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S. Hao. 101-653
NOMINATIONS OF DAVID W. MULLINS, JR.,
EDWARD W. KELLEY, JR., AND ROBERT H. SWAN
HEARING
BEFORE THE
COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIRST
CONGRESS
SECOND SESSION
ON
THE NOMINATIONS OF
DAVID W. MULLINS, JR., OF ARKANSAS, TO BE A MEr,IBER OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FOR THE
UNEXPIRED TERM OF 14 YEARS FROM FEBRUARY l, 1982, VICE H.
ROBERT HELLER, RESIGNED.
EDWARD W. KELLEY, JR., OF TEXAS, TO BE A MEMBER OF THE BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FOR A TERM OF
14 YEARS FROM FEBRUARY 1, 1990 [REAPPOINTMENT.]
ROBERT H. SWAN, OF UTAH, TO BE A MEMB* OF THE NATIONAL
CREDIT UNION ADMINISTRA'OON BOARD FOR THE TERM OF 6 YEARS
EXPIRING AUGUST 2, 1995, VICE DAVID L. CHATFIELD, RESIGNED.
MARCH 23, 1990
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
U.S. GOVERNMENT PRINTIN{l,.OPF_l?=
211-!!52
WASHINGTON : 1990
For sale by the Superintendent of Documents, Congremional Salee Office
U.S. Government Printing Office, Wubington, DC 20402
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
DONALD W. RIEGLE, JR., Michigan, Chairman
ALAN CRANSTON, California
JAKE GARN, Utah
PAUL S. SARBANES, Maryland
JOHN HEINZ, Pennsylvania
CHRISTOPHER J. DODD, Connecticut
ALFONSE M. D'AMATO, New York
PHIL GRAMM, Texas
ALAN J. DIXON, Illinois
JIM SASSER, Tennessee
CHRISTOPHER S. BOND, Missouri
CONNIE MACK, Florida
TERRY SANFORD, North Carolina
WILLIAM V. ROTH, JR., Delaware
RICHARD C. SHELBY, Alabama
BOB GRAHAM, Florida
NANCY LANDON KASSEBAUM, Kansas
LARRY PRESSLER, South Dakota
TIMOTHY E. WIRTH, Colorado
JOHN F. KERRY, Massachusetts
RICHARD H. BRYAN, Nevada
STEVEN B. HARRIS, Staff Director and Chief Counsel
W. LAMAR SMITH, Republican Staff Director and Economist
(II)
CONTENTS
MARCH 23, 1990
Page
Opening statement of Chairman Riegle......................................................................
Opening comments of Senator Bumpers.....................................................................
Opening statements of:
Senator Bumpers......................................................................................................
Senator Pryor............................................................................................................
Senator Garn.............................................................................................................
Senator Gramm........................................................................................................
Senator Sarbanes................ ..... ........ ............. ............................................................
Senator Mack............................................................................................................
Senator Pressler.......................................................................................................
Senator Dixon...........................................................................................................
Senator Shelby..........................................................................................................
Senator D'Amato......................................................................................................
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NOMINEES
David W. Mullins, Jr., of Arkansas, to be a Member of the Board of Governors, Federal Reserve System....................................................................................
Response to request of Senator Mack for comment on Governor Wayne
Angeli's statement explaining his dissenting vote at the December
meeting of the Federal Open Market Committee..........................................
Biographical sketch..................................................................................................
Response to written questions of:
Senator Riegle...................................................................................................
Senator Dixon....................................................................................................
Senator Gramm................................................................................................
Edward W. Kelley, Jr., of Texas, to be a Member of the Board, Federal
Reserve System.............................................................................................................
Statement of Senator Gramm................................................................................
Biographical sketch..................................................................................................
Response to written questions of:
Senator Riegle...................................................................................................
Senator Sarbanes..............................................................................................
Senator Dixon....................................................................................................
Robert H. Swan, of Utah, to be a Member of the National Credit Unit
Administration Board ................ ............ ............................................. .. ..... .................
Statement of Senator Garn ....................................................................................
Biographical sketch..................................................................................................
(III)
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NOMINATIONS OF DAVID W. MULLINS, JR., OF
ARKANSAS, TO BE A MEMBER OF THE BOARD
OF GOVERNORS, OF THE FEDERAL RESERVE
SYSTEM; EDWARD W. KELLEY, JR., OF TEXAS,
TO BE A MEMBER OF THE BOARD OF GOVERNORS, OF THE FEDERAL RESERVE SYSTEM;
AND ROBERT H. SWAN, OF UTAH, TO BE A MEMBER OF THE NATIONAL CREDIT UNION ADMINISTRATION BOARD
FRIDAY, MARCH 23, 1990
U.S. SENATE,
COMMITTEE ON BANKING,
HOUSING,
AND URBAN AFFAIRS,
Washington, DC.
The committee met at 10:00 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Donald W. Riegle, Jr. (chairman of
the committee) presiding.
Present: Senators Riegle, Sarbanes, Dixon, Shelby, D'Amato,
Gramm, Mack, and Pressler.
Also present, Senator Bumpers.
OPENING STATMENT OF CHAIRMAN RIEGLE
The CHAIRMAN. The committee will come to order.
Let me welcome all those in attendance. We have three important nominations to deal with this morning.
We are very pleased to have our colleague and good friend, Senator Bumpers, from the State of Arkansas, and he has asked to
make some introductory comments on behalf of Mr. Mullins. We
would be pleased to hear from you now, Senator Bumpers.
OPENING COMMENTS OF SENATOR BUMPERS
Senator BUMPERS. Thank you very much, Mr. Chairman, members of the committee. I will extemporize my introduction of David
Mullins and ask unanimous consent that my statement be inserted
in the record.
The CHAIRMAN. Without objection, it will be inserted in the
record.
Senator BUMPERS. Mr. Chairman, members of the committee.
David Mullins is a junior. His father came to the University of Arkansas as president in 1960 from Auburn, and he served with great
distinction as president of the University of Arkansas from 1974, I
guess it was, which incidentally-well, it was longer than that-no,
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through 1974, but that covered my tenure, the 4 years I served as
Governor. I never knew Dr. Mullins before I became Governor, but
he was an extremely intelligent man, a consummate gentleman,
and I mistook-sometimes we have a tendency, I mistook his gentleness for a lack of resolve, and I crossed him a couple of times,
and I found that he could be extremely firm and stood up to
Governors very well.
I have had that same experience with this David Mullins. I have
tried to beat him over the head two or three times to see my point
of view. He has not yet seen it, and I don't know what I'm doing
here this morning, to tell you the truth. [Laughter.]
The CHAIRMAN. Well, thank you for coming. Next witness.
[Laughter.]
Senator BUMPERS. But through no fault of his own, he moved to
the university, he moved to Fayetteville, Arkansas, when his father
was named president. Graduated from Fayetteville High School.
They came from Auburn. Actually, David, Jr., was born in Memphis, where his father was in the military, but his father was at
Auburn, and they moved to Fayetteville. He graduated from Fayetteville High School, first started attending the University of Arkansas and through some kind of a dumb stroke then went to Yale,
and graduated there and at M.I.T., where he received a master of
science degree in finance and a Ph.D. in finance and economics.
He has worked as a financial consultant. He served on the faculty of the Harvard Business School where he taught finance in the
M.B.A. Executive and Doctoral program. Recently he served as Associate Director of the Presidential Task Force on Market Mechanisms, and since October 1988, he has been the Assistant Secretary
for Domestic Finance.
Mr. Chairman, I simply want to say to you that I have found this
nominee to be a man of inordinate intellect, firmness, gentleness,
all the qualities that I personally like in people as individuals, but
qualities which I think will sustain him extremely well in the position to which he's been nominated.
It's a rare combination when you find a man with intellect, good
sense of humor and good common sense, as well as a professional
approach to the problems that he has to deal with.
I must say to you in all candor as a member of the loyal opposition, that all the nominees sent over here from the White House
were even close to the quality of this one.
So it's my honor, not just to introduce a fellow Arkansan with
deep Arkansas roots, who still owns a farm up in Poinsett County,
but a man whom I think will serve with great distinction, serve his
President and the country.
Thank you very much, Mr. Chairman.
[The complete prepared statement of Senator Bumpers follows:)
OPENING STATEMENT OF SENATOR DALE BUMPERS
Senator BUMPERS. Mr. Chairman, I am always honored to introduce a fellow Arkansan to my colleagues in the Senate. I am especially honored today to have the privilege of introducing David W.
Mullins, Jr.
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Dr. Mullins' ties to Arkansas are strong. Although he was born
in Memphis, while his father was in the military and spent the
early years of his life in Auburn, Alabama, he moved to Arkansas
in 1959. His father distinguished himself as president of the University of Arkansas from 1960 through 1974-a term which partially coincided with my two terms as Governor of Arkansas.
Following his graduation from Fayetteville High School in 1964,
Dr. Mullins attended the University of Arkansas. In 1968, he received his BS degree from Yale and then completed his formal education at MIT, where he received both a Master of Science degree
in finance and a Ph.D. in finance and economics.
Dr. Mullins has worked as a financial consultant and served on
the faculty of the Harvard Graduate School of Business Administration where he taught finance in the MBA, Executive, and Doctoral programs.
Recently Dr. Mullins has served as Associate Director of the
Presidential Task Force on market mechanisms. Since October
1988, he has been the Acting Assistant Secretary for Domestic Finance.
Although his education and his work have not allowed him to
live in Arkansas in a number of years, he continues to maintain
his ties to our State and we still count him as an Arkansan. He
jointly owns, with his sister and brother, a farm in Poinsett County
which they inherited from their father. He returns to Arkansas
when he can (that fact may be the best proof of his intellect). Just
last June he was the keynote speaker at the annual meeting of the
Arkansas Bar Association.
Above all, Mr. Chairman, Dr. Mullins possesses a rare combination of intellect, humor, and common sense, all of which enhance
his professional approach to very big problems. He is a very able,
articulate, and dedicated public servant.
It is my pleasure to recommend Dr. Mullins to you today for confirmation as a Governor of the Federal Reserve.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Bumpers. Your opinion, certainly carries weight with us here, and I appreciate your coming
and making such an important set of comments.
I want to read into the record while you're here a letter from
your colleague, Senator Pryor, who is unable to be here in rerson,
but who very much wanted to have his views known. It s very
brief, and I'll just read it to the committee.
"I regret that hearings in the Finance Committee will prevent
me from joining my colleague from Arkansas, Senator Bumpers, in
testifying in behalf of David Mullins, Jr."
And he notes that he's been nominated to the Federal Reserve.
He goes on to say as follows:
"Mr. Mullins' father, David Mullins, Sr., served for years as
president of the University of Arkansas, and his son carries on the
father's commitment to intellectual integrity and responsibility.
His record as a professor at Harvard and as an Assistant Secretary
of the Treasury both testify to his ability, his impressive professional background and his dedication as a public servant.
"David is widely published in the field of public finance and is a
recognized authority on banking and related matters.
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"It is a pleasure to recommend a fellow Arkansan, particularly
when it happens to be someone of David Mullins' experience and
talent.
"I look forward to his tenure as Governor of the Federal Reserve
and know that he will do a splendid job in this position."
Signed "David Pryor."
That's another very strong statement from another highly respected colleague. We will make that full letter part of the record.
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DAVID PRYOR
COM1111rnu1:
ARKANSAS
IIIUUlU SlfrtATI OfflCE Buu..01NG
WA.IHIHGTON. 0.C. 101510
(202)224--23153
AGAICUL TURE. NUlltlTION, ANO
FORESTRY
FINANCE
llnittd £,tatt.s £,matt
SPECIAL COMMITTEE ON AGING
SELECT COMMITTEE ON ETHICS
WASHINGTON, D.C. 20610
3030 FIDIIW. IUILDlflHI
l.mU floc1(,. AIIIWIUI 72201
(501)
37M331
March 22, 1990
The Honorable
Donald w. Riegle, Jr.
Chairman, Committee on
Banking, Housing, and Urban Affairs
U. s. Senate
Washington, D. C.
20510
Dear Mr. Chairman:
I regret that hearings in the Finance Committee will prevent
me from joining my colleague from Arkansas, Senator Dale Bumpers,
in testifying personally on behalf of David Wiley Mullins, Jr.
Mr. Mullins, a native of Arkansas, has been nominated for the
position of Governor of the Federal Reserve, and I am pleased to
second this nomination.
Mr. Mullins's father, Davyi Mullins, Sr., served for years
as president of the University of Arkansas. And his son carries
on the father's commitment to intellectuaJ. integrity and
responsibility. His record as a professor at Harvard and as an
Assistant Socretary of the Treasury both testify to his ability,
his impressive professional background, and his dedication as a
public servant. David is widely published in the field of public
finance ar.d is a recognized authority on banking and related
matters.
It is a pleasure to recommend a fellow Arkansan for this
position, particularly when it happens to be someone of David
Mullins•s experience and talent. I look forward to his tenurs as
Governor of the Feder!!l Reserve and know the.the will do a
splendid job in this position.
-o;;:;urs,
David Pryor
DP/dh
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The CHAIRMAN. As I know you have other things that you may
have to go to, let us excuse you.
Senator BUMPERS. Thank you very much, Mr. Chairman, for allowing me to be here today.
Senator GRAMM. Congratulations on the basketball game.
Senator BUMPERS. Gramm, we're going to finally get even with
you tomorrow night. [Laughter.]
The CHAIRMAN. You may be meeting Michigan State down the
road too, so don't lose sight of that.
Senator BUMPERS. Aren't you glad you're an Aggie? [Laughter.]
Senator GRAMM. Mr. Chairman, I'd like to ask unanimous consent that a statement by Senator Garn be put in the record in su~
port of David Mullins.
The CHAIRMAN. We'll make it part of the record.
OPENING STATEMENT OF SENATOR GARN
Senator GARN. Every member of this committee has had the opportunity to get to know David Mullins well while he has served as
Assistant Secretary of the Treasury for Domestic Finance. His understanding of the workings of both financial institutions and financial markets was of great value to the Congress as well as to
the administration last year, in particular, during the development
of legislation to address the problems in the Saving & Loan industry.
This demonstrated appreciation for the workings of the financialservices sector of our economy obviously will make Mr. Mullins a
valuable asset to the Board of Governors of the Federal Reserve
System.
Secretary Mullins' responsibilities at the Treasury also have included the following areas: Federal finance, Government-securitiesmarket regulation, and corporate financial policy. The expertise he
has demonstrated on all of these subjects, as well, will contribute to
his value as a member of the Board of Governors.
The principle responsibility of a Member of the Fed Board, of
course, is in the realm of monetary policy. To this aspect of the job,
Mr. Mullins will bring a Ph.D. in finance and economics from
M.I.T, an impressive list of academic writings in the area, and 14
years of teaching related subjects at the Harvard University Graduate School of Business Administration.
Mr. Mullins extended residence in Massachusetts and his shorter
residence in Washington did raise a question in my mind as to
whether he could be a proper representative of the St. Louis Federal Reserve District, from which he has been nominated. As I have
often said in the past, as long as the Federal Reserve Act requires
Governors to represent specific Federal Reserve districts, I believe
that we should abide by the spirit, as well as the letter, of the law
and choose Governors who have an appropriate tie to the Districts
they are to represent.
I believe Mr. Mullins meets this test. He was born and raised
within the St. Louis district. Not only was his father president of
the University of Arkansas, but both sides of his family have longterm ties to the St. Louis district. While living outside the district,
Mr. Mullins has maintained both close personal ties and business
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ties with the district. As we will hear this morning, prominent
members of the business community within the district feel that
Mr. Mullins is well qualified to represent it.
Secretary Mullins, I congratulate you on your nomination. I believe you will be an excellent Federal Reserve Governor.
The CHAIRMAN. Let me now make a few comments, and then I'll
call on my colleagues to do likewise.
As I indicated earlier, we have three nominees for important
posts here with us today: David Mullins and Edward Kelley for the
Federal Reserve Board and Robert Swan for the National Credit
Union Administration Board. We are, of course, starting with Mr.
Mullins.
The Federal Reserve not only determines our monetary policy
with substantial impact on our interest rates, employment and unemployment levels, and inflation, but it also has substantial regulatory responsibilities.
Mr. Mullins, your work over the past 2½ years, as a contributor
to the Brady Report on the stock market crash and currently as
Assistant Treasury Secretary, has clearly provided you with a good
background for many of the issues that the Fed and this committee
deal with regularly. Today's hearing will give us an opportunity to
discuss, in addition to monetary policy, several areas where you
have already played a large role and where the Fed will have an
involvement of one kind or another in the future.
The Brady Report that you helped prepare recommended a
number of changes in financial markets that have already occurred
and some others that are still open issues. Chief among the open
issues are questions of how regulatory authority should be allocated among the different agencies, particularly with regard to margins and new products.
You were a principal designer of the financing package for the
administration's S&L reform plan which we enacted without major
structural modification last year. As you know, serious questions
have since been raised about the adequacy of that financi!l.g.
You did some notable research on the junk bond market, pointing out that the risks of that market had been underestimated by
some. That market, of course, has since collapsed, threatening or
destroying the solvency of some owners of those bonds. I personally
think our information about this market is still very meager, although I don't get a great sense of concern about that issue in the
Treasury Department at the present time.
Within your purview at Treasury, work is currently in process
on possible deposit insurance reforms, and, I trust, on plans for financial modernization. Studies are also progressing on ways to improve corporate governance and evaluate the risks posed by Government-sponsored enterprises. This committee, of course, has a
keen interest in these matters as well.
Finally, you are going to the Fed directly from the Treasury.
There are some who think that the Treasury ought to have a seat
of its own on the Fed Board, and some have expressed a concern
that while that is not the present arrangement that you, in fact,
may become the Treasury's man at the Fed. I can tell you my own
very strong feeling is-without any reflection to the Treasury Department-I've great regard for Secretary Brady-that I certainly
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hope that you're going as your own man, with absolute independence of mind and thought in regard to the work that's to be done
there. We'll discuss that in the course of our hearing this morning,
and you may want to address that issue yourself in your opening
comments. The Congress set up the Fed as a agency with considerable independence, and we want to make sure that that proper
degree of independence is preserved.
With that, let me call on my colleagues and let me starting first
with Senator Gramm.
OPENING STATEMENT OF SENATOR GRAMM
Senator GRAMM. Well, Mr. Chairman, let me first say that I am
in support of David Mullins. I believe that we have among the best
Federal Reserve Bank Boards that we've had in the history of the
Fed. I think only time is going to tell whether the provisions that
Mr. Mullins is responsible for in the S&L bailout bill will work or
not. I did not think highly of the provisions that related to high
yield bonds being excluded from the portfolios of savings and loans,
but I think it-we have acted, we have a program in effect, and
we'll just have to see how all that works out.
I think the important thing is we did act, we do have a program,
and we're a lot better off than we would have been had we been
sitting around here talking about it for another 2 or 3 years. I
think it was quite an achievement for the administration to come
up with a package, and I don't have to tell you, Mr. Chairman, I
think it was quite an achievement on your part providing the leadership to bring that package together on a bipartisan basis, and I
continue to be impressed by that achievement, and I always will be
grateful for it.
I don't really have any questions. I do not support the idea of the
Executive Branch of Government exercising direct control over the
Federal Reserve Bank. I think the history of Government directly
controlling the money supply over 5000 years of recorded history is
about as clear as history can be, and that is that politicians are
poor stewards of financial matters, because they respond as the
system is set up to respond to political pressures. I think it is part
of the genius of the American system that as we started to move
away from gold as a basic unit of account and as the anchor of our
monetary system, that we moved toward an independent agency,
and I think that while that basic approach does not have all the
advantages of a commodity standard, I think it still has some insulation from politics. And my experience in making appointments in
my own State and my region has long ago convinced me that anybody who thinks that they're appointing somebody who is going to
be their guy when the person has independent tenure is probably
foolish to begin with but is going to be destined to almost always be
disappointed.
So I have no doubt that you will exercise independent judgment,
and I commend you to that action, and I am happy to support your
nomination.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Gramm. Thank you for your
kind personal comment as well. Senator Sarbanes.
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OPENING STATEMENT OF SENATOR SARBANES
Senator SARBANES. Thank you very much, Mr. Chairman. I'll be
very brief. I'm anxious to hear from Mr. Mullins. I simply want to
underscore the point which you made in your opening statement
and is the importance of the position to which Mr. Mullins and Mr.
Kelley have been nominated here this morning. We actually give
the Governors of the Federal Reserve Board the longest tenure of
anyone in the executive branch or in the executive or legislative
branches of our Government, a 14-year term, although I understand this nomination is not for a full term but to complete the balance of a term, which is, in fact, an issue I will wish to explore in
the question period, because in my perception there's now developed a unfortunate pattern of people going on the Federal Reserve
Board for, in effect, short-term appointments.
It is obviously not the premise of the legislation which provided
for a 14-year term, and you have people who sort of get on there
and stay there a few years, and then they go off, perhaps having
used the Board to enhance themselves, so to speak. That wasn't the
concept originally, in my view, in establishing the Board and the
Federal Reserve System, and it is a trend that has increasingly
troubled me and one I will hope to explore with the witness.
I also will want to look into the geographical distribution of the
Board members. I don't question Mr. Mullins' Arkansas origins,
but I'm not sure this is exactly a nomination from Arkansas, given
his intervening activities and locations over the years, and I think
it is worth developing that point as well.
I am pleased to be here this morning. I look forward to the witness' testimony.
The CHAIRMAN. Thank you very much, Senator Sarbanes. Senator Mack.
OPENING REMARKS OF SENATOR MACK
Senator MACK. Thank you very much, Mr. Chairman. Let me
just extend my welcome as well to Mr. Mullins, and we'll probably,
when the time for questioning begins, want to pursue some of your
thoughts with respect to the objective, true objective of the Federal
Reserve and how you see monetary policy developing.
These are, in fact, difficult times as we see international changes,
some arguing that lessening the ability of the Fed to direct monetary policy as we move into a global financial market. So again,
we'll be interested in your comments and appreciate your assistance as we were working through the S&L bill. Thank you, Mr.
Chairman.
The CHAIRMAN. Thank you, Senator Mack. Senator Pressler.
OPENING STATEMENT OF SENATOR PRESSLER
Senator PRESSLER. Thank you, Mr. Chairman. I look forward to
the statements of the witness, especially since he was involved, as I
understand it, in planning this structure regarding the Office of
Thrift Supervision and the Resolution Trust Corporation, and so
forth, and he is a Ph.D. and a professor and a thinker. I know
you're not applying for those jobs, but we told that-Senator GRAMM. And will never exhibit them again.
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Senator PRESSLER. We are told they are not functioning as well,
administratively, from a point of view of public administration as
they might be, I would very much like to hear your views on what
structural changes we need to make them function, if any, or if
you're satisfied. Weren't you over at Treasury when these things
were planned? So you probably drew the boxes, and so forth.
Mr. MULLINS. I didn't draw them.
Senator PRESSLER. You didn't? Well, somebody must have. But
anyway, I'll look forward to hearing what you have to say.
The CHAIRMAN. Very good, Senator Pressler.
Let me make one other comment before I administer the oath to
you, and then we'll proceed.
I appreciate the fact that you're prepared and willing to give important Government service. This is a challenging time in our national history, and this is a very important assignment that you're
here for, and in a citizen government, we have to be able to see
good people come forward and take on these important public
duties for periods of time in their lives. I appreciate very much
your professional background and training and the fact that you
are willing to undertake Government service at a high level and
accept all of the responsibilities and effort that requires. I salute
that personal commitment.
Let me now note that Senator Dixon has joined us. Senator
Dixon, did you have any initial comments you wanted to make?
OPENING STATEMENT OF SENATOR DIXON
Senator D1xoN. Well, Mr. Chairman, I am pleased to be here this
morning, of course, as the Senate Banking Committee considers the
nominations of David Mullins and Ed Kelley, Jr., to be members of
the Board of Governors of the Federal Reserve System and Robert
Swan to be a member of the National Credit Union Administration.
Gentlemen, as we all know, the Federal Reserve is central in
managing our Nation's financial stability and economic prosperity.
The responsibilities of Governors of the Federal Reserve are, therefore, of the greatest importance with regard to monetary policy,
safety and soundness concerns and the future of our banking
system.
Although I'm interested in your views on these vital issues, as
chairman of the Consumer and Regulatory Affairs Subcommittee,
I'm interested as well in your views on issues before the subcommittee. These range from the Community Reinvestment Act and
Government check cashing to risk-based deposit insurance, money
laundering, the regulatory burden of section 20 firewalls and other
regulatory affairs issues. Your backgrounds relate to macro-financial and macro-economic issues. I'll expect you, however, to take
your consumer issue responsibilities just as seriously as the other
macro and regulatory issues before you.
In the year 1990, it's unacceptable, in my view, that working
people in this country are discriminated against in trying to get a
mortgage. It's simply unacceptable. I believe we all have a responsibility to root out this discrimination, and we may need some creative new ways to do so.
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Your leadership on the Board is needed, and gentlemen, I trust
that I can count on all of you for your attention to and your cooperation with me on this issue, on regulatory affairs matters and on
other consumer protection issues which are, after all, the law of
the land. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you very much, Senator Dixon.
Let me ask you now, Mr. Mullins, to stand, if you would, and
raise your right hand.
[Witness sworn.]
The CHAIRMAN. Do you agree to appear and testify before any
duly constituted committee of the Senate?
Mr. MUI.LINS. I do.
The CHAIRMAN. Very good. Thank you.
Let me now invite you to introduce any family members or
others that may be with you that you'd like us to be aware of, and
then I'd like you to proceed with any opening personal comment
that you wish to make.
Mr. MULi.iNS. OK. My family is back in Arkansas. [Laughter.]
The CHAIRMAN. I'm sure they are watching C-SPAN at the
moment. [Laughter.]
Mr. MULi.iNS. Probably. I do have a brief statement.
DAVID W. MULLINS, OF ARKANSAS, TO BE A MEMBER OF THE
BOARD OF GOVERNORS, OF THE FEDERAL RESERVE SYSTEM
Chairman RIEGLE, members of the committee, it is a privilege to
appear before you this morning as President Bush's nominee to
serve on the Board of Governors of the Federal Reserve. I am
deeply honored that the President has asked me to serve in this
capacity. If confirmed, I will commit myself to carrying out the
Federal Reserve's mission of preserving the stability and vitality of
our Nation's economy and its financial system.
I'm also deeply grateful to the kind words of introduction by Senator Bumpers and Senator Pryor from my home State, and I'm
sure we're all happy this morning with the impressive victory of
the Arkansas Razorbacks over a regional team in the NCAA tournament last evening. [Laughter.]
Before turning to the particular issues confronting the Federal
Reserve, let me briefly describe my qualifications that I would
bring to this position. I received a Ph.D. in finance and economics
from M.I.T, where I specialized in capital markets, banking and
monetary economics.
During my 15 years as professor at Harvard, my research, teaching and consulting focused on banking, corporate finance and capital markets.
Following the 1987 stock market break, I served as Associate Director of the Presidential Task Force on Market Mechanisms
chaired by Secretary Brady. In the fall of 1988, I came to the Treasury Department, where I currently serve as Assistant Secretary for
Domestic Finance.
My Treasury responsibilities have included a broad range of financial issues. I was involved in the development of FIRREA, and
the design and issuance of bonds of the Resolution Funding Corporation. I oversee the issuance of Treasury debt and serve as chief
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lending officer of the Federal Financing Bank. I also serve on the
board of the Securities Investor Protection Corporation and have
represented Secretary Brady on the boards of the Pension Benefit
Guarantee Corporation and the Farm Credit System Assistance
Board.
Other duties include attending the periodic meetings of the banking regulators and the meetings of the Working Group on Financial Markets. I also direct the Treasury studies of deposit insurance
and Government-sponsored enterprises.
These experiences are, I believe, directly relevant to the responsibilities of a Federal Reserve Board Governor.
Let me now turn to two issues that I know are of direct concern
to both the Federal Reserve and this committee: monetary policy
and financial services reform.
I believe the Federal Reserve must engender the monetary and
financial conditions that will allow the United States to maintain
its position as the world's strongest, most successful economy. The
payoff, of course, will be continued increases in the standard of
living for every American. To achieve this, the Federal Reserve
should seek to maximize sustainable growth within a context of
price stability. Steady, credible policies with respect to the growth
of monetary aggregates should contribute to this long-term objective, although fiscal policy, international influences and economic
shocks will also play important roles.
Propelled by private initiative, the U.S. economy has demonstrated a remarkable capacity for growth, and the Federal Reserve
should continue to follow policies that foster this growth. High and
variable rates of inflation are fundamentally detrimental to this
objective. While much progress has been made to reduce inflation
in the past decade, more can and should be accomplished to remove
inflation as a variable in business and individual decisionmaking.
More broadly, I feel we should use the 1990's to build a strong
capital base for the 21st century. Reducing the budget deficit is the
single most important step to achieve this goal, but we must also
design and implement policies to increase personal savings and
reduce the cost of capital to U.S. enterprises. The resulting increase in investment and productivity will provide the capital base
we need for the coming decades. This is the only reliable path to
sustainable economic growth without inflation.
Finally, let me emphasize that the Federal Reserve is in a
unique position to establish policy focused on long-term objectives.
This is, in part, because of its traditional independence. I believe
this independence works.
If confirmed, I pledge to this committee that I will exercise my
independent judgment on matters before the Board.
Let me turn now to the subject of modernizing our financial services system which I believe is long overdue. I appreciate the difficulties of enacting legislation in this area, although it seems to me
that much progress was made in the last Congress, especially by
this committee. Nevertheless, there has been no comprehensive
modernization of the regulation of financial services in almost 60
years. The result has been a piecemeal approach by regulators to
keep pace with changes in the marketplace. That has been positive,
but in the end, inadequate.
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Rapid technological innovation and increased competition, especially from overseas firms and markets demand that we adopt a
comprehensive legislative solution. It seems to me that the key to
this comprehensive approach is competitiveness, whether we measure it by domestic or foreign competition. Many of our financial
firms have seen their traditional markets shrink. They have responded by building their expertise to expand into new markets
only to find that obsolete rules block their path. We can no longer
afford the luxury of this inefficiency.
But competitiveness is not the only concern we should address in
comprehensive financial reform. Any significant changes must be
made in the context of essential standards of safety and soundness.
This would include a reexamination of the so-called "Federal safety
net," which includes Federal deposit insurance, access to the discount window, access to the payments system and other less formal
types of Federal benefits to financial institutions.
For example, I believe the "too big to fail" doctrine already represents a costly expansion of the Federal safety net. That should be
fixed, and we must also address and adjust the relationship of the
Federal safety net to the spectrum of financial activities. The thrift
crisis illustrates that we should not make fundamental changes in
the way financial institutions compete without corresponding
changes in the Federal safety net.
Currently, there are a number of models of financial reform
under discussion by Congress, the regulators and the financial community. At this stage of the debate, I would not advance a firm
view on the way we should proceed. I do believe hearings scheduled
by this committee and by the House will be important contributions to this debate and so will be the Treasury study on deposit
insurance. With the proper foundation laid this year, I believe that
a sound, comprehensive approach can be developed for legislative
action in the next Congress.
In conclusion, what I have described today are only two of the
important and difficult problems that will challenge the Federal
Reserve Board in the 1990's. I can assure this committee that if
confirmed, I will commit myself fully to this challenge.
Mr. Chairman, I would be happy to answer any questions the
committee may have.
The CHAIRMAN. Thank you for your opening comments.
Senator Shelby has joined us.
Senator Shelby, did you have an opening comment that you
wanted to make?
OPENING COMMENT OF SENATOR SHELBY
Senator SHELBY. Mr. Chairman, I had a chance to talk with Mr.
Mullins and Governor Kelley yesterday, and the only issue I'm interested in is how they are going to solve the cost of capital to our
businesses in America, and if he can show that here, he's surely
going to have my support.
The CHAIRMAN. I'm sure he will.
Senator Sarbanes, I think, posed a very important question at
the outset, in terms of your intentions as to length of service. You
have been nominated to a term that has 6 years to run.
Is it your intention to serve the full time period?
