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KNOW YOUR CHICAGO GRAHAM SCHOOL OF GENERAL STUDIES AT THE UNIVERSITY OF CHICAGO Chicago, Illinois September 8, 1999 ..................................................................... The Federal Reserve and Community Development: Fostering Neighborhood Partnerships I. Introduction (2 minutes) A. I am particularly delighted to be her today because Know Your Chicago is a city institution. It’s been around for more than fifty years. And judging from the crowd today, it has some ver y popular programs. 1. The Federal Reser ve Bank of Chicago has also been around a long time. But I am not sure we are as well known as Know Your Chicago. In fact you might say that we are one of Chicago’s best kept secrets. 2. It worries us sometimes that most Chicagoans know so little about an institution that has such a large impact on their lives. B. Indeed, most Chicagoans don’t know that the Federal Reser ve isn’t just one bank, but rather of system of regional banks. C. Three weeks ago in newspapers across U.S., headlines heralded the latest news from the Federal Reser ve. “Fed Hikes Interest R ates”, and “Fed Hike May Be It for Year”. That sort of thing. 1. Reading through such articles, you do tend to get the impression of this process beginning and ending in Washington, D.C. The reality is that the ver y heart and soul of the Fed is its regional core. 144 Michael Moskow Speeches 1999 2. That regional core—and in particular, the Federal Reser ve’s Chicago connection—is what I’d like to discuss today. D. I’m going to give special attention to the Chicago Fed’s ongoing efforts in community development. Because, these efforts help illustrate the value of hav ing a system of regional banks, and not just one central bank. E. Over the last ten years, we’ve come to realize that we have an obligation to better infor m the public about the workings of the economy and the Fed. • So, I hope you’ll v isit us on October 5 and 6 as part of this program and tell others about what you lear n today and in October, and in doing so help us make the workings of the Fed as transparent as possible. II. Y2K (3 minutes) A. Let me begin by saying a few words about Fed involvement in Y2K preparations. Obv iously, given our role as the nation’s central bank, we are focussing considerable attention on Y2K. 1. First of all, I ’d l ike to reassure you that the re i s no t r uth to the r umor t hat the Fed i s stockpiling slide r ule s, sundials, and adding machin e s. 2. In fact, we’re confident that the centur y date change will come and go with a minimum of disruption. 3. As a nation, we have worked together to meet important challenges in the past. We believe that the public will keep the year 2000 rollover in perspective, realizing it is one more challenge we will meet. B. At the Fed we are addressing Y2K at all levels. Nationally, the Fed has three main areas of responsibility. 1. First, we’re a ser v ice prov ider: we prov ide financial ser v ices such as check processing and electronic payments to commercial banks and the U.S. gover nment. 2. Second, we are a bank regulator: we super v ise and regulate state member banks and bank holding companies and branches of foreign banks. 3. Last, but not of least importance, we for mulate national monetar y policy. We are committed to doing all we can to safeguard the operations of the U.S. financial system. That’s why Y2K is so important to the Federal Reser ve System. C. We’ve already made significant progress in preparing for the rollover; all of our most important systems are ready for Y2K and are already being used on a daily basis. Michael Moskow Speeches 1999 145 1. As a financial ser v ice prov ider, we’re confident there will be no disruption in our ability to meet the needs of our customers — be they commercial banks or the U.S. gover nment. 2. And we’re confident that the banking system will be ready too. Regulators have already examined ever y bank twice to check for Y2K readiness and we’ve found that 99% of banks are making satisfactor y progress. D. There is an old saying that a person surprised is already half-beaten. We have certainly taken this to heart, and we have no intention of being surprised by anything Y2K has to offer. But sound preparation is only part of the battle. We must also encourage the public not to overreact. 1. There has been concer n that popular misconceptions about Y2K could lead some people to withdraw unusually large sums of money from their bank accounts. 2. For this reason the Federal Reser ve is making available more than enough cash to cover any unusually large demands. 