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ID A H O ALASKA FEDERAL R E S E R V E TWELFTH /ASHINGTON B A N K FEDERAL OF S A N RESERVE F R A N C I S C O DISTRICT O d b b sA , 1963 3n ZJliis 3;S 5ue UTAH Jobs and the Jobless Federal Agency Securities: The Supply . . . , EGOH CALIFORNIA ARIZONA NEVADA Jobs and the Jobless expansionists and the structuralists— to use Professor A rth u r B urns’ descriptive phrase— have begun w hat promises to be one of the crucial dialogues of the Sixties. The debate centers around the best solution for the problem of unem ploym ent, which has been labeled in P resident K ennedy’s Manpower Report as “our num ber one econom ic pro b lem .” In their analyses, the extrem e expansion ists stress the recent failure of business invest m ent to m atch its earlier postw ar perform ance, the reduced rate of econom ic growth since 1957, and the higher rate of unem ploy m ent since then. As a solution, these critics advocate policies to increase aggregate de m and— low er tax rates, higher F ederal ex penditures, easy credit, o r a com bination of all three. The extrem e structuralists, however, argue that econom ic growth is ham pered by critical shortages of all types of trained personnel, and that sole reliance on the fiscal rem edies pro »h T e posed by the extrem e expansionists would be unsuccessful. The structuralists propose to focus policy on b etter organization of the labor m arket — for exam ple, by im proving and extending the present system of voca tional guidance and retraining, and by assem bling detailed inform ation on every unfilled job as well as every unem ployed w orker. (M any expansionists agree w ith this approach, of course, but they insist th a t aggregate de m and m ust be stim ulated as long as the total num ber of jobless exceeds the total num ber of unfilled jobs.) What are the facts? Professor Burns, who becam e involved in the complexities of this problem while serving as chairm an of the Council of Econom ic A d visers in the m id-Fifties, claims th a t m uch of the controversy could be solved on a factual basis if only m ore facts were available. Speak ing at Rice University last spring, he claim ed th at all sorts of expansionary m easures are October 1963 MONTHLY REVIEW u n d erta k en in the nam e o f the E m p lo y m en t A ct— yet, after tw o decades o f o p eratio n u n d e r th a t A ct, “ o u r n atio n h as thus fa r failed to take th e tro u b le o f equ ip p in g itself w ith the facts needed to d eterm in e w h eth er, w hen, o r to w h at degree aggregate d em an d is deficient.” M o st analysts agree th a t ad eq u a te in fo rm a tio n is n o t available to ind icate w h eth er the eco n om y at any p o in t o f tim e is m eeting w hat P ro fesso r B urns contends is th e basic criterio n o f full em ploym ent — eq u ality betw een the n u m b e r o f m en and w om en seeking jobs and the n u m b e r o f jobs. T h e u su al b aro m e ter, th e p ercen tag e o f individuals in th e la b o r fo rce w ho a re u n ab le to find w ork, provides a ro u g h m easu re o f one elem en t in th e eq u atio n b u t fails to indicate th e stren g th of th e o th er elem ent. In fact, the g reat m ass o f la b o r force d a ta developed in rece n t years, alth o u g h p ro viding a w ealth of in fo rm atio n o n th e n u m b er an d types of m en seeking jobs, has cast re la tively little light o n th e n u m b e r an d types of jo b s seeking m en. T h e need fo r in fo rm atio n of b o th kinds is increasing, especially because of th e rap id shifts o ccu rrin g in lab o r-fo rce co m p o sitio n — by age, sex, o ccu p atio n , in d u stry , an d region — th ro u g h o u t the p o stw ar p erio d . In th e six years betw een A u g u st 1957 an d A u g u st 1963, fo r exam ple, th e u n em p lo y m en t rate in creased fro m 4.2 to 5.5 p erce n t (seaso n ally ad ju sted ), b u t the increase w as cau sed p rim arily by jo b lessness am ong teenagers and o ld er w om en ra th e r th a n by u n em p lo y m en t am o n g m arried m en. (T h e jobless rate fo r fam ily b read w in n ers rose only slightly, to 3 .0 p erce n t, b etw een th e tw o points o f tim e .) T h e large in crease in th e jobless rate , th erefo re, is n o t surprising, in view o f the great influx o f new types of w orkers into the la b o r fo rce in recen t years— in view of the fact, fo r in stan ce, th a t ab o u t o n e-h alf of all w om en in th e 4 5 -5 4 age g ro u p are w orking o r looking fo r w o rk to d ay , as co m p ared w ith ab o u t 46 p e rc e n t in 1957 and only 33 p erce n t a d ecad e earlier. Rising u n e m p lo y m e n t accompanies employment gain in District Millie 590 580 57.0 560 9.0 0 1 8.0 O “ 40 • 30 .6 - .5 - 4 »* 1958 1359 i960 1961 I9E2 1963 N o te: T w elfth D istrict data exclude Alaska and H aw aii. L ast plotted figure is for A ugust 1963. Source: Bureau of Labor Statistics, Federal Reserve B ank of San Francisco. Jobs and jobless both increase T h e n eed fo r detailed la b o r force in fo rm a tio n is especially g reat in th e T w elfth D istrict — a region w hose ra p id grow th co n tinually generates large n u m b ers of jo b o p p o rtu n ities, b u t w hose w ell-know n attractio n s sim u ltan e ously a ttra c t larg e n u m