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C O M M I T T E E O N B A N K I N G , H OU SI NG A N D U R B A N AFFAIRS WILLIAM P R O X M I R E , Wisconsin, Chairman J O H N T O W E R ,Texas E D W A R D W. B R O O K E ,Massachusetts T H O M A S J.M CI N TY RE ,New Hampshire B O B P A C K W O O D ,Oregon ALAN CRANSTON ,California JESSE H E L M S ,North Carolina AD LA I E. S TE V E N S O N ,Illinois JAKE G A R N ,Utah. JOS EPH R. BI D EN ,JR.,Delaware R O B E R T M O R G A N ,North Carolina JOHN SPARKMAN ,Alabama HARRISON A. WILLIAMS,JR.,New Jersey KENNETH A. MCLEAN,StaffDirector ANTHONY T. CLUFF,MinorityStaffDirector (II) NOMINATION OF PHILIP C. JACKSON, JR. M O N D A Y , J U N E 9, 1975 U.S. SENATE, COMMITTEE ONBANKING,HOUSING,AND URBAN AFFAIRS, Washington,D.C. The committee met at 10 a.m. in room 5302 of the Dirksen Senate OfficeBuilding,SenatorWilliamProxmire,chairmanofthecommittee, presiding. Present: Senators Proxmire and Garn. The CHAIRMAN. The meeting will come to order. This morning we meet to consider the nomination of Philip C. Jackson,Jr.,tobe a Governor of the Federal Reserve Board. Senator Allen from Alabama will introduce Mr. Jackson. STATEMENT OF JAMES B. ALLEN,U.S. SENATOR FROM THE STATE OF A L A B A M A Senator ALLEN. Mr. Chairman and members of the committee. It is an honor and pleasure for me to present Philip C. Jackson, Jr.,to the committee and to endorse hisnomination and urgethe committee to approvethe nomination.I might say at the outset,Mr. Chairman, I'mauthorized tosay to the committeethatMr. Jackson'snomination has the enthusiasticendorsementof my distinguished colleague, Mr. Sparkman,formerly chairmanof thiscommittee.SenatorSparkman is enroute from Alabama by train and,inasmuch as Mr. Sparkman does not fly,he asked me to express his regrets in not beingable to be on handtoendorse Mr. Jackson personally. Mr. Chairman, the nomina tion ofMr. Jackson,as Governorof theFederal Reserve Board is a nonpoliticalappointmentand certainlythisisacasewherethe position soughtthe man rather than the man seeking the position, which is somewhatofanoveltyinGovernment today. Mr. Jackson has been an outstanding servant in Alabama.He was born in Birmingham,Ala. He has lived in Alabama all his lifeand he isoneof ouroutstanding citizens.He was educated at the University of Alabama and he attended the School of Mortgage Banking at Northwestern University in Chicago.He has been associated with the Jackson Co.,which is a mortgage banking companyin Birming ham .Later I'm surehe will testify to the fact thatimmediately before beingcontacted aboutthispositionhe soldhisinterestin thiscompany and has no interest whatsoever in the company. There would be no conflict of interest at all in this matter. Mr.Jacksonhad a very distinguishedbusinesscareer.He isdirector of Alabama Power Co.,in Birmingham . He is a member of the Ad visory Board ofthe First NationalBank of Birmingham.He is chair man of the Advisory Committee of Federal Mortgage Association (1) 2 andison the BoardofDirectorsoftheMortgage BankersAssociation of America. He has beenpresidentand was for the years 1971 and 1972 of the Mortgage Banking Association of America. He has been contributing to the textbook “Mortgage Banking.” He has been active in business and civic and charitable work in Birmingham and in Alabama for allof his life. I'm sure, Mr. Chairman, thatyou will check with Mr. Jackson about his various philosophies—his fiscal policy and philosophy and hismonetary philosophy and policy. Coming from the business world, from which he does .come, I would feel that,in addition to beinga fiscalconservative,Iwould say that on monetary policies hewould certainly bear inmind the need for an expandingmoney supply and the availability of money atlow rates of interest. He would recognize the power of the Federal Re serve Board, both to check inflation and to get us out of recession, and he would recognize that there is a fine line of activity there that the Board could engage in.And hewillspeak forhis philosophy I would think thathe would tilta littlebit in the directionofhaving adequate moneys available for investment purposes in the country. He would seek to promote astableeconomy,a growing economy,with emphasis on sound businesspractices, but with a recognitionthat if weought to grow economicallyin this country,money must be made available forinvestment purposes.It must bemade available at rates ofinterest that the buying public can accommodate with. Mr. Chairman,I believe that Mr.Jackson isan outstanding person who has been named to the Board.He is a young man ,and I ieel he has many years of distinguished service to render to the Federal Reserve Board and to the country. I thank you. The CHAIRMAN. Thank you Senator Allen for a very, very fine statement.We appreciate your strong endorsement of the nominee. Mr. Jackson,would you like to make any opening statement? Mr. JACKSON. I have no statement at this time, Mr. Chairman. The CHAIRMAN.There are a coupleof regular,standard questions that the committee asks of nominees for the Federal Reserve Board and other top policypositions. One, we had a chance to look at your financial holdings. As I understand it,you have been cleared interms ofno conflictofinterest. You have taken the position that you will put your holdings into a blind trust;is that rig Mr. JACKSON.That is correct. The CHAIRMAN. Does that include all of your holdings? One of the great problems for you is there isnothingyou can invest in.No matter what you invest in,it is affected by your policy.It is a very difficult position, unless,I guess,you doput your holdings into a blind trust. I presume that iswhatyou aredoing? Mr. Jackson. The trust is intheprocessof being prepared, and I expect to complete itprior to takingthe oath of office, sir. The CHAIRMAN. Would you respond favorablyinrequests to testify before this committee or other committees of Congress? Mr. JACKSON.Yes,sir. TheCHAIRMAN.SenatorAllenoutlinedyourbackgroundanditisan impressive background. I would like to ask oneor two questions 3 further.Did you have anykind oftraining orany experiences or any opportunity to study monetary policy as such? Mr. JACKSON. During undergraduate days that was part of a normal economics course at theUniversityof Alabama.Sincethat time,as a person who has made his living in trying to anticipate monetary policy actions in the buying of mortgages at some risk, I have studied monetary policy in that context, but I have never been a formal student ofmonetary policy. The CHAIRMAN. What do you see as the principal functions of the bankingsystem ? Mr. JACKSON.To provide a vehicle throughwhich theeconomic and personal resources ofthe country can beutilized anddeveloped. The CHAIRMAN. How important is the availability of credit at moderate rates to the growth of our economy? Mr. JACKSON.What do you mean by moderate ? The CHAIRMAN.I would like to ask you.Handle it any way you wish. Mr. JACKSON.Moderate is a relative adjective.It islike the ques tion, "how is your wife?” “Compared to who?" It is difficult to answer it,Mr. Chairman. You can answer itoneway,saying, “moder ate” to the man who has none,would be more than he has. The CHAIRMAN.I am glad you are consideringitthatway.We get some witnessessaying theybelieve in moderaterates,without coping with the word "moderate.” I am gladyou recognize that this isaacriti calpoint.What Iam getting at,ofcourse,isthekind of thing Senator Allen referred to in his introduction. We are in a serious recession.There is every indication,including the most optimistic kind of projections,that we willhave high unem ployment for 3 or 4 years,at leasteven with substantial growth. I am anxious to see as much activity in the private sector as possible rather than in the public sector.One way todo itishave credit avail able as freely as you can. Senator Allen mentioned the other aspect,ifyou go too far in that direction, which is you suffer from inflation, because the money supply gets too big.Just give me your reaction to how we meet this problem . Mr. JACKSON.I think the only fairanswer toyou,sir,is that presently have all the facts on which to make even a personal judgment.I think one ofthethings that we are going to have to look don't at,as we face the issue,is,No. 1, what will betheeffect of current fiscalpolicy. Thatis,thepotential effect that may take place,in the near future, together with the reaction of the private sector onthe efforts that themonetary authorities have already made.It would be m y judgmentthatthe questionisopen. The CHAIRMAN.Letme get to that in a littlemore detail later on. You are responsibleformonetary policy primarily.Ourresponsibility is the fiscal responsibility and themonetary responsibility. Let me ask you another aspect.The Federal Reserve Board isa regulatory body,too. You regulate the member State banks.What viewsdoyou have on the adequacyofourpresentfinancialinstitutions with respect to solvency? Do you have any feeling of concern with respecttosolvencyofourbankingsystem? 5 Mr. JACKSON.They are more concerned about the short-term rates. The CHAIRMAN.Iflong-term rates don't comedown,we will con tinue in a housing depression; isn't that logical? Unless long-term rates come down, you will not be able to finance housing. Mr. JACKSON.Ithink the fundamental question,to which I do not have the answer,is,what would be the attitude of consumers about the rates as they exist? The CHAIRMAN.What I am talking about is thefact ifyouhave a 9-percentrate,only aa small proportionof the population can afford to buy homes,lessthan30percent, some peoplesaylessthan 15percent. So,under these circumstances,it would seem to me we have to find some way of making housing money available at a lower rate,a rate they canafford,below 9 persent. Ihopeyou cancontribute tothat on the Board,because you will beundoubtedlythehousingexpert.Youare theonlyman ontheBoard with the kind of experience you have bad in housing.It hasbeen a great concern of the former chairman of this committee, Senator Sparkman,who has been Mr. Housingin the Senate formany,many years,and many of us feel thisisthesingle mostimportant industry to lead us out of the recession.Ifwe can get housingstarted,itwould be 2 million jobs,and it would bea great momentum . Mr. Woodcock said that the best way to help the automobile industrywas tohelphousing.Thiswassomethingon which theFederal Reserve Board can make a substantialcontribution. I have a number of other questions, but I will yield the floor to Senator Garn . Senator GARN . This entire discussion has gone on all year long between thedistinguished chairman andI primarilybeing theonesto carry iton.I do not disagree at all with Senator Proxmire on need for additional housing starts and jobs that will come from that and spinoffs into otherareas of theeconomy. I have been stating allyear long as that primary cause isFederaldeficit spending.I firmly sub scribe to thecrowding out theory. I do not see thatitmakes much sense when we,in the Congress,and ourfiscal policy,arethe primary cause of the lack of availibility of money,for reasonable ormodest interest rates or whatever that means . Then we come back with housing bills to subsidize 6 or 7 percent mortgages.Governmentcausestheproblem, and Government comes back in to solvethe problem which,I think,they could solve by not spending so much money in a deficit manner. Do you subscribe to the crowding out theory? Do you think it exists and makes lessmoney availablein the privatesector and drives interest rates? Mr. JACKSON. If you are asking whether crowding out may or may not occur,it willto a significant degree depend on how much, and how many,and of whatnature,other borrowers are in the market seeking creditat the same timeas the Treasury may be.The answer to that question,I don'tknow.Much would dependon the natureof the economy at the time. Senator GARN. This year,or fiscal year 1976,I estimate we will have at least a$ 75 billion budget deficit.What is your estimate of how that willaffect the marketnext yearwhen the Government has to go out and borrow ? You will beinvolved as a Federal Reserve 54-967-75-2 6 Governor.That money has to come from your printing it or your borrowing it in the private sector.How would the crowding-out theoryworkwithyouborrowing$75 billionorareyou creatingitnext year? Mr. JACKSON. I don't have an answer today for the question you are asking. Senator Garn. I don't expect you to have a specific answer, because we are all guessing.The economists we had parading before us thisyear,were wrong inregard to 1975,no matterwho theywere, conservative or liberal. Do you think a deficit of $75 billion will cause crowding out and much higher long-term interest rates? Mr. JACKSON.I don't think there is a question in my mind that many times interest rates areinfluenced bywhat exists,but,more so, by people's attitudes about what will exist in the future.Some have felt,in thelast fewmonths,that the crowding out concept will be valid, and have made decisions on that assumption. You have seen people pay higherinterest rates than they otherwise would have paid, iftheyhadnot believed inthe crowding-out theory. Senator GARN.You made a statement that I agree with that you can't separate fiscaland monetary policy.Inlightof the fiscal policy of the Congress and the huge deficits we are continuing to build up each and every year how do you feel about the pressurefor greatly increasedmonetarysupplyby theFederal ReserveBoard.Somepeople are talking aboutasmuch as 10-percent increase. Mr. JACKSON.I think the only answer Ican giveyou isIdon'tknow. Idon'thave allthefactsonwhich to base ajudgment. Senator GARN.You are going into a job as amember of the Federal Reserve Board. You must have some opinions.Not being a member of the Boardyet,I am sure you have nothad opportunity tolook at theirfigures. Iam not trying topin you to specific numbers.That is why I'm phrasing my questions in broad generalities. You must havesomeopinion as to where we ought to go.Chairman Burns talked in wide ranges, 5 to772 percent. Mr. Jackson.It would be my hope at the Federal Reserve Board notto basemy decisions on my hunches or opinions but on the best available information at my command and the Board's command. I am not trying to dodgeyour question.I do think in thelong run inflation is a serious problem inthis country and is a problemthat must be faced not only by the Federal Reserve Board, but by the Congressaswell.To theextentthatinflationcontinuestobeaproblem it shouldbe aproper concern of the Congress as well as theFederal Reserve Board. Based on the actions of either,the other may react to counterbalance that from time to time. Senator GARN.Even though we allrecognize that the recession is serious, that we do have high unemployment problems,do you feel in the longer term that inflation ismore of a problem than thecurrent recession?Ido phrase itin thelong term.I'mnot talking about asof today,do you think inflation is more of a problem than recession? Mr. Jackson. I think inflation is a problem in the entire world. Itis a problem that must be faced. Senator GARN.I have no further questions at this time,Mr. Chair man . 