3. However, I’d like to remind ever yone that there is no safer place for your money than where it is, Y2K or not. 4. Although you may want to have enough cash on hand for the long holiday weekend, remember that credit and debit cards, as well as checks, are expected to work over the New Year’s holiday as they would at any other time of the year. 5. In short, we are confident that the Federal Reser ve and the financial system will be fully prepared for the centur y rollover. III. The Role of the Fed (5 minutes) A. Now let’s get back to the role of the Fed. The Federal Reser ve System that you and I take for granted is only 85 years old. America did without a v iable Central Bank for most of its first 150 years. 1. It’s not that the U.S. economy didn’t need a Central Bank. 2. Its not that commercial banks didn’t need super v ision. 3. Its not that the price of bread didn’t occasionally surge beyond affordability. 4. It did. The need was there. 5. One author writes that at the period between the first and second central banks in the early 1800s, “any place where there was a church, a taver n, or a blacksmith shop was 146 Michael Moskow Speeches 1999 deemed a suitable spot for setting up a bank. With banks multiplying so rapidly, inflated currency and speculation in bank stocks naturally followed.” [put book down] C. By the end of that centur y, bank runs abounded. 1. In 1893, on just one summer day, well over 500 banks suspended operations nation-wide. 2. Bank failures here in Chicago, although not as numerous as those in New York, were notable for their size and impact. 3. The word “bank run” sanitizes how devastating these failures were to indiv iduals who lost their life sav ings. D. In 1906, the Chicago Tribune described this scene outside a Milwaukee Avenue State Bank, where crowds extended three blocks long, and, I quote, “Men and women knelt and prayed in the street that their gold might be retur ned to them … others were robbed as they came smiling from the safety deposit vaults.” E. The lack of financial stability throughout most of the 1800s, and the early 1900s hurt the economy. 1. The business cycle accelerated and decelerated erratically like a windmill in a dust stor m. 2. By 1908 Andrew Car negie would characterize American banking as “the worst in the civilized world.” If our disastrous economy of the day was what Car negie would call “civ ilized”, I’d hate to think what he’d have called “unciv ilized”. F. And yet, despite the need for greater financial stability, the U.S. gover nment, shut down the first two central banks in the late 1700s and early 1800s. 1. President Andrew Jackson explained, “Such a concentration of power in the hands of a few men [has proven] irresponsible to the people.” 2. For our first 138 years, Americans voters had a clear message: even financial disaster is better than a monopoly of power over money. G. It wasn’t until 1914 that the third and final incar nation of the U.S. central bank, the Federal Reser ve, opened its doors . Today the Federal Reser ve is one of the most trusted gover nment institutions in America. 1. In fact, the Fed is seen as so key to the quality of life we now enjoy that it is hard for you and I to imagine America without a Federal Reser ve. It s like Chicago without St ud s Te rkel. H. What changed between 1836, when the second U.S. Central bank closed its doors, and 1914, when operations began at the current Federal Reser ve? 1. Did Americans become more trusting of centralized authority? Michael Moskow Speeches 1999 147 2. I personally doubt it. I. No, the change that allowed the Federal Reser ve to flourish was a fundamental rethinking of the ver y definition of the ter m “central bank.” 1. A central bank for the United States would have to be more than a bankers’ bank, but an institution mandated to ser ve the economic interests of all Americans. 2. Only when the central banking system was redesigned to represent more fully our large and diverse economy, did the American people war m to the notion. J. Today’s Federal Reser ve is therefore a juggling act, balancing the financial needs of each and ever y American: be they consumers, factor y workers, bankers, small town businessmen, or retirees who can’t afford to see inflation wipe out the value of their pensions. K. So I’d like to spend some time clarifying how the Fed balances so many constituencies and commitments. IV. Fed Str ucture and Functions (9 minutes): A. The challenge for the designers of the Fed was to create a central bank that would be both the child of elected gover nment and protector of the long-ter m financial interests of the economy. 1. A purely gover nment-controlled Central Bank could subject monetar y policy to the whims of politics. 2. Or as the House Ways and Means Committee said in 1839, “the temptation to supply the Federal Treasur y by the easy process of [currency], rather than resorting to the unpopular process of inter nal taxation, would be too fascinating to resist.” 