b ers of ap p licants fo r those jobs. H o w well, th en , does th e D istrict m eet th e fu ll-em p lo y m en t criterio n ? H ow well does this region m atch u p th e d em an d fo r physicists, electronic engineers, grocery clerks, an d d om estic w orkers w ith the supply o f w orkers in each categ o ry ? In th e absence o f com p lete in fo rm atio n o n jo b openings, em ploym ent, an d u n em p lo y m en t, th e answ er ca n n o t be given ad eq u ately , an d th e dialogue betw een expansionists an d stru ctu ralists will rem ain fuzzy an d incom plete. E v en w ith o u t com p lete in fo rm atio n , how ever, som e u n d erstan d in g of th e T w elfth D is tric t’s success in m eeting the fu ll-em ploym ent criterio n can be o b tain ed by analyzing the size an d shape of its em p lo y m en t (a n d un em p lo y m e n t) grow th in rece n t years. B y th e stan d ard o f em p lo y m en t ex p an sio n , it has done quite well. Since th e cyclical tro u g h of early 1961, to ta l D istrict em p lo y m en t (ex clu d in g 145 FEDERAL RE SERVE BANK OF SAN F R A N C I S C O White-collar jobs important in District employment structure □ tw elfth D IS T R IC T E 3 Rest of United Stales Percent Otstributjon 100 EM PLOYED UN EM PLO YED — ' Unskilled cen t on the basis o f n e t im m ig ratio n alone. M o re im p o rtan t, recen t la b o r fo rce d a ta sug gest th a t new m ig ran ts w ill co n tin u e to add su b stan tially to th e em p lo y m en t a n d u n em p lo y m en t statistics d u rin g this d ecad e as well. District has “ better” structure 75 Skilled and Sem i-skilled 50 Clerical and Sale* 1 11 !! Iff! 25 Professional, Technical and Managerial 0 Source: Bureau of the C ensus (1 9 6 0 P opulation C en sus). A lask a an d H aw aii) h as in creased ab o u t 6 p erce n t to 9 .4 m illion— a rate of gain roughly d o u b le th e rate o f gain reco rd ed by th e rest of the n atio n . T h e reg io n ’s rap id em p lo y m en t grow th, nonetheless, h as n o t b een ra p id enough to induce a su b stan tial red u ctio n in u n em p lo y m ent. In th e first y ear o f this cyclical ex p a n sion, the u n em p lo y m en t ra te in th e D istrict (as in th e rest o f th e n a tio n ) d ro p p ed from a b o u t 7 p e rc e n t to 5.5 p erce n t, b u t d u rin g the la ter stages o f the ex p an sio n th e D istrict (u n like th e rest o f th e n a tio n ) h as ex p erien ced an u p w ard d rift in its jobless rate. In A u g u st the rate w as 6 p ercen t, o n th e basis of a 6 0 0 ,0 0 0 u n em p lo y m en t co u n t. T h e co m b in atio n o f rising em p lo y m en t and rising u n em p lo y m en t em phasizes th e cru cial role play ed by p o p u la tio n g row th an d m ig ra 146 tion in th e D istric t’s la b o r m ark et. In th e decade o f th e F ifties, this region co n tain ed fo u r of th e five fastest-grow ing states in the n ation, an d in each o f these m ig ratio n was the d o m in an t if n o t overrid in g fa c to r in p o p u la tio n grow th. C alifo rn ia’s p o p u latio n , fo r ex am p le, in creased alm ost 5 0 p erce n t d u rin g the decad e, b u t its p o p u la tio n grew 30 p e r T hese aggregates th ro w little light on the ex p an sio n ist-stru ctu ra list co n tro v ersy , h o w ever; fo r such an analysis, in d u strial and occu p atio n al d a ta co m p iled fro m 1960 C ensus m aterial m u st be exam in ed . T h ese d a ta show a “ b e tte r” em p lo y m en t stru ctu re fo r th e D is trict th a n fo r th e rest of th e n atio n , in th e sense th a t th e reg io n ’s la b o r fo rce is co n c e n tra te d in th e eco n o m y ’s faster-g ro w ing industries an d o ccu p atio n s. T h u s, o ccu p a tio n a l d a ta show a g re a te r co n ce n tratio n fo r th e D istrict th a n fo r the rest o f th e n atio n in p ro fe s sio n al-tech n ical-m an ag erial categories an d in clerical an d sales categ o ries, b u t a sm aller co n ce n tratio n in th e skilled an d unskilled w o rk er categories. In each g ro u p , u n em p lo y m en t a t th e C ensus d ate w as h ig h er in the D istrict th a n elsew here, b u t th e jobless w ere c o n ce n trate d in th o se categories w hich are of g re a te r im p o rtan ce in th e la b o r force in th e rest of n atio n — th a t is, th e b lu e -c o lla r cate gories. In d u strial d ata show a g reater co n c e n tra tio n fo r the D istrict in p ro fessio n al a n d rela ted services, public ad m in istratio n , and tra d e , and a m uch g reater co n ce n tratio n fo r th e rest o f the n atio n in the slow -grow ing m a n u fa ctu rin g sector. M o re im p o rtan t, in d u stry tre n d d a ta show a b e tte r reco rd for th e D istric t th a n fo r the rest of th e c o u n try in g en era tin g new jobs, even th o u g h th e rate o f g row th has slow ed d o w n d u rin g the seco n d h alf o f th e p o stK o rean decade. B etw een 1952 and 1957, n o n farm em p lo y m en t in creased 18 p erce n t in D istrict states an d 7 p e rc e n t in th e rest of th e n atio n ; b etw een 1957 an d 19 6 2 , th e c o m p a r able increases w ere 15 p e rc e n t an d 3 p erce n t, respectively. October 1963 MONTHLY REVIEW District outpaces rest of nation in creating all types of jobs I I TW ELFTH D ISTRICT ■ 1952-1957 0 5 10 IS R«tt of