7 The CHAIRMAN. Your answers are frank and helpful, because they indicateyou do have an open mind. I'm concernedabout the import anceofhaving aman appointed by the Presidentof the United States and confirmed by the Senate and who has a record of fine success as you have inthebusinesswillbein aposition on the Board to exercise, independent judgment. I am not saying there have been rubber stamps of the chairmen in the past,but there have been allegations to that effect.One way you get that,especially coming to a monetary policy field where you have not had as much experience as you have in housing is by having a staff available. One of theproblemswith respect to the FederalReserve Boardis that the staffis tightly controlled by the chairman.That happensin some of the congressional committees. I hope it is not truein this Committee . Senator GARN.I agree with that. The CHAIRMAN.Have you had opportunity to be informed by the Chairman ofthe Board and othersas to theavailability of thestaff toyou?Wouldyou befreeinmakingupyourmind on theappropriate increase inthemoney supply?Wouldyou be freeto consultprivately and directly with members of the staff at the Federal Reserve Board ordo you have to go through the Chairman? Mr. JACKSON.It is my understanding from previous members of the Board,Mr. Chairman, that each member of the Board is free to discusshis personalpoints of view, and the facts with any member of the staff.As far as I'm able to learn,based on preliminary discussion with the other members of the Board,you are free tohave those discussions. The CHAIRMAN.Would you have any staff at all to advise you directly, two or three experts? Mr.JACKSON.It'smy understanding, and I'mnotfamiliarwith the details,that the Board members each have an administrative assistant of his choice to work under him.At the same time it is my under standing that each Board member has access to all members of the staff. The CHAIRMAN.Do you think that one adviserwould beadequate, oneadministrative assistant?Maybe I shouldn't say "adviser." Mr. Jackson.I don't think one man can give you all the answers tothe questions,no,sir. The CHAIRMAN.Do you think each member should have hisown staff?One of the things that concerns us is the bureaucracy. Every policymaker who has a staffofhis own,ifthey did,itwould be burden some. Our monetary policyisso important,do youthink itwould be wise to consider having Governors with somewhat more advice available to them,directly by people they appoint,people that they can rely on. Mr. Jackson.Ihave never thoughtof the issue and I don'thave an opinion.Offhand, having seven members of the Board of Governors with each havingtheirownstaff,mightmake itmoredifficulttoarrive ataconclusionsatisfactoryto anybody.Againitmightnot.Irecognize the value of independentjudgment. The CHAIRMAN.Iagree,and Ithink allofus hereagree,Senators Allen, Garn and I want todiscourage increase in the bureaucracy.At 8 thesametimewhereyouhaveamenenteringapositionofgreat policy makingpowerwe want toseehe getsgoodindependentadvicewe can rely on. In your view,istheFederalReserveBoardindependentofthePresi dent and executive branch? Mr. JACKSON.M y understandingis that the Federal Reserve Board is a creature of the Congress. The CHAIRMAN. Its a creature of the Congress? Mr. JACKSON. Yes,sir. The CHAIRMAN. I'm glad to get that response,because that ismy conviction,too. Do you believe that when the Federal Reserve Board takes major action such as interest rate changes, tightening of money supply orin announcingitsmonetarygoalsthatitwouldbeagoodideatostatethe effect it would have on the number of houses tobe built or the effect on thehousing industry? When Chairman Burns toldus what themonetary policy was to be for the following year -it was very welcome- butwhenhe does it, wouldn't it be wise to tell us what consequence that would have on housing? Mr.JACKSON.The committee might well consider whether it would wantthe Chairman to giveareactiontohousing.I thinkitwould be a mistake to isolate housingper se.The ramifications for all sectors as well as any specialized sector of the economy ought to be of interest to the committee. The CHAIRMAN.How abouttherateofinflationandunemployment. Wouldn't itbe a good idea to indicate iftheyhave a monetarypolicy of a certain kindthat theyexpect a certainrate of inflation,range of inflation or range of unemployment? Mr. JACKSON.I'mnot sure I'm getting theexact thrustofyour ques tion, Mr. Chairman.As I understand your question,you are saying would the FederalReserve Board properlysay,ifwe do this,thenthis willnaturally result? The CHAIRMAN. I'm not saying that. Irecognizethesethings arenotinanywaycontrollableandneverwill a ertainpolicyand hopei bein afreesystem . You can followac twillget aresultand itmay not.When theFederal Reservecomesinwith a par ticularmonetary policyandit isexpectedtobemore expansivethan in thepast,and itisappropriatebecausewe have arecession,maybe they would at the sametime give some indication ofthe generalpattern thatthey expect prices and employment or growth,economic growth, to take. Ifthey did that,wewould have some notion ofthebasis,thereason for their adopting of the particular monetary policy. Mr. JACKSON.I thinkyour judgment issuperior to mine in that respect. I don't honestly have one. The CHAIRMAN.Well, the Federal ReserveBoard isin the position to do this.They have the computers, excellent staff, fineeconomic staff,one of thebestor thebestin Washington. They would be in a betterpositionthanIwouldbe orany otherMemberof theCongress would be.They musthave some idea ofthe impact ofwhat they are doingorhow do theydeterminethatparticularpolicy? Mr. JACKSON.I understand what you are saying. The CHAIRMAN.Why won'titbedesirableto tellus? 9 Mr. JACKSON.If the committee and the Congress wishes, I don't know why it could not say anything that the Congress wants them to say . The CHAIRMAN.Why wouldn'titbe desirable?They haven'tdoneit. Mr. JACKSON.I don't know . The CHAIRMAN.We not only have high unemployment now,9.2 percent,the highestsince the GreatDepression.W e have atremendous idleness of ourplants. They are operating at less than two-thirds of the preferredlevel of capacity. It makes sensethat putting idle m a chinery and idle people back to work is not inflationary. It couldget inflationaryatsomepoint,butthereseems tobenodangerofinflation inthenear future atleastfor thenextyearortwo. When we press the Federal Reserve Board to expand the money supply at rates sufficiently high for a moderate recovery they raise thespecter of future inflation.I agree that thatis a specter that is somewhat in the future and is very real,but itisinthe distantfuture in my view. Why shouldn'twebe engagingin amoreexpansivemonetarypolicy than we have had or thanGovernor Burns is projecting in viewof the greatidlenessofmachineryandequipmentandmen. Mr. Jackson.We arecontinuing to have a relativelyhighrate of inflation even with theidle capacity today.That has got to be part of the equation on which anyjudgment isbased. The CHAIRMAN.What concernsme about thatjudgment isthatthe inflation is not related, however, to the demand situation. We have pricesgoing up forobvious reasons. Oneis the jump of pricein the oil in the world. The other is the fact that we have had in 1973 and 1974 we had thefoodpriceproblem which was serious.We had two devaluations of the dollar that increased the price of imported goods and some thatwe exported tosome areas.Those are the factorsrather than shortages. Thereisnoareanow thatIcanthinkofwherewehaveanyshortages. Steel is operating at a far lower level than it was a few months or a year ago.Oil, we have plenty available and so forth.So that where is there the pressure onresources, on too much demand ? Where is there a situation where a lesser demand would ease up the anti inflation problems?Where is there the prospect that greater demand would cause inflation? Mr.JACKSON. I thinkthen the question,as Iunderstandit,is,ifwe have thissituationbasedon the presentmonetarypolicyshould threre notbeways to expand the monetary policy? The CHAIRMAN. Exactly. That is right. For the time being. I'm notsaying doingitforyears,butfor3 or4 or5 months. Mr. JACKSON.Basedonwhat Icanread,from thereportsofvarious people testifying before this committee, and others,thereare some who feel we are in a turning position in the economy and the rate of capacity utilization may go up. The CHAIRMAN. Won't an expansive monetary policy do exactly that ? Mr. JACKSON. I think the question, sir,is whether or not we are getting the turn in the economy that we all hope for today basedon the present monetary policy or whether it would takeadditional monetary easetosustain theturn thatpeople expect tobe happening. 10 The CHAIRMAN.The rate ofunemployment increased recently.All the projections —the government's own projection is 8.7 percent for this year and 7.9 percent for next year.Then they don't expect it to go be below 7.3 percent for 3 years. And even this assumes we would have the fastest growth we have had since World War II,which seems super optimistic. If we were operatingat 5 percentunemployment instead of9 percent,we would be producing $200 billionmore. Monetarypolicy,it seems,would bea good way to get there.In your opinion,is there any substantial dangerof inflation takingoff again in the near future,can we count on,in the future,deceleration ofthe rate of inflation this year and next year? Mr. JACKSON. I would hope it would not take place.The answer is,I don't know,Senator. The CHAIRMAN. If we do get inflation and it is possible,because nobody knows the answer but if we do get inflationit isunlikely to come from pressure on scarce resources. It is more likely to come from unpredictablefood shortage orwar in the Middle East. Thatwon'tbe the result ofa tightermonetary policy.What will happento theinterestratesinthenextfewyears? Mr. Jackson. One thing I have admired was something Peter Drucker saidinhis books.There are only two thingsyouknow about thefuture. No. 1,it will be differentfrom the past, and No. 2,it will be different than what you thinkitwill be. The CHAIRMAN.Thereisnoway tohaveeconomicpolicy,monetary or fiscal policy unless you makesome assumptionson the future.If you assume that the future is completely unknown there isno way to take policy positions at all.The policypositions you take will have effectnextmonth ornextyear.Therefore,you must make theassump tionasto what interest rates and what employment and what prices are likely to be. Mr. JACKSON.Ibelieveyou asked me what Ifelttoday.I'mnotin a positiontoinfluence thatjudgment.I'mnot amember oftheBoard of Governors. The CHAIRMAN.You are abouttobethough.We areconsideringyou for it. Mr. Jackson.Yes,sir. The CHAIRMAN.Ifyou dobecome amember oftheBoard,won'tyou have to make these judgments? Mr. JACKSON.Yes,sir. The CHAIRMAN.How willyou go about makingthem ? Mr. JACKSON.I will use the best informationI have available from allstaffresources and then use thebestjudgment I have to do what is best for the country. The CHAIRMAN.Well,this is one area where you have had a good background.As amortgage bankeryou had tohave opinions about in terest rates. I think, therefore, it is a fair question and a question whereyou would be competentto give us ananswer. Thequestion is what do you expectinterestrates to do.Not what you predict or fore cast or know, but what do you expect interest rates todo. Mr. JACKSON. Based on my mortgage banking experience,I think interestrates will tend to be level orturn slightlydownward. The CHAIRMAN. What do you assume about the money supply growth? 11 Mr. JACKSON. I assume it will continue to grow, particularly the largerdefinition ofitthathas to do withsavings accounts. The CHAIRMAN.Idon'tthinkyou canfind aquarteryearwhere M -2 hasn't grown.I'm talkingabout M -1.Do you expect it to grow at more than a 6-percentrate? Mr. JACKSON.I think Chairman Burns testified thatitwould be the presentobjective to grow between5 and772percent. The CHAIRMAN. What do you expect? Mr. JACKSON. If the Fed expects it to grow at that rate,its judg ment would be better than mine. The CHAIRMAN. What would happenifthemoney supplyincreased in a somewhat more rapid way? What would happeninstead of in creasing at 5 to 7% itwould increase at8 percent? Mr. Jackson. No. 1,you couldfind short-terminterestratescoming down.The investor reaction in the longer term market might make longer term rates go up. The CHAIRMAN . Wh a t is the best bet? Mr. JACKSON. Probably different from either of those results. The CHAIRMAN.How would it cause longer term interest rates to go up.You say cyclical effect? Mr. JACKSON. Ithink thereare many peopleinvestinginthe long term market who feel that ultimately over a short number of years, if we have substantially lower short-term rates, this will produce inflation that will in turn reducethe value of their long-term invest ments.So they want a rate high enough to make their long-term investments compensate for sucha reduction. The CHAIRMAN.They want it.What doyou do with your money ? You aresittingthere with halfaamilliondollarsasyouare,or alittle more.You are sittingthere with that kind of money,what do you do with it? Mr. JACKSON.For the present, many of the people that might ordinarily be making long-term investments are now making short and intermediate investments because of this concern. The CHAIRMAN. How long can the thrift institutions hold on? Mr. JACKSON. I would personallyhopenotmuch longer.That hope is based on the feeling that sooner or later the managers of these thriftinstitutions will be convinced that the rate of inflation will go down and stay down and they would be safe in making long-term investments. The CHAIRMAN.What do you think now,what do you think the Fed can do to stimulate housing? Mr. Jackson. Aside from anything else, the fundamental task is to generate an attitudein thiscountry thatthe Governmentis com mitted to the control of inflation and that its resources will be used to control inflation. The CHAIRMAN . H ow does the Fed do it? Mr. JACKSON. By its policies and by its actions. The CHAIRMAN.What policies do they follow? Mr. Jackson.It continues to take proper concern for inflation as a part ofitsmonetary policyfor the country. The CHAIRMAN.How do they dothat? I don't want to beunfair, but you're giving me an answer,which is a good answer,but I want to see where it leads. 12 You say theyshouldfollow apolicy thatisnoninflationary andhas concern.What does that mean? What do they do about the money supply? Mr. JACKSON.I think they do the job that the Congress assigned them to do as best they can . The CHAIRMAN.Well,areyou tellingme, or are you not,if they follow the policy of Dr. Burn's outline with a 5 to 7% increase in the money supply that that will best serve the interests of housing and the mortgage market? Mr.JACKSON. I can't tell you that any specificrate of growth will have directly a specific impact on thehousingmarket.I think the two best cures ofour problems in the housing industry are a sound monetary and fiscal policy. SenatorALLEN.Excuseme,Mr. Chairman,Ineed tobe on the floor. Will you excuse me ? The CHAIRMAN. Your Senator is conscientious. He is on the floor asmuch or more thanany Member ofthe Senate. Mr. Jackson. Thank you, and I wish to publicly express my ap preciation to him for joiningus today. Senator ALLEN . Thank you . The CHAIRMAN.What isyour opinion about variable ratesmort gages? Mr. JACKSON.I think they deal with a fundamental problem that probablyisgoingtobedifficulttosolve.The problemishow toprovide the lender an increased rate of return without costing the borrower too mu ch . The CHAIRMAN.Ifeltthe same way.Thatis a tough problem.But how do we proceed? Do we permit experimentation with it of a limited extent? We have instructed the Home Loan Bank Board not to permit variable rate mortgages,but certain States like California have permitted their State S. & L. to proceed withit.Do you think this is a logical way to see how these work out,or do you think we should not take that chance? Mr. Jackson.Any type of experiment that we can do that will better enable the thriftinstitutions to respond to pressures that are placed on them and particularly, their earning capacity, is an effort in the right direction.Whether isproves to bea right answer,nobody knows . It iscertainly appropriate that we continue to exploretheseissues such as the considerationrecently given by your committee and in the financial institutions bill.We have to do something. The CHAIRMAN.I take it from your answer,you do not think it wise to simply go ahead with the variable ratemortgages and permit them to beused whenever the national institutions wish to use them . The degree of constraint seems to be about right. Mr. JACKSON.I have no objection to the congressional approach in this matter. Senator GARN.I was interested in the chairman's lineof question ing aboutadditional staff.W e will find outsoon what his attitude is in givingjunior Senators additional staff. The CHAIRMAN.All Senators have at least 20 staff members.There isno Senator that has less than 18 or20,ifhe wants to use the staff. 