3. On the other hand, a central bank that was overly dominated by the private sector could be seen by the public as potentially corruptible. B. The resulting Fed we have today is, like many successful American institutions, a system of checks and balances. C. First, the Fed is a balance of public and private control, ser v ing as a link between the public gove r nme ntal sector on one hand, and the private banking sector on the other. D. Second, the Fed also balances centralized and regional control. 1. Thus the Fed is made up of a Board of Gover nors in Washington, but also twelve regional banks, including the Chicago Fed. 2. Here in Chicago we ser ve a five-state area consisting of most of Indiana, Illinois, Michigan, Wisconsin, and all of Iowa. 148 Michael Moskow Speeches 1999 3. We have a head office on LaSalle Street as well as district offices in Detroit, Des Moines, Indianapolis, Peoria, and Milwaukee. E. Our regional structure helps us monitor local concer ns throughout the countr y. And this in tur n, ensures that we live up to the overall mission of the Federal Reser ve, which is, quite simply, to foster a safe and sound financial system and a healthy, growing economy for the entire nation. 1. As part of this effort, we receive regular input from bankers, business executives, labor unions, academics, community groups and others. 2. At the Chicago Fed, for example, I travel throughout the Midwest to get a first-hand v iew of what’s happening in the region. F. Although the Fed constantly balances public vs. private authority, there is no doubt that we are accountable to Congress and the American people. 1. The seven members of the board of Gover nors are appointed by the President and approved by Senate for 14-year ter ms. 2. The Fed reports directly to Congress twice a year regarding policy objectives. And Fed officials regularly testify before Congress on matters pertaining to banking and the economy. G. And yet the Fed is insulated from short-ter m political pressures. We pride ourselves on being non-political and non-partisan. 1. We cover our own expenses through interest ear ned from our monetar y policy operations and fees charged from our check processing and other ser v ices we sell to banks. 2. We do not receive congressional appropriations. H. You may be surprised to lear n that the regional banks operate like a private company in many ways. 1. For example, neither I nor my staff are gover nment employees. We are not civ il ser vants. Just like the businesses on LaSalle Street we have costs and revenues, and we’re constantly working on greater efficiency and better customer ser v ice. 2. And we have a Board of Directors consisting of nine representatives from our district that perfor ms functions similar to that of a Board of Directors of a private fir m, though they also become directly involved in helping for mulate monetar y policy. 3. Many people believe that I am appointed by the President, but it is the Board of Directors of the Chicago Fed that selected me, with the approval of the Board of Gover nors in Washington. I. Perhaps it is the setting of monetar y policy that best demonstrates the system of checks and balances at work. Michael Moskow Speeches 1999 149 1. The setting of interest rates is the single most influential act of the Fed and is perfor med by the members of the FOMC, the Federal Open Market Committee. 2. I say the FOMC is “balanced” because it is made up of both all of the 12 regional bank presidents and 7 Governors appointed by the president. Alan Greenspan chairs this committee. 3. At any given time only 5 of the regional bank presidents can vote. This means that interests rates are always set by a body that shares power between both gover nment appointees and non-gover nment, with the gover nment appointees hav ing a majority. J. In short, the Fed’s structure is complex, but it works. 1. And regional set up helps insulate us from political pressure and obtain input from a variety of sources. K. A good indicator that the Fed is a system that works is our current economic success. 1. The lower inflation we’ve achieved in the past decade has prov ided the foundation for the strong real growth and low unemployment that are a hallmark of the current expansion. 2. We’re now in the longest peacetime expansion in our histor y. There is no denying it: nationally and here in the Midwest, these are the best of times. L. And yet juxtaposed against the extraordinar y nature of this expansion, there are still some people who are not yet full participants in the burgeoning economy. 1. The best way that monetar y policy can help most Americans is to create a low inflation env ironment conducive to growth. 