Unit'd S ta ttt 1957-1962 20 25 -5 0 5 Percentage Change in Employment 10 15 20 25 30 55 Source: Bureau of Labor Statistics. In the W est as elsew here, recen t em ploy m ent gains have cen tered in trad e, services, an d governm ent. In fact, those w ere the only categories in w hich em p lo y m en t in creased o u tside this region durin g the 1 9 5 7 -1 9 6 2 p e riod. In the crucial m a n u fa ctu rin g category, W estern em p lo y m en t in creased fa r m ore slowly in the second h alf th a n in th e first h alf of the d ecad e— b u t th e W est’s 8 p erce n t gain w as especially n o tew o rth y in the light of the 4 p erce n t loss suffered by th e rest of the n atio n in the last half-decade. D eclines in tra n sp o rta tion-utilities and in m ining have been a n atio n w ide p h en o m en o n in recen t years, b u t co n stru ctio n has been a so m ew h at different story; betw een 1957 and 1962, em p lo y m en t in this category increased 10 p erce n t in the W est b u t d ro p p e d by a like am o u n t in the rest o f the cou ntry. But unemployment rises D espite th e W est’s n o tew o rth y p erfo rm an ce in generating new jobs, how ever, it has n o t been so successful as to co n q u er the jobless p ro b lem . H ig h er u n em p lo y m en t rates, as n o te d at th e o u tset o f this article, em phasize this point, an d so too do th e available d a ta o n recent shifts in em p lo y m en t an d u n em ploym ent. Since th e 1960 C ensus d ate, fo r exam ple, n o n farm em p lo y m en t has risen al m ost 9 p erce n t in D istrict states, as against 5 p ercen t in th e rest o f the n atio n , b u t in su red u n em p lo y m en t has risen ab o u t 25 p erce n t in this a re a w hile declining 5 p erce n t in the rest o f th e n atio n . In all m a jo r categories— m a n u factu rin g , trad e , an d services — th e W est’s p erfo rm an ce has been stro n g er in th e em p lo y m en t field b u t w eak er in th e u n em p lo y m en t field. T h ese o ccu p atio n al an d in d u strial consid eratio n s, o f co u rse, are only a few of the m any facto rs involved in a stru ctu ra l analysis of the la b o r fo rce; age, sex, race, and ed u catio n all e n te r into th e eq u atio n , too. In these as in the in d u strial an d o ccu p atio n al categories, the D istrict’s la b o r force tends to be co n cen trated in the sectors w hich suffer the least un em p lo y m ent, In the n atio n as a w hole, th e A u g u st jobless rate am ong fem ales was 6.5 p ercen t as against 4.5 p ercen t fo r m ales; sim ilarly, the rate am ong nonw hites w as 10.5 p ercen t as against 4.5 p erce n t fo r w hites. T h u s, th e D is tric t’s g reater c o n ce n tratio n of m ales an d of w hites in its la b o r force m ight ten d (o th e r things being e q u a l) to depress its jobless rate in relatio n to jobless rates elsew here. Since th e D istric t’s la b o r resources are n o t c o n ce n trate d in th e o ccu p atio n al, industrial, an d o th e r categories w here joblessness is m ost p rev alen t, its p resen tly hig h er u n em p lo y m en t rate p ro b ab ly reflects a h ig h er level of u n em p lo y m en t th ro u g h o u t its la b o r force— w hich in tu rn reflects a co n tin u in g heavy inflow of w orkers of all types an d skills. T he censustak ers in 1960 fo u n d , fo r every occu p atio n al category, th a t jobless rates w ere higher in the T w elfth D istrict th a n elsew here. A t th e C en sus date, p rofessionals, farm ers, businessm en, clerical and sales w orkers, skilled an d u n skilled w orkers, a n d dom estics all rep o rte d higher jobless rates th a n th e ir co u n terp arts elsew here, an d th ere is little ind icatio n th a t th e ir situ atio n has ch an g ed since. ]47 F E DE RAL R E S E R V E B A N K OF S A N F R A N C I S C O The dialogue continues T h e stru ctu ralists could argue th a t th e D is tric t’s d em o n strated ability to create new jobs will p erm it the ab so rp tio n o f th e p resen t pool o f unem plo y ed , p ro v id ed of course th a t tra in ing facilities an d in fo rm atio n on jo b o p p o rtu nities are freely available to those looking fo r w ork. T h e ex p an sio n ists could argue, on the o th e r h an d , th a t in creased spending by co n sum ers, businesses, an d g o vernm ents will be req u ired th ro u g h o u t th e n atio n al econom y in o rd e r to g en erate a sufficient n u m b e r o f jobs in the W est an d in th e o th e r regions as well. B u t b o th schools m ight do well to co n sid er also w h eth er a high level of frictio n al u n em p loym ent, along w ith a high level o f m ig ra tion, is a necessary fa c to r in rap id regional grow th. M o st analysts w ould p ro b ab ly agree w ith P ro fesso r B u rn s th a t th e ex p an sio n ist-stru c tu ralist dialogue co u ld be clarified if detailed d a ta on jo b openings w ere available along 148 w ith the w ealth of lab o r-fo rce in fo rm atio n w hich is alread y available. A cco rd in g to L a b o r D e p a rtm e n t p ro jectio n s, T w elfth D istrict states, d u rin g the p resen t decad e, will add 4.4 m illion w o rk ers to th e ir la b o r fo rce— alm ost o n e-th ird o f th e p ro jec ted to tal ad d itio n fo r the en tire n atio n al eco n o m y . O th e r p ro je