13 SenatorGARN.The proofof thepuddingwillbe inthe vote;do we Have specialists or use the clerk here? I don't intend to pursue it . further, but I couldn't resist making the observation. One of the things I think is important, you talk about attitudes. I don't think it makes very much difference how much stimulus Congress tries to put in with variouspump-priming programs or how much the Federal Reserve decides whether it is 5, 772 or 10 percent increase in the money supply as long asbusinessmen,consumercredit mortgage lenders, etc. are out there trying to outguess what the Fed andCongress are trying todo and theyare afraidofwhat Congress or the Fed might do or not do to them,then we're not going to see the kind of recovery that thechairman and I would like to see. What I'm saying and Ithink you agreeisthat until we get con fidence built in this country, confidence that the economy will be more stable and that they are not afraid of political whime of the Congress, or possible temporary decisions of the Federal Reserve, that all the money in the world, increase in money supply, pump primingwill not get us out of theproblem . Would you agree that part of the problem of the Federal Reserve and Congress isto buildconfidencein the economy,that people can trust us,that we will make reasonable,sensible,commonsense deci sions and that is at least as much a factor in this recovery as the amount of money we pump into it? Mr. JACKSON.I don't think there is any doubt that the American consumer has had his confidence shaken in certain aspects. Along with business investment, we have to convince the consumer that here,again,he can continue togo forward. Senator GARN.On theFederal Reserve,you have banking where you will be comingin with housing expertise and background in that area,would you feel that thesingle most important thing we can do inthe housing market istoestablish somestabilityin thelonger term projects,so that the confidence does exist,builderswill dare togo out, Tenderswilldare tomake long-term commitments. Don't you think thatisalargepartofsolving thehousingproblem? Mr. JACKSON. Yes,sir. Senator GARN . I certainly agree with that. If we stay on the ups and downs ofthe rollercoaster— ifI were in the privatesector, Iwould be scared to death with what Congress is doing with those upsand downs.I hope as a member ofthe Federal Reserve,you can instill some of that confidence. I have nothing further,Mr. Chairman. The CHAIRMAN.What isyour opinion about regulationQ? Mr. Jackson. Iam not sure when you say,“What isyour opinion about regulationQ ?” what you mean. Thé CHAIRMAN. Do you favor having alimitation on the rate of interest that can be paidby banks and S.& L’s.? Mr.Jackson.I don'tthink thereisany question thatsucha regu lation isnecessarynow.Ithinkthequestionisshouldwe evereliminate it,and ifso,overwhat period andifso,how. 54-967–75-3 14 The CHAIRMAN.How about that? Mr. JACKSON.I think in the long-term,we should move toward the elimination of regulation Q. The CHAIRMAN.How a long a term? Mr. JACKSON.I can't giveyou an answer in years or months.The answerliesmore in wheneverwe are able toadjust the earning ability, ofthrift institutionsso they can more effectively compete. The CHAIRMAN.Would it take more than 2 years? Mr. JACKSON. Yes,sir. The CHAIRMAN. More than 5 years? Mr. JACKSON.Itwould depend on theaction the Congress takes to make the thrift institutionsmore The CHAIRMAN . What action can we take? Mr. JACKSON. To broaden theprospect oftheir ability to invest in other thingswhich would in turn improve theirearnings. The CHAIRMAN. When you say " other things,” you mean things other than mortgages? Mr. JACKSON. Yes,sir. The CHAIRMAN. When they do it, what happens to the housing industry? Mr. JACKSON. Simultaneously, it is necessary for the Congressto take action to encourage otherpeopleto invest in mortgages. For instance,theDepartment ofHousingand Urban Developmenthas the powerto insuremortgages and the Veterans Administration to guar antee home mortgages. The Government has given the Department ofHousing and Urban Developmenttheright to giveitsfullfaith,and credit to the mortgage-backed debentures. Recently the Chicago Board ofTradehas opened afuturesmarketinsuchdebenturesthrough which fluctuationsinrate can be hedged like commodities. Iwould like to hopethat this in turn offers substantial opportunity tocut down on aproblem thathas existed inthethrift institutionsfor alongtime. The thrift institutionhas a substantialshort-term liability with long-term assets.In addition to that,inorder to financeconstruction, a.thrift institution is called on to give a builder or developer a long term commitment of maybe 2 years before the actual mortgages are made. In the meantime,the thrift institution is absorbing that time priceriskduring that period and in turn,itssavers arehaving to help pay for the cost of that risk inone way or another. If the time-price riskcan bereduced,itwillbenefit the people who areultimate usersof the money If this development in the Chicago Board of Trade will enable. builders of housing to hedge this future risk in a way similar to the way other peoplehedge commodity prices, it will be of significant assistance toward helping the thrift institutions and people in the housingmarket to getloans on a more favorable basis,because there are lesspeople absorbing lessrisk. The CHAIRMAN. To what extentis this device for mortgageholders being used? Mr. JACKSON.Not at allnow,because itwas opened in thelast few weeks. The CHAIRMAN . Last few what? Mr. Jackson.It is in the process of being opened and the details arejust now being completed. It will be available in the next few weeks . 15 The CHAIRMAN.This isa veryinteresting operation. Itsoundslike it may be promising.II wonder ifit is,or a pipedream . You are the first witness that broughtit up and I am glad you have.We should know about it.It sounds like something to explore. You say itisnot being used at allnow ? Mr. JACKSON.PerhapsMr. Coan could answer the question.My a understandingisthatitwill be available in amatter ofweeks ordays, that trading will actually begin. The CHAIRMAN.Iunderstand itisbeingworked on now and itwill be 6 months to a year or 2 years to get going and then there is some question as to whether it will work. How big adifferentialdoyou think isappropriatenowinregulation Q?As youknow now,itwas aquarter.Itwentfrom halftoa quarter; funds flowed outof the savingsand loan institutions in a considerable a m o u n t. Mr. Jackson.I don'tbelieve any arbitrary decision should be made about what is a proper relationship. It is whatever relationship works. It is the result you intend toproduce, not the actual spread between a half or quarter, that produces the result. The CHAIRMAN.The charts we have seen indicate that when you have acne halfdifferential thatthe savers aremore inclined togo into the savingsand loaninstitutions,much more.Since we have the one quarterdifferential,there has been a great flowin favor of thebanks. Mr. JACKSON.I have not seen that chart. TheCHAIRMAN.Let me ask you now - not on futurepolicy, butdo youthink the Fed,on balance,isfighting or contributing toinflation in 1972 ? Mr. Jackson.I don'thonestly have an opinion. The CHAIRMAN. That was the year- and election year- results of the year when theFed increased themoney supplybyabout8 percent. It wasalso ayearof great prosperity compared to what we have now, year ofrelatively lowunemployment. You don't have an opinion as to whether that contributed to infla tion. You seem to have an opinion now that anythinghigher than 772 percent may be inflationary, increase inmoney supply this year. At that time itwas8 percent,unemploymentwas5percent andyou don'thave an opinionas to whether itisinflationary. This year unemployment is 9.2 percent, industry isoperating at & far lower rate of capacity and you say if we go above 72 percent,it would be inflationary. Mr. Jackson.If I conveyed that opinion, I was mistaken.I do not havea firm impression of whetlier the 5 to 7% percent would be inflationary or not today. The CHAIRMAN. In June of 1974,until March of 1975,we had a relatively smallincrease in the money supply,about 2% to3percent. Was monetary policy contributingto the present recession then, fighting inflation or showing a neutral force ofsome kind? Mr.JACKSON. The strong feelingamong most people in thecountry, including the President, was that inflation was the primary enemy in the country. On thatbasis, the Federal Reserve policy coincided with the feeling of the administration and Congress. ,onthebasisofhindsight, The CHAIRMAN.Do you think thatfeeling, was wrong? 102 16 Mr. JACKSON.Hindsight is wonderful. It may well have been a mistakeat thattime. The CHAIRMAN. Was it a mistake or not? Mr. JACKSON. It looks like,based on the rate of change,that it probably was. The CHAIRMAN. It seems to me to be a conspicuousand emphatic andtragic mistake; 2% percent increase in money supply when un employment was increasing steadily and sharply, going from672 per centto9percentandthelastquarterof1974 andfirstquarterof1975, realdropintheproductionandyetwehavethattightmonetary'policy: What is the difference in using monetary policy to fine tunethe economyand usingthe fiscalpolicy forthatpurpose? Mr. JACKSON.Ithink the basicproblem is the experience in this country isthat fiscalpolicy ismore difficultto handle on a fine-tune basis. The CHAIRMAN.Monetary policy iseasier? Mr. JACKSON. Monetary policyhas to be used infillingin the gap. The CHAIRMAN. I hesitate toask you this question based on your previous answers. Do you believein yourown ability to finetunetheeconomy? Mr. JACKSON.As an individual,I am one of270 million consumers. Therefore, my individual judgments in a free economylike ours do count. The CHAIRMAN.My questionisdoyou believein your ownability to fine tune the economy?I take itfrom everything you said,your . answer isno.Becauseyou can'tforesee thefuture.Ifyou can'tforesee the future,thereis no way to fine tune the economy. Mr. Jackson.Basedonmy personalindependent judgment,based on what I know now,I couldn't do it. The CHAIRMAN.What about ArthurBurns'ability to doit? Mr. Jackson. His judgment and ability would be substantially better at this point than mine. The CHAIRMAN. Do you think he should try to fine tune the economy? Mr. JACKSON.I think he is in a position to help lean against the The CHAIRMAN.Would you beinclined togo alongwithDr.Burns' windorwithitasthecasemaybe. judgment until you havemoreexperience inmonetary policy. Mr. Jackson. I would think his judgment should be considered with a lot of others. As far as my parroting his own conclusions,I would not.From the oath of office, I'm the person responsiblefor my vote.Therefore,I have to serve my own conscience and ability and vote theway I think it'sproper to vote. The CHAIRMAN.You havetold me that Dr. Burnshas more ability in this area than you have at the present time. How would you reconcile that discrepancy with the oath of office you aretalking about ? : Mr. Jackson. JACKSON I would say his judgmentalong with other members of thestaff and the Board should be consideredin trying to make a judgment. I wouldsay while he has great ability andhas earned a great dealofrespect, he isnot the onlypersonwithabilityorstature on the staff of the Board of Governors or on the Board itself. The CHAIRMAN.Does it make any sense to have three, and counting the SEC,four regulatory agencies?Should we consolidateit? 17 Mr. Jackson.I think thatisone issue the Congress should address itself to simultaneously with thefinancial institutions question.To a large measure,what the Congress decided to do with the financial institutions The CHAIRMAN. As a Member of Congress,I'm asking youyour advice on this. Mr. JACKSON.I personally think some modification of the super visory functions should be made . The CHAIRMAN.Would you favor having a single bank regulatory agency so you can standardize the regulationsand so you won't haveregulationsby laxityor competitionby laxity? Mr.JACKSON.Itendtofavormoreuniformity,butgivendiversity of responsibility through the funnel concept ofsupervision. a tendency touse thatsupervisor thati There tendstobea smost lax. The CHAIRMAN.If thatis true,why won'titbe wise toconsolidate the regulatory bodies as Dr. Robertson has proposed? Would you favor that? Mr. JACKSON. I would favor thatas a broadprinciple;yes,sir. The CHAIRMAN. Inside the Federal Reserve Board,wouldthe Fed be the regulatory body or should it be another? Mr. Jackson. I don't have a judgment as to which would be the best body. It would depend on the financial institutions to be supervised. The CHAIRMAN. The Federal Reserve Board has theresponsibility andpower of beinga monetarypolicy organization. Mr. Jackson.The two functions complementeachother. The CHAIRMAN.Do you have a view on so-calledliabilitymanage ment ? Should we restrict the banks in raising funds?Should we limit the extent of total liability that can be comprised ofFederal funds? Mr. Jackson.I have difficulty in hearing the question. The CHAIRMAN. I asked whether you favored the so-called liability management? Should we restrict theway that banks raise funds?For example, I asked should we limit the percent of total liability that canbe comprised by Federal funds? Mr. Jackson. I would think purely statutory constraints mightin thelong term prove to be a mistake.I think the circumstancesunder which these constraints might The CHAIRMAX. How can regulatory constraints operate? Mr. Jackson. Ibegyour pardon,Mr. Chairman. I have difficulty inhearing. Having the Fed or Comptroller, whoever the regulator is,deter mine the constraints.That might well be wise. The CHAIRMAN. Would you urge that as a Member of the Board ? Mr. JACKSOX. I don'thavesufficient background or judgment to speak finally and unconditionally on that question.I do see thedan gers ofcertain types of liability structures in the banking system thatwill produceproblemsforthe Federal system and the banks and public. The CHAIRMAX. How long isyour appointment for? Mr. Jacksox.January 31, 1982. The CHAIRMAN. Do you thinkyou will be any less independent and act any less independently asif you had been appointed for a full 14-year term ? Mr. JACKSON.No,sir. 18 The CHAIRMAN. Why are 14-year terms necessary. Would you favor reducing terms to 5 years,7,or 10 years? Mr. Jackson. Idon't have a judgment. I think the main point that needs to be taken intoaccount in anyconsideration of the term ofserviceofanymember oftheFederal Reserveisthatitbesufficiently long forhim to haveindependent judgment. The CHAIRMAN. You feel that'1982, that is 7 years, would serve asfaras you are concerned? Mr. JACKSON . Yes,sir. The CHAIRMAN.Now,the Chairman isappointedfora 14-year term as a Governor,but his appointment as chairman isonly 4years. His appointment of chairmanis not confirmed by the Senate.I'his could make him more the President's man than the Congress' man. You said the Fed should be the creature of the Congress and independent of the President. Would you favor requiring Senate confirmation of the President's chairmandesignee? Mr. JACKSON.Ihaveno objection to that.As you know,the Federal Reserve acts as a creature ofthe Congress and the provision for the appointment ofthechairmanispart oftheact.If theCongress wishes tochange it,why shouldn't it? The CHAIRMAN.Wouldn't that be logical? Wouldn't it follow from the congressional assertion that this is a congressional power? Mr. JACKSON.I