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Economic Stress and Forces for Recovery :: February 18, 2009 :: Federal Reserve Bank of Cleveland home | news & media | careers | site map FEDERAL RESERVE BANK o f CLEVELAND A bout U Tours For the Public News & Media S tream ing Media Forefront M agazine Recovery [Q Com munit y D e velopm ent shrre Speakers Bureau I Our IRegion I Research I Ban kin g I Learning Center Savings Bonds Home > For th e Public > News and Media > Speeches > 2009 > Economic Stress and Forces for J S S f t...] Economic Stress and Forces for Recovery Additional Information Sandra Pianalto Introduction My la s t s p e e c h h e r e in C olum bus w as in Ju n e o f la s t y e a r , to a gro u p o f b a n k e rs. At t h a t tim e , I sp o k e a b o u t how th e F e d e ra l R eserv e had a lre a d y d e v e lo p e d so m e in n o v a tiv e n e w le n d in g f a c ilitie s in re sp o n se to th e housing d o w n tu rn , fin a n c ia l m a rk e t s tra in s , an d a w e a k e n in g e c o n o m y . G iven th e sp ik e in oil an d c o m m o d ity p ric e s a t t h a t tim e , w e w e r e also k e e p in g a v ig ila n t e y e on w h a t s e e m e d to b e a p o te n tia l rise in in fla tio n . President and CEO, Federal Reserve Bank o f Cleveland Commercial Developers Power Breakfast C olum bus, Ohio February 18, 2009 A lo t has c h a n g e d in n in e s h o r t m o n th s . T h e e c o n o m y h as w o rs e n e d sig n ific a n tly , an d w e a r e now c o n c e r n e d a b o u t an u n w e lc o m e d isin fla tio n . U n fo rtu n a te ly , th e fin a n c ia l crisis has also b e c o m e b r o a d e r an d d e e p e r o v e r th e p a s t y e a r an d is now a ffe c tin g e c o n o m ie s a c ro ss th e w o rld . W h e th e r in b anking, h ousing, r e ta il, o r c o m m e rc ia l r e a l e s t a t e an d d e v e lo p m e n t, all p a r ts o f th e e c o n o m y h a v e b e e n h it h ard . T h e re is no d o u b t o u r e c o n o m ic s itu a tio n is b o th h isto ric an d u n p r e c e d e n te d . And fo r p o lic y m a k ers a t th e F e d e ra l R e serv e an d e ls e w h e re , th e r e is no q u e s tio n t h a t th is s itu a tio n is te s tin g a n u m b e r o f lo n g sta n d in g e c o n o m ic p rin c ip le s. For m e , th e e p is o d e has b e e n u n lik e a n y th in g I h av e s e e n in m o re th a n 2 5 y e a rs a t th e F e d e ra l R e serv e . And th e v o la tility is g r e a te r th a n an y th in g th e U.S. e c o n o m y h as e x p e r ie n c e d sin c e th e 1 9 3 0 s. This p e rio d has c e r ta in ly re in fo rc e d my c o m m itm e n t to “ lifelo n g le a r n in g ,” a n d I h av e d o n e m o re th a n m y s h a re o f le a rn in g an d h o m e w o rk th e s e p a s t s e v e ra l m o n th s. In d e e d , I h a v e s p e n t m any w e e k e n d s on e x te n d e d c o n f e re n c e c a lls w ith my c o lle a g u e s , b a n k e rs an d m y s ta ff , e x p lo rin g th e b e s t w ay s to e a s e th e tu rm o il in th e fin a n c ia l sy ste m . I know I am n o t a lo n e in th is re g a rd . In y o u r b u sin e sse s an d o rg a n iz a tio n s, m an y o f you h a v e also b e e n sp e n d in g f a r to o m an y w e e k e n d s revising b u sin ess s tr a te g ie s , looking a t w o rriso m e sa le s fig u re s, an d b a la n c in g th e d e m a n d s o f c r e d ito r s a g a in s t c a sh flow . In my re m a rk s , I w ill ta lk a b o u t so m e o f th e e c o n o m ic c h a lle n g e s fa c in g th e U.S. a n d e x p la in w hy th e o u tlo o k fo r th is y e a r w ill b e stro n g ly in flu e n c e d by d e v e lo p m e n ts in th e hou sin g a n d fin a n