c tio n s by th e sam e agency ind icate th a t th e g reatest increases in d em an d fo r la b o r will oc cu r in categories in w hich th e W est’s o c c u p a tional stru ctu re is co n c e n tra te d m ost heavily — p rofessional, m an ag erial, sales an d clerical categories, an d so on. T ak en to g e th er, the p ro jectio n s im ply th a t th e D istrict will co n tin u e to grow rap id ly in th o se o ccu p atio n al categories w here it alread y h as show n the m o st prom ising grow th. A g reat d eal m ore m u st be k now n ab o u t the sources of new in dustrial grow th, how ever, b efore any solid conclusions c a n b e d raw n ab o u t th e D istric t’s ability to m atch its unfilled jo b vacancies w ith its supply of available w orkers. October 1963 MONTHLY REVIEW Federal Agency Securities: The Supply F e d e ra l agencies finance th e ir cred it activities th ro u g h th e $ 10-biilion F ed eral A gency m ark et. A g ricu ltu ral cred it system s (F ed eral L a n d B anks, F e d e ra l In term ed ia te C red it B an k s, and B an k s fo r C o operatives) an d residential m ortgage system s (F e d e ra l H o m e L o a n B anks and th e F e d e ra l N atio n al M o rtgage A ssociation) each acco u n t fo r ab o u t o n e-h alf o f the to tal am o u n t o u tsta n d in g in this little-k n o w n b u t ex p an d in g m ark et. T his article describes the role play ed in the securities m a rk e t by th e five system s w hich issue F e d e ra l A gency securities. A n earlier article described th e p rin cip al featu res of A gency securities — fo r exam ple, th e ir low degree of risk despite th e la ck of a F ed eral G o v ern m en t g u aran tee — an d a fo rth co m in g article will analyze the d em an d fo r such secu rities o n the p a rt of com m ercial b an k s and o th e r investors. iv e F Farm agencies first in field T h e th re e agencies w hich p ro v id e su p p le m en tary long- a n d sh o rt-term cred it to agri cu ltu re w ere the first to finance th e ir credit o p eratio n s by selling m a rk e tab le securities. T h ese agencies are all supervised by th e F a rm C red it A d m in istratio n , an in d e p en d en t agency o f the G overnm ent. T h e th ree system s can b o rro w from one an o th er, and they can b o r row sh o rt-term funds fro m com m ercial b anks, b u t security sales fu rn ish th e ir m ain source of fu n ds. T h e in terest rate s they p ay o n th e ir securities determ ine th e rates these agencies ch arge th e ir m em ber asso ciatio n s, an d these rates in tu rn are reflected in th e rate s charged by th e associations on th e ir lo an s to farm e r borrow ers. T he capital stock of th e F e d e ra l L a n d B an ks is now ow ned by the m em b er associa tions, and the o th e r tw o system s also are m ov ing to w ard com plete priv ate ow nership. T h eir p ro g ram s are ch aracterized by slow, steady g row th in the volum e of cred it extended, b o th absolutely an d relative to o th e r sources of farm financing. T h e o ld est of these th ree ag ricu ltu ral credit agencies is th e F e d e ra l L a n d B an k System of 12 regional b anks. T his system , o rg an ized in 1916 to act as a so u rce o f lo n g -term farm m ortgage cred it, lends fu n d s to F e d e ra l L an d B an k A ssociations w hich have b een set up by law to fu n ctio n as lo a n retailers. A fa rm e r buys stock in his lo cal A sso ciatio n am o u n tin g to 5 p ercen t of his lo an , a n d th e A sso ciatio n buys an eq u iv alen t am o u n t of stock in the L a n d B an k in its district. T h e F e d e ra l L a n d B anks sell b o n d s, w hich are th e jo in t an d sev eral obligations of th e B an k s, w ith m atu rities o f up to 15 years, an d they also sell sh o rt-term obligations to p ro v id e flexibility fo r th e ir o p e r ations. B onds are sold at intervals th ro u g h o u t th e y ear; as th e v o lu m e of financing has grow n, the B an k s have en tered th e m ark et m o re freq u en tly , p e rh a p s in 6 m o n th s of each year. A sh o rt- and a lo n g -term issue are often sold at the sam e tim e. B etw een D ecem b er 1955 an d D ecem b er 1962, F e d e ra l L a n d B an k ob lig atio n s o u t stan d in g in creased fro m $ 1 . 2 billion to $ 2 . 6 billion, o f w hich ab o u t one-fifth was in m a tu rities o f less th a n one year. System loans have in creased by ab o u t $ 1 5 0 -$ 2 5 0 m illion each year, an d th e rise in th e ir d eb t has show n a close co rresp o n d en ce. T h ro u g h o u t th e p o st w ar p erio d , th e ex ten sio n of m ortgage cred it th ro u g h th e F e d e ra l L a n d B an k s has risen b o th absolutely an d relativ e to the to tal vol um e o f farm m ortgages. Short-ferm farm needs T h e F ed eral In term ed ia te C red it B an k sys tem w as c rea ted in 1923, in o rd er to facilitate the ex ten sio n of sh o rt-te rm cred it fo r farm ]49 FEDERAL R E S E R V E BANK OF S A N F R A N C I S C O Five agencies participate in rapidly growing Agency market Billions of Dollars N o te: D a ta show outstanding obligations for Federal N ational Mortgage A ssociation, Federal Hom e Loan Bank, Federal Land Banks, Federal Interm ediate Credit Banks, and B anks for Cooperatives. Source: D ep artm ent of the Treasury. 