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Remarks\ by

9

L. William Seidman
Chairman
Federal Deposit Insurance Corporation

Before

© T h e Grand Rapids Rotary Club-,
@ School of Business Alumni 7
Q) Grand Rapids, Michigan.
q P April 28, 1988 j

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It gives me great pleasure to be back in Grand Rapids to talk
about the economic outlook to the Rotary Club —

a speech my

father made to this club over a long period of years.

The last

time I spoke in this area, I told the good people of Holland
that the economy looked very strong.
Monday hit the stock market.

Three days later Black

I'm sure a good many of your

friends to the west decided to ask for their money back —
they have a refund claim?

do

More in a moment.

Life in Washington has been hectic at the FDIC where we insure
deposits at the nation's banks, and help maintain the safety and
soundness of the banking system.

When I first went to Washington with one of Grand Rapids' own,
President Ford, I considered it a great honor to be asked into
the Oval Office to talk with the President.

Do you know how to tell if you've really arrived in Washington?
It's when you're in the Oval Office with the President, and the
famous Red Phone on his desk rings —

and he puts it on hold

while he finishes his conversation with you!




2

Last month I got my biggest thrill yet.

The FDIC was working on

some of the biggest problems in its history —

two very troubled

institutions in Texas, First City and First Republic banks.

The

President asked me to his office to talk about these problems.

During our conversation, the Red Phone rang again.

The

President answered it, gave me a startled look, and said "Bill,
it's for you."

I told my wife never to call me while I'm in a meeting.

A couple of Sundays back, Jim Harger, business editor of The
{Grand Rapids} Press, wrote a column called "Whatever Happened
to Plain Old Facts?"

The gist of the column dealt with how often economic predictions
contradict each other, and how difficult it is to sort out which
way the economy is headed from so many mixed signals.

After all, last October 19 there was a 500 point drop in the Dow
Jones average, followed by a number of dire predictions that the
booming days for our economy were over.

I heard that the only stock that did well that day was
"Dial-A-Prayer" Incorporated.




3
But, by the same token, in many ways our economy upswing looked
surprisingly strong for an old fellow.

In fact, we are in the midst of the longest period of sustained
peacetime economic growth, ever recorded in this country!

"Black-And-Blue Monday” may have been the classic situation of
"its ill wind that blows no good."

There certainly was an "ill wind" last October, especially if
you were a Wall Street broker.

But far from bringing on another

Great Depression, the Dow's Big Drop seems to have breathed new
vigor into our economy in many ways.

I'm pleased that many indicators point to economic vigor for
Grand Rapids.

According to the Upjohn Institute in Kalamazoo, your local
economy is doing well. Your city's furniture makers are
accounting for a bigger share of the national market.

The

number of hours worked in your area increased during the last
quarter of 1987, as did the number of housing starts? while the
number of new unemployment claims fell.

Last November, within two weeks of the dramatic events on Wall
Street, I gave a talk at the National Press Club.



4
I decided that enough people were running around trying to find
causes for the "crash”, and instead I decided to focus on the
effects.

In my speech I suggested seven positive reactions to Black
Monday that should materialize in the economy following the
"crash".

I noted that any Presidential candidate that could

offer so much improvement to the economy should be a sure
winner.

Here are the positive developments I suggested as

possible from the big crash:

(1)

lower interest rates ;

expectations; (3)

(2) reduce inflationary

a real move by the Congress to reduce the

federal deficit? (4)

a stronger banking system, partially

because of inflows of deposits? (5)

a reduction of speculation

in the markets? and (6) economic reality would be brought to the
effort to stabilize foreign exchange rates —

that is, we'd deal

with our own economic problem first.

(7)

Finally, the October plunge would cause our young business

leaders of tomorrow to change the focus of their majors —

to

switch from investment banking, to marketing and production.

It's been six months since the Wall Street plunge.
thoughts look now?




How do these

5
(1) Did interest rates go down?

Yes.

In fact, the prime rate stood at nine percent the week

after the •’crash”.

It now stands at 8.50 percent.

(2) Have inflationary expectations been reduced?

Yes, and the inflation rate sank.

But, six months after October 19, we are just starting some
inflationary pressure.

(3) Do we have a healthier banking system?

Now this one is especially near and dear to my heart.

Well, there are still a lot of problems in the banking system,
especially in the Southwest.

But we have seen improvements in

the troubled farm belt banking region, and the problems in the
Southwest may be reaching their peak.

In fact, our so-called

"problem bank" list has dipped downward over the last few months
for the first time in almost eight years!




6

What effect has the crash had on this?

We found that in the

wake of the so-called "crash”, many banks actually were doing
better.

Almost a third of the banks noticed that deposits were

coming in at a noticeably higher rate.

So, unlike 1929, we found no "run" on our banks.

If anything,

people were running to put money in!

Moreover, to give you a sneak preview, we expect banking's first
quarter earnings to be up.

(4)

Speculation in the markets has been reduced.

Indeed, the speculative "takeover fever" that so characterized
the stock market in the period before October 19 seems to have
abated (at least as far as domestic efforts are concerned).

In

fact, we have seen the average Price/Earnings ratio of the
market drop by about one-third from the inflated heights it hit
before the "crash".

(5) Regarding the federal budget deficit, there has been
improvement.




7
The federal deficit for the first half of fiscal 1988 showed an
improvement relative to the first half of fiscal 1987.
we cannot say the budget is under control.

However,

The substantial

upward revision of the fourth quarter results, and the increase
in the deficit for March are of concern.

More hard work needs

to take place in this area.