c ia l m a rk e ts . T h en I w ill d e s c rib e so m e fo rc e s t h a t w ill le a d us in to e c o n o m ic re c o v e ry . F inally, I w ill d iscuss th e F e d e ra l R e se rv e ’s s tr a te g y fo r d e a lin g w ith th e c h a lle n g e s w e a r e fac in g . The Situation - Where Are We? http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090218.cfm[4/29/2014 2:01:03 PM] Economic Stress and Forces for Recovery :: February 18, 2009 :: Federal Reserve Bank of Cleveland As you know on ly to o w e ll, th e U.S. e c o n o m y has b e e n in a re c e ssio n s in c e D e c e m b e r 2 0 0 7 , an d all in d ic a to rs p o in t to it b ein g a s e v e re o n e . A lready, th is re c e ssio n is lo n g e r th a n th e 1 0 -m o n th a v e ra g e of th e n a tio n ’s p o st-W o rld W ar II re c e ssio n s. T h e e c o n o m ic new s is b le a k . A uto s a le s , in d u s tria l p ro d u c tio n , c o n s u m e r sp e n d in g , an d c o n fid e n c e m e a su re s h av e all p lu n g e d , e ith e r to re c o rd low s o r to low s n o t s e e n in s e v e ra l d e c a d e s . T h e loss o f c o n s u m e r w e a lth fro m th e c o lla p s e o f ho u sin g an d e q u ity p ric e s has b e e n sta g g e rin g . S om e e s tim a te s p la c e th e loss a t n e a r 10 trillio n d o lla rs sin c e th e th ird q u a r te r o f 2 0 0 7 . To p u t t h a t in p e rs p e c tiv e , t h a t is c lo se to a y e a r ’s w o rth o f gross d o m e s tic p ro d u c t. B usinesses h av e b e e n sla sh in g p ro d u c tio n a n d sh a rp ly re d u c in g th e ir c a p ita l s p e n d in g p la n s fo r th is y e a r. L abor m a rk e t in d ic a to rs c h a r a c te r iz e th e s itu a tio n in h u m a n te rm s . Since th e b eg in n in g o f th e re c e ssio n , a b o u t 3 . 6 m illion A m erican jo b s w e r e lo st. T h a t is th e la rg e s t p e r c e n ta g e d e c lin e s in c e 1 9 8 2 an d th e la rg e s t a b s o lu te d e c lin e sin c e 1 9 4 5 . A b out h alf o f th o s e losses h a v e c o m e ju s t in th e p a s t th r e e m o n th s . W e h av e also s e e n a h u g e in c re a s e in th e jo b le s s r a t e sin c e th e re c e ssio n b e g a n , ju m p in g fro m 4 .9 p e r c e n t to 7 .6 p e r c e n t. T h e rise in u n e m p lo y m e n t has b e e n w id e s p re a d a c ro ss all d e m o g ra p h ic g ro u p s, an d m o re p e o p le a r e sta y in g u n e m p lo y e d fo r lo n g e r p e rio d s. This e c o n o m ic m isery is n o t c o n fin e d to th e U n ited S ta te s . P ro d u c tio n an d s p e n d in g a c tiv ity h av e b e e n d e c lin in g a ro u n d th e w o rld . In th e p a s t, w e h av e b e e n a b le to rely on in te r n a tio n a l m a rk e ts to cu sh io n a d o m e s tic slu m p , b u t t h a t ’s n o t th e c a s e th is tim e . U n fo rtu n a te ly , I d o n ’t e x p e c t th in g s to g e t b e t t e r u n til w e s e e s ta b ility re tu r n to th e housing an d fin a n c ia l m a rk e ts . As you know , th e housing boom a n d b u s t trig g e re d th is re c e ssio n an d sp a rk e d s e v e r e s tra in s in c r e d it m a rk e ts . B ankers a n d in v e sto rs a r e still fin d in g it h a rd to e s tim a te th e v a lu e o f m o r tg a g e -r e la te d a s s e ts th a t th e y hold on th e ir b a la n c e s h e e ts , an d now u n c e r ta in ty a b o u t th e e c o n o m ic o u tlo o k is ad d in g to th e u n c e r ta in ty a b o u t th e h e a lth o f s o m e banks. In a d d itio n , fallin g housing p ric e s h av e le d to m o re h o m e f o re c lo s u re s , as m an y h o m e o w n e rs now o w e m o re th a n th e ir h o u se is w o rth . S tab ilizin g h o using p