2. Sustainable growth is the best way to ensure that the benefits of our national affluence reach ever y cor ner of American society. 3. A rising tide truly raises all boats. That assumes of course that some boats aren’t tied down, or kept out of the harbor all together. 4. Remov ing barriers is one of the greatest challenges facing us as a nation. 5. So it is important that we develop initiatives that will bring more Americans into the increasingly prosperous mainstream. N. Since the early 1970s the pace of real income growth has slowed and income inequality has increased. 1. In fact, those in the bottom of the income distribution saw virtually no growth in their income after inflation for over two decades, while the top 20 percent have experienced strong increases. 2. And the problem is not easily solved. 150 Michael Moskow Speeches 1999 O. Although this expansion is the second longest in U.S. histor y, not until a few years ago did we see the widening income gap begin to narrow. P. The reasons for this trend are a subject of debate among economists. But it’s clear that urban economic development efforts can help. As always the solutions lie in lessons lear ned from past mistakes. 1. I worked at HUD back in the 1970s and that experience led me to believe that gover nment initiatives need to include private sector involvement in order to be effective. 2. The high rise public housing projects for families is an example of one of our worst gover nment policies. It tore apart neighborhoods and concentrated people with problems in one place, multiplying their problems. 3. Hopefully, we have lear ned from these mistakes and in the future public-only approaches that do not take into account market forces will be minimized. Q. As a regional institution with a mixture of pubic and private features, the Chicago Fed is in a unique position to facilitate public-private partnerships in the Midwest. • We’ve championed a number of new partnership initiative that allow us to share our expertise with many Midwester n gover nmental and private sector growth and development organizations. R. Many of the Fed’s activ ities in this area are related to its responsibilities for the Community Reinvestment Act or CRA. • S. As you may know, CRA was passed by congress to help ensure that financial institutions meet the credit needs of their communities, particularly low-and moderate-income neighborhoods. One project of which the Chicago Fed is particularly proud is the Mortgage Credit Access Partnership. 1. We launched MCAP in 1996 with six other partners from both the public and the private sectors. 2. The goal of MCAP is to ensure fair treatment for all homebuyers in the Chicago area, regardless of where they choose to live, their race, ethnicity, or gender. T. Some 100 organizations participate in MCAP and the partnership has made home-lending more equitable and consistent across the Chicagoland area. • For example, MCAP has introduced an explicit non-discrimination prov ision to the Illinois Appraiser License law. U. MCAP is making a real difference in the Chicago neighborhoods that need it most. Neighborhoods with high rates of foreclosure quickly become half abandoned. Michael Moskow Speeches 1999 151 1. As you might guess, lower income minority communities are the worst hit. 2. R ather than simply pointing fingers and suggesting what others might do, two non-profit MCAP participants created the Foreclosure Inter vention Program. 3. They then partnered with the City of Chicago, HUD, and seven financial institutions. 4. The program has already prevented 100 foreclosures. That’s 100 families that would have been ripped from their homes needlessly. And 100 homes full of light on other wise silent streets. V. Conclusion (1 minute) A. In conclusion, I’d like to thank you for scheduling a tour of the Federal Reser ve Bank of Chicago this year, and for your interest in our community development efforts. You will hear more about this on October 5 and 6. 1. You know, the poet and activ ist Georgia Douglas Johnson, once said, “Your world is as big as you make it.” It seems to me that this could be the motto of Know Your Chicago. 2. One of our city’s greatest attributes is its small town feel. Another is its remarkable diversity, of people and communities, yes, but also of opportunity. Chicago is a world of opportunity, city-size. 3. Know Your Chicago is dedicated to exploring those opportunities. By celebrating ever nook and cranny of Chicago life over the years, you’ve made Chicago a bigger and better city. 4. I hope that after lear ning more about the Federal Reser ve Bank of Chicago, you’ll feel the same could be said about us. 152 Michael Moskow Speeches 1999
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