150 p ro d u ctio n an d m ark e tin g needs. T h e 12 B anks are lo cated in th e sam e areas as the F ed eral L a n d B anks. T h ey m ake lo an s to and d isco u n t th e p a p e r o f P ro d u ctio n C red it A sso ciations, w hich ow n stock in th e B anks. T he G o v ern m en t’s cap ital stock is g rad u ally being retired. T h e F e d e ra l In term ed ia te C red it B anks d eal in sh o rt-term cred its; th e ir securities also are sh o rt-term , n o rm ally n in e-m o n th d e b e n tures. T h ese are th e jo in t an d several liability o f all 12 B an k s, an d co n stitu te th e ir m ajo r source of fu n d s. T h e B an k s also m ay red is co u n t ag ricu ltu ral p a p e r w ith th e F ed eral R e serve B an k s, an d m ay b o rro w in terim funds from co m m ercial b an k s. O bligations of the F e d e ra l In term ed ia te C red it B an k s are u nique am ong A gency securities in th a t they are eligible as co llateral fo r advances by F ed eral R eserve B an k s to m em b er b an k s. Sales of d eb en tu res o ccu r m o nthly, in am o u n ts ran g ing betw een $ 1 0 0 -$ 2 5 0 m illion. T h e volum e o f d eb en tu res o u tsta n d in g show s a seaso n al p attern , rising in th e early p a rt o f the y ear as farm e rs b o rro w to finance p ro d u ctio n expenses, an d declining in the later m onths w hen loans are rep aid o u t o f farm m ark etin g p ro ceed s. D eb en tu re s o u tsta n d in g m ore th a n d o u b led , to nearly $ 2 billion, betw een th e 1955 seaso n al p eak an d th e co rresp o n d in g perio d in th e su m m er o f 1962, T h e sm allest of th e th re e agencies is th e system o f 13 B an k s fo r C o o p erativ es; th e sys tem w as estab lish ed w ith G o v ern m en t cap ital in 1933. T h ese B an k s m ak e loans to fa rm e row ned co operatives to m eet m a rk e tin g and o p eratin g cap ital needs. T h e C en tral B an k fo r C oop erativ es, in W ashington, D . C ., also can m ak e lo an s directly to co o p erativ es, p rovided th a t a d istrict b a n k is u n ab le to h an d le them . T h e farm co o p erativ es p u rch ase sh ares of cap ital sto ck in th e B an k s w hen they ta k e out loans. T h e G o v e rn m e n t’s cap ital investm ent h as been declining since 1950 an d co o p e ra tive-ow ned sto ck h as been in creasing, al th o u g h th e la tte r still rep resen ts less th a n half the to tal. In th e early years of o p eratio n , this system o b ta in ed fu n d s by d isco u n tin g sh o rt-term loans w ith th e F e d e ra l In te rm e d ia te C red it B anks. T h is w as la te r su p p lem en ted by borrow ings fro m com m ercial b an k s. A lth o u g h the o rig inal A c t establishing th e system p ro v id ed fo r th e sale of d eb en tu res, th e first sale d id n o t o ccu r u n til 1950, an d w as th e sole resp o n si bility of th e C en tral B ank fo r C o o p erativ es. Securities w ere issued by th e C en tral B an k until 1954, w hen C ongress au th o rized the 13 B an k s to issue co n so lid ated d eb en tu res; these have b een sold since 1955. T h e volum e o u t stan d in g rose fro m ab o u t $ 1 0 0 m illion in 1955 to an average of $ 4 0 0 -$ 5 0 0 m illion in 1962. T h e B an k s now b rin g o u t new issues o n a re g u la r bi-m o n th ly b asis, w ith six -m o n th m a tu rities, so th a t only th ree m atu rities are o u t stan d in g at any one tim e. Long-term housing needs T h e F e d e ra l H o m e L o a n B an k s and the F e d e ra l N atio n al M o rtg ag e A sso ciatio n issue securities to finance th e tw o m a jo r F e d e ra l cred it p ro g ram s co n n ected w ith the housing industry. A lth o u g h th e ir o rg an iz atio n and October 1963 MONTHLY REVIEW fu nctions are quite d istinct, th e ir com m on p u rpose is to stren g th en th e availability of p rivate funds in the m ortgage m ark et. T he supply o f th e ir securities exhibits m a rk e d fluc tuations w hich are asso ciated w ith m ortgage m a rk e t conditions. By th e very n atu re o f th eir p ro g ram s, th ey are likely to b o rro w heavily w hen m o rtg ag e m a rk e t conditions are tight, as in 1955 and 1959, an d these p erio d s tend to coincide w ith generally heavy d em an d s on th e cap ital m arkets fro m o th e r sectors. Yet even in periods w hen m o rtg ag e investm ents are relatively attractiv e co m p ared w ith alter n ative investm ents — as in 1 9 6 1 -6 2 — these A gencies m ay raise funds in the m a rk e t in o rd e r to help m ortgage len d ers m eet d em ands on th e ir resources. T h e F ed eral H o m e L o a n B an k System was establish ed in 1932, an d is a system of 11 reserve cred it b an k s, regionally distrib u ted , serving th rift in stitu tio n s. M em b er institutions, m ost of w hich are savings an d lo a n associa tions, have ow ned all th e c ap ital stock o f the F e d e ra l H om e L o a n B an k s since 1951, w hen the last of the G o v ern m en t sto ck w as retired. T h e stated fu n ctio n of th e System is to su p ply ad d itio n al liquidity by m ak in g advances to m em b er institutions. T his liquidity is fo r tw o p u rp o ses — to m eet u n u su al o r heavy w ithdraw al dem ands, an d to m eet recu rrin g needs fo r funds fo r seaso n al m o rtg ag e len d ing. A dvances also can be m ad e