have no objection to thatpersonally. The CHAIRMAN.As a Governor, one of your duties will be to super vise the affairs of the 12 Federal Reserve banks.Would you tell us briefly what this will involve, supervising affairs of the 12 Reserve banks ? Mr. JACKSON.As you know,the Federal Reserve Act establishes in definitive terms the extent to which the Board of Governors does supervise theReservebanks.The Congress establishedthatrelationship between the Board of Governors and the Reserve banks and gave them certain powers over the appointment of Directors,salaries,and So on . The CHAIRMAN.Will thispower you have as Governor involve selection of the presidents of Reserve banksinany way? Mr. JACKSON.You are asking me a technical question,and I don't know the answer to it. The CHAIRMAN. As I understand the Board must approve the selection and the nominations are made by the Directors ofthe banks; is that correct? Mr. Jackson.I hesitate to answer,because I'm not positive of the proper requirements. The CHAIRMAN.Will supervising the Reserve banks involve you in settingand approving theReserve bank budgets? Mr. JACKSON . Yes,sir. The CHAIRMAN. Will itinvolve you in auditing expenditures of Reserve banks and evaluating the effectivenessof theirmanagments? Mr. JACKSON.Yes,sir. The CHAIRMAN.Congresshasentrustedresponsibility for supervis ing the Reserve banksto the Board of Governors and establishes a , Congress gave the five Federal Reserve Federal-local committee, banks'presidents equal responsibility for the conduct of open market policy with the other governors. How can the presidents play an 19 independent role in forming monetary policy as they are supposed to dowhen the governors with whom theyserve and vote on the FOMC are theirsupervisors. You supervise their selection, and the job they doand yet,they are supposed tobeindependent ofyou and servingon the Open Market Committee.How canitbe? Mr. JACKSON.Ithink here again, iftheselection process isproper by thedirectorsoftheFederalReserveBank,then thesepeopleshould be capableof independent judgment and should be in turn required to exercise it. The CHAIRMAN.Isn't that likeletting the staff of this committee vote with the members? Senator GARN.Actually, that isn'tfaroff. Mr. Jackson.If you properly selectthe staffthey will be honest enough about t he question about which you askthem.That is the way with the FederalReserve System.If you askthem to and require that theyexercise independentjudgment, they should becapable of doing so. The CHAIRMAN.We shouldn't rely on men but law.Why should we provide forPresidentialappointment for6yearsfor the nomination of the office of Reserve bank presidentwith confirmation bythe Senate,so they do have that degree of independence.They would be selectedby the President and confirmed by the Senate. Mr. JACKSON.I never thought about the specific question enough to give you an informed judgment. The CHAIRMAN.It's agreat power they have. Mr. JACKSON.I have no informed judgment to give you. The CHAIRMAN.Why shouldn'twe require that all FederalReserve bank income regardless of source be sent to the Treasury. It is a creatureofthe Congress,therefore,shouldn't weappropriate thefunds they use and bein a position topasson theiractions aswedonotnow, because they are able to fund themselves. Mr. JACKSON.Havingnot been involved in the detailed operation of the FederalReserve,I can't answer that question directly.How ever,I can give you an answer in another context.It has been my experience as a person who deals with the Department of Housing and Urban Development. The CHAIRMAN.Do youknowhow much the Fed spentlastyear? Mr. JACKSON.Around $500 million. The CHAIRMAN . I understand itis$550 million.They have doubled their expenditures in the last 5 years and their rate of increase is more rapidthan the Federal spending.Why shouldn't we provide for the GAO to audit them. That isinthe operation ofthe Reserve Bank and Board. GAO should audit the efficiency of the Board. That would keep GAO out of monetary policy because they do not have the technical expertise.With respect to the efficiency and legality,why shoudn't they audit them ? Mr. JACKSON.It's my experience in private relationships-and I recognize the different valuesystems thatexist between the Federal Reserve andprivate relationships— that all too often that audits,in the context in which I believeyour question is framed, produce a few isolated instances of improper action and expenditure. In private relationships the audited organization then usually overreacts to that condition, so they end up spending more money rather than less. Whether it would be truewith the Federal Reserve,I can't say. 20 . The CHAIRMAN. I think it isan interesting observation. The Defense Department and H E W might give a similar response.Most people would argue that the GAO servesa tremendously useful purpose by being available to investigate these enormousagencies that spend this colossal amount of money. They have 2,000 or3,000 auditors and experts there.Why should the Fed besingled out as the only one on which we can'tcheck to see if there areimproprieties or mistakes or inefficiencies. Mr Jackson.I don't have an answer to your question. The CHAIRMAN.When you fellows get on that Board,like all of us,you don't like to giveup anything you have.Having GAO pry into youroperations would maybe be giving up something. I havea couplemore questions.I apologize for takingas longas I Ihave.Business Week reports in its latest issue that the heartof the disclosure battles are going on between the banks and Fed on the one hand and the SEC on theother in which the Securities and Exchange Commission is requiring the bank holding companies to disclose informationabout their loansand about the soundnessof their loans and aretryingtorequire them to doitand the Fed isresistingitand so arethebanks,one answer given by astock analyst isthis: If all banks upgraded disclosuresat thesame time,told aboutthe difficulty they arehavingwith theirloans,ifthecomptrollerpublished a list gradingeveryone's loans there would be no bruhaha. But Chemical and Manufacturers Hanover don't want to be the guinea pigs Why won't it be appropriate and logicalto provide that kind of disclosure ? Are you familiar with what I am talking about? Mr JACKSON I'm generally familiar, but not in adequatedetail to respond accurately tothe thrust of your question.One of thethings that concerns everybody is the fact if we get into a psychological situation where there may besome question aboutthe viabilityof a specificbanking institution, the exposure of all of its problems may inturn create a problem in and of itself. The CHAIRMAN. You can say that about any firm, Lockheed.You can say it about United States Steel,General Motors,or whatever. But we have had a policy now since the early 1930's of disclosure so the investor is told before he invests in the security of a company. It seems to me logical we should tell them the samethings about our banks . Eric Lindmann yesterday reported inthe New York Times that the Fed has refused up until now to publish any meaningful data on the aggregate level ofloans in the banking system that have been criticizedby bank examiners.Suppressing aggregatedata of this sort will not be helpful to the longer range problem of calming public attitudes toward the banking industry. Now,doesitseem toyou logicalunder those circumstances that the Fed which should be willing to publish data on theaggregate levelof loans criticized by bankers, refuses to do so? Shouldn't this be published? Mr. Jackson.In the context you explained it,itmay be. The CHAIRMAN.Why shouldn't it be? Mr. JACKSON.I don't know enough about the other side of thecoin to respond to your question or statement, Senator. 21 The CHAIRMAN. It has been suggested a good hypothetical. An investor is being requested to invest a million dollars in the bank because they need more capital.At that time the Fed knows that certainloans at the bank are not good ormay not be good.But they don't tell the investor.He is asked as apublic servicetoprovide for capitaland itisapublic interest action.Is that fairor isthatproper? Would itnot seem to you to be logical to give any investor allofthe facts? Mr. JACKSON.I think thatisan issue goingon not only with regard to banks,but allcorporations in this country. The CHAIPMAN. In all other corporations theSEC has not doubt. You have to make disclosure.Now they are saying it with respect to the banks,but theregulatory bodies won't let them do. Mr. Jackson.The questioniswhatispertinent.Irecognize thisisa decision inwhich one investor's case may be pertinent,but in another investor's case it may not be pertinent. The CHAIRMAN. Give the public thefacts.Let them know .There may be a large certificate of deposit involving a million dollars or several million dollarsnot insured. It couldmean a devastating blow for an investor.Mr. Jackson, I'm, as I said earlier, iinpressed by your experience inmortgage banking. It'sgood to have a housing expertnominatedforthe Board.But I'm disappointed inyourfeeling that you couldn't answer many of these questions. That is the whole purpose of these confirmation hearings and confirmation by the Senate. Particularly with respect to the Federal Reserve Board, because this isan agency that isa creatureofthe Congress.I feel,except for the fact you are from Alabama, which is certainly in your favor Mr. JACKSON.Thank you,sir. The CHAIRMAN.And thatyou are in housing,which isinyour favor, you are flyingblind. It's hard to know what your advice or your actions are likelyto be.Let me ask finally inlight of that,in view of the answersyou have given expressing no opinionon the policy ques tions you willface ifyou areconfirmed,do you feelpersonallyyouare a qualified tobe amember oftheFederalReserve Boardandifso,why ? Mr. JACKSON. I believe I am . I believe that the Federal Reserve Board, in directing monetary affairs, needs theoutside viewpoint, the experience ofpeople who havehad to deal in the real world of the economy,thatisin turnreflected in the attitude of the people of this country toward events,as well as in the absolute financial statistical numbers thatcan be gathered. As Senator Garn said,sometimes itisnotwhat is,but what we think is, thatproduces a given result. Therefore, that typeof insight into day-to-day activitieswould havevalue tothe Federal Reserve, par ticularly when it comes to the field of housing about which you have correctly expressed such concern. The CHAIRMAN. That's a reasonable answer, but I would feel better about itas a practical manwith practicalbusiness experience if you had strong convictions and feelings and you communicated those.I have a feeling if you have those convictions they haven't been disclosed. We are proceeding on the basis of not having a clear or under standable recordas to what you intend to do orare likely to do as a member of the Board . 54-967-75 -4 22 Frankly, I would feel better ifall the answersyou havegiven had contradicted my position.I would feel better ifyou had a strong positionwith respect to them and told us how you.felt. Thank you very much, and I wish yo u well. The committee will stand in recess, subject to the call of the . chairman. [Whereupon, at11:37 a.m.,the hearing was adjourned,subject to the call of the Chair.] [Thebiographical summary of Mr.Jackson and additional informa tion follow:] BIOGRAPHICAL SUMMARY OF PHILIP C. JACKSON, JR. Personal background Born October 27,1928,in Birmingham Ala. Son of Philip C. Jackson and Margaret Ellen Maddox . Married - Barbara Ellis Ritch, June 26, 1954. Children - Virginia Ellen, Philip C. III,and Florence Jean. Education Mountain Brook Grade School, Birmingham. Phillips HighSchool,Birmingham. BirminghamSouthern College, Birmingham . Univestity of Alabama, Tuscaloosa; B.S. in Commerce and Business Adminis tration . School of Mortgage Banking, Northwestern University,Chicago. Business experience Perfection Bedding Co., 1945-47 (summer job). Robert Decker Insurance Agency,1949 (part-time schooljob) . Jackson Company, Birmingham , since1949; now vice president in charge of mortage loan department and director. Business organizations Director,Alabama Power Co. Birmingham . Director, Perfection Bedding Co. Birmingham . Member,advisory board,FirstNational Bank of Birmingham . Chairman, advisory committee, Federal National Mortgage Association, Washington . Board of Governors,Mortgage Bankers Association ofAmerica. Civic affairs Trustee,Huntingdon College,Montgomery,Ala. Director, Metrolpolitan Birmingham Y M C A . Executive Board Member, BoyScouts Council, Birmingham. Director,Metropolitan Development Board, Birmingham. Trustee,Archaeological Research Association of Alabama. Religious affiliation Member,official board, First United Methodist Church,Birmingham. Politics Democrat. Past service Mortgage Bankers Association of America: President 1971–72; vice presi dent, 1969–71; received Distinguished Service Award 1965. Contributingauthoroftextbook “Mortgage Banking. Lecturer, Schools of Mortgage Bankingat Stanford University, Michigan State University, University ofMiami, and Northwestern University. Mortgage Bankers Association of Alabama, past president. Birmingham Board of Realtors, past president. Methodist Home forthe Aging,past vice chairman of trustees. Birmingham Festival of Arts,vice president. Metropolitan Birmingham YMCA,pastpresident. 23 FEDERAL NATIONAL MORTGAGE ASSOCIATION, Hon . WILLIAM PROXMIRE , Washington, D.C.,June 5,1975. Chairman,Committee on Banking, Housing and Urban Affairs, U.S. Senate, Washington, D.C. DEAR M R .CHAIRMAN:The purpose ofthisletteristo recommendmost strongly to your Committee andto theSenate, the confirmation ofMr. Philip C. Jackson, Jr. as a member of the Board of Governors of the Federal Reserve System . I first met Mr. Jackson shortly after I came to F N M A in 1970. Mr. Jackson played a key role in the development of the Jackson Company of Birmingham, Alabamainto one of the most respected mortgage banking companies in the nation. Elected the 1972 President of the Mortgage Bankers Association of America,Mr. Jackson is,to my personal knowledge,one ofthe mortgage banking industry's most articulate and able spokesmen and leaders. Until more recently, Mr. Jackson was the Chairman of the F N M A Advisory Committee and as such, and in anearlier tenure on the Committee,I have found hiscounseland advicetobe most helpful. Ibelieve his wide experience in business, in financialmatters and his knowledge ofthe housing industry clearly qualify him for the high level of public service to which he hasbeen nominated. I am pleased to endorse Mr. Jackson's nomination and hope that he will be speedilyconfirmed. I would appreciate it,Mr. Chairman, ifthis letter could be made a part of the hearing on Mr. Jackson's nomination . Sincerely, OAKLEY HUNTER, Chairman ofthe Board and President. NOMINATION OF PHILIP C. JACKSON , JR. 3 FRIDAY , JUNE 20, 1975 U.S. SENATE, COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS, Washington,D.C. The committee met at 9:05 a.m.,in room 5302,Dirksen Senate Office Building, Senator William Proxmire, chairman of the committee,presiding. Present: Senators Proxmire, Sparkman, and Garn. [Senator Packwood was unavoidably absent becauseof ameeting with a number of other Senators.] The CHAIRMAN.The committee will come to order. Thecommittee has been reconvened to hear again thenominee for the Federal Reserve Board, Philip C. Jackson, Jr. Mr. Jackson appearedbefore thiscommittee acoupleofweeks ago andatthat time hewas questioned primarily by SenatorGarn andmyself.Itwasmy feeling atthat timeanditwould seem tobeshared that Mr. Jackson's responses were not adequate.He was not as responsive as I feel we have aduty torequireofawitnesstobeinyourposition. The difficulty, Mr. Jackson, is that as you know the Federal Re serve Board,and as you told us franklywhen you