow through in buttressing the resources of the IMF. As to the amounts needed, I would generally agree with the magnitudes that have https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chairman St Germain Page 8 been suggested by Secretary Regan for an increase in IMF quotas and the special borrowing arrangement that has been proposed by the United States. While I cannot be specific on the share of the increase in the IMF's resources that might came fram the United States, which remains under negotiation, the present U.S. share of IMF quotas of about 20 percent and the U.S. share of the General Arrangements to Borrow (GAB) of around 25 percent suggest the appropriate order of magnitude. The provision to the IMF by the United States of additional resources requires Congressional authorization and appropriation. However, I would emphasize that the .quota increase (or the special borrowing arrangement) in itself has no impact on budget outlays, being in the nature of a stand-by facility. Should the IMF make use of the dollars from an increased U.S subscription, as is likely at same point in the years ahead (although that point cannot be forecast), there still will be no net impact on either budget expenditures or the deficit. Essentially dollars would be provided to the IMF, but the U.S. reserve position with the Fund -- a liquid asset readily available to meet potential external needs of the United States would increase by the same amount. The result is no net effect on budget outlays. Such operations do affect the borrowing requirements of the Treasury so long as the dollars are employed by the IMF. Conversely, if the United States draws on its IMF position, and when dollars drawn by other countries are repaid to the IMF, domestic borrowing requirements are reduced. The domestic interest cost of Treasury borrowings to provide dollars to the IMF essentially is offset by interest earned (related to international interest rates) on our IMF assets; the differential historically has been relatively small. I would point out, in that connection, that the United States has itself used IMF resources in the past; the IMF is a kind of revolving fund open for use to any of its members. While I would expect that we would much more frequently be a "provider" rather than "user" of IMF funds, it is also highly probable that additional resources provided would not be continuously, or even frequently, used. What is critical is that they be there_in tire of need. I believe that funding of this sort cannot be directly compared to dollars spent for domestic (or foreign) lending or expenditure programs of the type you mention, as is reflected in the differing budgetary treatment. In the case of the domestic spending or loan programs, there is presumably a direct and "multiplier" effect on income and employment related closely to the initial expenditure, and in proportion to it. Those favorable- effects may, however, be offset by the negative impact on interest rates and financial markets. The benefits flowing from the IMF funding are far more diffuse. In part, for the reasons suggested earlier, they are present even if the funds are never drawn. When the funds are used, the benefits to the U.S. (and world) economy may not be directly measurable, but they would certainly include the following: First, countries that borrow from the IMF are encouraged to adopt policies that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chairman St Germain Page 9 contribute to open trading and financial systems and sustainable growth, serving our interest in open markets and exports. Second, orderly adjustment by major countries, avoiding unnecessary disruption of its own commerce and payments, can help avoid a kind of domino effect for others, characteristic of the 1930s and earlier periods. Finally, we want to avoid cumulative depressing effects on our domestic economies that could occur if there is a breakdown in the stability of the international financial system. In the presence of such a threat, it would be even more difficult to restore vigor to business investment and to start opening up job opportunities for our work force. Thus, in my view, strengthening the IMF's resources is directly supportive of our domestic economic objectives and is essentially an investment in our own future economic well-being. I must emphasize that realization of these benefits rests on intelligent, disciplined use of the resources available to the IMF. "More" is not necessarily "better;" the United States and the world would not be well served by use of the IMF as a vehicle for extending credit if that credit were wasted in support of unsustainable economic policies. Judgements about appropriate amounts depend both upon evaluation of the IMF's probable performance and calculations of reasonable needs by the IMF in relation to the size of the world economy and financial system. I believe the essential criteria are met in the present instance, and the past record of the IMF provides a strong base of confidence in the prudent use of its resources. The United States and other potential creditor countries are, of course, strongly represented in IMF deliberations. I do not view proposals to increase the IMF's resources as "assistance" to banks, except in the broad sense that they contribute to an economic and financial climate in which borrowers can make needed adjustments in a more orderly way. The banks do, of course, have a large stake in that process. We are seeing in practice in the cases of Argentina, Brazil and Mexico that the use of Fund resources for these countries is predicated upon a broad financial program that includes additional financial commitments by the commercial banks therselves, typically well in excess of amounts provided by the IMF. The object of the entire program is not a subsidy for imprudent banks or mismanaged countries -- it is rather to presete a stable framework for the international financial system