Mr. MULLINS. Oh, Mr. Chairman, since I haven't been confirmed,.
I have not given a lot of thought to leaving [Laughter.]-but I cerDigitized by
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tainly enter this position with every intention of fulfilling the
term.
The CHAIRMAN. Just so we're clear on that, it is your intention,
as you think about it-Mr. MULLINS. It is absolutely my intention.
The CHAIRMAN. To stay for the entire 6-year term-Mr. MULLINS. Yes. Six years remaining-The CHAIRMAN [continuing]. That you have been named to.
Mr. MULLINS. 1996.
The CHAIRMAN. I think the independence question that I raised
and you touched on it in your remarks is a key issue. On the face
of it, you are a person who has been absolutely in the center of"
most major activities at the Treasury Department. I think it will
not be easy, would not be easy for anyone, to be able to disconnect
from the intimacy of that kind of central administration policy role
and, in tum, go over to the Federal Reserve in an entirely separate
and independent role. I would like you to talk a little bit more
about your feeling about it, and your intention to be free of any
kind of direct or indirect influence from anyplace, but very particularly the Treasury Department.
Mr. MULLINS. Yes, Mr. Chairman, as I mentioned in my statement, I believe the Fed's independence is crucial to its ability to
focus on long-term policies, especially in difficult times. This is an
issue which I feel very comfortable with. It is true that if confirmed, I will seek counsel from all quarters, including people I
know in the administration, Members of Congress and people in
the private sector. I think we ought to cast the net widely, although I can commit to .this committee that I will exercise my independent judgment on matters that come before the Board, and I
do believe that people who have known me in previous positions as
well as the Treasury, would testify to my independence of mind
and conviction.
The CHAIRMAN. And so, should an occasion arise where your
views were at direct odds with the position the Treasury Department was advocating, you are fully prepared to face off against
them without any reservation whatsoever?
Mr. MULLINS. Mr. Chairman, I would be happy to listen to anyone's views, but my view of the appointment is that I was appointed to exercise my judgment on these matters, and so I would have
no difficulty in exercising independent judgment.
The CHAIRMAN. You devoted a fair amount of the time in your
opening statement to your views about financial modernization or
reform of the financial services system, and I want to ask you some
questions about it. I realize you don't necessarily have finished
views on it, but I would like to have a sense as to what your views
are.
Do you think bank powers should be expanded and, if so, should
that be done directly or through holding company affiliates?
Mr. MULLINS. Well, Mr. Chairman, again I think we're entering
a period of debate and ought to consider a lot of models. I do firmly
believe that financial institutions should be allowed to capitalize on
their expertise and apply that expertise to a wide range of financial activities. I do also believe, though, that it is important to live
up to standards of safety and soundness and limit exposure to the
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Federal safety net. I think there is a lot of evidence that suggests
from the thrift crisis and other recent events the need to have
some sort of insulation for the Federal safety net, and I don't think
that insulation need be complex and tedious and cumbersome firewalls but something on the order of interaffiliate 23A, and 23B restrictions. There are other analogies as well, the Investment Company Act of 1940, for example, prescribes the relationship between
mutual funds and their investment advisers, and I think that
worked pretty well, keeping investment advisers from selling securities into mutual funds.
I think we should look for a simple and direct way to assure ourselves that the Federal safety net is protected. I believe the basis of
competition in new areas should not be access to cheap capital,
made cheap by the Federal safety net, rather the basis for these
institutions going out into new activities should be their own expertise.
The CHAIRMAN. Do you think it would be desirable for the Board
of Governors at the Federal Reserve to play an active role in developing a comprehensive proposal to modernize or change the financial services system?
Mr. MULLINS. I do think that they might play a role; however,
fundamentally, I believe Congress needs to enact a comprehensive
legislative solution and essentially not leave it to the regulators. I
also believe that Congress ought to think boldly and look widely on
this and not get trapped into too many of the parochial concerns of
particular regulators.
The CHAIRMAN. That is interesting. The Fed, of course, has taken
some steps in that area, incremental steps to change the system in
the absence of legislation. Is it your view that perhaps we have
gone about as far in that direction as we can and we are now to the
point where any further changes ought to be done legislatively?
Mr. MULLINS. I do believe Mr. Chairman, that by far the best approach is to look at the whole area and come up with a comprehensive solution instead of only continuing down the path of a piecemeal approach, and I think the Fed's work in this area has simply
been because we have not had legislative solutions.
The CHAIRMAN. On the issue of separating banking from commerce, do you have a view on that? If so, what is it?
Mr. MULLINS. I have an open mind on that. While many countries do separate banking and commerce, it is true that some other
countries do not have a separate of business and commerce. They
also do not have the same sort of Federal safety net that we have. I
might also add the countries that do have universal banking have
years of experience with it and know how to make it work. I think
we should look at it. I am concerned about conflicts of interest in
the credit-granting process and potential damage and exposure to
the Federal safety net.
In the thrift crisis we saw what happened when borrowers who
had very little interest in being in banking as a business got control of financial institutions. They have an interest in cheap capital, made cheap by the Federal safety net, and that did not work
out very well. That situation was different, because the capital
standards were low, and they were allowed to do this without cap-
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ital. With appropriate capital standards, some of these abuses may
go away.
I think it is one of the issues we should put on the policy debate,
but I think I approach it with some caution.
The CHAIRMAN. Senator D' Amato has joined us. Senator
D' Amato, do you have an opening comment that you wanted to
make?
Senator D' AMATO. Mr. Chairman, in the interest of time, I am
just going to ask that my statement be submitted for the record.
The CHAIRMAN. We will make it part of the record.
OPENING STATEMENT OF SENATOR D'AMATO
Senator D'AMATO. First, I welcome each of today's nominees to
the Banking Committee and I would like to congratulate the President on each of these nominations.
As we all know, this Congress faces large fiscal problems that are
very sensitive to overall economic parameters all of which are sensitive to the dicisions of the Federal Reserve Board. And the National Credit Union Administrative Board has a very crucial role
as well.
Indeed, if we believe all of the stories of financial disaster that
we hear, it may be that the credit unions and the Federal Reserve
System may one day merge as the country's surviving financial
system.
Seriously, Mr. Chairman, each of today's nominees faces a difficult and important task in the financial environment of the 1990's.
I commend each of them for their public service and hope for their
early confirmation.
Thank you, Mr. Chairman.
The CHAIRMAN. Senator Gramm.
Senator GRAMM. Mr. Chairman, I don't really have any questions
for Mr. Mullins. I have a budget meeting at 11 o'clock, and I
wanted to introduce Mike Kelley.
The CHAIRMAN. Do you want to do that now?
Senator GRAMM. Why don't I go ahead and do that now?
The CHAIRMAN. Yes.
OPENING STATEMENT OF SENATOR GRAMM
Senator GRAMM. Mr. Chairman, I know Mike Kelley. He is from
Texas. Has been a member of the Federal Reserve Board for 3
years. I think his service has been exemplary there. He has been
involved in many of the areas of Fed that often don't end up in the
papers, but they don't end up in the newspapers because he has
done an outstanding job in his leadership in those areas. And those
are areas related to the day-to-day management and administration of the Fed, to the oversight of the 12 district banks, to the
oversight of the competitive and safety aspects of banks and finally, he was the leader at the Fed in changing their salary system to
provide incentives and rewards for excellence. In fact, it was his
work at the Fed that is now the model for the OPM recommendations that Congress will have the opportunity to deal with and to
hear from all those who say incentive is an unproven concept, the
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same people who would reject perestroika if they were working in
the Kremlin instead of the Capitol.
But in any case, Mr. Chairman, Mike Kelley is a top man. He's
done an outstanding job, and it will give me great comfort to see
him have a 14-year term on the Federal Reserve Board. He brought
to the Fed practical business experience, and I think in the process
has made a great contribution.
Maybe we ought to take a second lien on all these people's
houses, and we take their house if they don't serve out their term
or something. [Laughter.]
Fourteen years is a long time, but I'm strongly supportive of
Mike Kelley, and I appreciate having the opportunity to introduce
him here.
Finally, in my remaining time I will just ask David Mullins one
question. As a general framework for the action of the Federal Reserve Bank, do you think the Fed ought to be primarily interested
as a monetary indicator and target in looking at the rate of growth
of the money supply and the monetary base, or do you think it
ought to be primarily aimed at looking at the interest rate and
having a target interest rate?
Mr. MULLINS. Senator Gramm, I will be the first to admit I am
not absolutely intimately familiar with all the current details of
macroeconomic policy. My opinions may change, but I can give you
my opinion going into this process. That is, I think the evidence is
persuasive that economic activity is related in direct and powerful
ways to growth in monetary aggregates, and I think, in the first
case, we should look to steady growth in monetary aggregates as
the basic monetary policy tool. Interest rates give us indications of
how that policy is working its way through the market, being received by the market, but most fundamentally especially over the
longer term, I believe growth in monetary aggregates should be the
guide.
Senator GRAMM. Well, I agree with that. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator Gramm. Senator Sarbanes.
Senator SARBANES. Thank you, Mr. Chairman. Mr. Mullins, you
are a bright and thoughtful person, and I want to ask just a couple
of questions about the Board and its structure, which I indicated in
my opening statement.
First of all, this trend that is developing of people not serving out
their term, raises, I think, probably the legitimate question as to
whether the 14-year term is still appropriate. Perhaps circumstances have changed in such a way since we first passed the legislation that 14 years just doesn't work any more. In other words, if
we are picking people and only a few of them serve out their term
and stay the 14 years and they leave after 2 years or 4 years or 5
years or 3 years or something, then perhaps we are living in a different environment, and we should think about revising the term.
Do you have any thoughts on that?
Mr. MULLINS. Senator Sarbanes, I think a 14-term is a good thing
and helps support the Fed's independence. Even if people serve 8
years, that is longer than a lot of terms, and it helps fundamentally decouple the appointments from the political process. I do think
it is difficult in a--
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Senator SARBANES. Would you have accepted this nomination if
it had been for the full 14-year term or would that have affected
your thinking about it?
Mr. MULLINS. Well, it certainly is a consideration. I think that
when you look at the 14-year term today, the financial side of it is
difficult to deal with to commit for 14 years. Although I think in
principle, it is a sound practice.
Senator SARBANES. Well, I take it from that answer that your decision on accepting this nomination was, in fact, made easier in the
direction of accepting it because you were filling an unexpired
term for 6 years rather an a full term for 14 years. Would that be
correct?
Mr. MULLINS. Well, I haven't thought carefully about whether I
would be willing to commit for a full term of 14 years, but it does
bring a different nature to the decision.
Senator SARBANES. Although when you look at the length of this,
you didn't have to spend as much time thinking about it as you
would if it had been a full term.
Mr. MULLINS. Perhaps, although tenure at Harvard is forever or
until you leave, and we have no difficult-Senator SARBANES. You are about to give that up, I take it; is
that correct?
Mr. MULLINS. Yes, Senator.
Senator SARBANES. Now what do you think of the requirement in
the law that not more than one Member of the Board shall be selected from any one Federal Reserve District?
Mr. MULLINS. I support the provision.
Senator SARBANES. What do you see as the purpose of that requirement?
Mr. MULLINS. Diversity. Diversity in the Board members.
Senator SARBANES. Why aren't you and John LaWare essentially
the same diversity then?
Mr. MULLINS. I think that-Senator SARBANES. Let me lay the basis for that first of all.
How long have you been living in the First Federal Reserve District?
Mr. MULLINS. Approximately 15 years.
Senator SARBANES. Ever since you finished-I mean, all of your
adult, post-school years have been in the First District; is that correct?
Mr. MULLINS. Yes, Senator.
Senator SARBANES. Well, how then is your diversity that different from John LaWare?
Mr. MULLINS. Well, because I think that I have a very direct relationship with my home State of Arkansas. I was born in the District, grew up in the District, my family still lives in the District, I
own property in the District, I have maintained business contacts
in the District and was a voting resident up through the finishing
of graduate school. The only blemish on that record is having spent
15 years as a professor at Harvard. And no one's perfect, I suppose.
[Laughter.]
Even during that time-Senator SARBANES. Well, I don't see it as a blemish. I guess what
I am really getting at is some thought as to whether we ought to
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just repeal the requirement. You are not the first to come before us
in which the nomination has been made from a particular district,
but the connection with the district is not-at least to me, it
doesn't seem to reflect what the statute-I mean, we're going to be
hearing Mr. Kelley soon, and of course, he's out of the Eleventh
District, out of Texas, and in a sense, he is out of Texas. He was a
businessman in Texas actually pursued his adult career in Texas,
which seems to be is what the statute was trying to get at, and I
would just be interested in your thinking on this. We get people,
they get nominated out of California even though they've been on
the East Coast, because they were born in California or they went
to school in California for a couple years or something of that sort.
Perhaps we just shouldn't have this requirement.
Mr. MULLINS. I think it is a good requirement, Senator. I do
think mine is a different case, because I have always considered
Arkansas my home, and the connections I have had to the State
have lasted even during my time in Boston. I feel very close to the
District and comfortable in representing it and, indeed, honored to
be nominated to represent it.
Senator SARBANES. How did this nomination come about, Mr.
Mullins?
Mr. MULLINS. Governor Heller left and there was an open position. In talking about candidates, Under Secretary Glauber asked if
I would like to be considered, and I said yes, I would be willing to
be considered. I guess I had brief discussions with Secretary Brady
and a few other people, and then I read it in the newspapers.
Senator SARBANES. Had you indicated an interest to Under Secretary Glauber or had he approached you about whether you would
be interested?
Mr. MULLINS. Well, we were trying to find good candidates, and
I-Senator Sarbanes. You mean the two of you together were.
Mr. MULLINS. The two us together. And I suggested I would be
willing to be considered and to consider the position.
Senator SARBANES. Did you get interviewed elsewhere about becoming a Member of the Board other than with Glauber and Secretary Brady?
Mr. MULLINS. Yes, Senator.
Senator SARBANES. Where was that?
Mr. MULLINS. I talked briefly with Michael Boskin, with Director
Darman and with Governor Sununu.
Senator SARBANES. In that order?
Mr. MULLINS. I think that's an approximate order, and perhaps
Deputy Secretary Robson as well.
Senator SARBANES. And particularly with Governor Sununu,
what was the nature of-was it your views on economic policy that
were being explored?
Mr. MULLINS. I don't know that I remember specifics, but it was,
I think, the general philosophy and my background and what I
might bring to the position.
Senator SARBANES. Did you feel in those discussions that you
were being carefully vetted for your views on economic issues or
economic policy?
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Mr. MULLINS. Interestingly, Senator Sarbanes, I think I did not
feel that. In none of these interviews did anyone ask me my opinion of the current situation or whether I felt the rates were too
high or too low. Perhaps it was because I had worked with these
people before, and they knew me, although they did not know my
monetary views. What discussion of monetary issues there was,
was more general, such as discussion on whether I felt monetary
aggregate growth was best or whether I was a monetarist or
whether I thought international consultation was a good thing. So
they were very-very general discussions.
The CHAIRMAN. Senator Sarbanes, I think that is an important
line of questioning, and it probably ought to continue. We are going
by the time period, but one way or another, I would hope that we
could fill out the rest of that discussion before we finish today. Senator Mack.
Senator MACK. Thank you, Mr. Chairman.
Mr. Mullins, I want to pursue some questions along the monetary policy line. I think maybe the first one would start us in a
very broad general kind of question. I guess most of the time when
people talk about the objectives of the Federal Reserve, it is, in
fact, to maintain price stability and maximize economic growth,
but as usual, when there are two objectives, you find yourself in
conflict from time to time. I would appreciate it if you would help
me understand your thinking as you kind of walk through how one
balances the decisions that are necessary between those two objectives.
Mr. MULLINS. Senator Mack, my view is that fundamentally
there is no conflict between growth and reducing inflation. The ultimate objective should be maximum economic growth, but high
and variable rates of inflation are fundamentally detrimental to
the growth potential of the economy. So I think reducing inflation
and trying to eliminate inflation is an important prerequisite to
maximizing growth. High and variable rates of inflation damage
the economy in a variety of ways, most directly by increasing the
real cost of capital to firms not just the nominal cost of capital, and
this way it hurts growth. So I think ultimately the two objectives
are not in conflict.
Senator MACK. It also sounds as though you might be putting the
emphasis on price stability, that with price stability, one is going to
get growth. And so let me just kind of look at, I guess a minidebate that has been taking place within the Fed itself. Chairman
Greenspan, I think, made it very clear at least through last year,
and certainly the early part of last year that inflation, fighting inflation was the objective. And even when the Fed was following
times of restraint with the money supply, we saw long-term interest rates decline, which I presume basically was because the
market said there is some confidence about the future. With the
Fed fighting inflation, inflationary expectations were not as great
and, therefore, long-term interest rates were able to come down.
In December of last year, there was a debate within the Federal
Reserve as to what the policy should be, whether further restraint
was required or whether there should be a loosening of the money
supply, an increase in reserves. The decision was, in fact, to increase reserves, drop interest rates a quarter of a point or so in De-
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cember; however, it appears that the market's response was that
the Fed was backing away from its commitment to fighting inflation and, therefore, long-term interest rates went up.
That is probably an oversimplification of-in fact, I know it is an
oversimplification of the statement made by Wayne Angell during
that December meeting.
I am sure you are familiar with that discussion, and I would be
interested in whether your feeling is the Fed made the right decision in December or whether the analysis that I have expressed is
an accurate one and any other thoughts you might want to add to
that.
Mr. MULLINS. I am not intimately familiar with all the considerations which went into those decisions, so I wouldn't express an
opinion on them.
I would question whether the increase in rates we saw at the end
of last year was due primarily to inflationary expectations because
there were a couple of other things going on.
The domestic economy was stronger than many people had expected and also, of course, there was the emerging investment opportunity in Eastern Europe which may have moved up interest
rates.
I do believe, though, that we should be moving on inflation and
I'm afraid if we don't it could get out of hand. So I do support the
notion of continuing to try to reduce inflation. I think we should
try to do it in the least costly manner, but if we fail to do it and we
let it get out of control, I fear the ultimate cost will be much
higher.
Markets have very long memories when you let inflation get out
of control. For example, if you purchased a 4 percent Government
bond in 1964, a 30-year bond, you're still suffering. That's why I
think it's quite important that we continue to move on inflation
and it's not clear to me that the movement of interest rates suggests that we're not continuing to have some success there.
Senator MACK. So you basically then would be siding with the
majority on the Board in this decision in December?
Mr. MULLINS. I would find it difficult to vote, not knowing the
full record, but I am generally, again, in favor of continuing to
work on inflation.
It is true we don't fully understand all the lag structures and
we've had high real rates for some time now, and at some time I
would hope we would start to see real progress on inflation. I think
it's not apparent that that time is at hand yet.
Senator MACK. I guess one of the traditional ways of continuing
that fight on inflation is a fairly restrained growth in the money
supply, which certainly we went through a period which I think
many would have thought that, as a result of that, we would have
seen inflation lower than what it is today.
Which raises a question in my mind as to whether-and I would
be interested in your opinion-as to, do we really have a good
measure of inflation today? Has the makeup of our economy so
changed that we have an inadequate measure of inflation?
Mr. MULLINS. I think it is difficult to measure inflation, especially in a service economy, although you might recall that Michael
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Boskin has undertaken a very large project to try to improve the
quality of the statistics.
We do have a variety of differing statistics on inflation ranging
from commodity prices through various price indices, and I think
you couldn't depend on just one. You need to look at all of them to
try to get a sense of whether inflation is accelerating or decelerating, but it's not a simple task of just looking at the CPI.
Senator MACK. Could you give me an idea of some of those indicators that you look at and which ones you place importance in?
Mr. MULLINS. I'd like to look at the full range. The Producer
Price Indices are important. Labor cost indices are important. I
think commodity prices are useful in that they provide direct
market signals, but they are not such a big input to the valueadded in the GNP. Labor is probably 60 or 70 percent of the valueadded in the GNP and the industrial commodity prices are less, but
they provide clues-they are subject to shocks. Essentially I think
you ought to look at them all and then try to get a sense of the
direction of inflation. Are we making progress or not?
I know it's also difficult when you have what we've had lately,
which is a series of inflation results which in each case you could
tie to one single special factor. Perhaps we are making more
progress than some of the numbers show. But you get concerned
even when there's a specific cause, because a series of specific circumstances may make up overall inflation. I do think we've made
progress and I hope we will continue to make progress.
[The following information was subsequently submitted for the
record:]
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DEPARTMENT OF THE TREASURY
WASHINGTON
ASSISTANT S&C"l:TAIIY
May 1, 1990
The Honorable Connie Mack
United States Senate
Washington, D,C. 20510
Dear Senator Mack:
ram responding to your request for co-ent on Governor
Wayne Angell's statement explaining his dissenting vote at the
December meeting of the Federal Open Market c~ittee. Without
commenting on the specific decision reached at that meeting, r
believe there is 1111ch to agree with in the general approach to
monetary policy outlined by Governor Angell.
The financial structure of the economy has become
increasingly complex in recent years. For monetary authorities,
this has meant that the conduct of policy must employ an
expanding array of economic information. Since monetary
conditions change continuously, it is important that the
information not only be relevant and reliable, but that it be
available quickly and continuously.
For many years, quantity data on financial flows, including
money supply measures, have played an important role in the
formulation of policy. However, deregulation and the
availability of many more financial instruments has raised
definitional, measurement, and timing problems for such data and
have weakened their reliability as forward looking guides for
formulation of monetary policy. This is not to say that these
measures should not continue to play an important role in policy
discussions, only that it is important to consider other economic
measures.
Price information from financial markets, c~odity markets
and the foreign exchange markets form a useful set of measures to
consider in policy formulation. They are readily available with
little or no time lag. They serve as summaries of the millions
of economic decisions of market participants. Finally, they also
embody the expectations of market participants about future
inflation, an important input to monetary policy decisions.
However, market data are available for only a relatively
small percentage of the important components of overall price
indices. For example, industrial commodities are only a small
fraction of the value added to GNP; labor is a much larger
component and r know of no broad labor related auction market
data. Therefore, price data cannot be relied upon exclusively in
assessing inflationary conditions.
·
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- 2 -
Moreover, like any data, movements in price indicators can
mislead unless carefully interpreted. Recently, for example,
sensitive commodity prices and the price of gold have declined
substantially. Yet the question of the appropriateness of an
easing of monetary policy continues to be a topic of considerable
debate. Inflation has not declined and some argue that it may
accelerate a bit this year. And, despite sluggish economic
growth, there are signs that labor and wage pressures are likely
to continue.
I feel we should continue to use a range of financial
measures in arriving at its policy decisions. The weight given
to one or another of these measures will necessarily vary as new
circumstances arise. Price measures certainly can serve as a
useful adjunct to more conventional data.
Like Governor Angell, I believe that the successful pursuit
of price stability by the central bank will bring about lower
interest rates and higher economic growth over time. Careful
attention to forward-looking indicators can contribute
importantly to the success of that effort.
Thank you for your kind words and good wishes.
Sincerely,
,
•• Kuiii=,
Assistant secretary
(Domestic Finance)
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Senator MACK. Thank you.
The CHAIRMAN. Thank you, Senator Mack.
Senator Shelby.
Senator SHELBY. Thank you, Mr. Chairman.
Mr. Mullins, let's talk about your statement or get into your
statement on expansion of bank powers, if you could focus on that.
In view of all the problems that we have had with the thrift industry and the deregulation that they could get into such as real
estate and all these ventures, do you believe that banks ought to be
in the real estate business, which is a high-risk business?
Mr. MULLINS. Senator Shelby, I would not put real estate development or investment on the top of my list of activities banks
should be allowed to engage in.
Senator SHELBY. That's not necessarily a banking business, is it?
Mr. MULLINS. Not necessarily.
Senator SHELBY. Or necessarily related? I can understand an investment bank or a commercial bank in other things, but real
estate with the attendant risks in real estate and what we have
been through and obviously are going to continue to go through not
only through Treasury but in this committee, I would-you say
that's not high on your list there. Is it on the list at all?
Mr. MULLINS. Well, I think we ought to draw up a full and complete list and I think some people would put real estate on that list.
It is true, though, Senator Shelby, I would agree with your assessment of our experience in that area and indeed commercial
banks have tended to increase their lending to real estate in recent
years and even in the lending area, we are seeing we're paying
some cost for that as well. So I would be very wary of going beyond
lending to more direct real estate activities.
I do believe this is a time for looking at the full range of activities and not starting with preconceived notions.
Senator SHELBY. But you also start with your knowledge of what
has happened recently in real estate where banking and real estate
have been combined in the deals. And if we forget that, we've lost
a valuable lesson.
Mr. MULLINS. I agree with that, Senator Shelby.
Senator SHELBY. The other subject that I talked with you a little
yesterday in my office about was the interest rates. Where are we
going? How big a role does the Japanese and the Europeans play in
the Fed's regulation of interest rates through the discount window?
Mr. MULLINS. I think there's no question that the markets are
internationally linked now more than they were in the past. But
they are not tied together inextricably. They are not tied together
in a way which can't be separated. We've seen in Japan recently
rates rise and rates have been falling here.
Senator SHELBY. Could they be separated more if we had a larger
savings rate or capital base?
Mr. MULLINS. I think that would help substantially. One of the
reasons that our rates are so tied is because of our inadequate level
of domestic savings which requires us to import savings from
abroad.
Senator SHELBY. And that goes back to the deficit we create here,
right?
Mr. MULLINS. Yes, Senator Shelby.
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Senator SHELBY. Now how is American business-small business,
large business, medium, whatever-going to compete in an international global competition that's with us now and going to be with
us where our companies and our individuals are paying much more
for capital than the Japanese, for example, and possibly the Germans?
Mr. MULLINS. I agree that that is a major problem with our competitiveness and what we need to do, we all know, number one, is
reduce the deficit. I think we also need to design plans to increase
personal savings. If you look at our policies versus other countries,
you notice a couple of tax differences as well. For example, virtually every other industrialized country has an advantageous rate on
capital gains, which is right at the margin of investment.
Senator SHELBY. What about the dividends tax?
Mr. MULLINS. Double taxation of dividends.
Senator SHELBY. What does Japan have and what does Germany
have?
Mr. MULLINS. The other countries give some relief from double
taxation of dividends and these work directly to reduce the cost of
equity capital. It's important not to tax capital because ultimately
the only real way long term to get growth without inflation is
through investment and increases in productivity. We are at a very
fundamentally competitive disadvantage because of our high capital costs and I think that's at the root of our competitiveness problem.
Senator SHELBY. Do you believe legislatively that we can come
forth in the Congress with some inducements to the American
people that would really generate savings, or would that just be a
horizontal shift?
Mr. MULLINS. I think we can generate new savings and not have
horizontal shifts. I think the IRA programs are not quite as powerful as they could be because you can't remove the money until retirement, although it's good to have retirement plans.
In the administration's family savings plan you can remove
money after 7 years.
I guess I believe the studies that are coming out now are showing
that even in the IRA plan generated substantially more new savings than people thought. I don't think we have much to lose here
because most Americans don't have much savings to shift.
Fundamentally, on the personal savings side, I believe that
saving is learned behavior and we need to give people the incentive
to teach them how to save.
Senator SHELBY. Does the psychology of inflation that was with
us so long play a role in the individual saving or lack of saving?
Mr. MULLINS. I think people forgot how to save and they learned
how to borrow and they need an incentive. And one of the things
about these tax advantage plans is they will activate the private
sector to design savings instruments and market them very heavily. You need to stick with it though. I think if you do stick with it
we will get the sort of thing that started to happen with the IRA
plan.
Senator SHELBY. By stick with it, are you talking about Congress
passing a law for inducement for savings and taking it away 2
years ago?
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Mr. MUI.LINS. That's exactly what I mean, Senator Shelby. It
needs to become a habit and a routine.
Senator SHELBY. Predictability?
Mr. MULLINS. And after a while I think people will see it as an
opportunity and there will be pressure-people will say, "Have you
put in your $5,000?" That happened with the IRA. You felt that
you had to do it or you were not very smart. It takes a while for
that behavior to get started, but it has the potential for creating
savings behavior throughout the population and I think it's worthwhile.
Senator SHELBY. Have you written any papers dealing with the
cost of capital? I know you have been teaching at Harvard for a
long time.
Mr. MULLINS. I haven't written papers directly on the differential cost of capital between the United States and other countries.
I have written papers on estimating the cost of capital and how
you estimate the cost of capital.
Senator SHELBY. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Mullins-Senator SARBANES. Mr. Chairman, could I ask just a follow-up
question to Senator Shelby's point?
The CHAIRMAN. Yes. I will yield to you for that purpose.
Senator SARBANES. You said we didn't have much to lose in this
effort to induce savings, but what's your view on seeking to induce
private savings through tax changes that cost revenue and therefore increase dissaving by raising the deficit?
Mr. MULLINS. I think it's important that it produce new savings
and not just shift savings, although with the average American
family at $6,000 in savings and with a $5,000 plan, it's sort of difficult-well, you would run through the shifting process pretty
quickly I believe
Senator SARBANES. What do you mean by shifting?
Mr. MULLINS. Well, simply the shifting of the $6,000 in savings
which is normally taxable to a non-taxed plan, that's a loss in revenue.
Senator SARBANES. That's not what I'm talking about. I'm talking about to provide the non-taxable plan you're going to have to
provide some inducement and you're going to raise the Federal deficit, which is dissavings.
Mr. MULLINS. Well, I think you raise the Federal deficit if you
take away the taxes on existing investment. If people simply save
more, the new savings, savings they would not have saved before,
invest funds they would not have invested before, it's not clear to
me that would increase the deficit.
Senator SARBANES. All right.
The CHAIRMAN. Mr. Mullins, you were the principal architect of
the administration's savings and loan reform package. I got a call
yesterday from Secretary Brady asking if the committee would undertake to expedite the handling of the Ryan nomination for chairman of the OTS. I indicated that we would move as rapidly as we
can and we hope to have those papers today.
But that request obviously relates to the problem that's arisen
with the court test which is underway out in the State of Illinois,
as you know.
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I took a look today at the original proposal that you helped
write, which was sent up by the administration and introduced by
request on February 22nd of last year. I went to the provision that
deals with this to find out exactly what the thinking of the administration had been.
It's found on page 186. And with respect to the chairman of the
OTS, it says on that page, "Provided, however, that the individual
serving as the chairman of the Federal Home Loan Bank Board on
the date of the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 shall be the chairman until
the date on which his term as chairman of the Federal Home Loan
Bank Board would have expired, notwithstanding section a."
Are you familiar with that? Do you recall this?
Mr. MULLINS. Vaguely, Mr. Chairman, yes, sir.
It is true that our original proposal was different because originally we did not propose splitting out the Federal Home Loan
Banks themselves and so the only change to the Federal Home
Loan Bank Board in effect was the splitting off of FSLIC. So it was
a less dramatic-The CHAIRMAN. Well, I'm raising a different point. As I read this
language-and I'll send it down to you so you can take a look at
it-it is very clear that you envisioned that the sitting chairman
would serve to the end of the term.
Now you're not saying you don't remember that, are you?
Mr. MULLINS. No, Mr. Chairman. I think that was the proposal.
The CHAIRMAN. It was my assumption then, and it's my assumption now, that that was the intention the administration had. Am I
correct in that?
Mr. MULLINS. Yes, Mr. Chairman.
The CHAIRMAN. The issue of where that idea came from has been
raised recently. It came right out of your bill, did it not-out of
your proposal?
Mr. MULLINS. Yes, Mr. Chairman.
The leadership of the FDIC and the Bank Board would have past
through the bill and stayed in place.
The CHAIRMAN. Did the question arise in the drafting group of
which you were part as to whether a legal challenge could later be
made with respect to the confirmation process? Do you recall it
ever coming up?
Mr. MULLINS. Well, I think it probably was considered, Mr.
Chairman, and looked into, but I thought people did not feel it was
a serious possibility because you took an existing agency and took
away one of its subsidiaries and passed it over through the bill and
I think it was looked at-that issue was looked at, but I think the
conclusion was that we thought we were on sound ground.