fo r longer term needs, b u t the em p h asis alw ays has been on problem s o f liquidity. A dvances are financed largely by th e sale o f notes, w hich are the joint and several obligations of the B anks. T h e advances, in effect, give savings and lo an associations access to cap ital m a r kets w hen th e ir n o rm al flow of savings is not sufficient to enable them to m eet dem an d s fo r m ortgage credit w hich they d esire to accom m odate. In recent years, ab o u t h alf the in crease in advances has been rela ted to a need to im p o rt capital into those grow ing areas w here dem ands fo r m o rtg ag e cred it ch ro n i cally o u tstrip the pace a t w hich savings funds are accu m u lated . F u tu re increases in a d vances m ay be m o d erated , how ever, by a ch an g e in regulations w hich p erm its m em b er associations g reater freed o m to p articip a te in loans m ad e outside th e ir ow n geographical areas. T his will p erm it associations in surplus areas to m ak e fu n d s available to institutions in deficit areas, th ereb y red u cin g the d ep en d ence o f the la tte r o n advances fro m the F e d eral H o m e L o a n B anks. T h e supply of F e d e ra l H o m e L o an B ank obligations o u tstan d in g in th e m ark et at any given tim e is closely geared to th e volum e of o u tstan d in g advances to m em b er associations, w hich follow a d istin ct seaso n al p attern . N early all o f the notes are sh o rt-term , m ost of th em falling in th e 9 -1 2 m o n th m atu rity range. T he seaso n al p a tte rn o f advances and notes o u tsta n d in g show s a p eak in D ecem ber, fol low ed by a h eav y flow o f rep ay m en ts in th e follow ing q u a rte r. W hile th e seasonal p eak in m o rtg ag e lending actu ally o ccu rs in the sec o n d o r th ird q u arte r, y ear-en d advances serve to en h an ce m e m b ers’ liquidity positions in y ear-en d financial statem en ts. To som e ex tent, y ear-en d borow ings are u n d e rta k e n in an tici p atio n o f w ithdraw als after y ear-en d dividend credits are m ade. A dvances and retreats T h e cyclical n atu re o f residential co n stru c tion is th e d o m in an t fa c to r in borrow ings by th e F e d e ra l H o m e L o a n B an k s. In 1955, p ri vate n o n farm resid en tial co n stru ctio n reached a p eak fo r th e p o stw ar p erio d to th a t tim e. M ortgage cred it ex ten d ed by savings and loan associations rose sh arp ly , an d F ed eral H om e L o a n B an k ad v an ces to m em b er associations rose also. B o rro w in g by th e B an k s, th ro u g h n o te sales, in creased by a co rresp o n d in g am o u n t, ab o u t $ 8 0 0 m illion. T h en , as resi d en tial co n stru ctio n declined th ro u g h 1956 an d th e 1 957-58 recession, b o th H o m e L o an B an k advances and b orrow ings reg isteredslight FEDERAL RESERVE BANK OF SAN F R A N C I S C O declines. D u rin g th e recessio n , m o rtg ag es b e cam e relatively m o re attractiv e investm ents th a n they h a d b een b efo re to th e variety o f investors w ho n o rm ally invest in them . In view o f this facto r, an d in view of the easier m ortgage m a rk e t co n d itio n s p rev ailing d u rin g m ost of 1958, H o m e L o a n B an k advances a n d borrow in g s d eclined fro m th e previous year. L a te r, as th e business reco v ery g ath ered m o m en tu m in 1959, m o rtg ag e len d in g in sti tu tio n s w ere p articu la rly h a rd p ressed to ac q uire investm en t fu n d s to m eet th e d em an d fo r new m ortgages. In th a t p erio d , th e H o m e L o a n B an k s’ ad v an ces p ro v id ed su p p lem en ta ry cred it to th e savings an d loan asso cia tions, and again th e volum e o f n o te sales increased. T h e am o u n t of F e d e ra l H o m e L o an B a n k notes o u tsta n d in g increased fro m $ 7 1 4 m illion in D ecem b er 1958 to $ 1 ,7 7 4 m illion at the end of 1959. T his $1 b illion increase in d eb t co in cid ed w ith a p erio d o f sh arp ly rising in terest rates an d in ten se co m p etitio n am ong m o st sectors o f th e econom y fo r funds. D u rin g th e 1960 recession, th e H o m e L o a n B an k s w ere u n d e r less p ressu re to provide funds to savings an d lo a n associations. T he volum e of ad v an ces co n tin u ed a t a high level, b u t rep ay m en ts ro se, an d p e rm itte d a re d u c tio n o f ab o u t $ 5 0 0 m illion in th e volum e of notes in ca le n d a r 1960. In th e su b seq u en t p erio d of rising resid en tial co n stru ctio n activ ity th a t b eg an in 1961 an d co n tin u ed into 1962, H o m e L o a n B an k borrow ings rose m ore th a n in th e 1 9 5 8 -5 9 p erio d , ev en th ough h o m e buildin g did n o t increase as m uch. C o n ven tio n al financing p lay ed an e x p an d e d role in the 1 9 6 1 -6 2 ex p an sio n o f p riv ate n o n farm resid en tial co n stru ctio n , an d refinancing of existing hom es also in creased . C onsequently, savings an d lo a n asso ciatio n s— w hich te n d to 152 co n ce n trate th e ir len d in g activities in the co n ven tio n al m o rtg ag e field — e x p an d e d th eir m o rtgage len d in g su b stan tially , an d the H om e L o a n B a n k System in creased its o u tstan d in g o bligations fro m $1.3 billion in D ecem b er 1 9 6 0 to $2 .7 