and for support of those countries,. including our own, that are willing to take the necessary measures to ensure their economic health. The entire concept of IMF lending in the so-called upper credit tranches -- i.e., where sizeable amounts of money are provided beyond the countries' own contributions -- is predicated on strong adjustment program that are therselves often difficult politically and socially. Your fifth question concerned possible mechanisms for direct assistance to international banks. As you know, in the Federal Reserve and in the FDIC, we have long had in place a framework for support of the banking system, and I do not believe further mechanism for special assistance are required to maintain confidence in U.S. international banks. In making that statement, I recognize that a number of countries heavily https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chairman St Germain Page 10 indebted to U.S. (or foreign) banks are indeed in serious liquidity difficulties, and there can be no guarantee that same of those situations may not lead to non-performing loans, interest deferrals, and the like. However, with actions along the lines sketched out above, escalating and contagious deterioration, dragging down otherwise credit-worthy countries, should be avoided, and the remaining risks should properly be borne by the banks. In that connection, I would agree the present situation does suggest the need for a careful review and analysis of supervisory practices, as your last question suggests. Indeed, such questions have been under review more or less continuously. Over the years, banks -- in their domestic as well as in their international operations -- have taken advantage of differences in laws and regulations among jurisdictions as they have affected their regulatory, supervisory, and tax treatment. In this situation, there is always the possibility of the "least common denominator" dragging down prudential standards, a temptation that needs to be avoided. With respect to differences in supervisory treatment, the major countries decided almost a decade ago to establish a committee under the aegis of the Bank for International Settlements to seek greater coordination of supervision of international banks. This BIS Committee on Banking Regulations and Supervisory Practices has been meeting regularly since early 1975 to consider common problers in bank supervision. One of the earliest issues dealt with was the clarification of supervisory responsibility for banks' international operations. TWo underlying principles have been established: all banks operating in international markets should be adequately supervised and all banks should be supervised on a consolidated basis. Specifically, international banks should be supervised by their home authorities in a way that includes all of their operations outside their home country -- branches, subsidiaries, and other affiliates. I believe the existence of a strong and responsible supervisory network underpinning the international banks is a vital element in maintaining confidence in the interpational banking system. Obviously many difficulties arise, in the light Of different national traditions, banking structure, and experience, in achieving the needed consensus in developing common standards and approaches. The Federal Reserve, for its part, will certainly be consulting with supervisory authorities abroad as well as in the United States in its continuing review of systens for evaluating international lending and other prudential standards. In reviewing these natters, I would also point out that the strong presumption is that the safety and soundness of individual banks is first and foremost a responsibility of the banks themselves, and supervisory authorities cannot effectively substitute for their credit judgements. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a. Chairman St Germain Page 11 I hope that you will find these answers to your questions helpful. I look forward to discussing these important issues with you and the House Banking Committee in person early in the New Year. Enclosures https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a. January 6, 1983 Claims on Non-Oil Developing Countries: Country pcposure Lending Survey Data for All Reporters (billions of dollars) Reporting . Claims on ,/ Banks' Non-Oil DevTotal eloping Countries .. Assets Reporting Banks' Total Capital Claims on Non-Oil Developing Countries as a percent of: Total Assets Total Capital 1977 December 46.9 717.1 40.9 6.5 115 1978 June 48.7 747.9 42.5 6.5 115 52.2 823.6 45.0 6.3 116 867.8 47.4 6.3 115 61.8 941.3 49.9 6.6 124 66.2 999.1 53.9 6.6 123 75.4 1,066.3 57.0 7.1 132 82.3 1,119.3 59.9 7.4 137 92.8 1,164.5 62.7 8.0 148 98.6 1,192.4 66.2 8.3 149 December 1979 June December 1980 June December 1981 June December 1982 June https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 54.4 - IV January 6, 1983 Claims on Non-Oil Developing Countries: Country Exposure Lending Survey Data for Nine Largest Banks (billions of dollars) .. Reporting Banks' Claims on Total . Non-Oil DevAssets eloping Countries Reporting Banks' Total Capital Claims on Non-Oil Developing Countries as a percent of: Total Capital Total Assets 1977 December 30.0 372.5 18.4 8.1 163 1978 June 31.0 390.2 19.0 8.0 164 33.4 422.5 20.0 7.9 176 35.0 449.8 21.1 7.8 166 39.9 486.1 21.9 8.2 182 41.9 508.4 23.0 8.2 182 47.9 531.0 24.0 9.0 199 51.6 553.7 25.0 9.3 206 57.6 564.6 26.1 10.2 220 60.3 566.3 27.1 10.6 222 December 1979 June December 1980 June December 1981 June December 1982 June https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • .• BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 January 7, 1983 PAUL A. VOLCKER CHAIRMAN The Honorable William Proxmire United States Senate Washington, D. C. 20510 Dear Senator Proxmire: I appreciate the concerns expressed in your letter of December 13, 1982, about the supervisory treatment of foreign loans extended by U.S. banks and referring to a suggestion made in the press that the Federal Reserve is trying to conceal the involvement of U.S. banks in international lending and its problems and that the Federal Reserve is favoring international lending over domestic lending. First, let me say I reject the suggestion in the press quotations. Obviously, the Federal Reserve is concerned about the sound functioning of the banking system, both domestically and internationally, in this difficult period, but we are not trying to hide problems or favor foreign lending. Commercial banks have a vital role to play in economic recovery. In the domestic economy, that role entails providing continuing flows of credit within sound prudential standards to assist firms in rebuilding liquidity and in financing expanded activity. That objective will be supported, not undermined, by dealing effectively and appropriately with the liquidity strains that have arisen in some important foreign countries. You are well aware that several countries have encountered severe liquidity problems for reasons that are well known. Mexico, Brazil and Argentina are the most notable of these and all three are major debtors of U.S. banks (as well as other large banks around the world). These countries have the capacity to service their debts over the longer run, but they must make the necessary adjustments in their economies. This has involved agreement with the International Monetary Fund on strong stabilization programs and providing for drawings on the Fund. When that condition is met, an orderly adjustment process will usually require some continuation of bank lending, parallel to the financing to be provided by the Fund and other sources. The statement in my speech to the New England Council in November was aimed specifically at those cases where a strong stabilization program has been established. It seems to me that when such programs have been arranged, both the existing credits and any additional credits are more soundly based, and the interests of supervisors in promoting the collectibility of bank https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable William Proxmire Page Two se circumstances, it would credit have been furthered. In the erest if supervisors were clearly be contrary to the public interrupt a suitable flow of severely to criticize lending and int essary adjustment process. credit, potentially impairing the nec ed country situations is A major problem encountered in troubl as appropriate arrangements t that the lenders must act in consor r might well be tempted to are made. Smaller banks in particula what they perceive to withdraw from participation to protect done is note the importance be their own interests. What I have which in some cases at of achieving an effective "package", le the banks themselves least requires wide participation, whi g decisions. must take responsibility for the lendin of the authorized I am enclosing with this letter a copy ities on the intdrest statement of the U.S. supervisory author . It will be noted that arrearages of the Mexican private sector completion of satisfactory the views expressed are conditioned on patt of the overall arrangements for further bank lending as st payments have been ere package and where as a consequence int regulatory authorities resumed. In those circumstances, the ts could be reflected in would confirm that the interest paymen that the statement current income. It will also be noted such arrangements whdre specifically provides for disclosure of . • they are material to the bank concerned Federal Reserve In sum, I wish to assure you that the domestic lending. There is not favoring foreign lending over the ways foreign and are no significant differences between respect to accounting h domestic loans are treated either wit isory standards. As erv rules, disclosure rules, or bank sup arise in applying always, questions of interpretation can losed. Moreover, enc those standards; hence, the statementneed for further review recent experience has demonstrated a that is in place among of the country risk evaluation system course, be proceeding of the supervisory agencies. We will, with that evaluation. Sincerely, Enclosure FD:EMT:PAV:vcd (V-276) bcc: Fred Dahl Ted Truman Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Authorized statement on the view of the U.S. regulatory authorities on interest arrearages of the Mexican _private sector The Federal Reserve Board, the Comptroller of the Currency and the SEC have been informed of the proposal for paying arrears of interest on Mexican private sector debt, and their views have been requested on the treatment of this proposal both from the point of view of the accrual status of the private sector debt involved and for disclosure purposes in the United States. The regulators understand that this arrangement is only one element of a broader effort among Mexico, the banks, the IMF and other official institutions, aimed at placing Mexican debt on a current basis that will be sustainable for the future. Accordingly, it is the regulators' view that their reaction to the arrears proposal must take into account the overall structure of the lending arrangements after the responses of the banks to the Mexican request for the new money facility are available. Assuming a satisfactory overall structure resulting from the responses to the Mexican request for the new money facility by the international banking community, the Advisory Group has been advised by the Federal Reserve Board, the Comptroller of the Currency and the SEC staff that they would be prepared to confirm before the end of this year their preliminary views that the loans on which interest payments have been made to Banco de Mexico would be considered to be current, that such interest payments may be reflected in current income, and that appropriate disclosure of these arrangements should be made where material for the institution involved. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 JAKE GARN, UTAH, CHAIRMAN XXIN TOWER,'roc. JOHN HEINZ, PA. WILLIAM L. ARMSTRONG. COLO. RICHARD G. LUGAR, ND. ALFONSE M. D AMATO, N.Y. JOHN H. CHAFEE, R.I. HARRISON "JACK" SCHMITT, N. MEX. NICHOLAS F. GRADY, N.J. D0MAI-0 W. RIEGLE, JR.. MICH. WILLIAM PROXMIRE. WIS. ALAN CRANSTON, CAUF. PAUL S. SARIVJUYES, MD. CHRISTOPHER J. DOOD, COMM. ALAN J. DIXON. ILL. JIM SASSER, TENN. , 11Cnifeb ,Zfatez Zen, ate com MITTEE ON BANKING. HOUSING.n2DEC Pti•P M. DANNY WALL, STAFF DIRECTOR ROMERT W. RUSSELL, MINORITY STAFF DIRECTOR https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 URBAN AFFAIRS ; II: 00 WASHINGTON. D.C. 20510 r December 13, 1982 The Honorable Paul Volcker Chairman Federal Reserve Board 20th and C Streets, N.W. ) Washington, D.C. 20554,_ Dear . 41. I read with considerable concern the enclosed item in the New York Times of Sunday, December 12th. The following paragraph is particularly alarming: "It is expected that the Fed will bend some rules so that at the end of the year American banks will not have to list loans to private borrowers in Mexico and Argentina among their 'nonperforming assets', even though those payments will be more than 90 days past due. That means the banks will not have to disclose large increases in problem loans to the public, nor will they be bothered by bank regulators anxious about the ballooning of bad debts." I can think of nothing more destructive of public confidence in the banking system and support for international financial institutions than juggling the books to try to make weak foreign loans look better than they actually are. Greater disclosure of problem conditions, not less, is the best way to bring market discipline to bear on international lending. Depositors, stockholders, and borrowers need more accurate information about the financial condition of banks, and the banks, as well as those foreign countries to which they have lent too freely, must pay for their mistakes. I raised the issue of equal treatment of domestic and foreign lending with you at a hearing of the Joint Economic Committee on November 24th. I noted your remarks to the New England Council on November 16th in which you suggested that new credits to foreign countries that have restructured their debt and are following adjustment programs agreed upon with the International Monetary Fund "should not be subject to supervisory criticism." I pointed out the grave danger https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Paul Volcker December 13, 1982 Page 2 in creating even the ppearanc-IIf a double standard treating foreign loans more favorably than to such domestic borrowers as farmers, aflI homebuilders, and small busines. The New York Times article states that the Federal Reserve "has I-- n quietly prodding" banks to maintain and even increase their international lending. The Times also identifies the Federal Reserve as one of the banking authorities seeking to "keep smaller banks parpating in credits to troubled countries." If the report is accurate, not only is a double standard being applied, but the smaller banking institutions, which are the financial backbone of communities thrIs.ut the United States, are being asked to lend more money abroad when the funds are desperately needed at home. More lenient standards of accounting, disclosure, and bank supervision appear to I- being used by bank regulatory agencies as carrots to encourage still more risky international loans by banks. I would appreciate receiving a full explanation in writing of present and anticipated treatment of foreign and domestic lending by U.S. banks. Please identify and explain any differences between the way foreign and domestic loans are treated with respect to accounting standards, disclosure rules, and bank supervisory standards and exami nation reports. Sincerely, Wi WP/rrh enclosure ProxMire, .S.S. 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: 3 Bennett, Robert A. "The Puzzling Tangle of Global Finance." New York Times, December 12, 1982. Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org 1111•111•1=1. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis January 5, 1983 The Honorable Carroll Hubbard House of Representatives Washington, D. C. 20515 Dear Carroll: I appreciated the "Time" letter, even if I'm not looking for cover attention. The Mayfield "experience" seemed to turn out just fine for me -- as you said all along why did you have to twist my arm?? Best regards, PAV:ccm ••••• .11•10. Cf . 113ROLL HUBBARD cONCtESSMAN AT LARGE MAJORITY WHIP COMMITTEES 1ST DISTRICT, KENTUCKY BANKING. FINANCE AND URBAN AFF AIRS 2244 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 (202) 225-3115 Congtrs'5 of Or ?Unita fitateg jooti5t of Rtpreclentatibt5 MERCHANT MARINE AND FISHERIES CHAIRMAN. SUBCOMMITTEE ON PANAMA CANAL/OUTER CONTINENTAL SHELF Walsbington, D.C. 20515 C"\J C December 28, 1982 COPY Ca') to the Editors Time Magazine Time & Life Building Rockefeller Center New York, NY 10020 Lettr To the Editors: The Man of the Year -- a computer? You have lessened the distinction that this title tiLTF... previously What a shame this honor did not go to Paul A. Volcker, chairman of the Federal Reserve Board. On December 16 I witnessed a rural crowd of 2500 in my hometown high school gymnasium give Mr. Volcker what he deserves for being a statesman and not a politician looking for popular trends -- three standing ovations. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Carroll Hubbard U.S. Representative Mayfield, Ky. ;IT`, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis January 5, 1983 Mrs. Benjamin S. Rosenthal Room 2372 Rayburn Building Washington, D. C. 20515 Dear Mrs. Rosenthal: My colleagues and I on the Board of Governors want to express our deepest sympathy upon learning of Our thoughts and prayers are with you and the members of your family in this time of sorrow. Sincerely, DJW:vcd bcc: Mrs. Mallardi (2)