The CHAIRMAN. Did it relate also, I suppose, to the fact that you
were bringing that office in under the-Mr. MULLINS. Under the Treasury Department.
The CHAIRMAN. Under the Treasury Department?
Mr. MULLINS. Yes, Mr. Chairman.
The CHAIRMAN. Let me ask you about the estimates in terms of
the cost of the package. I gather you had a role in that as well. The
latest estimates we have indicate that the $50 billion provided in
the legislation is not going to be enough and that we are looking at
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a figure that is probably going to exceed that by some significant
amount. The estimates vary, but I think a lot of the educated opinion is to the effect that we are probably going to see something at
least in the range of $20 billion higher than the $50 billion anticipated.
Beyond that, there was no provision in the original plan for
working capital. I mean, there's nothing spelled out in the plan
specifically as it was presented. You may want to respond to that,
but the estimates that we are now looking at are in the range of
about $50 billion for working capital.
Would that be the way you would see it at this point, or how
would you adjust those figures to what you think we ought to be
anticipating?
Mr. MULLINS. Mr. Chairman, with respect to working capital, the
legislation did include a working capital note cap-a cap on the
notes issued by the RTC. So it did envision some sort of interim financing backed by assets. It did not specify the specific form of the
financing.
In terms of the size issue, I still think it's too early to tell. The
RTC has spent only $8.5 billion the last time I checked to pay for
losses of S&L's. That's $8.5 billion of the $50 billion. At that pace,
they could go for some time before needing new funds. I hope they
are going to accelerate the pace.
I should also point out that-The CHAIRMAN. Let me just ask you at that point, are you saying
then that you think-that it is your best professional judgment, as
you sit here today-that $50 billion is going to do it, whatever the
time frame, or should we anticipate that it's going to overrun that
figure?
Mr. MULLINS. Well, it is true that we designed a plan which met
the estimates of the FDIC and GAO and the Bank Board, as well as
our own independent checks and subsequently, there has been a
tendency to raise estimates, in part I think because of the softness
of the real estate market.
It's not clear to me, though, that the total package is substantially underfunded because the $50 billion was never intended to pay
for all future resolutions. The $50 billion was intended to pay for
the current hole, the currently insolvent institutions that had been
insolvent for years and those that would be insolvent under new
capital standards. We put in additional funds which start to
become available in the fall of 1992, up to $32 billion in additional
funds, for marginal institutions which may ultimately fail and
have to be resolved through the SAIF fund.
I think if you look at the $50 billion and the $32 billion together,
it may mean that we need the $32 billion earlier or something of
that nature. But if you look at the total package it's not clear to
me yet that we have convincing, compelling, analytical evidence
that we have a serious underfunding. In fact, currently, there's
plenty of money available and I think we should focus on trying to
get the process moving because one input to the total cost of the
problem, perhaps the biggest one right now, is the speed and efficiency with which the resolution and asset disposition process proceeds. If that doesn't get moving, the costs will likely be higher. ,
28-952 0 - 90 - 2
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The CHAIRMAN. Well, on that point I agree with you that we've
got to get moving. We thought we had provided all the machinery
that had been asked for, including sufficient money to move. As
you yourself say, there's enough money there now, and I'm strongly of that view as well.
What's taking so long?
Mr. MULLINS. Well, Mr. Chairman, I think there are a number of
factors. The legislation involved a relatively large start-up burden
and I think appropriately so, of producing a strategic plan, of bidding rules, an inventory of all properties, ethics and conflicts rules
and the like, and certainly we had to get through that process.
I tend also to think that the major reason for delay just reflects
the difficulty, the massive complexity of this task. This thing took
15 years to develop. I'm not surprised that it isn't solved in 7
months.
We could speed up the process. If we wanted to do a lot of fast
resolutions, we could do them tomorrow by giving long-term Government asset puts, long-term Government guarantees, and we
could do a very large number of transactions at relatively attractive prices. However, I think that would be the wrong approach because that would leave the Government exposed down the road.
We've been trying to do this the right way and that is to move
these institutions and these assets into the private market and get
us out of this mess once and for all. That's just a very difficult,
complex process to get off the ground. It requires, by necessity, a
very large bureaucracy at the RTC level. I am hopeful, though,
that we are now at the real take-off stage and we will see a significant acceleration in the process.
The CHAIRMAN. Is that the same thing as saying you feel good
today about the package that we enacted? Because it was in every
substantial detail the package that you asked for.
Mr. MULLINS. Mr. Chairman, I feel that FIRREA is a good law. I
think it's the right approach. I think the administration made a
good proposal and Congress improved upon that proposal.
The implementation has not gone as quickly as many would have
like and as I would have liked. But I think that really reflects the
difficulty of the task rather than the legislation itself, which I
think is basically sound and the right approach.
The CHAIRMAN. Senator Mack.
Senator MACK. Thank you again, Mr. Chairman.
I want to move maybe to another area and another apparent
conflict I guess.
Some at Treasury I think would argue that through various
methods the value of the dollar should be reduced, reducing the
price of American goods making us more competitive, increasing
the price of foreign goods, reducing imports.
However, when one goes through that process, I think you can
argue that you have increased the supply of dollars and you have
taken away restraints in the domestic market because of competitive goods from outside the United States, and at the same time,
again if the Fed's objective is to fight inflation, there appears to be
at least on the surface an apparent conflict there.
I would be interested in your reaction as to (a) whether it is a
conflict and (b) what do you think Fed policy should be if the
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Treasury at the same time is trying to drive down the value of the
dollar?
Mr. MULLINS. Senator Mack, I believe there are times in which it
is appropriate to have intervention in foreign exchange markets.
The classic example would be a period of disorderly markets or if
we became convinced that the dollar had departed substantially
from underlying fundamentals because of speculative reasons.
However, in general, I believe it's not wise to try to manage the
dollar at levels inconsistent with the economic fundamentals. I
think the answer to our competitiveness problems are much more
in dealing with the underlying causes of inadequate domestic savings and cost of capital, which is too high, and I think addressing
those fundamental underlying causes are the way to improve our
competitive situation rather than looking to dollar management.
Senator MACK. I agree with that, but let me just go back again to
the specific. There are certainly indicators over the last several
months that the intention is to try to push the value of the dollar
down. Is that counter-productive from the Fed's point of view with
respect to its fight against inflation?
Mr. MULLINS. Well, it is true that a lower dollar does tend to increase inflationary pressures. We haven't seen much of a fall in
the dollar recently I might add.
Senator MACK. Would that indicate to you that the underlying
economic fundamentals are supporting a higher dollar value?
Mr. MULLINS. I'm not so certain. In part of my preparation I received, unsolicited, purchasing power parity estimates of the dollar
which range from 209 yen to 104 yen I believe. So I'm not certain
exactly where it is, although there seems to be a lot of demand out
there for dollars and it's not apparent to me that there's a convincing case that it's out of line with economic fundamentals.
Senator MACK. I'm sorry, when I asked you that question I got
off the main point again that I'm trying to pursue.
That is, is it counterproductive with the Federal Reserve?
Mr. MULLINS. My general view, Senator Mack, is that we ought
to let the dollar be based upon economic fundamentals rather than
trying to manage it. If the dollar falls, based upon economic fundamentals, we would have to deal with that.
Senator MACK. Thank you, Mr. Chairman.
The CHAIRMAN. What you're witnessing-of course, you can't see
it directly because you're facing this way, but any time a Fed
Member or a near Fed Member or a pending Fed Member utters
anything that touches in any way, shape, or form on interest rates
and where they might be going-Senator MACK. Mr. Chairman, I thought I asked a very offensive
question. I thought maybe that's what caused it.
The CHAIRMAN. If it touches the right buttons over at the press
table, there's a mad scramble out the door and everybody heads for
the phone booth from the press corps, at least those that have to
report on a real time basis. So that rush of noise you heard indicates that you apparently said something of sufficient importance
that it sent at least five hurdling press bodies out the door to the
nearest phone.
Mr. MULLINS. I hoped it was my comment on the thrift situation.
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The CHAIRMAN. And I took a look at Senator Mack because I
wanted to see if he had understood, because I missed the importance of whatever the comment was that sent part of the press
corps out there. Most of the press corps is still seated over here, so
they took it in stride. I'm not quite sure why it sort of rocketed five
out the door and the rest are here.
Senator MACK. I refuse to answer your question on the grounds
that it might incriminate me.
The CHAIRMAN. I see. [Laughter.]
Senator Sarbanes.
Senator SARBANES. Thank you, Mr. Chairman.
Mr. Mullins, had you served in Government before you came to
the Treasury in I guess it was October of 1988?
Mr. MULLINS. No, Senator Sarbanes, except for my service with
the Brady task force on market mechanisms.
Senator SARBANES. How did it develop that you came down to the
Treasury? Did the Secretary ask you?
Mr. MULLINS. The Secretary called me and asked if I would be
interested in coming down and working on the S&L problem. I
jumped at the opportunity.
Senator SARBANES. Did these talks that you had with Boskin and
Darman and Sununu, do you recall about when they took place as
it was leading up to this nomination?
Mr. MULLINS. I don't recall precisely, Senator Sarbanes. I think
it might have been in October perhaps.
Senator SARBANES. That far back?
Mr. MULLINS. Yes, Senator Sarbanes. The process is a long one.
Senator SARBANES. Are you familiar with the-some saw it as
almost an unprecedented intervention by the White House spokesman, Marlin Fitzwater, in effect, attacking the Federal Reserve
and its policies back in Jenuary? Do you remember when that took
place?
Mr. MULLINS. I do I think vaguely remember the incident.
Senator SARBANES. What did you think about that?
Mr. MULLINS. Well, as I recall, the President was going down to
speak at the housing conference at Atlanta the next day and it was
not unusual for Presidents to call for lower interest rates.
Senator SARBANES. So you saw it really as Fitzwater transmitting
a message from the President?
Mr. MULLINS. I really wouldn't know exactly how it took place,
although it's not unknown for people in the administration to
prefer lower interest rates.
Senator SARBANES. Well, now let me read you a comment that
was-this is from the Wall Street Journal about that point. It says,
"The statement"-referring to Fitzwater's statement-"reflected
concern by White House Chief of Staff John Sununu, Chief White
House Economist Michael Boskin, and Budget Director Richard
Darman that the Fed is being too zealous in its battle to rein in
inflation."
Now those three officials are all people that you spoke to, by
your earlier testimony here this morning-in effect, were interviewed by them, I guess is not an unfair characterization, in the
course of finally being selected by the administration to be nominated to the Federal Reserve.
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In those discussions, did this concern reported here-was that reflected in the discussions you had with these people?
Mr. MULLINS. Absolutely not, Senator Sarbanes. There was no
discussion of my views-I think it's kind of interesting that there
was no discussions of my views on the current situation or this concern.
Senator SARBANES. You say there were discussions in these sessions as to whether you were a monetarist?
Mr. MULLINS. Mike Boskin asked if I was a monetarist.
Senator SARBANES. What did you tell him?
Mr. MULLINS. I told him I was a pragmatist.
Senator SARBANES. And did Sununu ask about that?
Mr. MULLINS. He generally asked about my philosophy on monetary policy.
Senator SARBANES. Did you see the reports that Budget Director
Darman was angry with Mr. Greenspan because of his policy?
Mr. MULLINS. No, Senator Sarbanes, I didn't see that one.
Senator SARBANES. Back in the summer of 1989. You're not familiar with that?
Mr. MULLINS. I don't recall that one.
Senator SARBANES. Are you familiar with these reports-let me
just quote the headline-"Bush insiders see no renewal for Greenspan."
Mr. MULLINS. Yes, Senator Sarbanes, I have seen that.
Senator SARBANES. I would hope you would be familiar with
those because those reports are pretty contemporaneous, aren't
they?
Mr. MULLINS. Come to think of it, Senator Sarbanes, I do recall
that Director Darman on a TV program criticized the Federal Reserve.
Senator SARBANES. It's reassuring that your recollection is picking up on this issue because this very article says, "Last August,
Mr. Darman said in a television interview that if the country fell
into a recession it would be because the central bank erred on the
side of caution. Mr. Darman subsequently explained that he had
not meant to be so blunt and he has not spoken out publicly since.
Although a top Office of Management and Budget official said that
he had heard of Mr. Greenspan's future, Mr. Darman is known to
feel strongly about the issue and has continued to discuss it in Administration circles."
Have you ever heard any such discussion?
Mr. MULLINS. No, Senator Sarbanes, and I think when those reports came out, the Treasury Department issued a statement confirming there had been no discussions.
Senator SARBANES. And you hadn't been anywhere where this
issue came up and was talked about in your presence?
Mr. MULLINS. It was not talked about and, indeed, when I see the
stories on a number of fronts, the differences between the Treasury
and the Federal Reserve, from being inside some of these discussions, I think the differences have been exaggerated.
Senator SARBANES. Of course, Darman is not at the Treasury.
He's at 0MB. In your answer, is the use of the "Treasury" meant
to differentiate out Darman and Sununu?
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Mr. MULLINS. No, Senator Sarbanes. I think everyone denied the
basis for the story on the reappointment of the chairman.
Senator SARBANES. There just wasn't anything to it; is that what
everyone said?
Mr. MULLINS. I think that's what everyone said, Senator.
Senator SARBANES. No one had had any problems with the Fed's
policies?
Mr. MULLINS. I think everyone would like lower interest rates
and one way to get there is to reduce inflation, but I know of no
discussions in that vein and I might add again, in my discussions in
talking about this job, these issues of the current policy were never
brought up.
Senator SARBANES. Did you talk with the President about this
job?
Mr. MULLINS. No, I did not, Senator Sarbanes.
Senator SARBANES. I see my time has expired. Thank you, Mr.
Chairman.
The CHAIRMAN. Just on that point, I take it that the highest
ranking official that you spoke to when you were interviewed was
Secretary Brady and, I suppose, Budget Director Darman and Mr.
Sununu at the White Hous-e~ Would that be it?
Mr. MULLINS. Yes, Mr. Chairman.
The CHAIRMAN. Who called you to tell you you were going to get
the job?
Mr. MULLINS. Again, I read that in the newspaper, but Secretary
Brady and Michael Boskin and Director Darman had indicated to
me that they would support my nomination.
The CHAIRMAN. Let me go to monetary policy here.
Senator SARBANES. Mr. Chairman, I'm going to have to excuse
myself. I'd like to ask the chair if he would ask Mr. Kelley when he
comes before the committee-maybe not so much on his renomination but even his initial nomination, whether he went through the
same screening process that Mr. Mullins went through.
The CHAIRMAN. I will ask that question. He's had the chance to
hear the question, so he will be able to answer now.
Do you see policy actions available to the Fed right now that
would enable the Fed to push interest rates down from where they
are at the present time?
Mr. MULLINS. I think the Fed could do that. I don't know that
that would be a good policy. I am not a believer in these concerns
that the Fed has lost its discretion.
The CHAIRMAN. Suppose the Fed decided to lower interest
rates-and I'm not asking you to endorse that action, let me make
that clear-but what could the Fed do today that could materially
take interest rates down from where they are?
Mr. MULLINS. Well, in terms of short-term interest rates, they
can have a very direct effect by increasing the growth in monetary
aggregates. I would think in the long run, to get the long rate
down, the only way to do it really is to squeeze out the inflation
premium and pursue policies which the market is convinced have
inflation whipped.
The CHAIRMAN. Now I take it, following that logic, if they were
to just try to right now push down short-term rates, it would probably have the effect of pushing up long-term rates, would it not?
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Mr. MULLINS. I agree with that.
The CHAIRMAN. Now what's available to the Fed right now, actions that you see or policy options that the Fed could take to
reduce long-term interest rates?
Mr. MULLINS. Well, to reduce long-term interest rates, I think
the Fed needs to continue to work on inflation and reduce inflation.
The CHAIRMAN. How does the Fed do that?
Mr. MULLINS. Well, I would not disagree with the current policy.
Current policy has relatively high real rates and I think that's
having a moderating effect on inflation and ultimately I hope it
would lead to lower rates, although it may take a little while.
The CHAIRMAN. But you're saying that you don't really have a
different view, then, than what you see happening now. In other
words, it sounds to me like you are pretty much in harmony with
what you sense is being done with respect to efforts that could
bring down long rates?
Mr. MULLINS. Mr. Chairman, I haven't dived in yet and my approach to any job is to sort of dive in and learn it from the inside
out and I'm not in that position now. But I don't think there is
compelling evidence that the current approach is not generally
sound.
The CHAIRMAN. Now rou're an academic, and you're a very
thoughtful man, and you ve looked at these issues and these relationships for a long period of time. Are there options that are available to the Fed, that if it wanted lower long-term interest rates,
that somehow by sheer policy action of the Fed that they could
somehow bring those rates down? Is that realistic or is that really
not the way things generally work?
Mr. MULLINS. The markets set long-term interest rates and that's
been true for a long time.
Now it is certainly true-and I certainly wouldn't support itbut you could conceivably have very contractionary policies and
you could conceivably have a big recession and that would take
pressure off long-term rates. But that would be enormously costly
and I don't think we should pursue that.
The CHAIRMAN. Are you saying that's a policy option available to
the Fed?
Mr. MULLINS. No, I'm not.
The CHAIRMAN. I wouldn't think so.
Mr. MULLINS. I say that it is conceivable that you could get longterm rates down.
The CHAIRMAN. I'm trying to get at the issue of what the Fed's
ability is to move interest rates around as you see it, and it relates
to a question that was raised earlier by Senator Shelby. That is the
degree to which the internationalization of money flows and interest rates and capital flows may be and, I think, expressing my own
view, is having the effect of reducing the ability of the Fed to unilaterally push rates up or down. And I make the same differentiation you do between short-term rates and long-term rates.
As we rely increasingly on international borrowing and as the
world financial system is increasingly one system-and I know you
hold that view to a large extent-aren't we in a situation where
our ability to control long-term rates is probably less today than it
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was maybe 10 years ago or 15 years ago? If the same trends continue, aren't we apt to find that in the future that our ability, as one
Nation separate and apart, to take down our long-term rates without reference to the rest of the world is something that we, by and
large, are not able to do?
Mr. MULLINS. Well, I do think we can't do it without reference to
the rest of the world, although from someone who deals a lot in the
U.S. capital markets, the participants in those markets still believe
the Fed has a lot of policy discretion. I also think that-The CHAIRMAN. Do you believe that?
Mr. MULLINS. I believe they do.
The CHAIRMAN. That they can bring down long-term rates?
Mr. MULLINS. Well, now, let's talk about that one. I think in the
past people have overestimated the ability of the Fed to control
long rates except through inflation. I do believe that changes in
rates in other countries which are primarily changes in inflation
expectations do not have to affect our rates.
So if you have a situation in a specific country where inflation is
expected to be higher and the rates go up for that reason, that
doesn't have to be fed back.
It's also true that the exchange rates-some economists believe
interest rates should be totally decoupled and all the arbitrage
should take place in exchange rates. I don't believe that happens.
I do believe where we are tied together is in real rates and when
we see an opportunity, a world class opportunity like Eastern
Europe, where we've discovered an underdeveloped country of 100
million in effect, that in general will push up rates some. I believe
this argues for consultation among the economic leaders of the
world so everyone understands their goals, problems and targets.
The CHAIRMAN. I agree with your last point, and I want to just
pursue it one more step.
We see a picture today where interest rates are rising in Japan,
interest rates are rising in England, rising in Germany and rising
in Europe generally.
As interest rates are rising other places, the United States is
really not able, is it to disconnect itself from this world picture,
and if we want long rates from 8.5 percent to 7 percent because we
would rather have a 7 percent long rate in the United States? The
Fed doesn't have the power today to do that, does it? Do you think
it does? Do you see a way to make that happen if you're over there
at the Fed?
Mr. MULLINS. I think it depends on why the rates are going up.
The CHAIRMAN. I'm talking about today and your assessment of
the situation that's out there right now.
Mr. MULLINS. I think the increase in Japanese rates does not
have to wash back to United States rates. To the extent that the
German rates have gone up following the talk of the monetary
union which might be an inflation spread, I don't think we've seen
an increase. The real rate increase that we saw I think did wash
back.
I also think that with the inadequate personal savings, we are
always on the margin of dealing with capital flows from abroad
and, for example, when there's an opportunity to invest, like in
Eastern Europe, that's a competing opportunity for funds which we
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need to flow in to service our own investment needs. I do think if
we could increase our domestic savings, we would have more insulation from these-The CHAIRMAN. We all want to do that and it would be great if
we can, but it seems to me that we're in a situation where rates
are pressing up around the world for a variety of reasons. Because
we are now the largest debtor nation and continue to require a
large amount of foreign borrowing ourselves, we're not in a position to drive our long rates down as things stand today. The Fed
doesn't have that power today and you're not going to be taking
any power over there in the way of an approach or a theory-at
least if you have one I haven't heard it yet, and if you do I would
love to hear it-that's going to enable us to take long rates down in
the face of these rising international interest rates.
I am not saying there's a one-for-one wash back and forth in real
interest around the world, but we need to have a realistic expectation of what the Fed can and cannot do by itself with respect to
long term rates.
Mr. MULLINS. I agree with that, Mr. Chairman, although again, I
think if we can continue to reduce inflation, we would have a
direct impact in lowering not only our nominal rates but our real
rates, and I think the Fed has policy discretion to work on that.
The CHAIRMAN. Well, I want to hear what the Fed can do to
reduce inflation. I don't know whether Senator Mack will ask that,
but I will if he doesn't.
Senator Mack.
Senator MACK. Thank you again, Mr. Chairman.
I think we might as well continue the discussion. The sense that
I have is that while we're all kind of focusing on the impact of
changes in interest rates internationally, the bottom line, the level
of inflation in this country really is what drives long-term rates.
And it seems to me that if there were a stated commitment by the
Federal Reserve that said price stability is the number one goal, we
are committed to that, we realize that there may be some difficult
economic times ahead of us but we are determined to bring down
inflation and maintain price stability, and then Fed policy month
after month after month following that was not only in line with
that but seen by the markets as being in line with that, I would
suggest that that would be a way that interest rates in fact would
come down.
Do you agree with that?
Mr. MULLINS. 1 agree that it would be useful to set a steady,
credible path to try to reduce and eliminate inflation as a factor in
individual and business decision making.
Senator MACK. This kind of goes in full circle now to the first
question that I raised really because that was what was stated by
the Federal Reserve I think earlier last year, maybe even earlier
than that, maybe when Alan Greenspan was first named as chairman.
I really believe that what happened in December of last year was
a signal that the Fed was backing away from that commitment. As
a result of that, we saw the long-term interest rates go up.
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Now your response, if I remember correctly, was that basically,
no, there were other conditions that affected it and I think you
mentioned international rates as well in your response.
Mr. MULLINS. Yes, Senator Mack, and also the fact that the U.S.
economy proved to be stronger than many analysts had estimated.
Senator MACK. I've only got one more question to ask and that
has to do with-I, too, was kind of surprised by the lack of specific
questioning on the part of the administration with respect to your
views about monetary policy. So help me.
Are you telling me that the decision about who would be nominated to fill the balance of 6 years, that during that process that
detailed discussions and very specific questions somewhat along the
line that we've raised here this morning were not raised with you
as to what your specific beliefs about your ideas with respect to
monetary policy are?
Mr. MULLINS. Well, there was considerable discussion about my
ideas with respect to monetary policy and the opinions I hold and
the long-term issues.
There was no discussion of my analysis of the current situation
or these issues of whether I felt rates were too high or too low or
any of the sort of issues which Senator Sarbanes has been discussing.
Now it is true that I've worked with most of these gentlemen on
a number of occasions since I've been here, so they are not strangers to me nor I to them.
Senator MACK. Is it fair for me to draw from that that maybe
there were discussions during the last several months in the process of debates about other issues where you raised your points of
view with respect to present monetary policy?
Mr. MULLINS. Absolutely not, Senator. It's just that they knew
me as a person. They saw how I approached other problems. But I,
in those circumstances, did not discuss monetary issues either. It's
as if they were were focusing on the long-term characteristics and
the overall philosophy, rather than any specific opinion on the current situation.
Senator MACK. Just a last comment. I appreciate that and I wish
I could be here to carry on the discussion with Mr. Kelley when he
has an opportunity to testify, but frankly I got a number of answers as I observed your head either going up or down on the responses. So I apologize for not being able to remain. Thank you.
The CHAIRMAN. Senator Sarbanes.
Senator SARBANES. Mr. Mullins, do you think it would have been
wrong if they had asked you those kinds of questions? Why
wouldn't it have been-in fact, what do you say if I say to you that
I'm surprised you weren't asked those kinds of questions, just like
you're being asked them here today. Why would they put you on
the Federal Reserve Board and not have some idea of where you
were going to be coming from once you got there?
Mr. MULLINS. Well, I think they certainly know me and we've
worked together and they also talked a lot about my general philosophy on monetary policy and on-Senator SARBANES. Do you think they talked enough about your
general philosophy on monetary policy that one could deduce your
specific views on monetary policy?
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Mr. MULLINS. There was simply no detailed discussion on whether the current situation was good or bad.
Senator SARBANES. Well, obviously we've pressed this because it's
an independent institution and its independence is important and
you've been at the Treasury. I think essentially you're being nominated because you're on the same wave length as all these people
who interviewed you. I think they ran you through a pretty careful
vetting from the extent of the discussions apparently that were
held, but I think someone earlier made the comment that people of
substance often assert their independence when they get into positions.
I want to ask you a couple of substantive area questions here.
One is, you were the Associate Director for the Brady Commission
report on the stock markets, is that right?
Mr. MULLINS. Yes, Senator Sarbanes.
Senator SARBANES. The report of the commission concluded that
stocks and stock futures and options were all part of one market
and they recommended that one regulator be given responsibility
for that market. Is that correct?
Mr. MULLINS. For the important cross-market issues, the issues
that cut across markets.
Senator SARBANES. Do you agree with that report?
Mr. MULLINS. Yes, I do, Senator Sarbanes.
Senator SARBANES. Who should the regulator be?
Mr. MULLINS. Well, I think it's more important that we have coordination and end these sort of jurisd:ctional disputes and I think
that's more important than the specific decision on who it should
be. The Working Group on Financial Markets is currently looking
at these issues directly. I wouldn't want to prejudge those deliberations. I simply think that it's time to solve the problems of lack of
coordination and design a system which does put the appropriate
issues under one regulator.
Some people have discussed full merger of the CFTC and SEC as
an option. Others have suggested splitting off stock index futures
from the CFTC and putting them with the SEC. Others have suggested simply moving margins for stock index futures over to the
Fed. And I think it's worthwhile discussing all those options but
doing something pretty soon.
Senator SARBANES. Do you think the margins should be handled
by the Fed, setting margins on stock futures?
Mr. MULLINS. In the Brady Commission report we felt the most
important thing is that margins should be at one place. They
should be coordinated because stock index futures and stocks are
related and when margins are out of balance you have problems.
Now we felt the easiest way to do it, since the Fed already had
margins on stocks and on options, was to simply move over margins on futures.
That doesn't have to be the only way to do it. You can put it all
at the SEC.
Senator SARBANES. But come, come, Mr. Mullins, now. I don't
know why I have to get-it's a little bit like President Truman
saying he wanted a one-armed economist so he didn't get this
advice on the one hand and thei1 on the other hand.
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Now you were the Associate Director of that Commission. You
made a report. As you've pointed out, margins on stocks and on options are in the Fed now. Why shouldn't margins on stock futures
be in the Fed? Why shouldn't they be set by the Fed?
Mr. MULLINS. Well, they could be.
Senator SARBANES. Well, I understand they could be. Do you
think they should be?
Mr. MULLINS. I think it would be a better solution to try to do
what I think we are doing in this debate right now. And that is to
find an overall solution not only to the placement of margins but
the jurisdictional disputes on new instruments and also to the enforcement issues and I think margins are part of that.
Senator SARBANES. Do you envision taking from the Fed in order
to achieve this consolidation that you think is an important
premise-do you envision taking from the Fed its power to set margins on stocks and on stock options?
Mr. MULLINS. Well, it is conceivable that under a new structure
it would make sense to move those to some other place.
Senator SARBANES. Where would you move them to?
Mr. MULLINS. Well, for example, you might move them to the
SEC which currently has the other regulatory responsibility for
stocks. The Fed already delegates its authority to set margins for
options to the exchanges with oversight by the SEC. The Fed
doesn't do it directly. The Fed hasn't changed stock margins since
197 4 I suppose, and I think there's an argument that the original
circumstances which led to the Fed having the authority to set
margins are no longer present.
Senator SARBANES. So you would ente:rtain moving them to the
SEC?
Mr. MULLINS. That would be one possibility.
Senator SARBANES. Would you entertain moving them somewhere else other than the SEC?
Mr. MULLINS. Well, again, I think they should be under one
agency and I think that the two choices would be to leave them at
the Fed and consolidate them at the Fed or move them to the SEC.
Senator SARBANES. All right. Now if you move them to the SEC,
what does that imply about consolidating other regulatory jurisdiction, particularly that of the CFTC?
Mr. MULLINS. Well, again, I think to solve the problems we have
in jurisdiction, enforcement and market mechanisms, there are two
ways you could do it. One would be to move the jurisdiction for
stock index futures over to the SEC along with margins and then
you would have the SEC doing stocks and stock index futures.
Another approach, which is somewhat more drastic, is simply to
merge the CFTC into the SEC or create a new agency which has
responsibility, as most other countries have-one agency that has
responsibility for futures and stocks.
Senator SARBANES. Under any of your scenarios, you don't envision moving any of this jurisdiction to the CFTC, do you?
Mr. MULLINS. I don't think I would envision that.
Senator SARBANES. OK. Thank you.
The CHAIRMAN. May I ask a follow-up to this?
Senator SARBANES. Sure.
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The CHAIRMAN. I'm not sure there's anybody in the Government
that's thought about this any more than you have and I say that
respectfully. I mean, this is your background and it's your interest
and you've worked on it and you're highly knowledgeable and I
have great respect for your intellect. I think you are one of the
people around that really is able to fathom in a comprehensive way
these issues and I say that as a genuine compliment.
I think you have an opinion because I think you have studied it
enough to have, in all likelihood, reached a judgment about it and
I'd like to know what your own opinion is. You're not speaking for
anybody else. You're not here speaking for the Treasury Department or for a working group or anyone else. You're here as a nominee for the Fed and I would be interested in what your view is,
your own professional view.
Mr. MULLINS. Mr. Chairman, the difficulty I have is, I still participate in the Working Group meetings on financial markets and
we are literally-I don't know if I'm late for the meeting-but we
are literally considering these issues and confronting them. They're
in a stage of deliberation. I think I can outline what I feel are the
two viable approaches-either moving the stock index futures
which takes care of 90 percent of the problem, or the full merger;
but because of the state of those negotiations-I think the principals are going to be here to testify next week on that. I do not believe it is appropriate for me to state a final conclusion.
There's no question that merger is the most direct and powerful
way to deal with the problem and that's the way regulation is accomplished in most other countries. That is you have one agency
dealing with these issues. However, there are some disadvantages
to merger. For example, you create a large, bureaucratic organization which is less responsive to the market at a time we need competitive vitality. Moving the stock index futures would essentially
solve the jurisdictional problems, the enforcement problems, I
think, and the market mechanisms problems with less disruption
than full merger. However, you would still have two separate agencies and the CITC would have less to it than before.
The CHAIRMAN. If we confirm you next week in the Senate to the
Fed, do you stay on the Working Group or do you come off the
Working Group?
Mr. MULLINS. Well, I am on as a Treasury official and Chairman
Greenspan represents the Fed, but he consults widely enough I feel
confident I will stay in touch with the issues.
The CHAIRMAN. Is there no understanding as to whether you
would remain on the Working Group as the Fed member?
Mr. MULLINS. Well, I would certainly be involved, and senior Fed
staff, as well as some of the other Governors have been involved, so
I think I will continue to be-I have every expectation that I would
continue to be involved.
The CHAIRMAN. So I take it that your testimony on this specific
question is, it's not that you don't have a point of view personally
and professionally, but that you prefer not to state it right now because you're coming down the home stretch on the policy debate
and you would prefer to keep it ambiguous until that issue is settled there. Is that correct?