billion at th e close of 1962. F e d e ra l H o m e L o an B an k o b ligations, d e spite th e ir seaso n al an d cyclical fluctuations, h av e ten d ed to increase o v er tim e, in line w ith th e rising tre n d of sav in g s-an d -lo an associa tio n s’ len d in g activity. T h ese associations have in creased th eir sh are of th e m o rtg age m a rk e t in every y ear of th e p a st d eca d e; th e ir loans rep resen ted 32 p erce n t of th e estim ated m o rt gage d eb t o u tstan d in g o n 1-4 fam ily hom es in 1953, a n d reac h ed 41 p e rc e n t in 1962. T h e ir p articip a tio n in th e m o rtg ag e m a rk e t w as s tim u la te d f u r t h e r b y r e v is e d r e g u l a t i o n s w hich th e F e d e ra l H o m e L o a n B a n k B o ard p u t into effect d u rin g 1961, as a resu lt of p ro visions in th e H o u sin g A c t of 1961 th a t ex p a n d e d th e lending a u th o rity o f federally ch a rte re d savings an d lo an associations. Fannie M ae reorganizes T h e o rg an izatio n an d cred it fu nctions o f th e F e d e ra l N atio n a l M o rtg ag e A ssociation differ su b stan tially fro m those o f th e o th e r A gencies. T h e A sso ciatio n , p o p u la rly know n as “F a n n ie M a e ,” is a U n ite d S tates G o v ern m en t co rp o ra tio n engaged in b u y in g an d sell ing m ortgages. It has b een in existence since 19 3 8 , p u rc h a sin g resid en tial m ortgages in su red by th e F e d e ra l H o u sin g A d m in istratio n o r g u a ra n te e d by th e V etera n s’ A d m in istratio n . U ntil 1954, these p u rch ases w ere financed w ith T reasu ry funds. T h e A sso ciation w as re org an ized in N o v em b er 1954, an d th e re a fte r b eg an to finance som e o f its o p eratio n s th ro u g h th e sale o f deb en tu res. T h e reo rg an ized F a n n ie M a e ’s p u rch ases a n d sales o f m ortgages a re c a rrie d o n u n d er th ree p ro g ram s w hich are o rg an izatio n ally sep arate. T w o o f these p ro g ram s — m an ag e m en t an d liq u id atin g fu n ctio n s, and special assistan ce fu n ctio n s — are o u tsid e th e scope o f this article becau se they still are financed directly w ith T reasu ry fu n d s. T h e th ird p ro g ram — seco n d ary m a rk e t o p eratio n s — is financed now in the cap ital October 1963 MONTHLY REVIEW m arkets. T hese o p eratio n s w ere originally capitalized w ith $90 m illion of p referred stock p u rch ased by the S ecretary of th e T reasury. P riv ate investors selling m ortgages to F N M A are req u ired to p u rch ase co m m o n stock, h ow ever, and the u ltim ate goal is retirem e n t of th e p referred stock and tra n sfe r of th e assets and liabilities, as w ell as tra n sfe r o f the m an ag e m en t of seco n d ary m a rk e t o p eratio n s, to th e co m m on stockholders. A s o f D ecem b er 31, 1962, p referred stock o u tsta n d in g w as $ 1 5 8 .8 m illion of the $208 m illion statu to ry m axi m u m , a n d c o m m o n s to c k o u t s t a n d i n g am o u n ted to $8 9 .8 m illion. T h e p u rp o se of F a n n ie M a e ’s seco n d ary m a rk e t o p eratio n s i s : . . to provide su p p lem en tary assistance to the general seco n d ary m a rk e t fo r ho m e m ortgages by providin g a d eg ree o f liq u id ity fo r hom e m ortgage investm ents. T his objective is accom plish ed by th e p u rch ase o f acceptable F H A -in su re d an d V A -g u aran teed m ortgages in areas w here, an d at tim es w hen, investm ent funds are in sh o rt supply an d by selling th e m ortgages in areas w here an d w hen in v estm en t cap ital is av ailab le . ” 1 In general, F an n ie M ae p u rch ases m o rt gages in p eriods when an expansion of m o rt gage lending activities is h am p ered by an in sufficient supply of new investm ent funds. By p u rch asin g F H A -in su re d o r V A -g u ara n teed m ortgages fro m p riv ate m ortgage len d ers at prices w ithin the prev ailin g m a rk e t range, F an n ie M ae enables len d ers at such tim es to reinvest th e ir funds in new m ortgages. In tight m oney periods, the A sso ciatio n can avoid ex cessive p u rch ases w hich m ight conflict w ith n atio n al cred it policy by ad ju stin g u p w ard b o th its fees and the p ercen tag e of th e m o rt gage value each seller m u st ap p ly to p u rch ases o f com m on sto ck in the A ssociation. F an n ie M ae is au th o rized to hav e secu ri ties o u tstan d in g am oun tin g to a m ax im u m of 1 0 tim es its o u tstan d in g c ap ital an d surplus. T he am o u n t of p referred stock th e T reasu ry 1 Annual R ep o rt of the H ousing and H om e F in an ce A gency, 1961. m ay b u y is lim ited by statu te, b u t the am o u n t of co m m o n stock ow ned by the public d e pends largely o n the am o u n t o f m ortgages p u rch ased by th e A ssociation. T h e A ssocia tio n requires each seller to buy stock am o u n t ing to betw een 1 an d 2 p erce n t of the u n p aid b alan ce o f m ortgages offered fo r sale, b u t it m ay v ary th e ex act p ercen tag e depen d in g on w h eth er it w ants to en co u rag e o r discourage investors fro m offering m ortgages. ( I t m ay also increase the p ercen tag e w hen m ore cap i tal stock is n eed ed to p erm it g reater b o rro w ings fo r in creased p u rch ases o