appearedlasttime, isacreature of Congress, and independent of the executive branch. think that gives us a particular responsibility to make sure those who serve on theBoardhavedisclosed to theCongresswhattheiropinions are,what their position is,what theirattitudes are and soforth. Thiscommittee isthe only agencyofthe Congress and of thepublic that willhave an opportunity to question you andin viewof the fact thatas aGovernor of the Federal ReserveBoard you will havevery considerable power , there are a few people in theeconomy that have anything like thepower the Federal Reserve Board has to affect credit, interest rates,inflation,employment. For this reason,and because you're not being appointed simply for a year when you will come back again for another go around, but for7 years in this case,I think it'svery important that we elicit from youyour views in greater detail than we succeeded in doing last time. I'm not saying that we should demand a technical understanding of all the problems becauseit is a highly technical job,and almost everybody appointed has to learn to someextent after their appoint ment, but I think as an intelligent- and you are undoubtedly an intelligent and able businessman and banker- you must have developed some views on many of these things and we're going to try to seeif we can elicit some responses and,of course,thiscommittee is honored by the fact that the former chairman of the committee, the present chairman of the Foreign Relations Committee,is here this morning. He wanted very much to be here last time but was (25) 26 unable to, and we are delighted to start off by turning this over to Senator Sparkman to ask some questions. SenatorSPARKMAN.As you stated,Mr. Chairman,Idid not have an opportunity to be present at theprior hearing of Mr. Jackson.I returned to Washington on the 10th instead of the9th.You might be interested toknowwhy Iwaslate in returning after the recess. We always travel between Washington and Birmingham by train. We have excellent train service, the Southern Railway, which I think is perhaps the best railway system in the country. We intended to leaveAlabama on a Sunday whichwould have put us back here on Monday morning and in time for Mr. Jackson'sfirst hearing. How ever,at that time Southern Railwaychanged the schedule of therun to Birmingham to 3 days a week instead of 7 days a week, and Sunday was omitted. We had to wait until Monday tocatch the train to come back.I am sorryI missed theârst hearing. I have known Phil Jackson formany years and his father before him .I have not been able to read all ofthe transcript of the first hearing.Itseems tome thatperhaps someofthequestionspropounded him he could not answer because--well, I'llask him this ques tion.Before I doask him any questions let me say thatI didnot nominate PhilJackson.Iwouldhavebeenhappy todoso,butChair man Burnstelephoned me oneday and askedme ifI would approve of Phil's selection. Chairman Burns had selected him. I was very happy to endorse Phil and I am very glad that Chairman Burns recommended him to the President forthis position. Phil,how long have you been engaged in the home mortgage,real estate, and mortgage banking business? Mr. Jackson. Istarted work for Jackson Co. on October 1,1949, on a full-time basis.I worked two summers before that during my college days, and I have been in it since that day. Senator SPARKMAN.When you commenced work who was the head of the Jackson Co.? Mr. Jackson.Well,my fatherwas president up until the day before yesterday when the firm was sold to a local commercial bank. M y job duringthoseyearswas to head themortgagebankingdepartment. Senator SPARKMAN. How long was your father connected with that business? Mr. Jackson.I think my father started in that business just in time to see the collapse of 1929. His father, in turn, started the company about 1904. Senator SPARKMAN.In other words,you're the third generation? Mr. JACKSON . Yes, sir. Senator SPARKMAN. You have had a great deal of experience during that time,I take it,on money matters,interest rates, avail ability of mortgage credit and so on? Mr. JACKSON.The family has been in that business for a good while. Senator SPARKMAN.After being nominated or selected by Chair man Burns, did you have any briefing by the Federal Reserve? Mr. JACKSON. No ,sir. Senator SPARKMAN. In other words, you came here without any briefing and you simply responded to the questions as best you could with thelimited knowledge you had of the working of the Federal Reserve Board ;ism y assumption correct? 27 Mr. Jackson.Yes,sir. The Federal Reserve supplied me with copies of the Federal Reserve Act,with brief pamphlets concerning the operationof the system and some of the testimony made by members of the Board before the various committeesrecently. I believe those were the principal pieces of information that I got from them . Senator SPARKMAN. Of course, the Federal Reserve, as the chair man of the committee hasstatéd, is a creature of Congress and is supposedly separate from the executive branch of the Government, The Board determines the policysofarasmoneysupply isconcerned and things of thatkind. Do you have any particular knowledge as to how the Federal Reserve Board worked,its policy on expanding and contracting themoney supply and so forth? Mr. JACKSON.If I understand your question, the Federal Reserve Board operates through the Federal Open Market Committee in the purchase and saleof Government securities of various types to supply additional reserves to the banking system, and then it also operates through the establishment of various rates of reserves on varioustypes of deposits in the banking system either to expand or contractthe supply of reserves that are available in our banking system today. Senator SPARKMAN. Certainly you are correct.But more precisely I am asking about the policy as to the need of thecountry at any particular time to have the money supply expanded or contracted. Mr. JACKSON. It's my understanding that the goal of the Federal Reserve is to producesufficient money and credit in the banking system to enable the country to have sustained growth without inflation. That's the fundamental policy. Senator SPARKMAN. Then inyour opinion, that is, that the best way tocontrolinterestrates,toholdthem atasteady levelor atleast to have moderate increases and decreases instead of a sudden break increase in the money or a sudden decrease? Mr. JACKSON. Yes, sir. M y recollection is one of the reasons the Federal Reserve was established was to eliminate the money panics that existed prior to the time the systemwas established. Senator SPARKMAN. I think that's right, to stabilize the money supply. Mr. JACKSON. Yes,sir. Senator SPARKMAN. And you recognize that as being the “real” function of the Federal Reserve Board,to stabilizemoney conditions? Mr. JACKSON. Yes, sir. Senator SPARKMAN. Earlier this year Congress passed legislation, which was worked out with Chairman Burns, that the Board would supply this committee with information, I believe,6 months ahead of time on the increase or decrease The CHAIRMAN.Basedon his goal for the next year,but updated every quarter as to how they might modify it.We wanted 6 months. He proposed a year. Senator SPARKMAN. You are right.We asked for6 months and we worked it out more or less in agreement here in the committee on the basis that the chairmanhas justdescribed. Phil, do you feel that's a good policy? 28 Mr. Jackson. Sir,as long as the Federal Reserve isa creature of the Congress,I think the Congresshasthe righttoaskanythingit thinks the Federal Reserve should supply. Senator SPARKMAN.However,you would expect Congress toask only what was reasonable, though, wouldn't you? :: Mr. Jackson. I'm sure there are going to always be differences about what might bereasonable undera given set of circumsta ces, but I happen to believe that if the Federal Reserve is a creature of CongressandtheCongress wants theFederal Reserve todo something, the Federal Reserve should do itwhether the Federal Reserve thinks it's reasonable or not. SenatorSPARKMAN. I'm not talking about the power of Congress to do that. I'm talking about ourworking out a program with the Federal Reserve whereby Congress iskeptinformedasto the Board's projection for the future. Mr. Jackson.Ipersonally think that'sthe reason we were formed. Senator SPARKMAN. This committee thought so, and Chairman Burns, as I say,worked it out with the committee,and I'thinkthat it does make a definite contribution to the stability of the money situation and,in turn,of the stabilityof interest rates. Most of your pastexperience has been in mortgages andmortgage financing,has itnot? Mr. JACKSON . Yes,sir. Senator SPARKAAN. And real estate transactions? Mr. JACKSON. Yes,sir. Senator SPARKMAN. You recognize the importance of, shall I say,a fairly steady rate of interest on home mortgages? Mr. Jackson. Relativelystableratesare waysto produce a more stable home mortgage market ora market of any type. That's not to say they should be stable at rates which are too high for people to do business, but wild fluctuations produce abnormal profits and abnormal rates and abnormal concerns and makes peoplehesitant to do business,both consumers and lenders. Senator SPARKMAN. For a long timewe have,I don't like to use the word trouble,but I guess that is the best word,we had trouble with the FederalReservewith reference to housing.I can remember when --who was the Chairman of the Board from Utah The CHAIRJAN . Eccles. Senator SPARKMAN. Yes, and then,of course,BillMartin. They were alwaysafraid ofinflation,inflation,inflation;butIcan remember the time when the Federal Reserve took practically no interest in housing. To the credit of Dr. Burns, he has been most helpful in moving along a good mortgage market and home building program. Dr. Burns has had interestin housing. Mr. Chairman,ifI remember correctly,Dr. Burns was instrumen talin getting the G N M A establishedand the tandem plan working, which has been most helpful to subsidizing housing primarily. Mr. JACKSON. M y recollection is Chairman Burns did have some voice in the administration at the time, the tandom plan was estab lished and G N M A was created. Senator SPARKJAN. As I recall,Dr. Burns was one of the key au thors of these two matters.Nevertheless, I think the Federal Reserve Board in the last few years,even though tobegin with was not much interested -has become interested in housing and mortgage credit.I 29 recall testimony from theFederal ReserveBoard- perhaps 25 years ago - to the effect that 800,000 housing units a yearwas asmuch as thecountry ought to have.We couldn't get along very well on that number of units today,could we? Mr. JACKSON. No,sir. Senator SPARKMAN.But the pointI wish to make is the Federal Reserve has been helpful in thehousing field. "Idon't have any more questions,Mr.Chairman.Ido have a state ment that I'd liketoput in therecord. The CHAIRMAN . Fine. [Statement of Senator Sparkman follows as though read:] S TA T EM E NT OF SENATOR S P A R K M A N Senator SPARKMAN.I am pleased to support the nomination of Mr. Philip C. Jackson as a member of the Board of Governors of the Fed éralReserve System .I believethat his long experience as a business man inmortgagebanking and housingwillmake him aa valuablem e m ber of the Board of Governors. As everyoneknows, the policies of the Federal Reserve Board are probably the single most important factor affecting mortgagecredit and housingconstructioninoureconomy.We need aman ontheBoard whounderstands housing and thenecessity for a national policy that can be effective in maintaining the flow of mortgage credit to meet the Nation's housingneeds.I believe that Mr. Jacksonissuch a man. His experience,notonlyinrunning amortgagebanking business,but as a pastpresident of the Mortgage Bankers Association of America, providedhim with abackground thatcanbemostuseful to theBoard and,Ibelieve,most effectiveas an advocateforthehousingindustryin formulatingFederalReserveBoard policy: I have known Mr. Jackson formany years,firstas a mortgage banker in Birmingham,Ala.,and later aspresident of the MBA. As president of the mortgage bankers,he often testified before our Sub committee on Housing and Urban Affairs.I always found his testi mony and thoughts on legislation before usboth sound and construc tive.He was an outstandingwitness and responded to questions ina superiormanner.He was,andis,astrongadvocate ofmortgagecredit policies helpful to the housing industry, and I would expectthat he canbe depended on to carry this advocacy to the Board meetings ofthe Fed.W e do not now have anyone onthe Board who knows housing,and I can think ofno one better qualified to fillthis position than Mr. Jackson. :: I think it important to note that Mr. Jackson has notspent his timeonly at his mortgage bankingbusiness.His record willshow a broad interestincivicmatters and otherbusiness organizations where heis active on boards or advisorycommittees representingthe public interest.He has assistedin writingabook onmortgagebanking and has lectured extensively at universities onmortgagebanking subjects. 1.Istrongly support thePresident'schoice and recommendthatthe committee vote favorably for his confirmation. TheCHAIRMAN.Mr.Jackson,couldyou tellushow many timesyou have talkedwith Dr. Burns beforeyouappearedbefore thecommittee lasttime over the years? 30 Mr. Jackson.I first talked to Dr. Burns concerning the potential positionon the Federal Reserve Board in thesummer of 1974. At that time he asked m e to visit him in his office and discuss the interest of the Federal Reserve ingetting someone on the Board that had ex perience in housing and mortgage finance. He then mentioned the problems thatthebanking system washaving,particularly somecredit problems.I toldhim atthattime thatIhadafull-timejob.Iwouldbe glad to consider it,if Iwas nominated for the Federal Reserve,but did not want to give him any commitment at that time about my wanting to serve. The CHAIRMAN.That was in August of 1974. What other times did you meet with him ? Mr. Jackson.I next saw Dr. Burns in September of1974 ata busi ness trade association meeting and at that time he commented that it lookedlike theneeds of the Board werestrongerinotherareas thanin housing at that particular moment; therefore, Governor Coldwell had been nominated and I believe was serving at that time, and I told him ,fine, I felt that was a wise choice. Then about,I would think,around the 1stof May,Mr. Chairman, or maybe aa little earlier than that, a series of peculiar circumstances: happened to me personally. The CHAIRMAN.That was May 1975 ? Mr. JACKSON.Yes,sir.A seriesof peculiar circumstanceshappened. About 10:30 one morning the senior members ofm y family decided to sell our family firm to the Birmingham Trust NationalBank and informed me ofthat decision. That afternoon I gota call from Dr. Burns' secretary asking if I would come up to talk to him about potentialserviceon the FederalReserveBoard.I did,and I met with him ,I believe,that Friday afternoon. Since then,I may havehad two more personal visitsof a relatively brief nature with Dr. Burns. The CHAIRMAN.Now,Mr. Jackson,you toldme,andIapologizefor not having explained at the beginning, that you do have trouble hearing and that's one of the problemsthat you had last time,and I will be as clear as I can be and don't hesitateat all to ask me to state what Ihave said again ifyou don'thearme clearly. Mr. JACKSON. Thank you, Mr. Chairman. The CHAIRMAN.Today we arein an economicmess.There are some modest indicationswe may be pulling outof it; especially in thelast few weeks there have been some encouraging signs, butwe stillhave enormously heavy unemployment; we still have very high inflation based on any kind of historical experience;we have housingthat's: just a basket case. There have been few times in our history when housinghas been as bad.As amatter of fact,in May,although itwas aresurgenceoverthe verylowlevelswe had lastNovember,itwas the poorestMay in26yearsinviewof thenumber ofstarts,inviewofthe fact that the countryhas increased insize,andso forth.It'sa very discouraging kind of situation. So we are concerned that we — at least I am concerned and I think many other Members of Congress are concerned that we take action totry to correctthe situation,providemorejobs,withoutaggravating inflation. How do wemeetthe problem ofgettingout ofthe recessionwithout rekindlinginflation? 