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Mr. MuLLINS. I think we need to do something. For the first
time, these foreign markets are viable competitive threats to us
and we've not made the changes we need to make and I might add,
the more time that passes when we don't make those changes, the
greater the pressure just to put it all together in a merger and let
them figure it out.
I wouldn't say that I would leave it ambiguous. I think it's presumptuous of me at this stage of what they're doing to state my
opinion. I would prefer that the important opinion, those of the
Working Group members who will be up here next week, be stated.
The CHAIRMAN. Tell me what you think the Fed can do at this
point and the kinds of things you would try to endeavor to have
the Fed do in the current circumstance to reduce inflation. You
talked earlier about that being an important role for the Fed as
you see it. What could be done? What more can be done as you see
it now to bring down inflation by the Fed?
Mr. MULLINS. I think the Fed needs to show the willingness to
stick with a firm policy of moving on inflation and, again, it's not
clear to me that the current policy is not sound. But I do think we
have to-in fact, I think it, in general, is the right approach. What
we need to do is essentially break the back of inflation by continuing to have progress. I don't think we should-I am not a big believer in-The CHAIRMAN. How does the Fed do that? You're saying you set
it as a goal, let's get the inflation down further, but what does that
translate to? What tools does the Fed have available to it, as you
see it, that can enable the Fed to squeeze the inflation down further? What does that mean?
Mr. MULLINS. The basic tool is to keep the pressure on. Real
rates will have to be somewhat higher than we would like them to
be, and to maintain a stance that is not overly expansionary until
we start to see some progress.
The CHAIRMAN. So in other words, it means a somewhat higher
level of interest rates and then a lower level of interest rates. Is
that right?
Mr. MULLINS. I think ultimately the way to get lower rates is to
get rid of inflation, so temporarily we have to accept the cost of
higher rates.
The CHAIRMAN. Senator Sarbanes.
Senator SARBANES. On this very point, I want to pursue this capital gains tax cut, which over time will cost us money and raise the
deficit. Correct?
Mr. MULLINS. Well, I have not been involved in the revenue estimates, Senator Sarbanes. Those estimates do not include what I
feel is the most important aspect of reduction in the capital gains
tax, and that is a reduction in the cost of capital.
Senator SARBANES. Let's discuss the reduction in the cost of capital. That's exactly what I wanted to get to.
How much of the capital that is made available to corporations is
raised by debt rather than equity and therefore not subject to capital gains taxation?
Mr. MULLINS. Pardon me?
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Senator SARBANES. How much of the capital that is made available to corporations is raised by debt rather than equity and therefore not subject to capital gains taxation?
Mr. MULLINS. Well, a significant percentage is raised by debt.
Senator SARBANES. Some 40 percent?
Mr. MULLINS. That sounds about right.
Senator SARBANES. So that leaves 60 percent from equity.
How much of corporate equity is held by institutions not subject
to capital gains taxation?
Mr. MULLINS. For institutions not subject to capital gains, I
wouldn't know the exact number, although it-Senator SARBANES. Does about half sound right to you?
Mr. MULLINS. I think it would be less than half, Senator. Maybe
40 percent I would estimate.
Senator SARBANES. Now that brings us down to where we're
about 30 or 35 percent of the capital of corporations that would be
conceivably touched by the capital gains tax. Correct?
Mr. MULLINS. Well, I don't think you should just look at flows
and you can't look at static flows. I think if you offer people an opportunity to earn higher returns on investment, they will increase
their investment. And I think that increase is most significant.
Senator SARBANES. How much of asset appreciation in the household sector is held until death in part to avoid any capital gains
tax whatever?
Mr. MULLINS. Pardon me, Senator Sarbanes?
Senator SARBANES. How much of asset appreciation in the household sector is held until death in part to avoid any capital gains
tax whatever?
Mr. MULLINS. I wouldn't know, Senator.
Senator SARBANES. That's a fairly significant percentage, isn't it?
Mr. MULLINS. I suppose so.
Senator SARBANES. Do you think that a 30 percent exclusion
would induce many households to forego the 100 percent exclusion
they realize at death?
Mr. MULLINS. I think, Senator Sarbanes, that the capital gains
tax is absolutely at the margin of the decision to invest and virtually every other country has an advantageous rate on capital gains
because they consider the benefits to outweigh the costs.
I think we are at a competitive disadvantage because we do not
have such an advantageous capital gains tax.
Senator SARBANES. How far would interest rates have to fall to
give the same reduction to the cost of capital as a 30 percent capital gains exclusion?
Mr. MULLINS. I wouldn't know, Senator.
Senator SARBANES. Would I be correct in saying that they would
have to fall a very, very tiny amount-five-hundredths of 1 percent?
Mr. MULLINS. Again, if you were to look at the places where the
capital gains tax would be most beneficial-investment in young
growth companies, entrepreneurial activities-the equity investment is the prime risk capital which makes those organizations go.
They are not highly-leveraged organizations.
Senator SARBANES. Well, Venture Capital Journal says that 90
percent of the new commitments to venture capital funds in 1986,
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when you still had a capital gains tax, came from entities other
than individuals and families who benefitted from the exclusion.
And then after it was repealed, they set new records.
Mr. MULLINS. I would argue that a reduced capital gains tax
would benefit young growth companies and draw in-Senator SARBANES. But a rather slight reduction in the interest
rate would be more beneficial in reducing the cost of capital than a
capital gains tax cut, would it not?
Mr. MULLINS. I think we should do both.
Senator SARBANES. I know, but they work at cross-purposes if reducing the capital gains tax raises the deficit which then provokes
you to keep high interest rates, doesn't it? Isn't there a relationship between the deficit and the interest rates?
Mr. MULLINS. I think there is and it's not clear to me that when
you take into account the dynamic effect of reducing the capital
gains tax that debt revenues might well increase.
Senator SARBANES. That sounds a lot like Mr. Laffler. Are we
back to that curve?
Mr. MULLINS. No, Senator. I do think it's not an unusual proposition that reducing the cost of capital increases investment and
would benefit the economy, including tax revenues. And I do think
the debt question-Senator SARBANES. Well, that's my point. Don't you think it
would help more to reduce-if in fact, as I have asserted here, a
reduction of five-hundredths of 1 percent in the interest rate would
equal the incentive of the reduction of cost of capital that would
come from a capital gains tax cut, wouldn't it make more sense to
try to get the interest rate down?
Mr. MULLINS. Well, again, I think the place where the benefits of
the capital gains tax would be most directly applied would be in
younger companies, in growth companies, in which the debt ratios
are not especially high.
Senator SARBANES. Thank you, Mr. Chairman.
The Chairman. We've spent quite a bit of time here but I want to
cover a couple of other things before we finish.
I want to have you take a look at a letter that I sent to Secretary
Brady back on October 5th of 1989, and it was answered on December 12th. It deals with junk bonds. I think you're probably familiar
with the letter. I think you will be when you see it, and I will send
it down to the table in a minute.
When the response was sent back from the Secretary, there was
attached to it-I assume by inadvertence-a routing slip that one
would read to indicate that the letter had been assigned to you to
draft something for the Secretary.
Mr. MULLINS. I'm glad we make those things public, Mr. Chairman.
My guess is that would have been handled in my office, by the
Deputy Assistant Secretary for Corporate Finance.
The CHAIRMAN. Let me send it down to you because I want you
to take a look at it, and I want to send down a copy of the Secretary's response. Let me just give you a minute to look at the letter
and see if it rings some bells as you look at it.
• The thrust of the letter, as you're studying it, and for others in
the room, is to get at the question of what's the lay of the land
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with respect to junk bonds outstanding, who holds them, what kind
of a market system is there, how does one assure that people are
getting fair prices and full and adequate information and so forth.
Now, this was some time back. Since these letters were exchanged,
the junk bond market took the sharp drop.
Would you have been the one who would have drafted this response?
Mr. MULLINS. Mr. Chairman, I doubt that I drafted it. It was
drafted somewhere in my office. I have an office of corporate finance and that's where it was probably produced. I am generally
familiar with the letter.
The CHAIRMAN. Would the notations on the second page be your
notations, or would these be somebody else's?
Mr. MULLINS. The notations on the second page?
The CHAIRMAN. On the second page of my letter to the Secretary.
Mr. MULLINS. No, Mr. Chairman, that is not my handwriting.
The CHAIRMAN. OK. I must say that when I got the answer back
I was disappointed in the answer because I thought it didn't say
much. This is no disrespect to the Secretary. I have great respect
for the Secretary. But I thought that it really didn't engage very
fully the issues and questions that were posed in the letter.
And I think the events in the junk bond market since point out
why we ought to really know what we're doing here more than I
think the Government presently does.
When you look at the response of the Secretary, you notice the
attachments. Just take a look at those for a minute. You and I are
both folks that spent time at the Harvard Business School and so
we're used to seeing documents like these.
This constituted all of the information accompanying the reply to
my questions. Do you notice down on the bottom of the attachments what the source of the attachments is?
Senator SARBANES. Drexel?
Mr. MULLINS. Yes, Mr. Chairman, Drexel Burham Lambert.
The CHAIRMAN. I must say I when we took a look at this and we
saw that the documentation the Treasury seemed to have, the full
extent of it because it was all that we were sent, was information
that had been compiled by Drexel Burnham. I think it's obvious, at
least from today's perspective, that we need information in the
Government on something as important as this that is our own information, not derived from Drexel Burnham or any other outside
private company.
I must say, the impression that I got from the response was that
we really don't seem to know very much about what was going on
in the junk bond area.
Do you know if we've got more independent information, selfgenerated information, now within the Treasury Department on
the whole junk bond market and who holds the junk bonds, how
the marketing system works whether people are getting accurate
quotes, who has these instruments and wants to try to buy or sell
them? Do we have more information today than we had then?
Mr. MULLINS. Well, I think this information is only illustrative,
the Drexel information, and there is information from a variety of
sources.
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I am generally comfortable with the outlines of the aggregate information and feel that from a variety of industry sources and
other sources we have a pretty good idea. However, the specific information is not very good.
I think we also tend to have pretty good information in the regulated investor sectors on mutual funds. On S&L's we have good information, a little less well on pensions and insurance.
In general, though, I think it would be useful to have a little
more precision. For example, when doing research in this area you
literally have to go back to SEC filings and pick them up bond by
bond since there is no centralized system.
The CHAIRMAN. Shouldn't we have a centralized system? Why
isn't it time, when you've got-if I'm not mistaken-about $200 billion worth out there, shouldn't we have a modernized quotation
system so that people don't get cheated?
Mr. MULLINS. Let me just mention-to finish my earlier thought
before I go on to that one. I do think the SEC is really the appropriate place to develop the detailed information on who holds the
bonds and the like.
As for the market pricing system, I think that's worth looking at
and examining. One of the reasons I'm not so optimistic on that is
that to a certain extent it's like getting blood from a stone. These
instruments are not very liquid and they never have been and they
never will be. They are much more liquid than private placements,
so they are a big advantage. But they are not continuous markets
and there's a very real reason why they are not continuous markets.
In order to invest in one of these bonds, you have to do very detailed, fundamental analysis of the company, like you would have
to do for equity. But more than that, you have to do detailed analysis of the indenture, where you stand in default, which is a significant possibility. That adds a big analysis burden and because of
that you don't find a lot of investors standing by at all times ready
to buy and sell. Even inside these investment banking companies,
when you look at a screen and see prices for the high yield bonds,
those are not market prices. They are what's called matrix pricing,
which are hypothetical prices determined by interpolation. You
look at the few bonds that have traded recently in volume and you
try to interpolate a hypothetical price.
So I am not too confident, by the very nature of this market, it's
not going to be a continuous market.
I would also be a little concerned if we had a system which
tended to mislead individual investors into thinking the market
was more liquid than it was.
The CHAIRMAN. How could they be any more misled than they
are being misled now, when they can't basically get any kind of a
realistic reading?
Mr. MULLINS. Well, I think to a certain extent it's the nature of
these markets, that they are simply not liquid markets. People
should know that going in and one thing we ought to think about
is, when you have a new market which develops like this, how you
can get full disclosure so people understand the liquidity risk and
the price risk. Besides the default risk that the market I think
probably underestimated, they also misperceived the price volatili-
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ty of these instruments, the fact they tend to sell below par, and
the liquidity risk. And indeed, articles in Barron's in I guess
around May of last year really exposed the pricing and liquidity
problems in this area.
But these are, again, more liquid than private placements, but
they simply are not the type of instruments where you will typically find a lot of people ready to buy and sell at any time.
The CHAIRMAN. Let me ask you this. What specific lessons have
you learned from the failure of Drexel as a professional? What
lesson should be drawn from that?
Mr. MULLINS. The first is that large institutions can be allowed
to fail without undue systemic damage. I think that's an important
lesson for the coming debate in financial services.
The second is that the implicit firewalls in capital standards in
the broker-dealer worked pretty well under the watchful eye of regulators and they were able to keep the broker-dealer solvent, which
allowed the transactions to unwind without damage to the system.
And in some sense, the firewall of the capital requirements worked
in that case.
The third factor I would point to is the wisdom of the holding
company risk assessment proposal in the market regulation legislation up here because if this had been a commercial bank, regulators would have known for weeks ahead of time where the soft
spots were.
Here, when the Drexel situation became critical, regulators
walked in with very little idea of where the landmines were because they didn't know what was going on at the holding company.
And when you started to unravel what's going on in the holding
company and see how funds are shifted around, you had basically
each regulator looking at their little piece of the pie-the CITC
watching their margin and SEC looking at their capital-but no
one had an overview of the full system.
That's why I believe in financial services reform we ought to
think about the need for someone to have that overview.
Two other points I would raise hypothetically-The CHAIRMAN. Doesn't that mean that affiliates have to be very
carefully monitored and measured?
Mr. MULLINS. I think I would agree with that, Mr. Chairman. I
would agree with that.
I would mention two other lessons. It's interesting as we enter
financial services reform to think of the Drexel situation as a hypothetical situation under different models of Glass-Steagall reform.
Suppose Drexel had had a commercial banking affiliate. Would
they have made the same "decision that the private commercial
banking-the non-affiliated commercial banks made not to fund
the firm?
I think the difficulty is, if they had not, the problems of Drexel
could have ended up in the Federal safety net, in an insured depository. This illustrates the need I think for some sort of insulation, if
we do go to a structure allowing financial institutions to be in a
wide variety of activities-some sort of insulation-simple, firm,
direct-maybe like the inter-affiliate rules.
The second thing I would mention is the other form of the safety
net. Some proposals you see today-and I'd keep an open mind on
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this-would give broker-dealers access to the discount window and
that's part of the federal safety net. One would wonder how a
Drexel situation would work if the broker-dealer had access to the
discount window. We should be careful in thinking about the Federal safety net to realize it's not just deposit insurance but it includes other things as well. We may reduce it in one area and increase it in another area.
So I think the Drexel situation should be studied as we think
about comprehensive financial services reform.
The CHAIRMAN. I have one final topic I want to raise with you
that we touched on earlier. You're coming out of the Treasury Department and you've really been a key policymaker there and
you've been right in the center of most every major issue in the
Treasury insofar as I can tell.
You are now headed over to the Federal Reserve Board, which is,
as we've talked about today, an independent body. It's one whose
independence is particularly important I think.
Earlier, Richard Breeden, who also served in a key spot in the
administration on financial policy issues, was named to go over to
the SEC, confirmed by the Senate, and reported out favorably by
this committee with the affirmative vote of this chairman.
Do you know of any other time in recent history where there
would have been from an administration two central financial
policy players that would be taken out within the first year or year
and a half of that administration and appointed to major policy positions in independent regulatory bodies?
Mr. MULLINS. Mr. Chairman, I don't know of a circumstance.
However, I don't know that if you looked back it would be so unusual. Manley Johnson, currently at the Fed, came from an earlier
Treasury job as Assistant Secretary, and he had also been instrumental in a variety of things going on at that time.
The CHAIRMAN. The reason I ask the question is not to in any
way challenge your statement that you intend to be independent. I
take you at your word. By the same token, I think an appearance
begins to take shape of a small group of policymakers coming out
of an administration, going out into key spots in independent financial branches of the Government. I think a fair and appropriate
and necessary question is whether these cases or any continuation
of that pattern would give the impression of or start to have the
effect of creating a policy nexus across boundary lines that are designed to separate parts of our Government and to establish independence?
Obviously, there needs to be a flow of ideas and give and take
and so forth, but I think one of the safeguards of our system, and it
is a very important safeguard, is that there be these divisions and
that they be clean divisions, that separate bodies be charged with
separate tasks, be free to carry them out, sometimes in direct opposition to some other part of the Government, whether it be the executive branch or another independent agency.
This is my 24th year in the Congress, and I've tried to recall any
other time that would be parallel to this, where you've got a new
administration, roughly a year old, two central policymakers came
out of that administration and went out into two absolutely critical
independent financial agencies. That doesn't necessarily mean
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there is anything to it, but it is unusual. I can't recall another time
like it.
It causes me to ask with perhaps more than the normal sense of
interest that we have an assurance that we're going to have independent decisionmaking and not some kind of de facto group decisionmaking that spills across these boundary lines.
Mr. MULLINS. Well, I am sensitive to that concern and, again, as
I said before, Mr. Chairman, I would commit to exercise my independent judgment. I also think the agencies are set up to encourage independence, and I would hope and expect that appointments
are made based upon expertise, and I look forward to the challenges at the Federal Reserve.
The CHAIRMAN. I have one question that Senator Sasser has
asked me to raise with you. It runs as follows:
Now that the RTC has the Federal financing capital that is available, should we slow down our REFCORP borrowing? And would
you estimate how much more REFCORP will borrow in 1990 and
how much will be borrowed in 1991?
Mr. MULLINS. I don't think we should slow down the REFCORP
borrowing. REFCORP funding is for hole-we've done $9.5 billion
so far. We filled $8.5 billion of hole. I think it is worth while to
keep it distinct. The payment of losses should be seperate from the
working capital financing which is backed by assets. It is also true
that the cheapest way to do REFCORP financing is to set up a
steady predictable schedule calendar, and so it is costly to start and
stop REFCORP funding. I would not predict exactly what levels we
will be issuing in the future, although on the order of $3 billion to
$5 billion a quarter till the borrowing authority is exhausted, it
runs out, I think, is the order of magnitude.
The CHAIRMAN. So that projection would take us through 1990
and 1991?
Mr. MULLINS. Yes, Mr. Chairman. It may be that it could rise if
the pace of resolution picks up, but I would generally see it tracking the payment of hole in the resolution process.
The CHAIRMAN. Let me conclude by saying to all of the Arkansans that are watching on television, members of your family and
others that would be supporting your nomination, that I think
you've been responsive to what we have presented you with today.
There will be other questions, I think, for the record from other
members that we would like you to respond to.
I appreciate the quality of the answers that you have given
today. I am supporting your nomination because I think you bring
the kinds of skills and the capacity to the Board that it ought to
have. I think your independence is the most important asset you
have, and you have told us that you intend to hang onto it, and I
believe you when you say that, and it will be important that that
be carried out.
Thank you very much.
Mr. MULLINS. Thank you, Mr. Chairman.
The CHAIRMAN. Let us excuse you now, and let me call Mr.
Kelley.
Mr. Kelley, do you want to come forward, please. You, of course,
are here for reappointment, and you feel as if you've gone through
something of a hearing process already today sitting through that
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discussion with Mr. Mullins. We are pleased to have you before us.
I am going to ask you, if you will, stand and let me administer the
oath to you.
[Witness sworn.]
The CHAIRMAN. Do you agree to appear and testify before any
duly constituted committee of the Senate?
Mr. KELLEY. I do, sir.
The CHAIRMAN. Very good. Be seated, please.
Do you have any opening comment that you would like to make
to us? I am going to make a statement at the conclusion of any
opening comments you want to make.
EDWARD W. KELLEY, JR., OF TEXAS, TO BE A MEMBER OF THE
BOARD, FEDERAL RESERVE SYSTEM
Mr. KELLEY. Mr. Chairman, I do not have a prepared statement,
but I would appreciate just a moment of your time, spontaneously.
First of all, I appreciate the kind words of Senator Gramm when
he was with us earlier this morning by way of introduction. And I
would like to say it's been a tremendous honor for me to have had
an opportunity to serve on the Fed for the last almost 3 years. It
has also been a great pleasure. The culture, the integrity, the level
of skill and dedication that one finds across the country in the Federal Reserve staff and certainly in my colleagues on the Board
make it a great pleasure to be there.
I think far more important than these considerations, I do want
to say that I do understand and appreciate the fact that this is a
very heavy responsibility that has been given me by the Congress
and by the administration. As you know, and as you recited in your
introduction this morning at the starting of this hearing, the Fed
has a great many responsibilities. When people think of the Federal Reserve, they usually think of monetary policy and that certainly is a very important key responsibility, but quite beyond that, the
Federal Reserve has a responsibility for administering and, indeed,
operating a very large part of the payment system in this country
which is, in effect, a very large and absolutely critical public utility
function to enable a modern economy to operate.
We have responsibility for the supervision of bank holding companies which, in the aggregate, control on the order of 93 percent
or more of the assets in the banking system. The Congress delegates a large body of regulatory authority over the banking system
to the Federal Reserve Board and, of course, there are an increasing number with increasing complexity of international relationships that the Federal Reserve carries forward with other central
banks.
So it is, indeed, a very important body. It is an honor to serve
there, and I am very, very conscious of the heavy responsibility
that it entails. I have given it my very best efforts to date and
would intend to continue to do so. Thank you.
The CHAIRMAN. Thank you, Mr. Kelley. This is a reappointment,
as you indicate, for a 14-year term. You have already, of course,
served 3 years at the Fed. During that i;ime the Fed has raised
short-term interest rates close to a percentage point, lowered them
by a similar amount after the stock market crash, raised them 3.5
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percentage points to slow things down, and over the past year lowered rates 1.5 points to lessen the risks of recession.
There have also been some important regulatory decisions involving bank powers, and you make a passing reference to those
other activities.
So you have been very busy in the 3 years that you've been
there, and there are a number of areas that we would like to cover.
Some I am going to cover here. Others I will ask you to respond to
for the record.
I want to indicate that because you are presently a Board
Member, the questions that I am asking you today are designed to
elicit your own personal views and not necessarily the views of the
Board, obviously.
Before I pose the first question, is there anyone accompanying
you that you would like to introduce to the committee at this time?
Mr. KELLEY. Yes, sir, my wife Janet is here, and I appreciate the
opportunity to introduce her to the committee. Thank you.
The CHAIRMAN. Janet, we welcome you.
Many of us on the committee are concerned about the short-term
focus of many of our investors and business firms. As a former
businessman and investment adviser, do you share these concerns
and if so, what do you think we ought to be doing about it?
Mr. KELLEY. Well, I do, indeed, feel that we have slipped into a
short-term mentality in this country in a great many ways, and I
think it has manifested itself in a number of ways. As I have
thought about how we came to this pass, it seems to me that the
inflationary psychology which began to take hold of this country
back, I suppose in the early 1970's or earlier, has a great deal to do
with it. Inflation tends to put a premium on owning things, getting
out of financial assets because it denigrates the integrity of the financial system and of financial assets, and as a consequence, I believe that people have, to some degree, some lack of confidence. I
hope that that is diminishing, but they have had some degree of
lack of confidence in the long-term stability of our financial
system, and this has led them to feel that they must give shortterm considerations much more weight in their decisionmaking
than long-term, and I think that has, indeed, caused distortions in
the operations of our companies in various ways and perhaps in individual households in many instances.
So I think that it is an important concern that we should have,
and I think that the credible alleviation and ultimate elimination
of inflation would be the most important single thing that we could
do to restore the confidence that people will need to go back to a
willingness to consider the longer term when they make commitments and when they make decisions.
The CHAIRMAN. I want to ask you the question that I asked Mr.
Mullins.
What more can the Federal Reserve do or consider doing now to
squeeze more inflation out of the economy?
Mr. KELLEY. Well, I believe that the policy we have been pursuing is the wisest policy. The long-term objective of economic policy
in this country is sustainable long-term growth. In my view, an essential precondition for that to occur over time is to have a no-inflation or a very low- inflation environment in the economy and to
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have great confidence in our financial system that will grow out of
that. Price stability, in short.
If achieved, this would, in my view-The CHAIRMAN. Well, we are all for that, but let me be more
pointed with you, what can you do about it? You've been over there
3 years. What tools &re available now, today, at the Fed to squeeze
more inflation out than you are presently squeezing out.
Mr. KELLEY. The Fed has the tools to tighten monetary policy
which would tend to raise interest rates and tend to make credit
scarcer. Those are tools that are available. But the Federal Open
Market Committee is very conscious of the fact that while we seek
a no-inflation environment and while we seek stability, to kill the
economy, so to speak, which might achieve that, would obviously be
counter to essential long-term growth over time. So the Board and
the Committee finds itself walking a tightrope, if you will, between
being overly tight, which would tend to drive out inflation quickly
and put the expansion at some risk, or alternatively, being overly
accommodating, which might allow inflation to break out again,
which would, in our view, clearly be counterproductive in the long
run and perhaps in the fairly short run.
The CHAIRMAN. Are you concerned about international events,
higher foreign interest rates, foreign uses of capital and increasing
U.S. reliance on foreign borrowing? Are these things having the
effect of making us more susceptible to events abroad, and if foreign events drive interest rates up, doesn't that tend to pull our interest rates up now?
Mr. KELLEY. Well, we have, indeed, come more and more, and I
am sure the trend will continue, to an integrated world economy,
and there are transmission effects across borders that were not
there a few years ago. As we pursue the national interest in monetary policy, a factor now is in our own national interest, what
effect are events and conditions around the world having on our
own economy. This is a new complexity that has to be dealt with. It
is not something that in my view has rendered policy impotent.
The CHAIRMAN. If you thought the economy right now needed
lower interest rates to stay out of a recession and you became convinced of that, do you think the Fed at the moment has the maneuvering room to lower interest rates?
Mr. KELLEY. Well, again, to repeat, I think-The CHAIRMAN. Do you really have a policy tool open to you?
Mr. KELLEY. Those are certainly considerations that are there.
The policy tool is open, of course, and any judgment that would be
made would have to be made in the light of all those factors that I
recited and that you recited that might be playing at the time, and
there are always considerations that are cutting in both directions.
It is simply necessary to make a judgment as to what is in the national interest both in the area of the objective of policy, namely,
sustainable growth and also to maintain the integrity of our financial system and to reach toward price stability.
The CHAIRMAN. If we felt we needed to lower interest rates in
order to stave off a recession here, do you think we would still be
able to attract the same amount of foreign capital that we are now
attracting?
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Mr. KELLEY. Well, I think with the Government running a deficit
the Government is going to be financed. As to how those rates may
vary under different conditions, it is a little hard to predict, as was
discussed by Secretary-The CHAIRMAN. But it's not very hard to predict that if foreigners will lend you so much money at 8 percent and you take the
rates down to 6 percent, they are probably not going to lend you as
much, are they?
Mr. KELLEY. Well, the interplay there is going to be what other
alternatives are available to them.
The CHAIRMAN. Well, I am assuming the other alternatives are
the ones we see out there right now. I am asking about our ability
to act unilaterally in today's situation, and it seems to me we
really don't have much latitude to do that anymore, or are you telling me that we do?
Mr. KELLEY. Well, I think we do have latitude. Whether it's as
much as it used to be or not is a value question that I'm not sure I
know how to consider.
The CHAIRMAN. Yes.
Mr. KELLEY. But for example, there has been a decoupling, if,
indeed, there ever was a tight coupling, of foreign rates and foreign
exchange rates and the United States, witness the fact that Japanese rates have gone up very substantially over the last 6 to 18
months while ours are flat to down. Our currency relative to the
yen has been strengthening.
These things-I would also mention the stock market. Their
stock market has been declining rather radically recently and ours
has held up quite well.
So I think that national conditions in every country continue to
be predominant in that country, but there are certainly influences
across borders, and those are considerations in our country's national interest as we consider it. I am sure as other countries consider theirs, they have to consider what is happening here and how
that affects their national interest.
The CHAIRMAN. Are you concerned about the amount of foreign
borrowing the United States is now having to do? Is that getting
out to a point that concerns you, or do you think we can continue
to rely as much as we have become accustomed to on foreign lending to meet our own shortfalls in savings?
Mr. KELLEY. Well, we have a shortfall in savings and we have a
large Federal deficit that has to be financed and fortunately, there
is an appetite in the world financial community for dollar assets.
So we have been able to attract those assets which we must have
while we are in this configuration economically.
I suppose that there is some point where there begins to be a
diminution of interest on the part of financial interests in other
countries to continue to invest in dollar assets. Where and when
we get there, I don't know.
The CHAIRMAN. In terms of the debt instruments that the Government is issuing, roughly what percent over the last year, say,
would the Japanese finance?
Mr. KELLEY. I'm sorry, Senator, I do not have that number in my
head.
The CHAIRMAN. I think it is a significant fraction.
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Mr. KELLEY. I think it clearly is significant, but I hesitate to
quote a number because I'm not sure what that number is.
The CHAIRMAN. They have lost a lot of value in their stock market.
There is some questions as to whether their real estate values are
going to hold up and how wealthy they feel and whether or not they
feel they can continue to lend money to us or anybody else. I suspect
the Germans, as well, to the extent we have been relying on them to
take down some of our foreign borrowing with their savings. They
now have new needs and places to spend their money with the Berlin
Wall opening up.
My surmise would be, that we are going to find that it is going to
get tougher and is getting tougher right now to attract that foreign
capital. This is not one-dimensional, of course, because, there are
safety factors and other things, currency rates and what have you.
But I would think that that will put an upward pressure on interest rates.
Do you not feel any of that yet?
Mr. KELLEY. Well, it could put an upward pressure on interest
rates, but it does not necessarily mean that interest rates will go
up. It will just be-if that occurs, it will be one of a number of factors. I think that one thing we may be seeing now, it's hard to be
sure, is that as Japanese assets have declined in their stock
market, and presumably that is beginning to show up somewhat in
their real estate market, their interest rates have gone up, but at
the same time we have seen our dollar go up versus the yen, which
means that there are a number-or a very substantial quantity of
yen-dominated assets that are still flowing into the dollar.
So our rates have essentially been flat. Theirs have been going
up. But there still seems to be some attraction in holding dollar
assets.
The CHAIRMAN. You come from a State that is a big, strong economic State. I mean, it has had its problems, and I come from a
State, Michigan, where we are involved in the international economy, and I can tell you one effect of the dollar being at 1.55 or so
against the yen, and that is that we are going to be seeing our
trade deficit go back up. And the trade deficit going back up is not
a helpful thing in many ways, including you folks managing monetary policy, where we have got to borrow more money from overseas to cover that shortfall in the trade accounts.
I would say that if the dollar stays at current levels, you are
going to see the trade problem get worse.
How do you think the economy is doing right now? Are we chugging along pretty well, and are we going to stay out of a recession
here? What is your view? We are seeing more and more pieces
being written, including yesterday in The Wall Street Journal,
where small businesses are saying they are finding there is a credit
contraction, they can't get money, and they are having to draw
back.
Are you concerned about your feel for how our domestic economy
is doing at the moment?
Mr. KELLEY. Our feel, or I'll say my feel--
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The CHAIRMAN. I want your feel-Mr. KELLEY. Yes, sir.
The CHAIRMAN [continuing]. I don't want the Board's feel.
Mr. KELLEY. I understand. My feel is that the domestic economy
is doing satisfactorily well. There was a progressive slowdown over
the course of late 1989, and when you are getting that kind of a
condition, it is hard to know for sure whether it is going to keep on
going into the negative column or begin to stabilize. I think we
have substantial evidence that it is stabilizing. In recent days, I
have seen some projections by some economists that we are back
into a takeoff phase again, but I think that it is far too early to
make an assumption like that.
The employment numbers and others show that the deterioration
has apparently stopped. We have stabilized and may be coming
back somewhat. But we have had such an unusual number of oneshot events, some weather related, some strike-related, such as we
had in Boeing and other things, that have distorted the numbers in
the fourth and first quarters, that to some extent have rendered us
unable to make a very strong judgment as yet as to how strong the
underlying economy realll is and to what extent are we being bolstered by events that won t follow through and keep going.