f m ortgages.) N et pu rch ases of m ortgages te n d to coin cide w ith p erio d s o f h eav y d em an d s on th e cap ital m ark ets. F o r exam ple, th e A ssociation m ade large seco n d ary m a rk e t p u rch ases in the 1956-57 perio d , an d again in 1959 an d early 1960. O n th e o th e r h an d , n e t sales ten d to coincide w ith p erio d s of cred it ease, w hen m ortgage loans are easily ab so rb ed in the m ark et, an d w hen investors are actively lo o k ing fo r relatively high yielding investm ents w ithin a co n tex t o f declining long-term in ter est rates. T h u s, sales w ere co n ce n trate d in the recession m o n th s o f early 1958 an d early 1961, b u t also at tim es in 1962 an d early 1963. F an n ie M a e ’s role in the m ortgage m a r ket d u rin g this recen t u p tu rn in residential co n stru ctio n was q u ite different fro m th a t of earlier ex p an sio n s, largely becau se the m o rt gage m a rk e t rem ain ed relatively easy. D u rin g m o st of this perio d , the supply o f long-term investm ent funds co m p eted fo r th e supply of new m ortgages being created ; consequently, F a n n ie M ae b o th p u rch ased m ortg ag es to pro v id e liquidity an d sold m ortgages to p ro vide investm ent outlets. Fannie M ae innovates P u rch ases of m ortgages in the secondary m a rk e t began in 1955. P u rch ases a t th a t tim e w ere financed by selling d eb en tu res to the S ecretary of th e T reasu ry , w ho held $ 6 6 m il lion u n d er this arran g em en t by th e end of th e 53 FEDERAL R E S E R V E B A N K OF S A N F R A N C I S C O year. P ub lic financing b eg an in 1956, w hen three $ 1 0 0 m illion issues w ere sold, each c a r rying 9-m o n th m a tu ritie s . 1 Since m ortgage p u rch ases w ere heavy in 1956 and 1957. by the end of th e la tte r y ear the A ssociation h ad $ 1 ,3 1 5 m illion o f (m o stly sh o rt-te rm ) d eb en tu res o utstan d in g . In the easier m oney m ark et o f 1958, how ever, F an n ie M ae b eg an to shift to w ard lo n g er-term financing. A t the en d of 1959, w hen it was again financing heavy p u r chases of m ortgages, only $ 7 5 0 m illion of the $ 2 ,1 9 0 m illion o u tsta n d in g seco n d ary m a rk e t d eb en tu res w ere sh o rt-term issues. T h e te n d ency to w ard lo n g er-term financing has since co n tin u ed , so th a t by the end of 1962 the average length of m atu rity was nearly six years. E arly in 1962, in fact, the A gency sold a $ 2 0 0 m illion issue w ith a m a tu rity of 15 years, the longest m atu rity it has yet sold. S h o rt-term financing, nonetheless, has re m ained an ind isp en sab le ad ju n ct to secondary m a rk e t o p eratio n s. In late 1959, w hen the T reasury was b o rro w in g heavily to finance the huge deficit resulting from the 1957-58 reces sion. m a rk e t rates on sh o rt-term issues rose above lo n g -term rates, and F an n ie M ae fo u n d itself com p etin g in a very tight m ark et. C o n sequently, in A pril 1960, the A ssociation b e gan to shift all its sh o rt-term borrow in g o p e r ations to the co m m ercial p a p e r m ark et, until eventually it replaced sh o rt-term co u p o n is sues w ith d isco u n t notes. F a n n ie M a e ’s d isco u n t notes rep resen t a significant in n o v atio n in A gency financing. T h e ir use red u ces th e need fo r in terim b o r row ings from th e T reasu ry b etw een d eb en tu re 1 T h e tim ing of debenture sales is partly controlled by considera tions of p racticab ility. To fmancc its secondary market opera tions betw een debenture sales, F annie Mae can borrow short term funds from the Treasury, w hich are reflected in the budget as expenditures. T h is is u su ally done until borrowings are large enough to make a debenture sale feasible. Sales are usually for S 100-S200 m illion. All or part of the proceeds are then used to repay the Treasury. 154 Billio n s of D o llars LOANS BORROWING _ j 1955 1962 rn riA 1 1 1 1 1 1 I 1 N ote: D ata show outstanding loans and advances and ou tstand ing bonds, notes and debentures, for selected Federal agencies. Source: Board of Governors of Federal R eserve System . sales, because they are freq u en tly sold in sm all lots. T h ey co m p ete in the m a rk e t w ith T reasu ry bills; unlike bills, how ever, they can be b o u g h t with m atu rity dates ta ilo red to the individual needs o f the investor. T h e A g en cy ’s q u asi-g o v ern m en tal status en ab les it to ob tain rates fo r its disco u n t notes th a t are below co m m ercial p a p e r rates. T h u s, as the m a rk e t fo r F an n ie M ae d isco u n t notes has developed, state and local go v ern m en ts have becom e an im p o rtan t facto r in the m a rk e t, and yields on disco u n t notes have m oved clo ser to T reasu ry bill yields. By lengthening m atu rities an d by adopting new sh o rt-term b o rro w in g m eth o ds, th erefo re, F an n ie M ae has in tro d u ced sev eral significant innovations into its financing p ro ced u res. T h ese changes have been m ore extensive th a n those of o th e r agencies, possibly because its financial needs are m ore su b ject to change ov er sh o rt periods of tim e, and possibly also because its o p eratio n s have a m ore d irect im p act on the F ed eral budget.
@FedFRASER