31 Mr. Jackson.Well, first, let me state that it's my personal view that housing starts should be looked at in two separate components, while interrelated,they are distinctly different. First,thesingle-familycomponentthat alltoooftenwe emotionally thinkof as being thehousingmarket.I really think the problemthere liesin two areas.No. 1,inflation.There'sno question inmy mind that inflation has been the No. 1 enemy for housing considered in the single-family context.It'sdrivenupthepriceof houses. For instance,lastyear,ifI understood the figures properly,we had a10-percentincreaseinthe priceofsingle-familyhousing.Inprobably one of theworstdepressionyears we have had in thelast10,the price still went up 10 percent. Second,of course,inflation isproducing higherinterest rates which have,in turn, made it more difficult for people to buy even at the existing pricelevels. Themultifamily market ishurt for the same reasons but in different ways. Inflation has hurt the multifamily market. In fact, I don't think the public generally understands how much inflationhas con fiscated values in commercial real estate and multifamily real estate, and I mean confiscated values which existed before but no longer exist. Forinstance,ifyouown anapartment project asan individual and thatapartmentisproducing$100,000innetrents- afteryou collected all the rents and after you paid all the expenses and interest--and levels of return on capitalare 5 percent,that apartment project, theoreticallyat least,wouldbe worth $5 million, and probably was. at onestage inoureconomy.But today,thatsame apartmentproject, even ifit's continuing to produce the$100,000 in net rents,because ratesofreturn on capitalhavegone upinthe 10-percentrange,isnow only worth $1million,and the difference invalueshas effectively,been confiscated. Now,in addition to that, the multifamily market is going to be difficultto restore.First,because thenetrents produced by the owner ship ofnew multifamily apartments are not sufficient topay for the costs ofcapital of theseunits;second,unfortunately,in thiscountry thereis a subtle but nonetheless distinct change in the attitude of our laws concerning therights of owners of the building versus the rights of thetenant; and while I'm sure allof us can mention many cases in which therights of the tenant have been improperly ignored by the owner,at the sametime,the trend of increasing rightsof the renters or the tenants in a building in precedence to the rights of the owners isnot going to encourage new apartment development. The CHAIRMAN.Letme just interrupt,Mr. Jackson,to say thatI want to beas helpful as Ican toyou.I think what you are saying is very interestingandindicatesa fine knowledge of housing;butthat's not thequestion Iasked. Thequestion I asked ishow do wesolvetheproblem ofgettingout of the recession without rekindling inflation?Now housingmay be a partofthis.Ifitis,tellus how and whatelsewe cando. Mr. Jackson.I think we need to be patient. We willnot get out ofthe recession quickly andeasily. I think the fearof inflation isone of thereasons we willnot do so.The fear is still there and therisks are still there. Ipersonally feel that the90 percent who are employed 32 should share someof the benefits of thatemployment with those un employed and,:believe me; Senator, having become unemployed in thelast30days, I'm more sympathetic to that pointofview. I may be one of the people thatare creatingthat statistic. I don't mean to be facetious aboutthatsituation,butI do feel thatifwe try to expand the money supply at a veryrapidrate we run the risk of rekindling inflation and in the long term producing evengreater unemployment than we have now . The CHAIRMAN . Then what does the Fed do? I don't want to Mr. JACKSON.Inm y opinion the Federal Reserve should continue to increase the money supplyat a rate that some people would call moderate and some peoplewould call toorapid. The CHAIRMAN .Roughly;what is that rate? Mr. JACKSON.I think the rate outlined by Dr. Burns before this committee was in the 5 to 7% range over thenextyear,which in my mindlooksreasonable.Ipersonally think that we'retalking toomuch about the wrongmeasureofthe money supply: The CHAIRMAN .What is the rightmeasure? Mr. JACKSON. I personally think M3, which includes not only demand deposits, currency; and time deposits of commercial banks, but also the savings deposits in ourthrift institutions is abetter measure. Ipersonally think we're seeing a dramatic change inthe attitude ofthe American public toward how they maintain their money . The CHAIRMAN.What rates should My be increased? Mr. Jackson. Dr. Burns suggested that the target of the Federal Reservewas 10 to 12 percent over the next year.I personally don't see any objection to that.In fact,Iwould probably think that would be areasonablerateofexpansion.Variouscomponents Iwould expand at different rates. The CHAIRMAN.You feel ifwe get the increase between 10 and 12 in Mz and5 to7%,in M ,thiswillprovidethecreditwe need,agradual moderation of interestrates,and move usup out of the recession? Mr. JACKSON. Yes,sir. The CHAIRMAN.What views do you have on the presentadequacy of financial institutions with respectto solvency?W e know wehave had avery serious problem withthe Franklin Bank and the San Diego Bank, and many people feel that our banks have been over loaned. Mr. JACKSON. After thinking about thatquestion since our last session, I'd like to respond asfranklyas I can and asdirectly as I can based primarily on my opinions and not a detailed study, as you k now . First, Ithink ourfinancial system issolvent as a whole,but at the same time, I feel that ifwe'regoing to get expansion in credit, par ticularlyin the commercial bankingsystem, we are going to need to expand that capitalbasein order to make the expansionpossible. .Ho w do you dothat? The CHAIRMAN. Mr. JACKSON. Several ways. No. 1, recognize that commercial banksshouldnotdispensescarcecapitaland theevenscarcerqualified people into nonbanking activities. For instance,I personallyfeelthat while theFederal Reserve has authority tocontrol bank holding companies'expansion into otherfields,one of the primary things that 33 should belooked atis,“do theyhave adequate capitaltogo into this new area ?" The CHAIRMAN.How aboutbanks getting into mortgage banking? Mr. Jackson.Ipersonally think many banks wouldgive anything if they had not gotten into mortgage banking because as far asIcan see,it's beenthe biggest loser and thebiggest eaterup of capital of any part of the bankingsystem inthe lastyear.In fact,here again, I suspect that that mightbe one of the reasons Chairman Burnswas. interested in my service on the Federal Reserve Board, to do what I could to try toextricatesome of the The CHAIRMAN.Would you be inclined to take a skeptical view of applications to require banks under the Holding Company Act not to engage in mortgage banking? Mr. Jackson.I wouldn't say not to engage in mortgage banking per se.I would want them to verycarefully show me wheretheyhave theabilityand the personnel andthe money toput up to doitproperly withoutputtingstrainsontheircapital tosustain theirnormal regular bankingfunction. The CHAIRMAN. Because that's so hard to administer on a case by casebasis without chargesoffavoritism and withoutfeeling confusion on the part oftheindustry,why not simply cleanly provide that the banks wouldn't get intomortgage banking? Mr. JACKSON. Because, among otherreasons, they could do it within the bank itself.There's no prohibition about thebank making mortgagesand then, in turn,sellingthem.In fact,probably one of the largestis the Bank of America which has been doing itforyears. The CHAIRMAN.Let's get back to the original question.What are you going to doabout the inadequatecapital which you andI agree isaproblemforthebanksandyousaidyouwould preventbanksfrom gettinginto the nonbanking activities.How will you do that? Mr. JACKSON.Don't allow them toget in unless they can demon strate they have adequate capital andpersonnel to dotheir banking functionsfirst and only to theextent they have more than adequate personnel to dothatshould they bepermitted toengage inany other activities. That's thepreservation of capital.I recognizethat. No. 2, I personally feel that-here again I'm speaking of real estate loans because that's the thing I know most about— the Federal Reserve isgoing to need to work very carefully with banks that have high risk real estate loans,many of which are in default, to try to help extricate these banks from the potential impairment of their capital abilities that these defaulted loans represent on their balance sheets. And Ithink the proper question is "that's fine, but how are you going to do it?” First, it's extremely important that we recognize the difference between a nonearning asset- I mean an asset on which you're no longer accruing interest versus an asset that represents total loss. Now the accounting profession is proposing some very interesting rules that will assure that a bank, or any other corporation for that matter, properly represents the cost of carrying these dead assets, by usingan imputedinterest concept.Ithinkthat,in turn,willfairly state these assets on the books ofthe banks.But it's quite another thing to force banks,who normally think of short term assetsand liquid assets,to sell these real estate properties that they may have 34 foreclosed,or to quickly demand repayment of debt from their real estate development borrowers. For instance, we were talking about the family's experienceback in the previous decades. Our firm in the city ofBirminghamhad a severe real estate depression. We represented a large number of insurancecompanies. The insurance companies that forced the real estate to be sold quickly suffered severelosses. The insurance com panies that moved withpatience to rehabilitate the properties and then to orderlymarket those properties ended up making a profit. I personally feelwith that kind ofposture among the banks' real estate assetswill beprofitable.The Federal Reserveat the same time should stand by with asupply of additional temporary credit,or whatever ittakes to get them over thishump,until these properties can be marketed . The CHAIRMAN. My time is about up.Before I yield to Senator Garn,let me just ask if you'd like to round out your question by indicating what the bankscan do positively toincrease their capital. As Iunderstoodit,youhavegivenus someveryinterestingsuggestions on how they can preserve the capital they have and use it more effectively. Do youhave any ideas on how they can increase their capital? Mr. JACKSON.Well,of course, internal earnings are one way. If we can get them out of some ofthese high-risk loan situationsthat haveproduced highlosses they willin turnproduceinternal earnings. One follows the other. The CHAIRMAN.How about goinginto thecapital market? Mr. JACKSON. In the capitalmarkets? I think that the banks are going to have to seek additionalcapitalin the capital markets certain ly. Iwould personally hope that it would not be through some forms of debt, asthey areapparentlytempted to do.I personally would hope itwould be in theform ofold-fashioned common stock. The CHAIRMAN. Senator Garn . Senator GARN.Ihave no additional questions,Mr. Chairman. The CHAIRMAN.Some bigbanks have hadproblems, the Franklin Bank andtheSanDiegoBank,forexample.Do youhaveajudgment about this situation? Do you have any judgment about that specific kind ofproblem ? Mr. JACKSON. It strikes me that from what I can read in the news papers,and that's my only basis of information,that those bank fail ures resulted from banks investing too largely in highly speculative assets whichdropped invalue substantially.Those represented situa tions where the banks did notuse prudence in the typeofinvestments and loans that they made,whether it be speculation in foreign cur rency or improper loansor loansthat proved to be a mistake. For instance — again talking about real estate becausethat's the thing I know most about— it's my understanding that there was a forced merger in South Carolinawhich, while itmight not have involved quiteas many dollars as the size of the banks youmentioned,may have had just as much impact in the community.That was because ofpoorreal estate investment. Îhe CHAIRMAN. One of the problems this committee is getting increasinglyinterested inisthatthe Fed and the SecuritiesExchange Commission, both of whom are under this committee's legislative jurisdiction,seem to be clashing on disclosure.Some people believe 35 thatfailureof thebanks todiscloseproblem loansas soon astheyare discovered encourage banks to takeimprudent risks and inviteman agers of liquidfunds toput them inriskybanksby purchases oflarge CD's and sales of Federal funds. Now, as you know, those large CD's are insured only in minor parts,$40,000, therefore theregulatoryagencies— the bankregulatory agencies,including the Fed,seem to feela compulsion tokeepshaky banks solvent long enough to get claimants of uninsured C 's and Federal funds out,and this can lead tounwise policies. Do you havea feeling aboutthat? First,letme put it this way to make itdirect.How doyou feelaboutthe requirement that the SEC has been urging that banks disclose fully to investors the quality and character oftheir loans? Mr. Jackson.Ipersonallyfeelit'sa very appropriaterequirement. I think thecruxof thatdiscussionisthe problemofdefiningwherethe problems lie.For instance,Imentioned the term “nonearning asset. An asset that is not accruing interest is what I'm reallytalking about, and that is the thing that the SEC has required be part of the disclosure. Well,theunsophisticatedinvestor,theaverageconsumerthatmight buy stock in abank under those circumstances normally would sus pect that,ifit isnolonger accruinginterest the asset maybe worth lessand should be deducted from the net worth of the bank in deter mining what true value would be.You and I know thatthefact that you'renot accruingintereston aloandoes notmean thatyou're going to write it off totally. The CHAIRMAN.To put this in perspective,Chairman Burns has indicated that if the banks are required to make the kind of full disclosure of their loan account it would make it hard for them to get the capital they need and would impede economic recovery.Do you have any fearson those grounds? ? Mr. Jackson.Ithink your statements arefundamentally correct, but at the same time may have gone beyond the necessity for dis closure.In otherwords,I personallyfeelthatno disclosureisamistake. I thinkthe problem is to try and define what type of disclosure is appropriate under these circumstances. Forinstance,I personally feel that ifa bank were to state we have x dollars worth of loans on our books that are notearning interest and this represents x dollars per share ofour capital and we expect that the recovery on these loans would be 100 cents on the dollar afterimputed interest is deducted at so much, then I could at leastlook and say thatlooks reasonable. However,the problem is,as I understand it,difficult to describe in a prospectus. Not onlyto describe what exists,but it is difficult to define.For example, if I'm making aloanand the borrower is30 days past due, I may decide as aprudentbanker to classify that loan as anoninterest accruingloan.On the other hand,you say,well, know that borrower and he's got temporary problems andhe will pay up in 90 days.W e are not going to put it