So I am confident that the economy has stabilized at a satisfactory level. I can't be sure of that. Obviously, it is still quite possible
that this could turn down. It is quite possible that it could turn up
also. But I am a little leery of making any projections in either one
of those directions.
The CHAIRMAN. Let me ask you one other question here. There
have been a number of studies produced within the Federal Reserve System showing that white homeowners receive a much
higher proportion of mortgage loans even after taking into account
homeownership rates, income levels, house values and so forth
than, say, people of color. And I am wondering if those studies that
have shown this now a number of times suggest a pattern of racial
discrimination to you and, if so, what do you think we can do about
it?
Mr. KELLEY. Well, I think that these studies have been valuable
in that they have pointed up that we haven't gotten as far as we
need to go in completely eliminating those kinds of distortions.
Whether or not they show any overt racial discrimination, I am far
from sure. I think they do show some patterns that need attention
and are receiving attention.
The CHAIRMAN. Yes. Well, how are they receiving attention?
Mr. KELLEY. Well, I think that the very fact that it has been
identified that we are still in a less than completely balanced position there will encourage our examiners and other regulatory examiners who are charged with overseeing CRA compliance to look
in those areas where there will possibly be some imbalances that
still take place.
Also, as I am sure you know, this summer the CRA ratings that
are assigned to banks are going to begin to be made public.
The CHAIRMAN. Right.
Mr. KELLEY. And I have already seen a very greatly heightened
sensitivity on the part of banking institutions over the past several
years. I think many are-perhaps most-I am sure most are
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making a very serious effort to comply, but I think that will be an
additional incentive.
The CHAIRMAN. Mr. Kelley, I want to thank you for coming
today. We've got other questions that we are going to submit to you
for the record, and we will send those to you forthwith, and we
would like an early response. I know you will give us one.
Mr. KELLEY. Certainly. Thank you, sir.
The CHAIRMAN. Thank you.
Let me excuse this witness and now invite Mr. Robert Swan of
Utah, a nominee for the National Credit Union Administration
Board, to come forward at this time.
Let me ask everyone trying to exit the room as quickly as you
can find seats, so others can, then we will proceed with the next
witness.
Senator Garn has asked me to indicate to you that he is very
much supportive of your nomination, and that he wished that he
were able to be here in person, but he cannot be. He has submitted
a statement for the record that expresses his knowledge of you and
his strong support of you, and I am going to make that a part of
the record at this point.
Mr. SWAN. Thank you.
STATEMENT OF SENATOR GARN
Senator GARN. Mr. Chairman, I would like to take this opportunity to welcome Mr. Robert Swan. I have known Bob for over 20
years. Robert and I have much in common. Not only are we both
from the same State, but we are both former mayors. Bob served as
mayor of Tooele, Utah from 1970 to 1974. Prior to that he was a
member of the Tooele City Council. Bob has also had considerable
financial experience as the Deputy Director of Finance for the
State of Utah. Bob is currently the President of the Tooele Federal
Credit Union and an active member of the Credit Union Executives
Society. I am proud that Robert Swan has been nominated by the
President for this position, and know that based on his qualifications and personal integrity that he will serve very ably.
Thank you, Mr. Chairman.
The CHAIRMAN. Let me just say, Mr. Swan was Mayor of his
hometown of Tooele, Utah, at the same time as my distinguished
colleague, Senator Garn, was Mayor of Salt Lake City. He went on
to serve as Deputy Director of Finance for the State of Utah. Since
1983, you have been President and Chief Executive Officer of the
Federal Credit Union in your hometown.
The NCUA Board is responsible for chartering Federal credit
unions, for administering the National Credit Union Share Insurance Fund and protecting the safety and soundness of all Federally
insured credit unions.
Credit unions, I think, are clearly a great asset to this country
and that makes this position a very important one.
Let me now administer the oath to you and, then I am going to
invite you to make any opening comments.
[Witness sworn.]
The CHAIRMAN. Let me invite you to introduce anyone that may
be accompanying you and to make any other initial comments you
would like to make.
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ROBERT H. SWAN, OF UTAH, TO BE A MEMBER OF THE NATIONAL
CREDIT UNIT ADMINISTRATION BOARD
Mr. SWAN. My family is in Utah. I have some friends in Washington that are here in support. And I think the only comment
that I would make-I did not have a prepared statement-I appreciate your comment in regard to the significance of credit unions,
and I just might say that although we only control about 6 percent
of the deposits in financial institutions throughout the country, we
are the lifeline financial services for millions of Americans.
In the aftermath of the saving and loan problems, I just feel that
any regulatory position that can impact on the security of the
American depositor is a significant position, and I approach the
possibility of going into this position as one of challenge, and I
think it is a privilege and honor to be considered.
The CHAIRMAN. Well, you bring a credit union background, so I
take from that that you are a very strong supporter of credit
unions and the credit union movement.
Is that a fair statement?
Mr. SWAN. That is a fair statement, and I might add that I was
not a member of a credit union until 8 years ago when I did
become part of the industry as a manager, and I have been excited,
challenged and enjoyed and become very much a credit union supporter as well as being an officer in my credit union.
The CHAIRMAN. Now one of the NCUA's most important responsibilities is to protect the National Credit Union Share Insurance
Fund, and obviously, we are highly sensitive to that with what we
have seen in the savings and loan industry. That fund insures all
Federal credit unions as well as thousands of State-chartered credit
unions. My belief is that if the Federal Government insures the deposits of a State-chartered credit union, that credit union should
not be allowed to jeopardize the Deposit Insurance Fund by engaging in risky activities that are off-limits for Federal credit unions.
We made that correction in the savings and loan industry, and it
was a central part of the problem that led to the collapse.
I want to ask you, will you work to make sure that NCUA has
adequate controls on risk taking by State-chartered, but Federally
insured credit units?
Mr. SWAN. I agree with that, Senator. I believe that-of course
those State-chartered credit unions that are now part of the Federal system experience a Federal exam, and they are expected to
adhere to Federal guidelines. Many States do do a good job in their
examination process in the regulation of State credit unions, but I
agree that it is incumbent upon the Federal agency and the NCUA
to work and possibly monitor those States that might have weaknesses in their examination process and in the ability of their own
insurance funds or in the case of privately insured credit unions,
that they're adhering to Federal standards and the same things
that we demand of our credit unions.
The CHAIRMAN. I want to ask you to do something specific on
that, and that. We found that in 1988, 70 percent of the massive
losses came from just two States: Texas and California. And they
were State power problems in both States of a very severe sort.
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I want to ask if yo•.1 will undertake as part of your work, if confirmed, to examine that issue specifically. I would like to know that
we would have an understanding that you will take a look at the
State powers issue and assure yourself and be able to come back
and discuss with me whether or not there are any outstanding
problems in that area in any State, because it doesn't take many
States having an exposure there to put the whole system at risk, as
we have seen in this other instance.
So I would like to ask you if you would be prepared to spend
some special time and effort on that as a new member able to take
a fresh look and be able to come back and report to us later what
your findings are.
Mr. SWAN. I would be very glad to do that if you consider it necessary.
The CHAIRMAN. Very good.
One of the hallmarks of the credit union charter has been the
requirement that the members of a credit union share a well-defined common bond, but I think as we know that common bond requirement in the historic sense has been changed, and I think
weakened in recent years to the point where some critics of credit
unions question whether the requirement is still meaningful. They
argue that the loosening of the common bond requirement tends to
undercut the basis for treating credit unions differently from commercial banks.
How do you feel about this issue of maintaining a strong
common bond requirement? You come out of a credit union experience, and how do you think we ought to do that at this point and
treat it at this point?
Mr. SwAN. Well, I think the common bond idea is a good one. I
think it is part of the credit union philosophy, and I realize that
there have been a lot of membership expansions and some question
about whether or not we're adhering to the old philosophy of the
common bond; however, just by the nature of what has happened
in the financial services industry, there have been some things that
have weakened the common bond only because credit unions have
had to do it to stay competitive, as they have had to grow and provide other financial services, become a part of the electronic age,
computers, to stay in a competitive market and offer more services,
it has just been natural that they have had to attract other people
to survive.
And there have also been-in the credit union movement, rather
than face losses, there have been a lot of mergers and acquisitions,
and in doing so, that takes in also a larger field of membership.
The CHAIRMAN. Do you intend to serve the full term for which
you are being appointed?
Mr. SWAN. Yes, I do, Senator.
The CHAIRMAN. Many of the regulatory agencies, including the
NCUA, are often criticized for being too close to the institutions
that they regulate, and of course, you have served as full-time
credit union executive for the past 7 years. You have been active in
the credit union trade associations, and I think that is very valuable experience that you bring, but at the same time I would like
you to address the issue of your ability to maintain a healthy independence from the industry so that you are able to be in an over-
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.
sight capacity and independent in your view so that you can make
the hard calls when you think they are required.
Mr. SWAN. I think I would have no problem doing that. I can
maintain my independence, I think, very well.
The CHAIRMAN. And you intend to do so.
Mr. SWAN. I intend to do so.
The CHAIRMAN. Very good.
We may have some other questions for you that we will send you
to respond to for the record. I appreciate your being here today.
You have been very patient sitting through two long prior witnesses. There is a certain virtue to that, however, and that is that
if you are the last man in line and those have taken a long time,
then your time sometimes isn't quite as long.
Mr. SWAN. Well, I might mention, my patience is well-tried, because I am now only one of five Democrats from Utah. [Laughter.]
And that's former Governor's Rampton and Mathesen, Congressman Owens, my brother-my wife is questionable.
The CHAIRMAN. I see. [Laughter.]
Mr. SWAN. She's noncommittal.
The CHAIRMAN. Well, that may be why they are appointing you,
is to get you out of the State. [Laughter.]
Have you thought of that?
Mr. SWAN. It may be.
The CHAIRMAN. Anyway, it is good to have you here today, and
we appreciate your willingness to serve.
Mr. SWAN. Thank you.
The CHAIRMAN. We thank you for appearing.
The committee stands in recess.
[Whereupon at 1:10 p.m., the hearing was adjourned.]
[Biographical sketches of nominees and response to written questions of the witnesses follow:]
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STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
Name:
MULLINS
DAVID WILEY. Jr.
CUS1I
111,m
Position to which
nominated:
Governor of the Federal Reserve
Date of birth:
J~ .,.,A M..,
<OTIWIJ
Date of
nomination: _ _ _ _ _ _ _ __
Place of birth: -"Menpb""""""''-'.sa..,._:,,Te..,oJI01-_ _ _ _ _ _ _ _ _ __
Marital status: _...:S:.:ing==-le=----- Full name of spouse:_..:.Nc../:.:A_ _ _ _ _ _ _ _ _ _ _ __
Name and ages
of children:. _ _..:;N,_/A"'--------
Education:
Institution
Dates
attended
Univ. of Arkansas
1963-1968
Yale University
Mass. Inst. of
Technology (MIT)
1964-1968
1969-1974
Degrees
received
Dates of
degrees
None
1968
B.S.
SM, Ph.D.
1972, 1974
Honors and awards: List below all scholarships, fellowships, honorary degrees, military medals, honorary society
memberships, and any other special recognitions for outstanding service or achievement.
Sloan Fello,,,'shin. NSF Fellowships
at MIT
Bates Prize for best Masters Thesis, MIT,
1972
AM (Hon) Harvard llniversitv, 1984
Smith-Breeden Award, l\rrerican Finance Association for best Joornal of
Finance article, 1989 ("original Issue High Yield Bonds: Aging
Analyses of Defaults, Exchanges, and Calls", Sept. 1989, co-authored
with Asquith and Wolf),
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List below all memberships and offices held in professional, fraternal, business, scholarly,
civic, charitable and other or1anizations.
-(ifany)
Harvard Club of
Harvaro
Employment l9CORI:
Club
BostgJ
of New York
lhQe
Present
Rlre
Present
Yale Political Union
l%me
]964-1968
Society for the Mvancatent
of Marlagems!nt
Nooe
1964-1968
List below all positions held since c:olllla, lncludlfll the title or dacrlptlon of Job, name of
employment, location of work, and dat• of lnclusi,,. employment.
See
Attachnent
z
28-952 0 - 90 - 3
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DAVID W. MULLINS, JR.
EKPIQYXENT RECORD:
3/89-Present
Aaaistant secretary for Doaestic Finance
U.S. Treasury Department
15th Street and Pa. Ave., N.W.
Washington, D.C. 20220
10/88-2/89
Acting Assistant Secretary for nc.e.tic
Finance
U. S. Treasury Department
15th Street and Pa. Ave., N.w.
Washington, D.C. 20220
9/74-9/88
Finance Professor
Harvard University Graduate School of
Business Administration
Soldiers Field
Boston, MA 02163
9/74-9/88
Financial Consultant
Self Employed
10 Emerson Place - t20-A
Boston, MA 02114
9/70-8/74
Teaching Assistant
Sloan School of Management Maas. Institute of
Technology (MIT)
Memorial Drive
Calllbridge, MA
9/71-6/74
Part-thae Teacher
Bentley College
Beaver and Forest
Waltham, MA
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63
Gov9mment
experience:
List any experience in or direct association with Federal, State, or local governments, in•
eluding any advisory, consultative, honorary or other part-time service or positions.
o Assistant Secretary for Dc:mestic Finance
n s Treasncy: Depart:Jrent
o Deputy Assistant Secretary for Dc:mestic Financy Policy an:i 1\ct.in;J
Asai stant Sec;reta;cy for IX&lJ::stic Finanqe
U.S. Treasury Oepartn-ent
o Associate Director
Presidential Task Force on Market Mechanisns
Publishld
wrltlnp:
Ult the titles, publlshers and dates of books, artlcl115, reports or other published rnmrtals
you ' - written.
SEE ATT1\CHMENr
Palltlcal
llllllltlons
111d activities:
List all memberships and offices held In and services rendered to all political parties or
election committees durin1 the last 10 years.
NOne
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PQBLISHJD BOOKS. ARTICLES
cash Management - Inventory control Limit Approach (with R.B.
Homonoff).
1975.
Lexington, MA:
Lexington Books, D.C. Heath, Inc.,
ca■• Problems in Finance, ath ed. (with Butters, Fruhan, , Piper)
Homewood, Ill.: Richard D. Irwin, 1981.
"Reatrictiona on the Rate of Intereat on Demand Deposit ■ and a
Theory of Compenaating Balancea.• The Journal of Finance, May
1976.
"Application■ of Inventory Caah Management Models• (with R. B.
Homonoff) s.c. Myera, ed., Modern Developments in Financial
Management. New York, N.Y.: Praeger PUblishers, 1976.
"Regulated Rate of Return and the Double Leverage Controveray"
(with Butter■). Cambridge Reaearch Inatitute, 1980.
•0oea the Capital Aaset Pricing Model Work?"
Buill, Jan.-Feb., 1982.
Harvard Business
"The Impact of Initiating Dividend Payaenta on Shareholders'
wealth" (with Asquith). Journal of Business. Jan.-Feb., 1983.
•The Gaina to Bidding Firms from Merger• (with Asquith and
Bruner). Journal ot Financial Economics 15 (19B6):61-a9.
case Problems in Finance, 9th edition, Richard D. Irwin,
Homewood, Ill., 1987. Mullins, D., Jr., Butter■, K., Fruhan,
Jr. and Piper, T., editors.
•signalling with
Dividend■,
w.,
Stock Repurchaaea and Equity Iaaues, 11
27-44. Mullins, D., Jr., and
Financial Management 15 (1986):
Aaquith, P.
•original Iaaue High Yield Bonda: Aging Analyse■ of Defaults,
Exchange■, and Calla•.
The Journal of Finance, September, 1989;
Mullina, D., Jr., Aaquith, P., and Wolf, E.
"Merger Return■ and the Form of Financing,• in Proceedings of the
Seminar on the Analyaia of Security Pricea 34 (May 1987).
Kullina, D., Jr., Aaquith, P., and Bruner, R.
•convertible Debt and Corporate call Policy," unpublished working
paper, Harvard Buainess School, (May 1988). Mullins, D., Jr.,
and Aaquith, P •.
A variety of case studies and technical notes published through
Harvard Busineas School case Services, Harvard Busineas School.
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Political
-· contributions:
Itemize all Political contributions of $500 or more to any individual, c1mpai1n orpnization, Political party, Political action commiltN or similar entity durin1 the last eipt
years and identify the specific amounts, dates, and names of the recipients.
None
Quallficatlons:
State fully your qualifications to HrW In the PoSition to which you have bNfl named.
1.--,
SEE ATrl\ClfolENI'
Futureem~
relationships:
1. Indicate whether you will - r ail connections with your preunt employer, buliMa
firm, assoc:iation or o,sanizatlon if you are confirmed by the Senate.
on
Yes, except
leave fran full Professorship at Harvard University
throogh Septenrer 1990.
2. As far u can be i - , state whether you have any plans ■ftw complltlnf IOV9fflment •rvlce to r■sume emptoy....t, affiliation or practice with your ptfflOUS employer, busillftl firm, association or orpniz■tion.
None
3. Hn anybody made you a commitment to a job aftar you ..... IIM"'-'1
No
4. Do you upact to HrW the full term for which you have bNfl appointal?
Yes
"
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OQALIFJCATIQNS:
I feel ay experience, training and knowledge in the field of
financial economics qualify ■e for this position.
At the Treasury Department I was the Assistant Secretary for
Domestic Finance. In that capacity I advised and assisted the
Secretary, Deputy Secretary and Under secretary for Finance on
■atters of Federal finance, financial institutions policy,
government securities ■arket regulations, corporate financia1
policy, and synthetic fuels projects. I played a major role in
developing President Bush's plan to resolve the s,L crisis.
Prior to joining the Department, I was a Professor of Business
Administration at the Harvard University Graduate School of
Business Administration. I received a B.S. in administrative
sciences from Yale University and an S.M. in finance from the
Sloan School of Management at the Massachusetts Institute of
Technology (MIT). After earning a Ph.D. in finance and economics
at MIT, I joined the faculty of the Harvard Business School where
I taught finance in the MBA, executive and doctoral programs.
I have published original research in leading acade■ ic journals
on a wide variety of topics in financial economics. These
include cash management and banking, as well as corporate finance
and capital market topics such as cost of capital, dividend
policy, ■ergers, stock issues and bond issues.
I have served as faculty chairman of Harvard's Corporate
Financial Management program, an executive program for senior
financial officers of major corporations as well as course head
for the first year MBA finance course. I have also taught the
advanced courses in Corporate Finance and Capital Marketa in the
MBA prograa.
I have been a consultant to a wide variety of fir■s and
governmental agencies and have taught in numerous executive
training programs in the u.s. and abroad, and have served as
Associate Director of the Presidential Task Force on Market
Mechanisms.
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l'atlntlal -.flicts
of I ~ :
l. Dncribe any financial arranpments or deferred compensation a1-ments or other
continuinc dulinp with buslneu associates, clients or customers who will be af•
feclld by policl• which you will lnfl- in the position lo which you h - been
-..1na1111.
None, except an ootstanding account receivable fran Citibank
(appnl>Cimately $40,000).
2. Ust any lffll9stments, obliptions, liabilities, or other relationships which milht Involve
powntial conflicts of inte,-1 with the position to which you have been nominated.
None
3. Dncrlbe any business relationship, dNlinc or financial transaction (other than tupayinl) whl:h you h - had durln1 Iha iast 10 years with the Flderlll Government,
whather for yoursalf, on behalf of a client, or ac:tin1 as an apnt, that mlsht in any
way constltuta or .-ult In a possible conflict of Int-I with the position to which you
have been -..1na1111.
None
I
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4. List any lobbyin11 activity durin11 the past 10 years in which you have enppd for the
purpose of directly or indirectly influencinll the passaae, defeat or modification ol
any le11isiation at the national level of 110V9fflment or affectinll the administration and
execution of national law or public policy,
as part of nr,r official duties as
Treasury Assistant secretary
None - other than
5. Explain how you will resolve any potential conflict of inteNSt that may be disclosed by
your responses to the above items.
N/A
Civil, crlmlnal and
investiptory
actions:
1. Give the lull details of any civil or criminal proceedin1 in which y:,u were a defendant
or any inquiry or investiption by a Faden!, State, or local apncy in which you W8r1I
the subject of the inquiry or im,estiption.
None
-e
2. Give the lull details of any proceedinll, inquiry or investisation by any professional
the subject of the proassociation includinll any bar association in which you
ceedin1, inquiry or. investi1ation.
6
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STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
Name:
IL
P:LLE'Y~Jll.
Poslllon to which
EDWARD
<',"!
. JiAISON
t,1111)
-
Date of
nomlnated: _ _~coy.....,e=m.,_o,..r,..,._.._Fe"'d""e"'r=al~R=e=se~rv'"'""'e-':a=o=•=r=d__ nomlnatlon: _ _.4-'-2:.:7c..-.;;;8.;..7_ _ __
DIie of blrth:_Z,,.J;.1,e.,~~-~l~~-e!\3~2_ Place of
birth: Eugene, Oregon
Marital status: _ _.K.,.a.:..rr:.:i:.:e:.:d_ _ _ _ Fuffnameofspouu:
Ellen Loui■e !liz:ardi Kelley
Nameandaps
of chlklt911:
Jtinaloe Jtelley Queen (3_0~)_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
Jame, Micajah Jelley <~21,..>~------Mich1ct Mcivcr Jelley(wZ-5-)_ _ _ _ _ _ __
Data
attended
Institution
Education:
. Jtinkaid
0.Sl'NI
recehled
1942-1947
fl/A
Woodberry Forest
1947-1950
Biah1chool
1950
Rice
1950-1954
:a.A.
1954
1957-1959
M.B.A 1
1959
univer ■ ity
B•TY•I4
Bu ■ ioc••
school
Honors and awards: Ust below an scholanhlps, tellowshlps, honorary decrees, mlllllry medals, honorary society
memberships, Ind any Oilier apeclal r■co111ltlon1 for outstandln1urvlce or a c h l ~
l
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Memberships
list beklw an memberships and offices held In professional, fratem■I, business, scholar!)',
cMc, charttable and other oraanlzallonL
See
♦ ttechwnt
-
(If_,
Olllce
-
°"'6
Employment record: Ust below all positions held alnc:e college, lncludln1 the title or description of Job, name of
employment, location of work,. and dat• ol lnctualve employmellt.
9/25/11 to preeent
Inveeteent
♦ dvienre,
Inc
Cbeinnen
Boueton, Texae
6/30/81 to present -The Shoreline Companies, Inc., Chairman
Houston Texas
2/1/73 to 6/30/81 -JtelleY Indust,;'i.u, Inc,, Pruident
104
cm
Houston, Tex••
7/1/56 to 6/30/81
Jelley Men11factnrin1 r-nmpan1 President & 0>airm
Bou1ton, Tex••
I
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0-111-.t
uperiencc
~ : any uperience In or dl1'9Ct alOCiallon with Federal, Slate, or looal pamments, 1n~ ~ l n 1 any advisory, con1ult1tlve, honorary or other part-lime 1■rvlce or po1ill011L
Published
wrillnp:
LIii the titles, publishers and dales of boob, articles, reports or other publllhed materials
you
have written.
!lone
Polltlcal
aflillatlonl
and activities:
Usl all memberships and offices held In incl services rendered to 111 political parties or
election committees durin1 the last 10 years.
Director of HOUPAC.
Inactive.
I
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Political
contributions: _illamln an political contributions of $500 or mo,. to any Individual, campal1n orpnlza.
>J.,.I.. tlon, political party, political action commlttN or similar entity durin1 the last eipt
;/'. yurs and Identify the specific amounts, dat•, and names ol the racipients.
See attached
Qualifications:
I
State fully your qualifications to serve in the position to which you haw been named.
(1ttacllollNQ
See attached
Futu,. employment
,.lationships:
C
1. Indicate whether you will - • all connactlons with your p,.sant employv, ~
firm, association or orsanization if you ara confirmed by the Senata.
Ye•
•fl•
2. As far II can be foraseen, state whether yo0 haw any plans
compl.tlnc avvwnment service to resume employment, affiliation or practice with your pm,ious employer, business firm, association or orpnizatlon.
3. • Has anybody made you a commitment to • job after you leave pemlMIII?
!lo:
4. Do you expect io serve the full term for which you have been appolntedf
Te•
.
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73
Pottntlal canlllc:ta
of Inter.st:
.•:l;...Dncrlbe any financial arranpments or deferred compensation aareements or othw
~,:;;; contlnulna dealinas with business as~iates, clients or customers who will be af.
~J,-.ii ftcted by policies which you will influence in tht position to which you have been
-,,:
nominated.
2. Usl any investments, obllaatlons, liabilities, or other relationships which miaht lnwlft
potential conflicts of lnter11t with the position to which you haft been nominated.
3. Describe any business ralationship, dullna or flnanclal transaction (othar than tu,
payinl) which you have had durina the last 10 yurs with tha Federal Government,
whether for yourself, on behalf of • client, or ectina n an aaent. that miaht In any
way constitute or -ult In • possible conlllct of Interest with tht position to which you
have been nominated.
·
ne
I
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4. List any lobbyinc activity durin& the past 10 years In which JOU have enppd for the
purpose of directly or indirectly influenclnc the pauace, defeat or modification of
~;;., any legislation at the national level of covernment or aflectinc the administration and
~•-. execution of national law or public polic)'.
..it·._
·:-.-.-.-,
5. Explain how JOU will resolve any potential conflict of interest that may be discloHd by
your responses to the above itema.
I will make any divestment, as required; and alter or eever
any rclationsbiea,
Civil, criminal and
lnvestieatoiy
ectlona:
as required.
1. Give the full details of any civil or criminal proceedine In which you ware a defendant
or any inquiry or lnv1stl11tion by a Federal, State, or local apncy In which JOU wera
the subject of the inquiry or lnvestl11tion.
·
2. Give the lull de!alls of any proceedinc. Inquiry or lnvestJ1atlon by any proflU'-1
association includinc any bar association in which you were the subject of the proceedine, inquiry or lnvestication.
•
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Attachment A
Membership■:
Organization
Inveatment Adviaora, Inc.
The Shoreline
Date ■
Chairman
1981-to present
Chairman
1981-to present
Rally Club of Rice Univeraity
Vice President
1953-1954
Young President'• Organization
Chapter Chairman
1962-1982
Companie ■,
Inc.
Office held
(if any)
1982-to present
World Buaineaa Council
Houston Club
Board of ~jrectora
1960-to present
Texas Industries, Inc.
Board of
1976-to present
Diatribution
ltI
Bolding■,
lelley
System■,
Inc.
Inc.
Induatrie ■,
Inc.
lelley Manufacturing Company
We ■ t
Belt Rational Bank
Director ■
of Director•
1977-1984
Board of Director•
1981-1983
President
&
CEO
1973-1981
President
&
Chairman
1956-1981
Bo■ rd
Board of
Director ■
1974-1982
Board of
Director ■
1982-1984
1961-1972
Southern Rational Bank
Board of Director•
Rice University
Tru ■ tee &
Rational Association of
Independent School ■
Trustee Coaaittee
St. John'• School
Chairman, Bd. of
Metropolitan YMCA
Board of
Barria County United Fund
Agency Operation• Comm.
1966-1969
Better
Bureau
Executive C011111ittee
Vice Chairman
1978-1981
1980-1981
Girl Scout ■ of America
San Jacinto Chapter
Director, Treasurer
1964-1970
Buaine ■•
1977-1982
Trustee ■
Director■
Bou■ ton Philo ■ophical
1972-1981
1970-1971
1981-to present
The Forum Club of Houston
Harvard Buaine•• School Club
of Hou■ ton
1977-to present
Governor
Board of Director•
1959-to present
1971-to present
Society
St. Luke'• Methodist Church Foundation Vi~e t:h•;""""
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Attachment
B
Political contributions:
1979
2/13/79
9/19/79
George Bush for President
George Bush for President
$
1,000
250
1980
9/22/80
10/27/80
Fields for Congre••
Barria County Republican Party
500
500
Jim Greenwood Campaign Fund
500
1981
11/6/81
1982
5/28/82
BOUPAC
1,000
BOUPAC
1,000
BOUPAC
Friends of Phil Gr1111111
Victory '84 (Reagan)
1,000
2,000
1,000
BOUPAC
Fund For America'• Future (George Bu•h)
1,000
500
Fund For America's Future (George Buah)
BOUPAC
500
1,000
1983
3/4/83
1984
2/84
2/24/84
8/8/84
1985
5/23/85
10/31/85
1986
4/7/86
4/11/86
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Attachment C
Qualifications:
The duties of the Governor of the Federal Reserve System can fairly be
divided into three categories: technical central banking activity, policy
setting based on macro and micro economic judgments, and institutional
governance and management. In passing the various statutes that created
and now control the System, Congress foresaw this broad variety of activity
that would confront the Board, and instructed the President to nominate
Governors with "due regard to a fair representation of the financial,
agricultural, industrial and commercial interests."
Continually from 1959 to date, I have had primary profit and loss
responsibility for corporations in (successively) distribution, manufacturing, and financial service. I have been a founder of two banks, and
joined the Board of a third within several months of its opening.
Additionally, I have been an active Director in other companies involved in
aggregates, cement and concrete, distribution, real estate development,
steel, terminaling, and trucking. These are among the most competitive and
entrepreneurial industries in our economy. --Most of these involvements
have been in corporations with under $100 million in sales, the size
category that includes virtually all of the net growth in employment that
has occurred in our country in recent years.
As a manager of financial asset portfolios over the past five years, I have
continuously studied and monitored the U.S. economy.
In the not-for-profit sector, I have served actively in nine institutions
variously as Chairman, Trustee, Director or other officer.
In sum, it is my belief that experience in activities related to those in
which the Board must act, and insight into areas in which the Board must
make judgments, will enable me to make a useful contribution to the nation
as a Governor of the Federal Reserve System.
28-952 0 - 90 - 4
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STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
ROBERT
Name: _ _ _SW=AN=---c(W'I)=.------
HARDY
(FIRST)
(OTHOO
Position to which
Date of
nominated: _ _ _---'-'NaJ=A~BOARD=='-'-MEMBER===---------- nomination: FEBRUARY 8. 1990
Date of birth:
Marital status:
Name and ages
19, JULY 1935
Place of birth:
MARRIED
Full name of spouse:
(DAY)
(IIIONTNJ
(YEAR)
TO:JELE. UTAH
---~===~=~----------RU'Ill JANET SPENCEll SWAN
~===------
of children: _ _
Education:
Institution
Dates
attended
Degrees
received
Tooele High School
1950-1953
\ara!lL!<lted
Uni versi t):'. of Utah
1953-1957
B,S, A~QQ1.!Ilting
University of Utah
1959-1961
Dates of
degrees
Jun~ 19!:!7
Honors and awards: List bela.v all scholarships, fella.vships, honorary degrees, military medals, honorary society
memberships, and any other special recognitions for outstanding service or achievement.
Merit Award for Achievement as Mayor of Tooeje
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Memberships:
List below all memberships and offices held in professional, fraternal, business, scholarly,
civic, charitable and other organizations.
Office held
(if any)
Organization
Civic -
Dates
Tooele County Olamber of Q::mner=:ce,=_ __,_No=.n,,,e~--Tooele County F.conanic Developnent
President
Fraternal -
B.P.O.E. #1673
None
F.O.E. #164
None
Professional -
Credit Union Executives Socie~t~y_ _~No=n~e~---
1987 - 1989
1983 - 1990
Employment record: List below all positions held since college, including the title or description of job, name of
employment, location of work, and dates of inclusive employment.
6/57 to
1/58 U.S. Army Audit Agency
Pasadena,
1/58 to 10/59
U.S. Army
Ft. Belvoir
1/66 to 10/75
swan's Market
Tooele
TIT
9/81
State of Utah
S.L.C.,
UT
6/77 to
1981 to 1983
6/83 to present
Western United Mines
Tooele Federal C.U.