The "crash" was necessary to get the "dispute resolution group"
on the Hill to take steps toward solving this problem, as the
deficit reduction package late last year demonstrated.

It takes

a perceived crisis to get that kind of action taken.

(6)

Economic reality

foreign exchange rates

returned to the effort to stabilize
The Fed and Treasury moved to lower

interest rates as the first priority and let the dollar seek it
own level abroad.

Thus, the dollar has fallen since October.

The weaker dollar has given our economy an extra boost in the
export area.

(7) Finally, our young people have switched from finance courses
to ones in marketing and production.

Last week, the University of Pittsburgh took a poll of 600
students at top "B" schools.




8

It found that 20 percent of the business school students planned
to switch the direction of their careers; awav from investment
banking —

and into manufacturing.

Compared to figures a year ago, twice as many MBA candidates at
Carnegie Mellon planned to go into manufacturing after
graduating.

So, it turns out that what happened in the stock exchange last
October 19 was indeed what one observer had called "a salutary
shock”.

But it also could be called a warning "heart disturbance," which
could become a real "heart attack" if our life style wasn't
changed.

Let's look at today's economy for signs of strength and
potential weakness.

I'll use what we call our "red and green" charts to help in
analyzing where the economy seems to be headed from here.




9
In our chart system, Green lines indicate a commonly accepted
view that the trend indicates increased economic activity.

Red

indicates the commonly accepted view that the trend is toward
reduced economic activity.

When I was in the White House as

President Ford's Economic Assistant, we used these simple trend
lines to check on the many fancy econometric models on hand, and
found our charts quite useful.

Let me give you a look at where today's charts stand.

—

INFLATION.

It's under control for now, and is a GREEN.

—

Our UNEMPLOYMENT trend line is sharply down to only 5.6

percent -- the lowest level of the decade.

—

It's GREEN.

UNEMPLOYMENT CLAIMS are on the decline, down almost 50,000

since February. A GREEN.

—

INDUSTRIAL OUTPUT.

The Federal Reserve says OUTPUT last year

at the nation's factories, mines and utilities made the Best
annual showing since 1984.

—

It's GREEN.

BUSINESS CONFIDENCE, as measured by the National Association

of Manufacturers in a survey of top CEOs, is up. It's GREEN.




10

—

PRIVATE HOUSING STARTS have moved up in the last couple of

months.

—

A GREEN.

U.S. MANUFACTURING CAPACITY UTILIZATION is way up.

Another

GREEN.

—

And CAPITAL SPENDING, spurred on by stronger exports and high

capacity utilization, is expected to increase by eight percent
this year.

—

It's GREEN.

INTEREST RATES are stable at a relatively low rate, another

GREEN.

—

Commerce's LEADING INDICATORS have improved slightly after

suffering a modest post-October decline, and are now GREEN.

—

MI has moved up. Well, I guess you could call that a GREEN.

—

GNP GROWTH is up, well above many forecasts

Of course, not all of the news is GREEN.

Another GREEN.

There are a couple of

RED trend lines.

—

The TRADE BALANCE deficit has been on the decline, but has

moved up again recently. Unfortunately, it's RED again.




11

_ The FEDERAL BUDGET DEFICIT is trending down, especially when
compared to GNP.

I'll let you decide if this is a Keynesian

green or a Friedman red.

But as a follower of the Friedman

school, I score it as a RED.

That gives us 12. GREEN, and 2. RED.

So we have a greening picture for increased economic activity in
the near term.

But while trend lines are helpful, like income

statements, they don't tell all.

They state where we're going

near-term, but we still need balance sheet items to tell us
where we are.

Here there are definitely some RED indicators^

America's debt levels in all sectors are at or near record,
levels when compared to repayment ability.

Americans and their

government are spending by the motto, "Always live within your
income, even if you have to borrow to do so."

There has been some sign of relief in this area since "Black
Monday."

For the last quarter of 1987, and the first quarter of

this year, the savings rate has increased.

But there is still a

long way to go, with household debt as a percentage of
disposable personal income climbing to 87.6 percent at the end
of 1987, almost 12 percentage points higher than in 1983.




12

The NY Fed's President Gerald Corrigan, in an excellent
presentation on the long-term economic imbalance in the economy
said, "the harsh reality [is], that for too long we in the
United States have been borrowing more than we save and
consuming more than we produce in an environment in which debt,
deficits and leveraging have become a way of life for
government, for business and for individuals.”

The balance sheet indicates that for the longer term the U.S.
will have to do all those good things we learned as kids: save,
work hard, and be ready for a rainy day.

According to some analysts at Drexel-Burnham, the October plunge
might have extended the life of what they see as the final boom
in their predicted "seven years cycle.

At best we are running

out of time for dealing with our problems.

Our hope is that we

can turn what many saw as the PROBLEM of October, into an
OPPORTUNITY for a stronger future: We must produce more, export
more, save more, and continue to keep the trend lines GREEN.

If we don't heed that advice we will see the lines go from green
to red.

As our debt levels increase when compared with the

income necessary to service the debt, our risk increases.




13
In closing, I'd like to quote from a new book to be published
soon that discusses America's competitive strengths.

It is

titled, "Competitiveness: An Executive Guide to Success.”

In

the last chapter, called the "American Advantage," the author
states that America's economic freedom, educational resources,
technological base, vast capital markets, and entrepreneurial
spirit are good reasons to believe the U. S. will be a winner in
the competitive world economy of tomorrow.

By the way, the author is otherwise known as a Grand Rapid's boy
now chairing the FDIC.

Thank you.




So you now know where I'm coming from.