on nonaccrual until he's 90days past due.If I'm under somepressure with my capital, it would be tempting for me to say, well,until that borrower gets 6 months past dueI'mnot going to touch him. 36 The CHAIRMAN. I see the dilemma, but doesn't it seem logical that the agency to determine how toresolve itis theagency thathas the responsibility to requireall people who sell securities to state the truth?They have hadvast experience formany years,the Securities and Exchange Commission. Why notsimply require the banks to conform with what they requirein disclosure? Mr. JACKSON.If theS E C will be careful enough to set up aset of rules so that everybody would operate under the same rules,I per sonallysee no objection to that. TheCHAIRMAN.Well,areyou saying thatthe SEC hasgot different rulesdiscriminating more against thebanks? Mr. JACKSON.I don'tknow whether they are ornot,Mr. Chairman, but the danger is thatall too often people who arenot skilled in a particular specializedline of endeavor may require accounting pro 'cedures,forinstance,that may distort rather than clarify the position of the sharesbeingoffered. So I personally think ifSEC will be very careful to work with the Fed and the Controller in setting up a set of rules for instance, duringthe previous hearing the question was asked why no figures were disclosed for the entire country. I personally don't see any reason why the nationwide experience wouldn't be appropriate so that people The CHAIRMAN.Wouldn't itbe very beneficialon the part of the banking system on the whole if therewere this disclosure? It seems to m e it would restore investor confidence. Mr. JACKSON.If you start with a common definition, yes.But if you start with a diversity of definitions the finalresultsaren't going to be worthwhile.If you start with a common definition,I personally feel that nationwide disclosure would help the whole situation and clarifyit. The CHAIRMAN.That's very helpful. Now many Members of Congress have urged the Board through its open market account to buyhousing agency paper. Confiningits purchases exclusively, as they do now,to Treasury securities, the Board resisted this idea but recentlyhas made some progress.As of April30,the Board'sportfolio of Treasury securities was $87.8 billion,while agency paper held only $5.2 billion. If you were confirmed,will you press for greater purchasing of housing agencypaperby the Board? Mr. JACKSON.Yes, sir.And let me give youa specific example. Many people in the Congress,and agencies, and theFederalReserve, and in the countryas a whole,don't understand what powerful tool, obtained through this committee,that the Department of Housing and Urban Developmenthas to obtain funds in preferenceto most sectors of the money market through theissuance of G N M A mort gage-backed securities.There areover$18billionof these outstanding now and I understand that the figure may goas high as $24 billion relativelysoon.These securities enjoy thefull faith and creditof the United Statesand I personally think one of the things the Federal Reserve should do tomake a more orderly market in those securities. would beto buy and sell the G N M A mortgage securities through the open market. 37 TheCHAIRMAN.So you would arguethe 6 or 7 percent theyhold in the housing securities is inadequate.You wouldpress for ahigher proportion? Mr. JACKSON.I don'thavethefactualinformation toknow whether the holdings of housing securities represent a higher total holdings of allhousingsecuritiesissuesversustheholdingofGovernmentTreasury issues.Ithinkitshouldbeproportionate.Idon'tthinktheFedshould go inand buy allhousingsecuritiesperseuntil they reach anabnormal percentage ofallhousing securitiesoutstanding,but I do thinkthat they should buy housing securities. As Isaid,personally I think GNMA represents anoutstandingopportunity.It'smy understanding for instance,right now those securities are traded ona marketspread or commissionof about one-half of 1 percent.It strikesme that the Fed couldimprove thatspread and inturnmake housinglesscostly to the public atlarge. The CHAIRMAN.One of the problems for housing and forthe re covery of the economy in general is the feeling that the Federal Government has gottenso very deeply indebt it's going to have to borrow somuch money thatit'sborrowingisgoing to crowdoutother borrowingandisgoingtodriveinterestratesup. Now ifin the next year we recover,as we all hope we will, and interestratesrise, as we hope they willnot,and theydo begin to rise and private investors arecrowded out of the money and capital markets,what should the Federal Reserve Board do? Mr. JACKSON.If the Treasury crowds out other borrowers in the money market,the Congress and the administration effectively will be putting the Fed on a very difficult spot because you charge the Federal Reserve with control of inflation.But if the Federal Reserve mustexpand themoney supply purely to accommodate the needs of the Treasury, it'smy personal opinion that they would in fact be producinginflation.However,thealternativewillbesevereadampen ingof our economic recovery which will hurt us. I personally feel that the crowding out theory isvalid as a theory, although I personally don't feel thatcrowding out will occur in 1975. I think many of us may feel that. For one reason, many lenders and investorshave lost alotofmoney and there have been some bad loans and bad investments in the last year.As a result, our investors are becoming highlyselective about where theyput their money.As a consequence of that, people with relatively low grades of credit or marginal credit can't get it at any price. So I wouldn't be surprised thatwe wouldn't suspect the Treasury crowded outmany of these borrowers when in fact the Treasury would not have crowded them out.Theysimplycouldn'tgetthemoneybecausetheinvestorsweren't willing to take thosetypesofrisks again. The CHAIRMAN. You have indicated there wouldn't be any danger of that this year. Mr. JACKSON.No ,sir. The CHAIRMAN.H ow about next year? Mr. JACKSON.Ipersonallyfeel thekey to the crowdingout question isthe abilityofCongresstoliveunderthebudgetarylimitationswhich it's imposed on itself.If the Congress lives up to the $68.9 billion I'mnot sure of theexact figure— budget deficit that the Congress has established, then the country in turn will be confident thatnot only 38 the Federal Reserve— but the Congress,the administration and the entire economy will put deficitspending in a proper perspective and can rely on the Congress to do so.As a result, I think that will probably do as much toward improvingthe money market and thelong-term recoveryasanything thatcould happen,certainlymore than anything the Federal Reserve could do. The CHAIRMAN.Do you now havean opinionas to whetheryou and the publicwould be better servedby having a professional staff appointed for helping you in addition to your administrative aid, tohave asaGovernoroftheFederal ReserveBoard?I'mtalkingabout four or five or six people responsible directly to you. A s yok unow , there are several hundredstaff people at theFederal Reserve Board. There are over a thousand,I understand,and some - I'm not asking for more peopleto be appointed. What I'm saying is using thestaff there andif you had asmallgroup of fiveorsixof those thousand and so would the other six members of the Board, would you think it would bedesirable? Would that mean in your view that you would probablybe ableto arriveatwiser decisions and soforth,or do you think this is not necessary? Mr. JACKSON. I don't think it's necessary. That's one question previously asked me that I wentand got some answers to before I came back today,Senator.I asked verydirectly not only some other members of the Board of Governors but to the staff- could I get independent counsel and would I have access directly toanybody that worksthere for personal advice,informationof any sort without fear, threat or constraint on the part of any other member ofthe Board? I was assured that that was unconditionally true and for that reason I think fragmenting the staff upinto littlepockets would be a mistake, from an operational point of view as well as an overall point ofview. The CHAIRMAN.I don't necessarily agree with that. I don't know enough aboutitmyself.Itjust seemstome to be wise to consider the possibilityandIsuggestyou might want toreconsiderthatpossibility and discuss it with former members of the Board and with others, but ifyou have gone into itin that detail and feel that one aid isall you'd want or need, I certainly understand your position and that's the kind of answer that wouldbe helpful to the committee. Do you have an opinion on whether inflationwill accelerate or decelerate the second half of this year or next year? Mr. JACKSON.I think inflationwill continue to decelerate. The CHAIRMAN.Why ? Mr. JACKSON.Why ? I think that our businesses and our industries have not recognized, among other things,one of the fundamental causes of inflation. We have concentrated so much on inventory adjustment, changes in raw materials, expectationsof rises and so forth, changes inpurchases,thatI don't think we have recognized that the Americanconsumer has changedhis attitude about what he wants and the shape he wants it in and the price he's willing to pay for it;I think it'sgoing to take through thesecond half of this year tomake some of thoseadjustments. For instance, there aretwo industries that most people think are likelyto lead usout of the depression -housing andautomobiles. There's been publicity that builders are having to rethink the type 39 of houses they're building for the American consumer. As I men tioned, Idon't think multifamily housing willleadhousing upward. Ithink theAmericanpublicistakinga differentattitude aboutwhat kind of car they're going to buy andit's going totake the automobile companies a good while to adjust theirproduction means and sales techniques and other things,inorder to produce the type of cars the American people want,and until they do that The CHAIRMAN.Buthereyou have the situationyoupointed out yourself,thatinspite ofthefact thedemand forhousing has gone up the price has gone up;the demand for automobiles has gonethrough the floor andyet the price has gone up.The demand for steel has plummeted in the last severalmonths and the price hasn't dropped one bit.The demand for chemicals has gone down and the pricehas gone up.There's a seriesof articles in the Wall Street Journal on this phenomenonand depending on how you look atittheheroic efforts by these industriestomaintain their prices when allthelaws of classical economics should have their prices fallingwhen they're operating far below capacity,and yet they aremaintaining theirpricein the face of this.This is what is discouraging to me,combined with the fact that we do havethe likelihood of increased energy prices which,of course,has an inflationary effect on the economy. Mr. JACKSON. I share your concern. This is one reason that I remain concernedabout the future prospect of inflation. I see too many businesses in this countrythat price their product not on what itshould be bought foror willbeboughtforby theconsumer, but ratheronwhat itcosts them to produce it.I don't see the market place demand /supply relationshipworking in too many instances. I don't see the demand/supplyworking in too many labor relationships as well.People stillexpectinflationwillbehere.Until we canreorient their thinking and regalvanize the risk of loss that these industries have,I think we've got built-in attitudes toward inflation that will make it much more difficult to contend with. The CHAIRMAN. The Fed,in addition to telling us what their goals arethisyear,theChairmanhassaid5 to712 percentwould be hisgoal forthe comingyearfromnow to ayearfromnow roughly,should they indicate the results they expect?That is,what the Fed expects to happen toprices andwhatitexpects tohappentogrowth and employ ment, so that we can have somebasisforevaluating the goals, some basisforfacing them?I realize thisisdifficultand I realize thiswould be only an estimate, that it would be very strongly qualified. Mr. Jackson. First,let me quickly say I think it's within your powers to ask them to produceit whether they want to or not.In other words, there might be a lot of intense discussion about the wisdom ofit,but ultimately the power rests with the Congress tomake the Fed do what it wishes. Fundamentally, I can see why the Con gresswouldwant them todoso,simplybecausethey could then under standthemonetary reports inbettercontext.However,ifyou getoff into that briar patch,ifI can use that expression,II suspect thatit's going to create more second-guessing and demonstrate more vividly to the public and tothe Congress thatmonetary policy or monetary actionorwhatever the action oftheFedmightbeisatbest animper fect tool. 40 The CHAIRMAN.Why wouldn't that be healthy and wholesome? Can't we learn from our mistakes? We see what we tried to do and what happens.If it's a good performance,fine. If it's a bad perform nance, then itwould inform us that we need some new policy,some change. Mr. JACKSON.Unfortunately, as you know, the public tends to concentrate on the mistakes and not on the rightguesses, and I suspectThe CHAIRMAN . That's not a bad idea. That's the way we learn, isn't it? Mr. Jackson.Well,I think we learn by our mistakes,but some times we distort the mistakes when we concentrate on them rather than thethings we do right. The CHAIRMAN.At any rate,your answer is that if the Congress wants to do it,all right, and the Fed ought to conform,but they ought to do itwiththeireyesopen,recognizingitmight Mr. Jackson. Certainly,the more detailed instructions the Con gress gives the Federal Reserve, toa certain extent,the lesssleepless nightsthemembers of the Federal Reserve have tospend on whether their decisions were proper. The CHAIRMAN. What do youthink is likely tohappento short 1 doesfollow the guidelines that term and long-term interestrates ifM , the chairmanhas indicated ? Mr. JACKSON.I personally feel the short-term rates will continue downward,but at a reduced pace than we have seen recently. I think long-term interest rates will come down more dramatically. The CHAIRMAN . Really? Mr. JACKSON.Yes,sir;due to two reasons.No. 1,as Imentioned,I don't thinkwe'regoingtogettheeconomicrecovery andthe demands that we would like to have. No. 2,I think the expectation of future inflation will diminish,the longer we have reduced economic activity. The memories of 1974 are stillextremely vivid in the minds of people with funds for investment or for saving. The CHAIRMAN. I don't want to be unfair, but you seem to be saying as we continue in a recession,the high level ofunemployment, that the expectation of inflation will diminish and that thiswill tend tobring long-term interestrates down.Is that right? Mr. JACKSON. Yes,sir.Don't misunderstandme .I'm not saying the reasons for which it occurred are desirable, but that doesn't change my attitudeabout theresults that I expect tohappen. The CHAIRMAN.It sounds like you expect we will bein recession for some time,at least with a high levelofunemployment and alower level ofproduction, than we wouldhave ifwe had 5 percent. Mr. JACKSON. I personallywould. The CHAIRMAN.Do you think Fed actions have importance and lasting effects on interest rates? Mr. Jackson.I think Fed actionshave immediate importance,but I personally don't think the Fed can lean against the tide,so to speak. Its actions produce reactions on the partof the market,but I person allyfeelthat theFed cannot controlinterestratesperse over thelong term . The CHAIRMAN. Do you nowhavean opinionwhether monetary 1 in policy was inflationary in 1972 when M , creased to9 percent in the 41 secondyearofrecovery,when unemploymentwassomuch lowerthan it is now ? Mr. JACKSON.This is one of the reasons I hesitate to answer that question, because ifI serve this Board I'm going to have to live with those people; and