Auditor
CA
VA
Dwner Q:>erator
Deoutv
Director /Finance
S.L.C,. (JT
Vice President
Tooele,
President/=
UT
2
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Government
experience:
Published
writings:
List any experience in or direct association with Federal, State, or local governments. in•
eluding any advisory, consultative, honorary or other part-time service or positions.
Tooele City Council
1964 - 1966
Tooele City Mayor
1970 - 1974
Tooele County Bicentennial Oiairman
1975 - 1976
State of Utah Deputy Director of Finance
1977 - 1981
Tooele County F.conanic Develoµnent
1986 - 1990
List the titles, publishers and dates of books, articles, reports or other published materials
you have written.
None
Political
affiliations
and activities:
List all memberships and offices held in and services rendered to all political parties or
election committees during the last 10 years.
None
3
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Political
contributions:
Itemize all political contributions of $500 or more to any individual, campaign organization, political party, political action committee or similar entity during the last eight
years and identify the specific amounts, dates, and names of the recipients.
None
Qualifica1ions:
State fully your Qualifications to serve in the position to which you have been named.
(attach aheet)
See
Attachment
Future employment
l. Indicate whether you will sever all connections with your present employer, business
relationships:
firm, association or organization if you are confirmed by the Senate.
Yes I I will sever all connections
2. As far as can be foreseen, state whether you have any plans after completing go-n.
ment service to resume employment, affiliation or practice with your previous employer, business firm, association or organization.
No lans
3. Has anybody made you a commitment to a job after you leave government?
No
4. Do you expect to serve the full term for which you have been appointed?
Yes
4
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A'ITAaJMENI' - PAGE 4
educational and practical experience background in finance, accounting and management
provides the basic qualifications for this position, plus the specific professional
experience in the credit union industry will provide valuable input to the NCUA board's
decision making process. The safety and soundness of the financial industry in America
is of primary concern to everyone. I expect as an NCUA board member to contribute
positively to decisi.'.lllS that will en=urage credit union financial strength.
An
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83
Potential conflicts
of interest:
1. Describe any financial arrangements or deferred compensation agreements or other
continuing dealings with business associates. clients or customers who will be af•
fected by policies which you will influence in th• position to which you have been
nominated.
None
2. List any investments, obligations, liabilities, or other relationships which might involve
potential conflicts of interest with the position to which you have been nominated.
Only Normal IDans, (Mortgage, Consumer) Fran ri:2Jmtaio AUM?rica
Credit Union and Tooele Federal Credit Union, To preclude an¥
conflict of interest, a recusal letter will
to
be
signed in regard
these 00 credit unions,
3. Describe any business relationship, dealing or financial transaction (other than taxpaying) whi:h you have had during the last 10 years with the ~ederal Government,
whether for yourself, on behalf of a client, or acting as an agent, that might in any
way constitute or result in a possible conflict of interest with the position to which you
have been nominated.
None
I
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4. List any lobbying activity during the past 10 years in which you have engaged for the
purpose of directly or indirectly influencing the passage, defeat or modification of
any legislation at the national level of government or affecting the administration and
execution of national law or public policy.
None
5. Explain how you will resolve any potential conflict of interest that may be disclosed by
your responses to the above items.
N/A
Civil, criminal and
investigatory
actions:
1. Give the full details of any civil or criminal proceeding in which pu were a defendant
or any inquiry or investigation by a Federal, State, or local agency in which you were
the subject of the inquiry or investigation.
None
2. Give the full details of any proceeding, inquiry or investigation by any professional
association including any bar association in which you were the subject of the pro,.
ceeding, inquiry or investigation.
None
6
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QUBSTrOHS FOR DAvrD If. IIULLDfS, JR.
FROII SENATOR DONALD If. RrBGLB, JR.
IIARCII 23, 1990
Q.l. rn the financial estimates for the Administration••
thrift proposal that accompanied Secretary Brady's testimony
before the Banking Committee in February 1989, was there any
allocation of funds for RTC working capital? How much? Was that
part of the $50 billion supplied to the RTC, or in addition to
it?
A.l. The $50 billion was provided to the RTC to pay for the
net losses of the currently insolvent thrifts -- otherwise known
as "filling the hole." rn addition, the Administration's
original thrift proposal provided the Resolution Trust
Corporation (RTC) with the same borrowing and assistance
authority that previously existed for both the Federal Deposit
Insurance Corporation (FDIC) and the Federal Savings and Loan
Insurance Corporation (FSLIC). This included the authority to
issue notes in order to raise the funds necessary for the
temporary purchase of assets, which we refer to as working
capital. Working capital amounts were extremely difficult to
estimate at that time because of the many variables involved that
affect the timing and amount of assets actually purchased and
sold. In fact, these variables continue to make working capital
projections difficult to estimate, even though there has been
actual case resolution experience since the time of the
Administration•• original proposal.
Q.2. When did the Administration first publicly indicate
that additional working capital funds would be needed?
A.2. My understanding is that the RTC's borrowing authority
was specifically discussed in Senate Banking Committee hearings
soon after the bill was introduced. I personally testified
before the House Ways and Means Committee in connection with
their markup of the thrift legislation in May of 1989. RTC
borrowing authority was a specific focus of many of the questions
asked at that time, and it was my understanding that the
Committee subsequently sent a letter to Banking Committee
Chairman Gonzalez expressing its concerns.
Chairman Gonzalez later successfully offered an obligation
cap amendment on the floor of the House of Representatives to
address this issue, and Congressman Wylie filed a different
version of the same type of amendment with the House Rules
Committee. In addition, Mr. Wylie specifically addressed the
working capital issue in House floor debate on the Gonzalez note
cap amendment.
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-
2 -
On the Senate side, both Secretary Brady (June 23, 1989) and
Chairman Seidman (June 26, 1989) sent letters to you, Senator
Riegle, last June that specifically referred to the need for
working capital.
Finally, during the Senate-House conference we worked
closely with your staff and others to craft an obligation cap
that would explicitly tie the amount of working capital
obligations issued to tangible assets owned by the RTC. This is
a concept that protects the taxpayer from additional exposure
while at the same time providing the RTC with the flexibility to
raise adequate working capital. The Administration had supported
this concept for some time before the conference.
Q.3. The $32 billion of additional funds, that you referred
to as available to the thrift industry after RTC funds run out,
were meant to cover all losses through 1999 and to build up the
thrift deposit insurance fund to $8.8 billion by the end of that
time. If we use those funds earlier, what will we use for later
losses and for building up the fund?
A.3. The $50 billion provided to the RTC was designed to
cover the approximately 500 institutions that were thought to be
tangibly insolvent at the time the original bill was introduced.
The $32 billion was designed to cover future losses from other
marginal thrifts that appeared likely to stay in business several
years after the date of enactment of the legislation -- which
would mean that any subsequent failure would be outside the RTC's
jurisdiction.
If these same marginal thrifts fail sooner than expected and
fall within the RTC's jurisdiction, then it may be necessary to
reallocate funds from the $32 billion provided in the outyears.
Regardless of when these marginal institutions fail and are
resolved, the remaining solvent thrifts are healthier as a group
and, therefore, less likely to require amounts of resolution
funds in the outyears. Thus the $32 billion has always been
earmarked for the same potential failures out of the marginal
group of thrifts. The only difference is timing.
Finally, the Savings Association Insurance Fund would
continue to grow from the premiums paid by these healthy thrifts.
At the same time, the Administration's bill provided the FDIC
with the authority to raise premiums if the industry experienced
worse losses than expected. This, too, would help maintain the
financial integrity of the fund even if federal assistance were
reduced.
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-
3 -
Q.4. The Adainistration•s estimates, last year, of deposit
insurance preaiums assumed that s,L deposits would grow at a 7
percent annual rate over the next decade. Deposits have since
declined. What do you see now as the likely future size of the
thrift industry?
A.4. The rate of depoait growth has absolutely nothing to
do with availability or adequacy of the RTC'a $50 billion and the
size of the probl- the RTC faces.
The recent decline in deposit growth is in many ways a
healthy sign. To a large extent it reflects intentional policies
designed to i■prove the financial health of the industry rather
than any loss of depositor confidence. It reflects in part the
fact that the RTC has stopped insolvent thrifts from trying to
grow out of their problems -- in fact, as required by the
oversight Board's strategic plan, these thrifts are shrinking to
avoid higher operating losses. Other thrifts have been
liquidated or have converted to banks as part of RTC case
resolutions, which is obviously another positive development that
often results in a reduction of thrift deposits. Finally, the
shrinkage also reflects the fact that many thrifts are shrinking
both their assets and their deposits in order to raise their
capital ratios -- again, a very healthy trend. Many of these
thrifts fail capital compliance because they grew their assets
and liabilities faster than their capital. They are simply
reversing this process now.
An examination of each of these factors leads me to believe
that the current decline in deposit growth is probably a
t-porary adjustment. once the industry stabilizes, it appears
likely that aggregate deposits will resume growth at least to the
extent of interest credited. Indeed, the deposits of the
healthiest thrifts are growing even in the current climate.
Finally, even if deposits do not grow at the 7 percent rate
over ti■e, it will have little impact on the overall cost of the
thrift cleanup. This is especially true if the shrinkage in
thrift deposits is essentially matched by deposit growth at
banks, since net budget collections would remain essentially
constant.
Q.5. The Administration's thrift plan assumed that the RTC
would sell all assets of thrifts under its control by the end of
1994. How long do you now think it will take?
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-
4 -
A.5. Under the Administration's original proposal, the
objective was to move the bulk of RTC assets out of the
government and into the private sector by 1994 with any remaining
RTC assets at that date transferred to the FSLIC Resolution Fund
to be resolved by the FDIC.
Under FIRREA, the RTC is in operation until December 31,
1996. When the assets will actually be sold depends primarily on
the asset disposition strategy of the RTC as well as the speed
and efficiency with which that strategy is executed. Thus, the
RTC is really in the best positipn to answer this question.
I would favor moving assets rapidly into the private sector
in bulk transactions where possible. I am not talking about
dumping assets on the retail market. Instead, I think the RTC
should play the role of packager and in effect, "wholesale"
assets to private sector entities with expertise in working the
assets out over time.
With such a "wholesaling" strategy it should be feasible to
sell the bulk of RTC assets by the mid 1990 1 s. The alternative
strategy of having the RTC own the assets, and work them out
individually by selling them retail would involve much longer
government involvement in ownership and management of these
assets.
Q.6. The Brady report concluded that margins on stock
futures were too low and may have aggravated both the rise and
the fall of stock prices in 1987. Do you agree, and how high do
you think they should be?
A.6.
I agree that low margins on stock index futures played
a part in the market disruptions in 1987. I do not think it
would be appropriate for me to try to pick a specific level for
how high stock index futures margins should be, but they do need
to be harmonized with margins on stocks. The only way to ensure
that margins are harmonized is to provide for a single regulator
of margins on stocks and stock derivative products.
Q.7. There is considerable uncertainty among analysts about
how low the unemployment rate can go before inflation begins to
accelerate. Have we reached that point, or can we safely reduce
unemployment a little further?
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- 5 -
A.7.
The level of the "natural rate of unemployment," also
termed the "nonaccelerating inflation rate of unemployment," is
an unse~tled issue in economics. It is sensitive to shifts in
the demographic composition of the workforce and to changes in
institu~ional arrangements, such as availability of income
support programs, competitive pressures from abroad, etc. Some
previou• work at Treasury suggests that the rate might be in the
range of 5-1/4 percent, and the fact that inflation has been
little changed over the past year or so while the civilian
unemployment rate has held at about that rate would tend to
corroborate that finding. However, some analysts place the
figure at a higher level, while others believe it to be lower.
As to current situation, there are some measures that suggest
additional slack in labor markets and others that point to
tightness. The fact that there is considerable uncertainty in
this matter would argue against attempting to fine tune the
economy to hit a particular target.
Q.8. What do you believe should be the goals of deposit
insurance reform? What do you see as the most promising
proposals for deposit insurance reform?
A.8.
The broad goals of deposit insurance reform should be
to reduce and limit the exposure of the federal government to
loss; maintain depositor confidence to avoid runs and protect the
financial system; and foster the competitiveness of U.S.
financial services providers.
As I said in my testimony, I have not reached firm
conclusions about specific changes that should be made. My
initial impression is that certain proposals do appear worthy of
study. These include the proposal to require early and certain
resolution of failing depository institutions; the limitation of
deposit insurance to individuals or to a single account (although
there appear to be substantial administrative problems); and
possibly the proposal to impose some kind of "haircut" on
uninsured depositors in resolutions of failed institutions.
I also believe that it is important to examine other aspects
of the federal "safety net" as well, including access to the
discount window and the payments system. It seems to me that the
fundamental question is how to reduce the scope of the federal
safety net without destabilizing the financial system. This will
require very careful study.
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QUESTIONS FOR DAVID If. IIULLDfS, JR.
PRON SENATOR ALAN J. DIXON
MARCIi 23, 1990
Q.1. What are your views on enforc-ent of the Community
Reinvestment Act? Do you believe that redlining still occurs?
How can this best be prevented?
A.1. While I am new to this area, I recognize that
enforcing compliance with the Community Reinvestment Act in an
effective manner is one of the important regulatory challenges
facing the Federal Reserve today, especially in view of the
vagueness of the statutory mandate. That challenge is made all
the more striking by the added requirement for public disclosure
of an institution's CRA rating, called for by the FIRREA
amendments to the act.
As I understand it, the Federal Reserve•s program for
enforcing the Community Reinvestment Act includes monitoring
banks' CRA performance and assisting them by disseminating
information and technical advice on community lending. In
reviewing applications, the Board can closely examine an
individual applicant's CRA performance. Though I am not yet
fully acquainted with all the various pieces of its program, I
have the impression that the Federal Reserve has established a
solid framework for encouraging state member banks to find sound
and profitable ways of meeting the credit needs of their
communities. This includes meeting the special needs of a lowand moderate-income neighborhoods that may present for a bank the
greatest risk but, at the same time, a real opportunity to make a
difference in its community. I support a continued strong
emphasis in all of these areas.
As to redlining, while one cannot be totally certain that it
no longer occurs, I have been advised that the Federal Reserve•s
examiners pay special attention to checking bank policies and
practices (for evaluation of an applicant's creditworthiness, for
example, or assessing the value of residential property) that
might unfairly result in the denial of a mortgage or in the
failure to serve the overall credit needs of low- and moderateincome neighborhoods. The recent amendments to the Home Mortgage
Disclosure Act should further enhance the ability to identify
lending patterns that warrant closer attention. Active
enforcement of the CRA and the fair lending laws, it seems to me,
is ultimately the best means available to us for preventing
discriminatory lending.
Q.2. How should the Federal Reserve best address the
problem of discrimination in home mortgage lending? Would use of
testers be an effective enforcement tool?
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A.2.
I am familiar, of course, with recent reports on
mortgage lending in Atlanta, Boston, and elsewhere. The
inference of discrimination is an obvious cause of concern,
although as I understand it the studies do not necessarily
conclude that the disparities in neighborhood lending result from
purposeful racial discrimination.
I believe that the Federal Reserve has in place procedures
for examining state member banks to ensure compliance with the
Fair Housing and Equal Credit Opportunity Acts. In addition, I
understand it is seeking other ways to ascertain more effectively
the presence of unlawful discrimination. Some measures under
study would be taken independently, others in close collaboration
with other agencies.
I believe these measures will move us
closer to finding effective ways to deal with the problems in
the mortgage area highlighted by the studies.
As to using testers as an added enforcement t~ol, the
concept is not one I would readily espouse. It raises very
negative connotations in the minds of many, and I know there are
technical problems in setting up such a program in the credit
area. At the same time, I recognize that testing might be
warranted in specific instances where there is a strong
suspicion of unlawful behavior. But this is really a very
complicated issue, on which I have no experience, and I would
have to study the matter much more thoroughly before reaching a
definitive conclusion. Beyond that, let me reiterate my own
strong commitment to ensuring banks' compliance with
antidiscrimination laws, and more generally to our reaching the
goal of providing decent housing opportunities for all Americans,
including the nation's low- and moderate-income citizens.
Q.3. Do you believe that low and moderate income Americans
lack access to banking services? If so, what should be done
about it?
A.3.
I have not examined this issue in sufficient detail to
provide a definitive answer. However, I will study it and
develop a position on it in due course.
Q.4.
Do you believe the firewalls around section 20
subsidiaries result in unnecessary inefficiencies? How do your
views on these firewalls compare with your opinion of the
firewalls included in the Proxmire Financial Modernization bill?
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A.4. The firewalls between Section 20 subsidiaries and
their bank affiliates, while similar, appear to be somewhat more
restrictive than those in the Proxmire Financial Modernization
bill. While some have recently been relaxed, and the Board has
indicated its intention to review others this year, I think there
is little doubt that these firewalls have produced inefficiencies
in the delivery of financial services by bank holding companies
and, in my view, we should study ways in which they -y be
relaxed. Bank holding company securities powers should provide
the scope for these organizations competitively to deliver
services to the public, consistent with the appropriate
protection of Federal safety net. We need to explore whether or
not the disclosure rules required by the securities laws,
functional regulation of the securities subsidiary -- especially
regulatory capital requirements coupled with mark-to-market
rules -- and Section 23A and 23B limits on bank loans to, and
asset purchases from, affiliates, would be sufficient for
protection of the latter while permitting the former. I feel the
design of a sufficient but not inefficient mechanism for
insulating the Federal safety net from risky activities is an
important part of financial services regulatory reform.
Q.5.
What are
your views on universal banking?
A.5. I believe that it is desirable to give commercial
banking institutions the flexibility to engage in a broader range
of financial activities. We need to ensure, however, that those
activities are conducted in a sound manner, one that does not
expose excessively parts of the institution that are protected by
the federal "safety net" to risks associated with other
operations. "Universal banking" can encompass a variety of
specific organizational arrangements, and I believe that it is
important to have simple, effective and efficient mechanisms to
insulate the federal safety net. At this stage I have yet to be
convinced that organizational forms of universal banking without
such protections would be appropriate.
Q.6. What are the implications of Europe 1992 for the
United States banking industry?
A.6. The issue of the Community's reciprocity policy in
the banking sector appears to be settled. The EC Commission has
stated that the standard to be applied under the Second Banking
Directive will be national treatment and that no sanctions are
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cont-plated against countries such as the United States that
provide EC banks with genuine national treatment.
Nore generally, the EC internal market program may create
new competitive opportunities within the Community for U.S. and
other non-EC banking organizations. However, as competition
within the EC market increases, it is possible that there will be
declining profit margins on financial intermediation. While such
an effect would not be regarded as beneficial by banks, it would
benefit consumers of banking services. Indeed, that is a key
objective of Europe 1992.
U.S. and other non-EC banks compete with Community banking
organizations on a worldwide basis. Given the increasing internationalization of banking, the evolution of the structure of
financial organizations in the European Community (including the
relatively unlimited securities powers permitted under the Second
Banking Directive) will likely be a factor in consideration of
financial regulatory restructuring in the United States. Indeed,
EC 1992 underscores the need to move forward as soon as possible
with reform of our antiquated U.S. financial services laws.
Q.7. What are your views of the relationship between the
Federal Reserve discount window, the deposit insurance system,
and prospects for deposit insurance reform?
A.7. The Federal Reserve•s discount window is used to
provide liquidity to individual depository institutions unable to
obtain such funding elsewhere, and the Congress has directed that
such loans be fully collateralized. · In effect, such liquidity
support is part of the federal safety net. The deposit insuring
agencies, in contrast, are authorized to actually inject capital
into failing depository institutions, if that would be cheaper
than liquidating their assets and paying off their insured
depositors. Quite often, when a bank is under duress and
uninsured depositors and other creditors are withdrawing funds,
the Reserve Banks are called upon to provide collateralized
discount window credit. If the institution is subsequently
assisted by the FDIC, the discount window loan is repaid by the
FDIC as soon as possible. Any deposit insurance reform that
relies more on depositor discipline may increase the number of
requests for -- and perhaps the size of -- such loans. While
depositor discipline may limit deposit insurance exposure it
might increase exposure via discount window liquidity support.
Careful consideration should, therefore, be given to these issues
in designing deposit insurance reform especially since discount
borrowing is also a basic monetary policy tool.
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premiums?
5 -
What are your views on risk-based deposit insurance
A.8 Finding more sensitive mechanisms for regulating risktaking by depository institutions is important. The risk-based
capital requirements now being implemented are a step in the
right direction. Risk-based insurance premiums may also have a
place in the regulatory structure, although there possibly would
be some redundancy with the capital requirement mechanism. How
these, or other regulatory changes, should be coordinated is a
complex question. As you know, the issue of deposit insurance is
being atudied at the present time, as required by FIRREA. I
believe the Congress should give high priority to reviewing that
work, for it is clear that FIRREA left unresolved some of the
most difficult problems of reforming our system of deposit
insurance.
Q.9. What are your views on market-based accounting?
thia be desirable either for regulatory or for financial
disclosure purposes? Is it practical?
Would
A.9.
The problems in our financial system over the last
several years have focused attention on the considerable
differences that often have been found to exist between
accounting and economic measures of the earnings, assets, and net
worth of financial institutions. Market value accounting has
been proposed by some as a way to narrow divergences between
accounting and economic measures of income, assets, liabilities,
and equity capital positions. This suggestion is primarily based
on the view that the market values of assets and liabilities are
more reflective of their true economic values than are the
historical cost amounts generally reported in financial
statements under GAAP. Therefore, it is argued that the use of
market value accounting might lead to more effective regulation
and supervision of financial institutions and to the closure of
problem institutions long before they would become insolvent on
the basis of financial statements prepared under current GAAP.
While this proposition has considerable theoretical merits,
a number of concerns have been expressed regarding market value
accounting that should be considered. First, market values do
not exist for a large percentage of a financial institution's
assets and deposits and standards have not yet been developed for
the estimation of reliable market values for these items.
Second, even when independent market quotations exist, there are
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questions as to whether market values always reflect true
economic values. Some suggest that this problem arises because
markets may not always be informationally efficient (e.g., as
evidenced by the excessive volatility in bond and stock prices).
Third, the overall cost and reporting burden associated with
market value accounting could be considerable, including the cost
of verifying market value quotations and estimates during audits
and supervisory examinations. Finally, there are questions of
the relevance of market values for fixed income instruments that
are to be held to maturity. Aren't well designed measures of
default risk sufficient and appropriate in assessing such
instruments?
In my view, these concerns should be thoroughly studied
before dramatic moves toward market value accounting are made.
The federal banking agencies are reviewing the use of market
values in connection with the federal deposit insurance study
mandated by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA). At the same time, the
Financial Accounting Standards Board (FASB) is studying the need
for greater use of market values in GAAP as part of a project to
develop new comprehensive standards for all financial
instruments. These studies should provide additional information
regarding the appropriateness of market value accounting for
purposes of bank regulation and financial reporting.
Q.10. What are your goals for this job?
goals for the first two years?
What are your
A.10. I would hope to contribute to the general goal of
achieving high sustainable economic growth with negligible
inflation. Maintaining and enhancing the health and vitality of
the U.S. economy has to be the Fed's number one goal. The
challenges are particularly evident in view of the recent
experience of slow growth and persistent inflation. Maintaining
and enhancing the health and competitiveness of our financial
system is also an important goal. I would hope that
comprehensive legislative reform of financial services regulation
will be forthcoming, and I would like to contribute to the coming
debate on this topic. In view of the competitive threats facing
U.S. financial services firms, I think a two year time horizon
for this goal is both realistic and necessary.
Q.11. If you were confirmed, how frequently would you
expect to consult with Secretary Brady, Undersecretary Glauber,
or Deputy Secretary Robson?
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A.11. To date, I have made no plans for regular
consultation with Treasury officials or others and have formed no
expectations about the frequency of consultations. Fed Governors
on a rotating basis have lunch weekly with Treasury officials and
lass frequently with members of the President•• Council of
Bco~oaic Advisors. Bob Glauber is a close friend and Secretary
Brady ia alao a friend so I would expect to see th- relatively
fr~ently. But, I would not feel any special requirement for
consultation with th- on the decisions facing the Fed. overall,
I think it is useful to consult widely including friends and
former colleague■ at Treasury, in other parts of the
Administration, in academia, in the private sector and with
members of Congress. Consultation is important in view of the
difficult probl- facing us.
Q.12. Do you believe that banks, particularly community
banks, are burdened by inefficient regulation? If this is a
probl-, what should Congress or the Federal Reserve do about it?
A.12.
analyaia.
I think this is an issue worthy of extensive
Bank regulations can generally be placed into one of three
categories: (1) those related to maintaining the safety and
soundness of financial institutions; (2) those related to the
efficient conduct of financial markets; and (3) those directed to
accomplishing socially desirable goals. The first category
includes regulations dealing with such matters as capital
adequacy, insider loans, physical security, risk-diversification,
and ao forth. The second includes regulations such as those
necessary to implement monetary policy and those facilitating
bank payments. The last category would include regulations
dealing with bank disclosure, the rights of consumers, and the
reporting of large cash deposits.
Clearly, within this scheme, there is some minimum core of
rules and regulations necessary to promote the soundness of our
banking and financial system, to ensure the smooth and efficient
functioning of financial markets, and to protect the legitimate
interests of bank depositors and customers. Normally, when laws
are written or rules formulated, those involved are seeking to
achieve what they perceive as desirable goals in a manner that is
not unduly burdensome, disruptive or inefficient. Nevertheless,
rules or regulations that are not properly formulated, or that
have not been subject to a reasonable balancing of the costs and
the expected benefits, can result in an excessively burdensome or
inefficient regulatory framework. In this regard, it is
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particularly iaportant to keep in aind that while individual
rules aay not be unduly burdensoae, the CUJIUlative effect of all
regulation■ taken together may indeed po■• unnecessary or
excessive restriction■ and inefficiencies on certain cla■••• of
banking organization■•
I aa concerned that regulations, rules and supervisory
activities may not be structured in ways to impose the least
burden on banks while still enabling regulators to carry out
their responsibilities in accordance with the law■ set down by
the Congress. I certainly aa not prepared at this tiae to
provide a blanket endorsement or condeanation of every rule,
regulation, or procedure. Indeed, if confirmed, I would aost
certainly give careful consideration to this very basic.question.
More generally, I believe that all involved in foraulating
laws and regulations for our financial system -- including both
the Congress and bank regulators -- must be very sensitive to the
costs to banks of regulations, as well as the anticipated
benefits, and must recognize that these costs are ultimately paid
by society at-large. Accordingly, both the Congress and th•
regulatory agencies should move prudently in creating new laws
and regulations and should periodically review their continued
aerits. We should redouble our co1DJ11itaent to find the aoat costeffective way to achieve public policy objectives. Law■ or rules
that contain "sunset" provisions may be particularly appropriate,
and we should always be ready to revise or rescind rule■ that no
longer achieve their intended results.
Q.13. In last week's hearing on CFTC/SEC issues, Chainan
Greenspan stated that:
- "the Board, as best I can judge, is unanimous on the
question that the appropriate margins for stock index
futures and for stocks should be prudential only •••• had we
found such a relationship [between margins and volatility),
I suspect we would be arguing that margins should be
constructed in a manner which picked up not only prudential
requirements but also an element of additional margin which
would act to presumably suppress the degree of volatility in
the system. All of the analytical tools we have brought to
bear have failed to find any such relationship. As a
consequence of that, we are unanimous on the issue that
prudential margins are the realistically sole purpose of
putting margins in place."
Do you share the unanimously expressed view of the Board
that margins on either stocks or on stock index futures should be
set for prudential reasons only?
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A.13. I do not believe that :margin■ ahould be aet froa the
narrow perspective of the private interest of a clearinghouse.
One reason is the potential for the failure of one clearinghouse
to create a chain reaction leading to broader distabilizatioil
within the financial system. Since the cost of such systemic
disturbances is borne by the public rather than the
clearinghouse, this risk may not be adequately reflected in the
private decisions of an individual clearinghouse.
Margins must be adequate to protect against this broader
systemic risk. Moreover, inconsistent margins in two segments of
what is really "one market" can, I believe, contribute to
episodes of market wide disruption. These disruptive episodes
also engender systemic risk.
Therefore, I think it is not inappropriate to say that
margins should be set for prudential reasons as long as limiting
systemic risk is included as a prudential reason, and so long as
federal regulators have ultimate margin setting authority.
Q.14 Do you share the unanimously expressed view of the
Board that the evidence does not show a link between margins and
volatility?
A.14. There are studies which provide evidence on both
sides of this issue. For example, a study by Gikas Hardonvelis
("Margin Requirements and Stock Market Volatility," Federal
Reserve Bank of New York Quarterly. summer 1988) concluded that
higher margins are statistically associated with a reduction in
price volatility; while a study by Paul Kupiec of the Federal
Reserve staff came to an opposite conclusion.
Having reviewed many studies on this topic, I feel the
question is unresolved. I would agree that there currently
exists no convincing consensus in the research that there is a
link between margins and volatility. However, I am also not
convinced that the research to date demonstrates convincing the
absence of such a linkage. I am optimistic that improved
research methodologies will provide more insight into this issue
in the near future. As an aside I would also note that there is
also no compelling evidence that stock market volatility has
increased over the past twenty five years.
Finally, and mostly importantly, I believe the issue of the
linkage of margins and volatility as modeled in the research is
totally irrelevant to the current debate. Volatility, as defined
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in these ■tudie■, is a measure of average variance over soperiod of time, for example, the average daily volatility of the
stock market. I would note two points. First, volatility
measured in this manner has not increased in recent year■ and
second, average daily volatility is not what concern■ u■ in the
current aarket environment.
It is not the volatility on average day■ which i■ a concern,
but rather the infrequent periodic episodes of market disruption
which we have experienced over the past several year■• Such
episodes are not simply draws from the average volatility
distribution.· These episodes are periods in which markets are
simply not functioning correctly. For example, during the
periods the pricing relationships between stocks and future■
break down, markets in particular instrument■ experience
difficulties in staying open, serious supply-demand imbalances
develop, very large market moves occur in the absence of
underlying fundamental information, etc.
Though infrequent, I believe the problem is these disruptive
episodes, rather than simply days of major market moves in well
functioning markets. Volatility is not the problem: market
disruption is the problem. These market disruptions put
inordinate strains on the clearance and settlement process and
thus engender systemic risk. These disruptive episodes erode
investor confidence and ultimately can produce adverse effects on
the cost and availability of capital, and the competitiveness of
our financial markets.
Though very damaging, such episodes are too infrequent to be
amenable to large sample statistical studies such as those
relating average measures of volatility and margins.
Nonetheless, I think that a strong case can be made that
inconsistent margins between stocks and stock index futures play
a role in such disruptions.
Lowering margins in futures encourages highly leveraged
participants to enter the futures market. This may increase
liquidity on normal trading days with moderate price movements.
But these highly leveraged participants cannot absorb a major
negative market movement, and indeed, may fuel the decline by
forced sales to meet margin calls. The acceleration in futures
market decline can wash back to the stock market via index
arbitrage and produce disruptions there as well.
There are many other scenarios under which highly leveraged
participants in some market segments can result in market wide
disturbances.
While there may be no demonstrated linkage between
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average volatility and margins, I do think there ia a atrong case
that margin levels play a role in the damaging episodes of
market disruption.
Q. 15. Chairman Greenspan, at that aame hearing, when asked
abut the consequences if Congress failed to act on further
CFTC/SEC related legislation, responded that:
"On the issue of the change is structure which I would
personally recommend, which is not a huge change but I think
a desirable one, were that not done, I do not think that we
leave the structure in total at risk. I think it will be
more difficult to resolve certain issues, but I would
scarcely want to argue that action is mandatory because if
action fails that the system would be put in jeopardy. I
don't believe that.
"I think that if there is a major market reaction, it
is likely to occur with or without changes that we're
talking about and I'm not certain the extent to which the
types of changes we're talking about would make all that
much substantial difference in how the particular :market
break worked its way through the system."
Do you agree with the Chairman that, if jurisdiction over
stock index futures is not shifted from the CFTC to the SEC, our
regulatory system would not be put in jeopardy by the failure to
take that action?
A.15. I think we need action now, and failure to resolve
the critical issue of regulatory fragmentation leaves our
financial system vulnerable to a wide range of potential
problems. A major concern is the potential loss of business to
foreign competitors' markets due to the jurisdictional disputes
which hurt innovation in our markets. Other problems which would
persist with inaction include the potential for cross-market
abuses due to the difficulties in cross jurisdictional
enforcement.
I do not think the implementation of the needed reforms will
eliminate major market moves based upon fundamentals. But it
would, in my view, reduce the probability of major market
disruptions and the attendant systemic risks associated with such
disruptions.
Implementation of a unified regulatory structure governing
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■tocks
and ■tock index futures would also facilitate the
implementation of badly needed improvement• in the coordination
of clearance and ■ettlement mechanisms, circuit breakers and the
like. Without ■uch reform, I do believe there remains a level of
systemic ri ■k which i• unnecessarily high and which can be
effectively reduced with these reforms.
Q.16. Do you agree with
jurisdiction over stock index
the SEC, that shift would not
potential future market break
the Chairman that, even if
futures is shifted from the CFTC to
make much difference in the way any
worked its way through the system?
A.16. I would not agree with Chairman Greenspan on this
issue. Transferring jurisdiction over stock index futures to the
SEC will help to minimize both the likelihood and the impact of
further market disruptions, although it seems likely that major
market move■ will, of course, occur from time to time anyway.
Unified regulation could make an enormous difference in our
ability to resolve critical intermarket issues like unharmonized
margins, uncoordinated circuit breakers, inconsistent short
selling rules, and unintegrated clearance and settlement systems.
Establishing a framework for resolving these key issues, and
others we have not anticipated, is the most important step we can
take to reduce systemic risk and minimize the destabilizing
effect■ of major market moves in the future.
Q.17. The Federal Reserve Board was divided on the question
of whether stock index futures regulatory jurisdiction should be
shifted from the CFTC to the SEC, and so the Fed took no official
position on that question. What is your view on whether
jurisdiction should be shifted?
A.17.
Shifting the regulatory responsibility for stock
index futures to the SEC would appropriately unify the regulation
of stock■, stock options, and stock index futures under the
agency with the greatest overall expertise. Such unified
regulation would end the jurisdictional disputes over the
regulation of new products that stifles innovation or otherwise
drives them overseas. In addition, enforcement efforts to combat
intermarket abuses would be enhanced and the market disruptions
and heightened risk resulting from conflicting rules, such as
unharmonized margin requirements and uncoordinated circuit
breakers, would be eliminated.
This solution represents the minimum necessary to deal
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comprehensively with the most prominent problems our markets now
face. Moreover, because index futures are only a small
percentage of the transactions regulated by the CFTC, it would
not be a radical departure from the existing regulatory scheme.
If this minimum approach cannot be accomplished soon, I feel the
pressure for a more complete merger of SEC and CFTC jurisdiction
will increase and the arguments in favor of the more dramatic
solution of full merger will be strengthened.
Q.18. Assuming that Congress decided not to transfer
jurisdiction over stock index futures from the CFTC to the SEC,
do you believe that coordination could provide many, if not all
of the benefits, that transfer is thought to provide by those
arguing for transfer?
A.18.
I believe the evidence on this is clear.
Interagency
coordination has not worked, It has not adequately resolved
intermarket problems. While in theory interagency coordination
should provide many of these benefits, in practice the problems
have remained unresolved even when they have been severe and
evident to all observers. Jurisdictional reform, on the other
hand, would ensure that intermarket problems are viewed from an
intermarket perspective.
Q.19. Chairman Greenspan, in his recent appearance before
the Banking Committee, argued that the real cause of increased
volatility in our stock markets is technological change and the
increased concentration of stock in institutional hands, Do you
share the Chairman's views?
A.19. First, there is not, I believe, convincing evidence
that volatility, as traditionally and appropriately measured, has
increased in recent years. What has increased is the occurrence
of periods of serious market disruption.
It is certainly true
that technological change and institutional trading have put new
demands on our market mechanisms, and we need regulatory reforms
to ensure that these mechanisms can handle increased demands in
an efficient and orderly manner.
Q.20. Do you agree that it makes sense for us to have a
sound understanding of the factors responsible for market
volatility before we act in any way that could potentially harm
our markets and our international financial leadership?
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A.20.
I think we have adequate understanding of intermarket
probleaa and failure to implement reforms soon will adversely
affect our international financial leadership.
We always must be careful not to make changes that do more
hara than good, but I believe we have a sufficient understanding
of'these issues to warrant carefully designed measures to address
th9. Examples of such measures include coordinated circuit
breflkers and harmonized margins.
It has been 2-1/2 years since the market break of 1987, and
in that time we have become much better informed about the
markets• interaction, the forces underlying excess volatility,
and ways to minimize market disruptions. Numerous studies have
been conducted by regulatory agencies, SROs, market participants
and academics. Congressional oversight committees have held
comprehensive and informative hearings. Particularly during the
mini-break last October, we have had an opportunity to observe
how markets react to the regulatory changes that have been put in
place. Most importantly, we have observed repeatedly how the
linkages between markets confirm the reality of one market and
thus the need for more unified regulation.
I believe we have sufficient information to act responsibly
at this time on the crucial issue of regulatory fragmentation, as
well as on uncoordinated mechanisms that are contributing to
intermarket problems. The sooner we do so, the better prepared
we will be for future market volatility.
Q.21. Chairman Greenspan expressed some concern that some
actions carry a risk of driving stock index futures trading
offshore. Do you agree that some actions, for example, raising
futures margins beyond those required for prudential reasons,
carry that risk, and can you elaborate on the potential adverse
consequences for U.S. financial regulation and financial
leadership if most stock index futures trading was to move
offshore?
A.21.
I feel the greater competitive risk is in inaction.
I am concerned that failure to resolve intermarket problems will
drive trading to foreign markets.
If stock index futures traders go to Tokyo markets they
will find (1) stocks and stock index futures are traded on the
same exchange, (2) ultimate margin authority is vested in one
regulatory agency, MOF, (J) margins on stock index futures are
likely to be higher than present margin levels in the U.S., (4)
there is no jurisdictional dispute over who regulates any new
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product and thus, an absence ot the sorts of problems that beset
innovation in the fragmented U.S. regulatory system. This
unified regulatory system is generally the world standard among
all our major competitors.
Although we have the most free-market oriented regulatory
philosophy of any major market, our fragmented regulatory system
inhibits market participants and leads to intermarket problems
that undermine the competitive attractiveness of our markets.
Although other market systems such as those found in Japan are
clearly less free-market oriented in intent, the efficiency of
streamlined, unified regulation may make them more attractive to
market participants.
Rather than drive trading offshore, I believe harmonizing
stock and stock index futures margins will strengthen our markets
and help to preserve U.S. financial leadership. Regulatory
fragmentation can drive trading offshore by impeding innovation
in the U.S., as we have seen with index participations. There
are a number of reasons why it is important to preserve U.S.
derivative market leadership by keeping these markets safe, fair,
efficient, liquid, innovative and competitively priced. Perhaps
the most important is to preserve our leadership in the
underlying stock market and thereby promote U.S. capital
formation. In particular, I think a unified regulatory system
would strengthen the futures markets by eliminating intermarket
problems and attracting new market participants.
Q.22. Given that the futures exchange clearing system
successfully handled the 508 point drop in October of 1987, isn't
that strong evidence that the margining system already in place
is a good, workable system that provides the kind of prudential
protection that is needed?
A.22. No. The system was under very severe strain in
October 1987 and the fact we were fortunate enough to avoid major
systemic damage does not mean the clearance and settlement system
is sound. After the October 1987 break, the clearance and
settlement system fell over 6 hours behind its normal settlement
times, with Chicago clearinghouses owing over $1.5 billion to
investment houses. Had these funds been missing for any
significantly longer time, it would have unleashed a chain
reaction of events where other payments to other creditors would
not have been made. The result could have been very severe
systemic damage. Regulators also expressed concern about the
system in the October 1989 break. I do not think we should wait
until it breaks to fix the system.
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Moreover, the current system •ay have contributed to the
severity of such declines. Low futures margins indirectly permit
high leveraging in stocks. This leverage creates the potential
for major market disruptions, starting in the futures market and
washing back to the stock market. The active use of this
leverage has the potential, when concentrated in short periods of
time, to punch a hole in the fabric of the market.
I believe rethinking the existing margining system will help
to ensure that our markets do in fact achieve the requisite level
of systemic protection.
Q.23. Chairman Greenspan•s testimony on the CFTC/SEC issues
indicated his opposition to merging the CFTC and the SEC. He
stated that this kind of approach would "concentrate a great deal
of regulatory authority over the financial system in a single
agency ••••. We should not lose sight of the fact that under the
existing system of split jurisdiction over financial instruments,
our financial markets have been the most innovative in the world
with many of the new products spurred by the introduction of
index futures and other futures." Do you share the Chairman's
views in this area?
A.23.
I agree that, in the past, regulatory competition has
Competition between New York and
Chicago spurred new product development, while the practices of
different regulators often promoted diversity, experimentation,
and creativity. However, today adequate competition comes from
foreign markets and the disadvantages of regulatory fragmentation
outweigh, in my view, any residual advantage from regulatory
competition between the SEC and CFTC.
at times, promoted innovation.
Since the market break of October 1987, we have all come to
realize that the securities and futures markets behave as one.
This has significant implications for the regulatory structure.
Recent experience has seen this competition degenerate into
jurisdictional squabbles, which can strangle innovation and drive
new products overseas. Today, therefore, the globalization of
financial markets provides"us with all the regulatory competition
we need.
Q.24. One of the criticisms of letting bank holding
companies into the securities business is that it creates an
unfair competitive advantage because of the existence of deposit
insurance. The argument is that deposit insurance permits
banking organizations to take more risk, secure in the knowledge
that deposit insurance will provide protection if things go sour.
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This argument is made with particular force with respect to money
center banks, which some argue are too big to let fail. How do
you respond to this argument?
A.24. I believe that deposit insurance and other aspects of
the "federal safety net" do provide depository institutions with
benefits that could conceivably be used to compete unfairly with
other financial firms. Moreover, if firms are permitted to rely
on such benefits rather than their own expertise alone, they may
create additional risk to the system -- they may grow and
increase market share while being less efficient and •ore
vulnerable to failure. This could have the effect of increasing
ultimate losses to the deposit insurance fund.
on the other band, it seems clear to·me that banking
organizations do have substantial expertise in the securities
business and other lines of financial services in which they are
currently restricted from fully competing. This expertise should
be used both to make these businesses more competitive and to
make banks more competitive generally. I believe the basis for
banks' entry into these new fields should be their expertise, not
their access to cheap funding, made cheap through the federal
safety net.
The goal should, therefore, be to allow banking
organizations to capitalize on their expertise or "synergy• in
non-traditional lines of business without permitting them to take
advantage of federal safety net benefits. I think this can be
accomplished through appropriate insulation of the insured
depository, although I have not reached any firm conclusions on
the best specific ways to accomplish this. Obviously, structural
separation is one method, whether by using subsidiaries or
affiliates. Another is restrictions on transactions between the
insured depository and its subsidiaries or affiliates. These are
exactly the kinds of questions that should be addressed in
efforts to reform the financial services industry.
Q.25. It is also argued that deposit insurance makes it
possible for banking organizations to raise money more cheaply
than their securities industry competition can. If banking
organizations are only allowed into the securities business
through an affiliate of the holding company, and the bank is not
permitted to lend to its securities affiliate, is this argument
adequately addressed?
A.25. I believe we can design a system to address
adequately this concern. If appropriately designed structural
requirements and firewalls are successfully enforced and if the
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protection of deposit insurance is not extended beyond its
intended scope, then there should be an essentially level playing
field for bank and nonbank securities firms.
Q.26. Another major criticism made of letting banks into
the securities business is that it creates a real opportunity for
tying services, and that this tying would disadvantage customers
of the banks and the banks' competition in the securities
business. Many securities firms are affiliated with insurance,
real estate, or other kinds of companies. That leads to two
questions:
a)
How is the potential for tying in these situations
dealt with under existing laws?
b)
Is the problem any more serious when a bank is involved
and is any additional special protection necessary?
A.26. This question deals with complex issues associated
with both banking law and antitrust law, and I have not studied
this area sufficiently well to give a definitive answer at this
time. I do think it is an important issue and will examine it as
we consider financial services regulatory reform.
Q.27. Some insurance companies are involved in corporate
lending. I understand that at least one even has loan production
offices in various locations around the country. Insurance
companies are already the biggest long term lenders to
agriculture. While insurance companies or securities companies
cannot offer demand deposits, on the asset side of the balance
sheet, is there anything that a bank holding company can do that
a financial conglomerate such as Prudential/Bache, Sears, or
American Express cannot do?
A.27. The only asset that a bank holding company may own
that is not permissible for commercial companies is a controlling
interest in a bank or bank holding company (except for so called
"nonbank banks" which were grandfathered by statute). On the
other hand, bank holding companies are limited to owning shares
of banks, companies engaged in activities that are closely
related to banking, and certain other authorized companies.
Thus bank holding companies have less authority and stricter
regulation than insurance companies or securities firms. In
fact, bank holding companies are disadvantaged vis-a-vis the
three firms noted in your question, because each of them owns a
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CEBA-grandfathered nonbank bank. This permits the combination of
commerce, finance, and banking. I would also point out that to
my knowledge none of the more than 160 grandfathered nonbank
banks, which permits such business combinations, appears to have
faced any difficulties because of its broader range of
activities.
Q.28. The Federal Reserve has provided liquidity support
for troubled banks in the past, and is doing large amounts of
such lending to at least one bank with financial problems now.
Under a risk-based deposit insurance premium syst-, would the
Federal Reserve lending practices have to change in any way, and
what factors would the Fed have to consider before making a loan?
A.28. I do not see a rigorous connection between a change
to a risk-based deposit insurance premium system and Fed lending
except that the discipline imposed by such an insurance system
might reduce the chances that a bank would get into trouble and
need liquidity support.
The one thing that does need to be considered carefully in
any effort to reshape the insurance system is whether the changes
being proposed would increase the propensity of holders of
uninsured claims to "run" when an institution has suffered a
reversal but actually is still solvent and viable. In this
respect, the insurance system may have significant i•plications
for the stability of the banking system and for the Federal
Reserve in its role as lender of last resort.
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QUESTIONS FOR DAVID W. KULLXNS, JR.
FRON SENATOR PIIXL GRAIIII
MARCH 23, 1990
Q.1. The last twenty years have seen a dramatic growth in
foreign exchange markets. This growth has diminished almost to
insignificance the role that governments can play to influence
those markets by direct intervention. The market volume each day
could easily absorb any financial position taken by a central
bank. And yet, international developments are having a growing
influence on the conduct of domestic monetary policy. Xn this
new international environment, how can the Federal Reserve
effectively conduct monetary policy?
What are the restraints on its action?
What effective tools remain in the possession of the Federal
Reserve?
How long can we count on such tools?
What additional tools would you envision or recommend?
A.1. In my view, intervention in the foreign exchange
markets has never been an especially important tool of United
States monetary policy. Intervention has at times been used to
calm disorderly markets, or as a complement to monetary or fiscal
policies that were appropriate to domestic objectives. still, I
believe it is no substitute for such policies, nor is it
necessary for their success.
Instead, monetary policy is implemented either by adjusting
the quantity of reserves available to depository institutions
through open market operations or by changing the price of
reserves at the discount window. These actions affect the volume
of money and credit as well as domestic short-term interest
rates. In turn, those changes ripple through the financial
markets, altering the cost of credit and influencing decisions
about prices, production, and spending. Of course, this process
has always been subject to significant uncertainties about the
magnitude and timing of policy effects on the economy.
The increasing globalization of the world's economies and
financial markets has opened up new channels through which
monetary policy operates. For example, with exchange rates free
to vary, a change in monetary policy can change not only domestic
interest rates, but also the value of the dollar on foreign
exchange markets. Such fluctuations in the exchange rate alter
the relative prices of domestic and foreign goods, influencing
our economy by shifting demand -- both domestic and foreign
toward or away from U.S. producers. At the same time, with funds
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flowing freely across our borders, developments in foreign
financial centers have a greater capacity to affect both the
exchange value of the dollar and conditions in domestic financial.
markets.
Nonetheless, while international factors do alter the
precise channels through which a given monetary policy action
affects our economy, they do not change the fact that, in the
long run, our economic circumstances depend on our own monetary
and fiscal policies. Policy makers must take into account the
effects of developments abroad, and be aware of the impact of our
actions on the rest of the world, and how that feeds back to
domestic conditions. I feel international consultation among
policy makers is also useful. Still, participants in financial
markets feel that domestic conditions and Fed policy are very
important influences on our economy, and I agree with this view.
Domestic factors remain the most important influences on our
economy and on our financial markets, and existing policy tools
remain well-suited to pursuing our goal of sustainable,
noninflationary growth while supporting stable international
economic relations. We need to think carefully about how we
deploy our instruments of policy, but at this time I do not see
the need for new methods of implementing monetary policy.
Q.2. Describe what you see as the appropriate division of
responsibilities for international monetary policy between the
Federal Reserve Board and the Federal Reserve Bank of New York.
What problems have there been in the past?
A.2.
The Federal Reserve has a role in formulating international financial policy through a process of consultation with
the Administration and Congress. The Board of Governors itself
is required to exercise special supervision over all foreign
relationships and transactions of any Federal Reserve Bank.
With respect to international monetary policy, the relevant
policy-making body of the Federal Reserve System in this area is
the Federal Open Market Committee, composed of the Board members,
the President of the FRBNY, and four other Reserve Bank
presidents.
The Foreign Department of the Federal Reserve Bank of New
York headed by the FOMC's Manager of Open Market Operations,
Foreign Exchange, conducts actual foreign exchange operations as
agent for the FOMC and for the Treasury. Its responsibilities
are operational rather than policy making, though by virtue of
its close contacts with the market it is in a position to offer
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constructive suggestions on strategy and policy. The Manager
also frequently acts as a facilitator tor co-unications between
the Federal Reserve and the Treasury.
I know ot no serious problems between the Board and the New
York Federal Reserve Bank in this area iJI recept years, and I
feel the respective areas ot responsibility ar._well defined and
well understood.
! ..
Q.3. What do you see as the appropriate division of
responsibility for international monetary policy between the
Federal Reserve and the Treasury?
Who sets U.S. exchange rate policies?
What happens it the Federal Reserve and the Treasury
disagree over exchange rate policies?
A.3. As the chief economic officer of the United states,
the Secretary of Treasury, acting for the President, should have
ultimate responsibility for the international financial policies
of the United States. However, since exchange markets are
integrally linked with money markets and questions of monetary
policy, over which the Federal Reserve has independent authority,
it is imperative for the Federal Reserve and Treasury to work in
close consultation and coordination in this area to ensure
consistency of overall U.S. international monetary and financial
policy.
The Secretary of Treasury, in close consultation with the
Federal Reserve, sets U.S. exchange rate policies. In most
international forums where these policies are discussed, both
agencies are represented. The Secretary of the Treasury and the
Chairman.of the Federal Reserve both participate in meetings of
the Group of Seven finance ministers and central bank governors.
The Secretary of Treasury serves as the U.S. Governor of the IMF,
and the Chairman of the Federal Reserve serves as his alternate.
Differences between the Federal Reserve and the Treasury
over exchange rates policies always have been worked out in the
past through the process of reasoning and deliberation. If
irreconcilable differences should arise in the future, which is
highly unlikely, I would suggest that the appropriate Committee
of Congress should be notified immediately.
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Q.4. How closely should the State Department be involved in
the conduct of foreign exchange policies?
What weight should be given to foreign policy concerns?
A.4. The Secretary of Treasury, acting for the President,
has responsibility for U.S. international financial policy. To
the extent that international financial issues are related to
other issues confronting the U.S. government, as is often the
case, the Treasury Department should consult with other relevant
agencies both informally and in interagency meetings.
With respect specifically to foreign exchange policies, the
Treasury works especially closely with the Federal Reserve.
Finance ministries and central banks throughout the world are the
agencies most involved with exchange rate matters. Broad foreign
policy concerns provide a context in which foreign exchange
policies are formulated, and the State Department makes its views
known to the Treasury Department and, on occasion, to the Federal
Reserve. Moreover, I believe the State Department -- along with
its counterparts in other countries -- participates in some
international forums where foreign exchange policies are
discussed. However, I think the State Department in the past has
not been closely involved in specific aspects of foreign exchange
policy, and this is an appropriate division of responsibility.
Q.5. Should the United States promote the international
convertibility of the Soviet currency? Why or why not?
A.5.
currency convertibility helps integrate a country
into the international economy. The primary benefit of
convertibility is that it facilitates the free movement of goods
and capital internationally, thereby contributing to the
efficient allocation of economic resources. As such, there is a
clear connection -- and interdependence -- between
convertibility, on the one hand, and international capital
mobility, free trade, and free markets in general, on the other.
Indeed, it would seem that the full benefits of a market economy
would not be realized without a convertible currency. Without
convertibility, the costs of certain transactions (involving
foreign currency) are affected, thereby altering some allocative
decisions.
However, convertibility need not be, and often has not been,
an all-or-nothing proposition. Various forms of limited
convertibility have been employed by many countries. However, as
long as there are some distortions owing to the remaining
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restrictions on convertibility, there are, in principle, economic
costs to partial convertibility. In some cases, these costs
might be small and/or outweighed by other considerations.
X feel that it is for the Soviet authorities to decide the
pace at which they move toward convertibility of the ruble. The
clearest active role that the U.S. authorities can play in this
process is in the area of what might be called "technical
assistance," that is to say, advice and information on how a
market economy operates and how policy is made in such an
economy. This assistance could be brought to bear on all aspects
of economic reform, not just the narrow question of currency
convertibility.
Q.6. If you were appointed to the Soviet central bank
rather than to the U.S. central bank, what program would you
outline to move the Soviet economy to the condition where the
ruble was fully convertible internationally?
A.6.
It is somewhat difficult for me to project myself
into the premise of this question, but I'll give it a shot.
The key conditions required for a successful implementation
of ruble convertibility would be an economy organized along the
lines of a market-oriented economic system and exhibiting a
reasonable degree of macroeconomic stability. Many elements are
involved in a successful reform along these lines. However, the
Soviet central bank would be responsible for helping to achieve
macroeconomic stability. For such stability there are two
essential ingredients: a central bank that is effectively
independent of the fiscal authorities -- and the pressures to
finance the government through the creation of money -- and a
commitment to some type of monetary discipline that would limit
any upward drift in the general level of prices. I do not feel
sufficiently expert on the topic to comment on the details of
such a program within the Soviet context.
Q.7. The Federal Reserve shares responsibility for United
states participation in the International Monetary Fund. Under
what conditions would you favor Soviet membership in the IMF?
A.7.
While I have not studied this issue in detail, I would
favor membership of the Soviet Union in the IMF if the Soviet
Union could meet the obligations of membership as described in
the IMF Articles of Agreement and if Soviet membership appeared
to be in the best interest of the international community.
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Q.8. It has been said that the single most important factor
in bringing on the Third World debt crisis was the rapid rise in
interest rates and that the single most important factor in
defusing the crisis was the fall in interest rates in the
mid-1980s. To what extent, do you believe, are such assessments
valid?
A.8.
I have not studied this topic extensively, but I would
make a few points in response to your question. The rapid and
large rise in interest rates in the early 1980s was needed to
contain inflationary pressures in industrial countries. The rise
in interest rates and the related slowdown in economic activity
and weakness in commodity prices contributed to the debt problems
of heavily indebted developing countries. Obviously, oil price
volatility also played an important role. However, some heavily
indebted countries did not encounter debt problems. This
suggests that the policies followed in the indebted countries
were also important determinants in whether or not a crisis was
encountered. The subsequent decline in interest rates and pickup in world economic activity, as well as ongoing adjustments in
the developing countries, all helped to ease the debt problems of
developing countries. Those countries that implemented sound
policies benefitted the most from these developments, whereas
those countries that failed to address the fundamental problems
facing them did not derive lasting benefits from the lower
international interest rates and the resumption of growth in
industrial countries.
Q.9. What do you see as the fundamental causes of the
international debt problems of Latin America?
A.9.
In my view, the fundamental causes of the
international debt problems of Latin America include the failure
on the part of borrowing countries to recognize that the
relatively low rates of interest that prevailed in the 1970s
would not be maintained and that the extent of their indebtedness
therefore would become a burden; the overeager lending by
commercial banks; oil price volatility played a role as well; and
the inappropriate macroeconomic and microeconomic policies that
many of the borrowing countries had been following prior to
encountering debt problems, including the ineffective use of
external borrowing.
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Q.10. Why, do you believe, have the debt problems in Latin
America and Africa not been found similarly in many of the
countries of the Pacific Rim, such as Thailand, South Korea,
Malaysia and Taiwan?
A.10. This is not a topic I have explored in detail, but I
would note a few points. The recent debt problems of many
developing countries resulted from a combination of adverse
external shocks and the failure of these economies to adjust
rapidly to these shocks. All indebted developing countries,
including those of the Pacific Rim, were affected in the early
1980s by the rise in real interest rates and by the recession
among the industrial nations. On the other hand, many Pacific
Rim countries entered the 1980s with smaller debt ratios than did
the African and Latin American countries. Moreover, the declines
in commodity prices during the 1980s generally affected the
African and Latin American countries more strongly than they
affected the Pacific Rim economies, where manufactured products
represented a greater share of total exports. Finally, the
stronger outward orientation of the Pacific Rim economies allowed
them to generate higher trade surpluses by increasing exports and
hence preserving high levels of economic activity.
By contrast,
economies with an inward or import-substitution orientation,
which was the more normal pattern in Latin America, found it
difficult to implement the reforms necessary to encourage export
expansion, and had to finance higher debt-service payments
through import contraction instead. This, in turn, necessitated
reductions in long-standing fiscal deficits, which political
considerations often made difficult to achieve. As a result,
many countries failed to make the fiscal and economic adjustments
necessary to meet their debt-service obligations.
Q.11. Would you provide for the Committee your evaluation
of the recently announced Brazilian economic plan? Do you
believe that it will be successful in achieving its announced
goals? What do you see as its strengths? It weaknesses?
A.11.
I have not analyzed the plan in detail, but I have a
few comments based upon a preliminary look at it. President
Fernando Collor de Mella's economic program, announced when he
took office in mid-March, is Brazil's most ambitious antiinflation program to date. The plan proposes to increase tax
revenues, sell public sector firms, reduce government
expenditures on personnel, and liberalize trade, and includes
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other structural reforms. The plan also includes an 18
month freeze on large domestic deposits. In addition to greatly
reducing the amount of liquidity in the economy, the government
also reduced interest payments on government debt. Most of the
measures require legislative approval.
The strength of the plan is in the inclusion of concrete tax
increases and spending cuts designed to reduce the fiscal
deficit. The Brazilian government's goal is to make fiscal
adjustments equivalent to 10 percent of GDP. It remains unclear
at this early stage whether the government can achieve this goal.
If it does, I am hopeful that the program will be successful in
eliminating the threat of hyperinflation.
The future management of the freeze on deposits (affecting
about $100 billion out of $150 billion in deposits held with
financial intermediaries) will be another key to the plan's
success. The large fall in liquidity has made it difficult for
firms to pay employees and other creditors. A challenging
problem for the government will be to relax the liquidity squeeze
in a manner that is consistent with price stability, while
avoiding an excessive decline in economic activity.
Q.12. Do you favor involuntary, government-mandated
forgiveness of international debt of troubled Third World
debtors? Why or why not?
A.12. Involuntary, government-mandated forgiveness of
international debt of troubled Third World debtors would harm the
growth prospects of developing countries and would not be in the
U.S. policy interest. Dictating terms of debt relief
unilaterally is likely to fail, and even if enacted might be
detrimental to the long-term interests of creditors and debtors
alike. In particular, countries run a high risk that access to
trade credits and other private capital inflows would be
curtailed for an extended period of time. In addition, I believe
that it is not the proper role of government to impose specific
terms on private bank creditors that essentially serve to reduce
the value of their assets.
In contrast, the Brady initiative emphasizes a cooperative
approach balancing official support for debt and debt service
reduction with new money flows where necessary for those
countries that agree to adopt sound policies and to continue the
process of structural reform. Positive results have been
achieved under the initiative in a number of countries to date,
and several other countries are beginning negotiations with the
banks on financing packages.
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Q.13. In your view, what role does the IMF currently have
in the post-Bratton Woods era of flexible exchange rates?
'The current Managing Director of the IMF
would like to see the IMF given the resources
role >in the •anagement of exchange rates. Do
the XMF should have an increased role in this
shoul'd that role be? If not, why not?
has stated that he
to play a greater
you believe that
area? If so, what
Do you believe that the IMF should be given increased
resources at this time? Why or why not?
A.13. As I understand it, the IMF has a defined role in
current foreign exchange •arket arrangements. Article IV of the
IMF'• Articles of Agreement, governing exchange arrangements, was
revised in 1976 to take into account the changes in foreign
exchange market policies and practices in the post-Bratton Woods
period. Article IV specifies the general obligations of Fund
members. It includes a provision for Fund surveillance over the
exchange rate policies of its members, and it calls for the Fund
to "adopt specific principles for the guidance of all members
with respect to these policies." These principles are spelled
out in more detail in the 1979 Fund decision on "Surveillance
over Exchange Rate Policies."
over time, the Fund's role in exchange market arrangements
has evolved further. The Managing Director of the Fund
participates in multilateral surveillance discussions of the
Group of Seven, as well as in the discussions of the semi-annual
meetings of the Interim Committee. In its various roles,
therefore, the Fund is actively involved in monitoring foreign
exchange market developments, and the Managing Director has ample
opportunities to voice his views on these matters.
The f'und'a role in exchange market arrangements, however,
does not require the Fund to be a party in foreign exchange
•arket intervention activity. There, thus, is no need to
increase the Fund's resources for this purpose. current
discussions regarding an increase in Fund quotas relate primarily
to providing the Fund with adequate resources to support the
stabilization programs of its members that require additional
external finance. In light of recent developments in Eastern
Europe, the purview of the Fund's activities, and calls on its
resources, has widened. This larger Fund role provides an
additional justification for the consensus for an increase in
Fund quotas that is now emerging.
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Q.14. What purpose, if any, do you believe that IMF gold
reserves serve?
If an increase in IMF resources is required, why should the
taxpayer be called upon to provide that increase before these
gold reserves are used?
A.14. Gold is an important asset of the Fund even though
gold is not now normally used in the Fund's transactions and
operations. Gold provides additional confidence to creditors of
the IMF, including the United States.
Gold sales would only substitute one type of asset for
another, assuming the Fund were to retain the proceeds from the
sales, and would only raise liquid resources on a one-time basis.
In contrast, an increase in quotas enlarges the assets of IMF,
and can be repeated as appropriate.
While a quota increase means that the United States and
other creditors will be providing more resources to the Fund, the
United States does receive interest on the resources when they
are used. Moreover, a quota increase enlarges the size of
potential drawings on the Fund by the United States and other
countries. The United States did draw on its reserve tranche in
the Fund in 1978.
Q.15. What problems do you believe are presented for U.S.
foreign exchange policy if the proposed European Bank for
Reconstruction and Development bases all of its transactions,
contributions, and so forth on the ECU?
A.15. In my view, the choice by the European Bank for
Reconstruction and Development of a currency or currencies in
which to denominate its transactions and contributions would have
very little, if any, effect on exchange rates or, therefore, on
U.S. foreign exchange policy. Even if that choice influenced
ultimate demahd for assets denominated in various currencies on
the part of individual holders of wealth, the magnitude of the
effect would likely be trivial relative to total wealth.
Q.16. Do you support the view that a bank holding company
and its subsidiaries should be considered a source of strength
for the insured bank subsidiaries?
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Is the perpetuation of this doctrine, in your view, an
iJlpediaent to restructuring the relationships between banks,
securities, and insurance industries, since it would discourage
securities and in•urance corp9rations fro■ seeking to acquire
banks (should such acquisition become allowable by law)?