making public statementsmay not endear me to theirhearts;but it'smy personal opinion,in hindsight, thatanything we failedtodo for the last4 years prior to 1974 thatwasn't intention allyleaning against inflation wasamistake.We should have paid the price earlier and longer and continuously. The CHAIRMAN.But that was the year whenyou had the most con spicuous increase in themoney supply and the year of substantial recovery and ayear of relatively low unemploymentcompared to the situation now . Mr. Jackson.That may have been the biggest of the series ofmis takes onthe part ofus all. The CHAIRMAN. What dangers do you see in banks buying large amounts of Federal funds and selling large amounts or volumes of CD's . Mr.Jackson.I personally think thatit'stime thatthe banksquit being hotmoney shops to the extent that they are leveraging both assets and liabilities to an extent that exceedstheir capital base and exposes them to risk ofthe money market,both as to maturities and rates. Unfortunately, though, this runs contrary to one ofour other desires,and that's to expand the monetary baseon which bankscan operate.But I think it'shighly risky.If we'regoing tohave acapital short banking system , we'vegot to be careful about how much of that we allow. The CHAIRMAN.There's been some complaint that the regulatory agencies,three ofthem,have beenpermitting akind of competition of laxity, that theyget banks to become subjectto their regulationby being easier in their regulations and not really serving the public interest and not preserving the soundness of bankingand so forth. Do you think the bankingregulatory system isworking well;and ifit'snot,what do you think can be done about it? Mr. JACKSON.I think it hassome imperfections and particularly in regard to this competition of laxity that you described.I think it's timethe Congress concentrated some of those responsibilities in one place so we've got one set of criteria that everybody can follow. The CHAIRMAN.That'sveryhelpful.Would itbedesirabletorequire some confirmation of Reserve bank presidents? Mr. JACKSON.Ipersonally don'tthink so.Among otherreasons,it would mean they probably would allhave totake acutinsalary and therefore it would The CHAIRMAN.Why would they take a cut in salary? Mr.Jackson.I would guess that,ifconfirmed,they would as a result be subject to the executive pay schedule,and I would suspect that most ofthem make more than $40,000 today. The CHAIRMAN.Some of them make $90,000. Mr. JACKSON.I don't have any idea what they make,but I would suspect it's more than $40,000. The CHAIRMAN.What's wrong with these poor fellows maybe making only $60,000 instead of $90,000 in viewof the fact theyare appointed by theGovernment,in view of the fact that theyhave a publicresponsibility and theirpowerderives,to agreatextent,from 42 the Government? Why shouldn't their salary be subject todebate and discussion? And maybe it ought to be higher. Why shouldn't it be subjecttomu Mr.JACKSON. I think we're talking about two different things. No. 1,whether the salary is subject to congressional confirmation. The CHAIRMAN. Why say “their salaries?" I just jumped a step here and assumed what you're talking about is that the Senate is going to confirm them .Thenwemight startlookinginto theirsalaries. Recently we had legislation on the floor to limit the salary of the Chairman of Amtrak, for example,and I voted against it.I wanted the high salaries. I think you get what you payfor and I feelthe same way about a Reserve bank president, andI was outvoted then and I assume I might be again;but I don't see anything wrong with that procedure. If the House and Senate decide they should get less,what's the matter with that? Mr. JACKSON. I would personally think it might be more ap propriatefor the Senateto confirm those people who serve on the Federal Open Market Committeerather than the Senate having confirmation directly over the presidents. The CHAIRMAN. That's why I asked the question, because they do serve on the Open Market Committee. Mr. JACKSON. If I serve as Governor of the Federal Reserve Board,yes,I would,and these people do,too,under thepresentrule. I understand the thrust ofyourquestion, butI wouldthink it'smore important to confirm those people that serve on that committee ratherthan allFederal Reservebankpresidents perse,simply because these people havea vast amount of administrative responsibilityin running the individual banks that is not directly pertinent to the Open Market Committee's considerations. The CHAIRMAN. How do you feel about thePresident'sdesignation every 4 years of one of the Governors as Chairman ? Mr. JACKSON. I personally see that that's reasonable. I can see the wisdom , and yet the dangers of consideration to have that con current with the President's term . If that's concurrent with the President's term,it's not in The CHAIRMAN. It wouldn't be concurrent.I agree with yo u that it shouldn't be concurrent. Mr. JACKSON. I personally see that seems like a reasonable term for any member,yes, sir. The CHAIRMAN . It seemed to many of us, especially to some people in the House but in the Senate too,that it's strange to have an importantpublic agencydecidingitsown expenditures andwithout audits by the Government, which is true of the Federal Reserve Board.You don't have a GAO audit in the Federal Reserve Board, as you know . Do youhaveanopiniononproposalstorequiretheFederalReserve Boardto go through the normal appropriations procedure or GAO audits? Mr. JACKSON.I think there are two partsto your question.First, whether the Federal Reserveshould be audited by the GAO ; and next,whether all of its expenditures should be subject to appropria tions procedure;and theyshould be separated. 43 Personally,I donot— I would liketo hope that the Congress would not put theFederal Reserve Board under the appropriations pro cedure.My experience indealing with the other departments ofthe Federal Government is when the need is greatest they always seem to be the shortest on funds with which tohire the people to getthe job done,and I think particularly ofHUD over which I have had direct experience. For this reasonI personally would hope that the Congress would not put the Federal Reserve under that type of constraint so that it could better respond in its primary function of operating the reserve partof the banking system. TheCHAIRMAN.How about acompromise?How about alimitation instead of annualappropriations? I'm inclined toagree with you on annual appropriations. So there would be some direct review. After all,it's a creature of the Congress.The Federal Reserve Board not to have anycongressional discipline as to where itspends itsmoney and not auditing by theGAO so we don't havea comprehensive notion of wherethemoneyisspent- I'm notsuggesting this in any criticism of Dr. Burns or Martin or any of thefine people that serve. It's just as amatter ofprocedure,we don't know what'sgoing to happen in thefuture.Wouldn't we be better served in having more knowl edge? This is the purpose of this. Mr. JACKSON. I think you answered yourown question. Wedon't know what's going to happen in thefuture.If the Congress couldtell the Federal Reserve how many banks are going to getintodifficulty, how many food stamps thatthe Congress is going toask them to administer, then perhaps it might be more reasonable.But I believe thehistoryof our country isany time the Congressestablishes ceilings they, in effect,become absolute expenditures. The CHAIRAIAN. You Governorsof the Federal Reserve don't give the banks under yourjurisdiction a blank check. Mr. JACKSON.N o , sir. The CHAIRMAN. You auditthem very carefully.Why shouldn't we the Congress, do the same thing of you? Mr. JACKSON. The difference is that our control over budgets, I hope--and I'm not sure ofmy factshere-isentirely flexibletorecog nizequicklychanging conditions.The appropriations procedureofthe Congress, in my experience, isrelatively inflexible. The CHAIRMAN. Well, the Defense Department has an annual budget farmore complicated than the Federal Reserve and far bigger than the Federal Reserve. Well, at any rate, I think I understand your position on this and I think itisresponsive. Finally—and I have gone into quite a length here but I will ask just one other question.Can theeconomy be fine-tuned? Does any body haveenoughknowledge and expertise tofine-tune itor should we,asMiltonFriedman suggests,resign and sticktoa longrunpolicy consistent with achieving maximum employment withoutinflation as a longrun matter ? Mr. JACKSON. I personally don't think any oneperson or any one group can fine-tune theeconomy per se.I think they can try. I thinktheycan do thebesttheyknow how.But insofar as producing assuredresults,I don't think they can. The CHAIRMAN.Should they try? You see what I'm getting at is whether or not we should follow a policy of having a steady increase 44 in the money supply commensurate with the long-term goal for the ec o no my . Mr. JACKSON. Our economy,Mr. Chairman, in my view,is not a mathematical model thatproduces results in mathematical formulas, but it'sa social creature that producesresults entirely differentfrom anything any of us expectbased on the original concept. Therefore any mathematical proposal made in advance, no matter by whom , is bound to be wrong; and it takes some creature- in the history of most Western nations, a central bank - to try to lean against the wind and moderate changes produced by changing expectations. and changing occurrences. SenatorSPARKMAN.Mr. Chairman,I have some pro forma questions to put to him regarding conflict of interest and appearancebefore a congressional committee. The CHAIRMAN. Yes. The nominee has indicated that clearly he has no conflict of interest.He's indicated he will appear before this committee and other committees when requested todo so. Mr. JACKSON. Yes,sir. Senator SPARKMAN.Then I have no furtherquestions. The CHAIRMAN.Mr.Jackson,I want tosay that I think you have been far more responsive this time. I thinkyour coming back has been most helpfulto us and has given us a much betterpicture of what your position is. I happen to disgree with you on some of your positions.I agreed with you heartilyon others,butI think youhave given us a better understanding of your attitude and your competence too,sowe are in a much better position now to evaluate your qualifications for the Board.Thank you vey much . Mr. JACKSON. Thank you,Mr. Chairman.If the committee would like,in connection withm y previoushearing, I would like to submit a personal statement outlining The CHAIRMAN. If you would like to make any statement now, that would be fine.Why don't you go ahead now ? Mr. JACKSON. To illustrate the reasons I was reticent to answer before, Iwill tryto summarize this,although if the committee would like, Iwill include itin toto. First, I feel extremely strongly that anyone that takes onthe positionfor which I have beennominated has got to approach it with no bias,no personal prejudice,anything of that sort; relying on thebestfactsavailabletothemonmakingdecisionsand approaching any of these major policy issueswith a veryopen mind. As aresult,priorto my hearing before, Iintentionally didnottry tocome to any foregone conclusions aboutsome of these policies. Next, as I have taken thesepolicy positions today, I recognize quickly that becauseI havenot had thedepth ofexperienceor infor mation that should be available to officers of the Federal Reserve, that it's entirely possible that after I have had that information I may have a change of attitude and I was concerned that the com mittee might properly question the candor of my original remarks if I answered thequestion one way today and find that proper and better facts produce a better conclusion later. Finally,as the committee knows,the Federal Open Market Com mittee isa committee of 12 people and any member of the Federal Reserve Board has only one vote.If I am to have influence on that 45 committeebeyondthe84percent vote thatI'd have,thosemembers ofthatcommitteehavegottofeelconfident thatI don'ttakepositions unless I havedone my homework and done the job in themanner that they think appropriate beforearrivingatconclusions. I think I'm runningtherisk today of takingpublicpositions that may be contraryto whatI conclude the proper position should be later,andImay be properly questionedaboutwhy did I Ihavesuch a change of heart.However,asthe committee knows,despite all these personal reservations, I do recognize the need of this committee to make proper inquiry with regard to my views so they in turn can reflect them to the Senate and the Senate can in turn make the decision on the appropriateness of m y nomination. The CHAIRMAN.Well,Mr. Jackson,letme just quicklyrespond to that because I think what you have said this morning canhave a bearing on other nominees for the Federal Reserve Board and other officers and the attitude they take before they come before the committee. Ithinkit'sfinethatyouhaveanopenmind andit'sverywelcomethat you indicated that you wanted tomaintain that.At the same time, as you alsoindicated,Ithink we have arightand duty to elicitfrom nominees what their attitude is and what their position is on the critical issues they are going to face so we can be as well informed as possible.I don't see how we can do that if people say,"M y mind is completely open on every issue,on every subject, and I'm not going totake a position.” I think you have handled that very well thismorning by indicating the positions that you have are tentative, should be tentative. think the worst thingwe can doin our society isto be frozen in con crete.We allgrow andlearn as time goes on and I think it'sperfectly proper to change and I wouldn't expect to hold you to anything or anybody would expect to hold you to anything you have indicated this morning if you find as time goes on that that position was in er ro r . Mr. JACKSON.Thank you,Mr. Chairman. The CHAIRMAN.As far as yourrelations with others, Ican tellyou from havingservedintheSenateforanumberofyears,that veryfew people are going tohold against you the fact that you may disagree with them . Ifyou have a personal animosityagainst them, ifyou're unfair to them in some way they will resent it and maybe retaliate, but I thinkifyou disagreebecause you sincerely believeone view and them another Ican't imagine thatthat wouldweaken your influence in any way.You would be respected as aman of strong views.But I don'tseewhy thatshould affectyourrelationshiporyoureffectiveness with your colleagues.We allhave thesame problem. Senator Garn and I agree wholeheartedly on some things and disagree on others,but we're good friends and we getalong well and I don't resent any position he's taken and I don't think heresents any position I've taken,and thesame is true of Senator Sparkman, and I think that undoubtedly will be true with your relations withyour fellow members on the Board of Governors. Senator GARN.Mr. Chairman,I'd just like to say that Ihave been much more pleased with the testimony today, too. I shared some of the chairman's feelings in the first interview,that you were not being 46 as responsive as I thought you should be,and I think we recognize thatas people gain moreinformation, Icertainlyhave changed some opinions,after5 months in the Senate,thatIhadayear agobeingon the outside. I think the Chairman, SenatorSparkman, and I would all be surprisedif you didn't have some change of opinion as you get into the Board and learn more about it. I'm sure that these more senior Senatorshave changedtheir minds a few times over theyears.As a matteroffact,Iwouldn'tworryaboutchangingit.Some Congressmen and Senators change their mind daily two or three times on the same issue. So I appreciateyour testimony today. Mr. JACKSON.Thank you,Senator Garn. The CHAIRMAN.Thank you verymuch,Mr. Jackson. The committee stands in recess. [Whereupon,at 10:20 a.m.,the hearing was adjourned.]