A.16. I have not yet reached a definitive conclusion on
this issue, but it is an iaportant issue to explore as we move
toward financial services reform.
The Federal Reserve Board (PRB) has long contended that bank
ho1ding companies should act as a source of managerial and
financial strength to their subsidiary banks "by standing ready
to use available resources to provide adequate capital funds to
subsidiary banks during periods of financial stress or adversity"
(12 C.F.R. Part 261). The FRB developed the source of strength
doctrine pursuant to its authority under the Bank Holding company
Act of 1956 (BHCA), the Federal Deposit Insurance Act, and the
International Lending supervision Act. However, the doctrine l!ll
H has never been codified under current law. Of course, FIRREA
provided for cores-guarantees for banks within the holding
company structure, but it is too early to assess the impact of
this provision.
The source of strength doctrine is based in large part on
the rationale that a bank holding company derives certain
benefits at the corporate level through its ownership of a
comaercial bank. Specifically, the subsidiary bank can obtain
federally insured funds and has direct access to Federal Reserve
credit. These are alleged to be unique franchise benefits in
return for which the holding company ought to serve as a source
of strength and support to its subsidiary banks. As a practical
matter, this policy is intended to prevent a holding company from
"walking away" from a failing or failed bank subsidiary.
It is true, however, that from both a theoretical and policy
standpoint, the source of strength doctrine is in conflict with
the principle of corporate separateness which has served as the
cornerstone of many proposals to restructure the commercial
banking system, most notably in the area of Glass-Steagall
reform. This is so because the doctrine can be interpreted as
requiring a failing bank's non-depository affiliates to provide
financial assistance, effectively negating the purpose of
constructing "firewalls" and presumably "insulating" insured
depositories from their holding company parents and affiliates.
In this respect, the source of strength doctrine may tend to
impede an efficient, balanced and equitable restructuring of our
financial services markets, and this is why we need to rethink
this issue in the coming debate on financial services reform.
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li1
Q.17. What are your views on the Qualified Thrift Lender
test in the FIRREA?
;_
To what extent does this QTL test increase the cost of
resolving the S&L crisis, either by disqualifying or discouraging
potential acquirors or by increasing the amount that the
Government must provide in an assisted acquisition in order to
attract an acquiror?
A.17. The Administration did not support the 70 percent QTL
test in FIRREA because it may be too restrictive, and instead
supported a 60 percent QTL test. It is true that the test in
FIRREA may tend to increase the risks inherent in a nondiversified portfolio. Nonetheless, very many successful thrifts
currently prosper within the 70t QTL test. There are many
techniques for dealing with the problems associated with it (e.g.
hedging, ARMs, originating and selling off MBS).
Thus, it is still unclear exactly how much the QTL test in
FIRREA might increase the cost of resolving thrifts.
Q.18. Do you support Chairman Greenspan•s view that
regulatory authority over securities margins should be
transferred from the Federal Reserve to the SEC?
A.18. I believe a single agency should have authority over
all stock related margins. There are several possibilities for
the single regulator. The Federal Reserve currently regulates
margin on stocks and stock options, so it is a logical choice for
stock index futures margin authority as well. Of course,
Chairman Greenspan has said that the Federal Reserve does not
want to be the single regulator of margins.
The SEC also is a logical choice because of its expertise
and regulatory authority in the securities markets. The Fed has
also delegated its stock option margin authority to SROs with SEC
oversight. If jurisdiction over stock index futures were
transferred to the SEC, it would seem all the more appropriate to
give the SEC authority over securities and stock index futures
margins.
If futures margins remain unregulated at the federal level,
however, I see no compelling need for the Fed to relinquish its
current authority over securities margins. Nonetheless, the
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basic rationale for margin authority at the Fed may need reexamining and there is merit in the notion that regulation should
be unified under one regulator rather than fragmented among
several. overall, I feel this issue should not be dealt with in
a piecemeal manner but as part of a coherent, comprehensive
so1ution to the problems caused by regulatory fragmentation.
Q.19. What do you see as the difference, if any, between
margins on futures, options, and stocks?
What changes, if any, would you recommend in the regulation
of these margins?
Do you support the conclusion of the Brady Commission that
the Federal Reserve should be given authority over futures
margins?
A.19. Margins on stocks and futures are different in some
respects due to differences in the extent of daily marking to
market, different settlement periods, and the like. But margin
requirements on stock and futures share a fundamental
characteristic -- they control leverage, and leverage determines
how much securities or futures can be bought or sold with a given
amount of collateral.
Leverage in the futures markets has several consequences.
It obviously affects the prudential interest of the
clearinghouse. But if the clearinghouse sets margin too low for
its own private purposes, as I believe they have in some cases,
there is a systemic risk that a failure of one clearinghouse
could cause a chain reaction that destabilizes the system. That
systemic risk, which really is a cost to the public, goes beyond
the private, prudential interest of the individual clearinghouse.
This is one very important reason why I believe some mechanism
for governmental oversight of futures margins is needed.
Moreover, inconsistent margins in two segments of what is really
"one market" can, I believe, contribute to episodic periods of
market wide disruption. These disruptive episodes erode investor
confidence and ultimately can affect the cost and availability of
capital. Such periods of market disruption also put inordinate
strain on the clearance and settlement process and thus, engender
systemic risks as well.
I believe the margins on stocks, stock options, and stock
index futures should be harmonized, not equalized, so that the
leverage effects in the "one market" are consistent. To ensure
consistency, and given that futures margins have a public
purpose, there also should be, I believe, a unified system of
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federal oversight of margins on ■tocks, stock options, and stock
index futures. The Federal Reserve i ■ one of several possible
choice ■ for unified regulation of margins, as I explained at
questions 18.
Q.20.
Do
you favor the merger of the SEC and the CFTC?
Several proposals have been made to transfer jurisdiction
for some or all of the regulatory authority over financial
futures to the SEC. Which, if any, of these proposals do you
favor, and why?
A.20. I believe we must find a solution to the probl-s
associated with intermarket regulation. These include the
jurisdictional conflict associated with new products which hurt
U.S. innovation and competitiveness; cross market enforcement
issues; and inconsistent regulations in different markets which
contribute to market disruptions. The latter two problems in my
view undermine the confidence of investors in our markets and
may add to systemic risks. It is important we solve these
problems soon because, for the first time, we have serious,
viable competition from foreign markets.
Merger of the SEC and CFTC is one of several possible
solutions that I believe merit serious consideration. A merger
would be the most direct and broadest solution, and it would 111a.ke
our regulatory system similar to many of our major foreign
competitors. By unifying all regulation we could address not
only the intermarket issues we now recognize, but new one■ that
are bound to arise as innovation continues.
A different solution would be to unify regulation only of
those markets where problems have been acute. This could range
from unified regulation of all financial products and their
derivatives to unified regulation of stock-related products.
In my view, the minimum course of action would be to unify
regulation of stocks, stock options, and stock index futures
under the agency with the greatest overall experti ■e in ■tocks,
the SEC. Margin authority over each of these products would also
require consolidation in a single regulator. In addition, it is
imperative that we end the jurisdictional disputes over the
regulation of new products that simply drive th- to overseas
markets (this would require elimination of the "exclusivity"
clause in the Commodity Exchange Act, which currently requires
exclusive CFTC regulation of sl!ll! instrument that has .illU!: element
of "futurity").
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This minimum solution would deal comprehensively with the
most prominent problems we now face. Moreover, because index
futures are only a small percentage of the transactions regulated
by the CFTC, it would not be a radical departure from the
existing regulatory scheme.
Indeed, any more limited approach will only delay the
resolution of intermarket problems that must be addressed.
If
this minimum approach cannot be accomplished soon, it seems very
1ikely that the pressure for the complete merger approach will
increase as the problems continue unabated.
Q.21. Who should have jurisdiction in the United States for
the regulation of foreign exchange futures markets?
A.21.
I know of no particular problems in this area and,
therefore, feel currency futures should be dealt with in the
broader context of a solution to problems of regualtory
fragmentation.
As you know, the cash market for foreign currency is a
large, international market that is not subject to direct
government regulation, though many of the major players in this
market, such as commercial banks, are regulated.
In contrast, in
the case of stock index futures one regulator, the SEC, regulates
the cash market and certain derivatives, while another regulator,
the CFTC, regulates futures on the cash market. In the case of
foreign currency futures, we have an unregulated cash market and
a regulated futures market. This is also the case with many
other futures contracts.
While I have not studied this area, I do not see a
particular reason for transferring to a different agency
regulation of foreign currency futures. However, this does not
mean that aspects of their regulation might not be altered. For
example, the exclusive jurisdiction clause of the Commodity
Exchange Act could be modified to allow useful hybrid products,
including those involving foreign currency to be traded.
In this
regard, because the CFTC seems to have a narrow view of the
Treasury Amendment, which exempts from their jurisdiction
transactions in foreign currency unless conducted on a board of
trade, modifications could clarify that debt instruments with
some aspects having similar risk characteristics to foreign
currency futures are not precluded by the Commodity Exchange Act.
Moreover, I would not rule out a general solution to the
continuing jurisdictional issues between the CFTC and the SEC,
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auch aa merger of the two agenciea, but I do not favor
transferring the jurisdiction of exchange-traded foreign currency
future• separately from a more global solution to jurisdictional
conflicts involving futures markets.
Q.22. Under what condition•, if any, would you support the
imp-,.ition of wage and price controls upon the economy?
A.22. Wage and price controls are a distinctly inferior way
of dealing with inflationary probl-s; they are costly and
distortive, and usually prove to be at best temporary palliative.
One perhaps should "never say never," but I am inclined to do so.
It clearly is the central task of the Federal Reserve to pursue
policies that obviate any consideration of such measures.
Q.23. What are your views on Senator Moynihan•s proposal to
reduce Social Security taxes, or proposals to take Social
security out of the unified federal budget for deficit
calculation purposes?
A.23. Many of these proposals have their roots in concern
about the progress we are making toward the elimination of the
federal budget deficit. I share those concerns. However, it
should be possible to address the fundamental issues of deficit
reduction without tampering with the substance or the accounting
of Social Security, which I do not think would be constructive in
itself. FUndamentally, we need to rein in the non-Social
Security deficit and, thereby, secure the benefits of greater
national saving and capital formation that the Social Security
surpluses could provide.
Q.24. Do you believe that the Gramm-Rudman-Hollings deficit
reductions goals can be reached without an increase in taxes, or
do you favor a combination of spending reductions and taxes to
meet these goals?
A.24.
I believe that the goals can be reached without
additional taxes, and I would hope that decisionmakers will find
the political will to achieve that objective.
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Q.25. Would you favor legislation providing for an
independent, perhaps GAO, audit of the Federal Reserve on a
regular basis? Why or why not?
A.25. It is •Y understanding that the Federal Reserve is
al.ready subject to both independent and GAO audits on a regular
basis. Outside independent auditors perform several functions.
Under the Board• s Inspector General, a private accounting fina
conducts an annual financial audit of the Board of Governors,
which i~ publicly available. In addition, this outside fina is
responsible for review of the examination procedures used by the
Board in its audits of the Reserve Banks.
The General Accounting Office also has authority, under the
1978 Federal Banking Agency Act, to audit the Board, the Federal
R-erve Banks, and the branches and facilities of the Reserve
Banks. The GAO has initiated nU11erous audit projects since the
law•• enactment covering a whole range of Federal Reserve
operations including bank supervision, check clearing, wire
transfers, and Federal Reserve expenditures.
The law does, however, exempt monetary policy from the
purview of GAO audits, which I fully support because a GAO
examination of the monetary policy process, I think, would
constitute a step toward compromising the independence of the
Federal Reserve. Indeed, in exempting monetary policy from the
purview of a GAO audit, Congress recognized that the purpose of
an independent monetary authority is that, subject to the
oversight of Congress, that authority should be free from
political pressure to determine and put into effect the most
appropriate monetary policy.
Rather than GAO, Congress, in effect, audits the Federal
Reserve•s monetary policy. Indeed, the semi-annual HumphreyHawkins hearings were established so that Congress could oversee
Federal Reserve monetary policy.
Q.26. Would you support immediate publication of the
minutes of the Federal Open Market Committee meetings? Why or
why not?
A.26.
While there are arguments on both sides, I feel the
current approach works well, and I do not support immediate
publication of the minutes of the meetings of the Federal Open
Market Committee. I recognize that, in general, the more
information available to the market, the more efficiently the
price mechanism can operate. And, in the case of financial
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markets and the pricing of financial instruaents, ■onetary policy
decisions and the intentions of the monetary authorities are
certainly key information variables. The current stance of
policy, however, is seldom a source of uncertainty for the
market. Through its open 111arket transactions, the Federal
Reserve makes that stance quite clear. It is these actions that
matter. Hence, imaediate announc-ent of changes in the
operating stance would add very little to information already at
the market's disposal. Indeed, accompanying open aarket
transactions with interpretative announcements could increase the
potential for misunderstanding and market disruption.
Moreover, uncertainties about ■onetary policy involve the
prospective course of policy; here prompt release of the
■inutes -- or the directive to the Open Market Desk -- 111ay add
to volatility, rather than damp it. The directive contains some
forward-looking language, in the form of contingency plans for
policy should events not accord with the FOMC's expectations.
PUblication of that portion of the directive could elicit price
mov-nts in financial markets, despite the fact that the
contingency plans rarely are implemented. Concern about market
reactions, in turn, might cause the FOMC to restructure the
directive in ways that made it less informative and less useful
as a guide for implementing policy. Partly as a result, the
requir-ent to release the minutes might interfere with the
efficient pursuit of policy goals.
On balance, I would prefer to confront the possibility of
efficiency losses to the financial markets than to
risk a loss of flexibility, efficiency, and effectiveness in the
operation of monetary policy.
some
■inor
Q.27. Are U.S. banks in decline vis-a-vis their
international competitors?
If so, what are the causes and what can be done to address
these causes? If not, then why do the major U.S. banks complain
that they are?
A.27. The large U.S. banks involved in international
activities clearly have been losing shares in some traditional
banking markets, and individual U.S. banks are no longer the
world's largest. However, in some other markets, notably those
involving more sophisticated instruments and services, which do
not show up on banks' balance sheets, U.S. banks remain among
the world's leaders. Moreover, the profitability of U.S. banks
has been relatively good.
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In any case, the competitive position of u.s. banks would
i.Japrove if the cost of capital facing U.S. banks were lower.
U.S. banks would benefit also from a removal of the limitations
on securities activities and interstate branching, which would
perait greater geographic and product diversification and would
enable :1.s. bank■ to achieve the synergies from additional
activities that banks from some other countries already enjoy.
Q.28. Do you support the concept of using the Federal
Reserve•• regulatory powers as a tool in a trade war, that is, to
base decision■ on petitions from foreign-owned applicants not on
the aerits of the particular application alone, but on the
treatment given to u.s.-owned banks in foreign countries?
A.28. No. The Federal Reserve has always taken the
position, with which I am in agreement, that national treatment
applied without any conditions of reciprocity facilitates a more
efficient, a more innovative and dynamic, and a more prudent
financial system in the United states. Moreover, a reciprocity
policy could have the effect of discouraging foreign investment
in the United States at a time when such investment is needed.
Supporters of reciprocity argue that, whatever the economic
merits of a policy that is based on free trade, an important
strategic consideration is that foreign countries such as Japan
take liberalizing measures only when under the pressure created
by a reciprocity policy. However, I would be concerned that a
U.S. policy of reciprocity in the banking sector could be viewed
as an endorsement of the tendency of EC policy toward reciprocal
national treatment and could encourage other foreign countries to
adopt reciprocity policies that would be applied on a bilateral
basis. The standards used in such policies and their
impleaentation would be likely to vary considerably, with
considerable potential for restricting international trade in
financial services and for restricting opportunities for U.S.
banks. I, therefore, believe that it is more appropriate and
less risky to continue to work cooperatively on a bilateral basis
with those countries in which U.S. banks see the greatest
benefit ■ from some relaxation of restraints on entry and
operation of foreign banks, or through a multilateral forum such
as the GATT.
Q.29.
What, if any, monetary role would you support for
gold?
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A.29. The price of gold can be sensitive to changes -actual and expected -- in the monetary environment.
Specifically, gold prices often react to variations in the
expected rate of inflation, as well as to returns on financial
assets. Changes in gold prices for these reasons can give
information to policpakera about economic and financial
conditions, which -y be especially valuable in the pursuit of
price stability. However, gold prices also respond to a number
of other influences, including variations in supply and changes
in de-nd unrelated to underlying monetary conditions. In
today•• complex economy, tying monetary policy directly to the
price of gold likely would introduce undesirable fluctuations in
output and prices. The price of gold should be one indicator,
among others, that policymakers monitor to judge whether policy
is on track and converging toward their objectives.
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Responses of Governor Kelley to
Questions from Chairman Riegle
Q.1.
o
What are your viewa allout how our fin-cial
aervicea
ahould be reforaed?
•Y•t-
Should ball power• be espanded, either directly
or through holding coapany affiliates?
A.1. I support the general expansion of financial
powers through the bank holding company structure. Global
financial markets are changing so rapidly under the constant
pressures of technological change and innovation, that to
freeze any set of institutional powers as of those of some
past date is to create the likelihood that those institutions
could atrophy and weaken. It is not, however, just concern
about banks that is relevant. Bank customers should have the
benefit of the most competitive markets possible and I see no
reason to force individuals and institutions to migrate from
the banking system to other financial institutions to obtain
vital financial services, unless some essential public purpose
so requires.
The holding company structure is best suited to
assure competitive equity and guard against misuse of the
safety net. It facilitates functional regulation and permits
special safeguards for insured deposits and the payments
mechanism. But market realities suggest to me that all
affiliates will seek to operate as one whole and that problems
in one affiliate can cause problems for others. For this
reason, we should be cautious of the risks of certain
financial businesses. I would, for example, exclude fire and
casualty insurance underwriting from the list of acceptable
financial affiliates for this reason and I have not yet made
up my mind about life insurance underwriting.
o
Should the current regulatory atructure be
simplified or otharviae reorganised?
The present structure is working well and one should
be cautious, therefore, about modifications. It could, of
course, be simplified and thereby reduce the costs imposed on
the institutions regulated. However, modifications to the
regulatory structure should only be contemplated seriously
when the other structural questions have been successfully
addressed, and congress has available for its deliberations an
up-to-date profile of the financial services industries.
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Q.2.
Do you believe it would be desirable for the
Board of Governors to play an active role in
developing a co■prehensive proposal to
■odernize the regulation of financial
services?
A.2. congress, which must make the final judgments,
should draw on all of the special expertise available. I
think the Federal Reserve experience does provide a useful
point of view that could be helpful in developing
modifications to the regulatory structure. For example, in
administering both the Bank Holding Company and International
Banking Acts, the Board has learned a considerable amount
about the dynamics of affiliation among financial entities and
the interrelationships among financial markets domestically
and internationally. Moreover, its focus on the risks to
financial and real economic activity associated with
regulation and supervision also offers insights which Congress
might find useful.
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Q.3.
lfh&t 4o you believe should be the goals of
deposit insurance refora?. lfh&t 4o you see
the ■oat promising proposal ■ for deposit
insurance refora?
a■
A.3. The original goal of protecting the small,
unsophisticated depositor still seems to me to be first on any
list. Our federal deposit insurance now does this reasonably
wel}, but we should try to develop reform to limit its misuse
through multiple accounts. The goal of contributing to macro
fin~ncial stability through avoidance of deposit runs and the
insu'l.ation of failing banks from healthy banks remains vitally
important. Any proposal which could weaken that goal should,
in my view, be considered very carefully.
The deposit insurance problem today is that, in our
desire for systemic stability, we have insulated bank
management from the risks of their own bad policies.
Depositors--both large and small--look to the government
rather than the depository institutions' assets to protect
their funds, knowing of the insurer's and regulators'
sensitivity to bank runs. In its most extreme case, this has
led to a perception of a too big to fail policy that many feel
means 100 percent deposit insurance at large banks. This is a
perception we cannot maintain without either overly regulated
banks or large taxpayer costs.
In balancing the need for stability with the need
for market forces to help the regulators discipline bank
management, I think that we should give serious attention to a
policy designed to harness management and stockholder
self-interest to limit the potential misuse of the deposit
insurance subsidy. That policy would call for early
intervention with progressively more stringent limitations and
constraints on the growth and dividends of banks whose capital
declines below minimum regulatory levels. If a bank cannot
recapitalize reasonably soon, this policy should call for
conservatorship, shrinkage and/or sale to others, capped if
necessary by closure while there is still some capital in the
institution.
Beyond prompt resolution, we should consider some
coinsurance above $100,000, and perhaps risk-based insurance
premiums. I would be interested in seeing how some use of
private insurance might compliment federal insurance.
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Q.t.
Do you believe tbat the wall separating
balllting and coaaerce should be eliainated?
A.4.
In principle, I would like to see it happen,
so that banks had wider access to capital and management.
However, the feasibility of doing so depends critically on the
nature of the regulatory and insurance reform addressed in the
previous question. If, for example, we adopted a universal
bank approach, with all powers exercised in one corporate
unit, I would be opposed to banking-commerce combinations. In
such a structure, it would be impossible to see where one
entity began and another ended, which had access to the safety
net and which did not, which was the lender and which the
borrower. If we retain the holding company form and adopt
rules that require all bank affiliates, as well as the parent,
to use all their resources to maintain the capital of the
bank--on pain of divestiture of the bank and compensation to
the insurer for any of its costs--one has to worry less about
misuse of the bank safety net. The critical element is to
develop ways to ensure that the safety and soundness of a bank
unit will not be compromised by a commercial affiliate. If
that can be accomplished--and that depends heavily on the
holding company structure and on rules on bank support by
affiliates and the parent--the end of the separation of
banking and commerce can be considered in a serious way.
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Q.5.
Laat •all, tbe •ec1eral ••••rv• and tbe
~r-•ury bad a difference of opinion about
wbetber to puab tb• dollar do- by intervening
in currency -rketa. What aid• 414 you
aupport? Since tben, tbe dollar baa fallen
againat tbe -rk and gained againat tb• yen.
Ar• current rat•• auatainable?
A.5. Differences of opinion between the Federal
Reserve and the Treasury with respect to U.S. intervention in
foreign exchange markets are infrequent and should not be
exaggerated. Last fall, the difference was largely one of
scale and tactics not whether there should be any foreign
currency operations at that time. on that occasion, as on
most others, I found myself within the Federal Reserve
consensus which is generally one in which concern about the
inflationary effects of an excessive decline of the dollar are
given significant weight. I favor exchange stability, which
has been broadly achieved over the past several years. This
would include current rates, and I see no reason why they
should not be sustainable.
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Q.6.
There is considerable uncertainty -ong
analysts about how low the unemployment rate
can go before inflation begins to accelerate.
Have we reached that point, or can we safely
reduce unemployment a little further?
A.6.
I should begin by emphasizing that the level
of unemployment is but one of many factors that may influence
the rate of inflation at any given time.
Exchange rate
movements, industrial capacity utilization, agriculture
supplies--these are just a few of the forces that have been
important in determining the pace of inflation in recent
years.
One critical determinant of inflation is the
prevailing expectation about the intentions ot the monetary
authority.
Inflation cannnot persist over the longer run
unless there is an accommodating expansion of the money
supply, and inflation expectations therefore are importantly
affected by whether or not it appears that the Federal Reserve
is willing and able to adhere to a policy that is conducive to
the achievement of price stability. Credibility on that score
will be enhanced if the federal government is not consistently
issuing large amounts of debt, raising the specter of possible
inflationary monetization, and if there seems to be political
support for the Federal Reserve's policy.
I would suggest that the experience of recent years
is illustrative of the points just made. The fact is that
inflation has remained in a fairly narrow channel (apart from
the period when oil prices collapsed), as the rate of
unemployment trended downward--repeatedly piercing levels that
many analysts were suggesting were floors beneath which the
jobless rate could not fall without grave consequences.
I
would assert that the clear commitment of the Federal Reserve
to fighting inflation was one reason for this success.
As for the current circumstances, it does appear
that the labor markets are fairly tight overall, with the
usual geographic, occupational, and industrial variations.
Given the recent behavior of wages and prices, I would have to
say that, at this juncture, prudence would dictate that lower
levels of unemployment be tested cautiously, lest there be any
overshooting that would give additional momentum to the
inflation process that would be costly to reverse later.
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Responses of Governor Kelley to
Questions from Senator Sarbanes
Q.1.
Before your original nomination to the Federal
Reserve Board, what was the screening process
you went through? Who interviewed you, and
what subjects were discussed? Were you
reinterviewed before your renomination? If
so, by whom and on what issues?
A.l.
I was originally contacted by the Office of
Presidential Personnel in mid-November of 1986 and came to
Washington for interviews on approximately December 1, 1986.
Four interviews were conducted on that date.
I met with
Robert H. Tuttle, Director of Presidential Personnel and,
subsequently, with his Deputy, Mark Sullivan. Both of these
interviews were designed to gain an impression of my
background and personal characteristics, and involved no
questions of policy or political position.
I visited with
John Rogers, Assistant Secretary of the Treasury, where the
agenda was similar. The final interview was with Beryl
Sprinkel, Chairman of the Council of Economic Advisors, where
in addition to the above, he also inquired into my views
concerning monetary policy and its impact on economic growth
and inflation. We also discussed the possible restructuring
of the banking industry to allow a greater degree of commerce
participation in banking.
It has been my understanding that then Secretary of
the Treasury, James A. Baker, III, worked for my selection.
I have known Secretary Baker all of my life and had occasional
discussions of policy matters with him over the years.
In
late 1985, as best I recall, I expressed to him my interest in
becoming a Governor of the Federal Reserve. He replied that
he would keep it in mind.
Subsequent to being contacted by
Presidential Personnel in November of 1986, I have had no
further discussions with Secretary Baker on Federal Reserve
policy-related issues up to the present time.
In none of the above discussions was I asked to take
any policy position and volunteered none.
In late summer of 1989, I met individually with
Michael Boskin, Chairman of the Council of Economic Advisors,
Treasury Secretary Brady, and Under Secretary Robson.
Each of
those meetings followed the same general line of discussion.
We discussed the progress of the economy generally, and they
inquired into my views on economic growth, inflation, and
monetary policy.
I replied that I fully supported the goal of
sustained economic growth but I believed that this could not
be achieved without considerable reduction in inflation over
time.
I have supported policies designed to achieve that end
since I have been on the Board and would continue to do so.
No other policy issues were discussed.
No policy positions
were requested, or volunteered by me.
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Responses of Governor Kelley to
Questions from Senator Dixon
...
Q.1.
What are your views on enforcement of the
communty Reinvestment Act?
A.l.
I believe that appropriate enforcement of the
Community Reinvestment Act calls for the federal enforcement
agencies to encourage the institutions they supervise to lend
in all parts of their communities, to assess the institutions'
records of doing so in examinations, and to consider
applicants' records of community lending in connection with
certain applications to expand.
I support the programs that the Federal Reserve now
has in place to address each of these. The Board has a
community affairs program which gives information and
technical assistance on how to do productive community
development lending. It has a specialized compliance
examination program that conducts Community Reinvestment Act
examinations of state member banks. Its applications
processing system is set up to review in depth any issues
presented in a case involving a protest based on the Community
Reinvestment Act or a low Community Reinvestment Act
examination rating.
The policy statement on the Community Reinvestment
Act issued by the agencies last year, I believe, will be
helpful in achieving the objectives of the Act. In essence,
the statement stresses that the agencies expect the
institutions they supervise to manage their process for
addressing their responsibilities under the Act like any other
corporate activity, to market their products in all parts of
their communities, to undertake outreach to all parts of their
communities in order to ascertain what the credit needs are,
and to lend in all areas in a safe and sound manner. The
statement encourages communication between the institutions
and members of their communities on a routine basis, rather
than waiting until a time-critical application has been filed.
I believe this approach fosters the kind of long term
sustainable lending programs in all neighborhoods that will
further the purposes of the Act in the years to come.
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Q.2.
How should the Federal Reserve best address
the probl- of discrimination in home mortgage
lending?
A.2. The Federal Reserve examines all state member
banks on a regular cycle, and has found them to be in
substantial compliance with the Equal Credit Opportunity Act
(implemented by the Board's Regulation B) and the Fair Housing
Act. The policies and practices of the banks examined do not
suggest that individual banks take the race of an
applicant into account when making a credit decision.
Nonetheless, I find the various studies of mortgage lending in
metropolitan areas, identifying different lending patterns
across minority and nonminority neighborhoods, to be a source
of major concern. While these issues may offer only limited
insight into the issue of discriminatory conduct and make no
definitive statement about the presence of racial
discrimination in lending, they establish quite clearly the
need to look behind the statistical data for answers to the
problems that produce these results.
In addressing this mortgage lending problem, I
believe we should continue to place major emphasis on a strong
compliance program of consumer examinations by specially
trained examiners. I expect us to make maximum use of the
data about the racial characteristics of applicants that will
be newly available under the changed requirements of the Home
Mortgage Disclosure Act. These data will provide information
not only about loan originations but also about applications
that do not result in the granting of a loan. I believe our
examiners will be better able to assess whether a bank's
credit standards are being fairly applied.
Together with the other agencies comprising the
Federal Financial Institutions Examination Council, the
Federal Reserve is also working with the U.S. Department of
Justice and the Department of Housing and Urban Development,
to share information about our respective efforts in regard to
lending dscrimination and to find ways in which we might
improve our effectiveness through joint efforts. I support
these efforts.
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Q.3.
Do you believe that low and moderate income
Americans lack access to banking services? If
so, what should be done about it?
A.3. The Federal Reserve has data showing that
account ownership tends to be lower among low and moderate
income individuals, and it has apparently not declined. We do
not, however, have data regarding the number of institutions
offering low-cost deposit account services. surveys conducted
by the banking industry indicate that a high percentage of
banks, particularly larger institutions, offer such services.
On the other hand, consumer group surveys conclude that the
percentages are much lower.
Based on these disparities, I am not persuaded that
a clear problem regarding access to banking services has been
demonstrated. Individuals may choose, for a variety of
reasons, not to maintain an account relationship. Moreover,
even if every institution does not offer low-cost account
services, low and moderate income consumers are not
necessarily shut out of the banking market; such services
could still be obtained by persons who are willing to shop for
them.
I think the financial services industry has become
increasingly sensitive to the need of low and moderate income
individuals for low-cost services. As you know, the Board
joined other regulators in issuing a policy statement
encouraging institutions to recognize this need, and industry
trade associations have been active in this area as well. In
my view, the voluntary efforts by institutions that have
resulted represent the best solution to any problems that may
exist in this area. In addition, other promising developments
such as electronic delivery of government benefits should also
address many of the concerns that have been raised.
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Q.4.
Do you believe the firewalls around section 20
subsidiaries result in unnecessary
inefficiencies? How do your views on these
firewalls compare with your opinion of the
firewalls included in the Proxmire Financial
Modernization bill?
A.4.
By design, the Board began its regulation of
section 20 subsidiaries with very tight firewalls in order to
assure that no unnecessary risks were taken and that unfair
competition and conflicts of interest did not result. These
firewalls are substantially the same as those contained in the
Proxmire bill. In adopting the firewalls, the Board indicated
that it would review the firewalls based on its experience.
The Board has modified certain of the firewalls based on
experience, and has indicated it intends to review other
firewalls later this year. I would hope that ultimately
securities powers for bank holding companies could be operated
with more flexible insulating firewalls, but that would depend
on the structural form and deposit insurance reforms
ultimately adopted by the Congress.
Q.5.
What are your views of the relationship
between the Federal Reserve discount window,
the deposit insurance system, and prospects
for deposit insurance reform?
A.5. The focus of the discount window is to assure
the liquidity of our payments system and financial markets.
It does so by acting as a lender of last resort to solvent
insured depository institutions. As deposit insurance reform
goes forward, I would expect our need to act as a lender of
last resort would remain unchanged. However, insurance
reforms that run the risk of inducing deposit withdrawals and
runs, by relying too much on depositor discipline 1 could
increase the need for insured institutions to use the discount
window.
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