ric e s w ill h e lp s te m f o re c lo s u re s , b o ls te r b a n k b a la n c e s h e e ts , r e s to r e c o n s u m e r c o n fid e n c e , a n d sh o re up c o n s u m e r sp e n d in g . H o w ever, th e h o using s e c to r is s till f a r fro m s ta b le . H ousing p rices a r e s till d e c lin in g in m an y p a r ts o f th e c o u n try , h o u sin g s ta r t s h av e fa lle n by o v e r 60% sin c e th e ir p e a k in 2 0 0 6 , a n d th e n u m b e r o f unsold h o m e s is s till q u ite la rg e re la tiv e to th e p a c e o f sa le s . At th e c u r r e n t r a te it w o u ld ta k e 1 4 m o n th s ju s t to c le a r th e e x istin g in v e n to ry . C o n fro n tin g p ro b le m s in th e housing m a rk e t is a n e c e s sa ry p a r t o f th e o v e ra ll e f f o r t to r e s to r e e c o n o m ic v ita lity . C ongress a n d th e A d m in istra tio n h av e p ro p o se d f u r th e r s te p s to a s s ist d is tre s s e d h o m e o w n e rs an d to le n d s u p p o r t to th e housing in d u stry . P o licy m ak ers a r e also w o rk in g h a rd to b re a k th e lo g jam t h a t e x is ts in fin a n c ia l m a rk e ts . T he c a p a c ity o f o u r fin a n c ia l sy ste m to p ro v id e c r e d it is b ein g c h a lle n g e d tre m e n d o u s ly . U n fo rtu n a te ly , t h a t has m e a n t t h a t c r e d it h as b e e n c u r ta ile d o r is n o w c o n s id e ra b ly m o re e x p e n s iv e fo r m an y h o u se h o ld s a n d b u sin ess b o rro w e rs. I know m an y o f you a r e all to o fa m ilia r w ith th e s e issu es. T h a t’s w h e r e w e s ta n d to d a y . So w h a t is th e o u tlo o k fo r 2 0 0 9 ? http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090218.cfm[4/29/2014 2:01:03 PM] Economic Stress and Forces for Recovery :: February 18, 2009 :: Federal Reserve Bank of Cleveland U n fo rtu n a te ly , i t is n o t g r e a t, a n d it w ill n o t b e m u ch b e t t e r th a n w h a t w e e x p e r ie n c e d la s t y e a r. My b a s e lin e p ro je c tio n is fo r r e a l gross d o m e s tic p r o d u c t to d e c lin e sh a rp ly in th e f ir s t h alf o f 2 0 0 9 , fo llo w e d by a m o d e s t u p tu rn in th e se c o n d h a lf o f th e y e a r . In th is s c e n a rio , u n e m p lo y m e n t r a te s w o u ld likely c o n tin u e to rise th ro u g h th e e n d o f th e y e a r. H aving sa id th a t, i t is alw ay s d iffic u lt to p r e d ic t th e p re c is e tim in g o f w h e n th e e c o n o m y w ill beg in its re c o v e ry a n d th is is a p a rtic u la rly ch a lle n g in g tim e to m a k e e c o n o m ic p ro je c tio n s . W hen f a c e d w ith su ch u n c e rta in tim e s , I fin d t h a t h isto ry c a n p ro v id e so m e in sig h ts to g u id e o u r th in k in g . O ne stu d y I fo u n d in fo rm a tiv e e x a m in e s p rev io u s re c e ssio n s in c o u n trie s t h a t h av e also fa c e d sig n ific a n t fin a n c ia l tu rm o il. This e v id e n c e fro m th e p a s t 5 0 y e a rs su g g e sts t h a t re c e ssio n s lin k ed to fin a n c ia l tu rm o il te n d to b e lo n g e r an d m o re s e v e r e th a n ty p ic a l re c e ssio n s. T he good n ew s is t h a t th e e v id e n c e fro m p a s t re c e ssio n s also show s t h a t th e y all e n d , a n d I can sa y w ith c o n fid e n c e t h a t th is re c e ssio n w ill c e r ta in ly e n d as w ell. How Do Sick Economies Get Better? E ven so, I am s u r e t h a t m an y o f you a r e w o n d e rin g w h y I am o p tim is tic en o u g h to e x p e c t a re c o v e ry to beg in la te r th is y e a r . H ow w ill i t c o m e a b o u t? In f a c t, my o u tlo o k fo r a re c o v e ry in th e se c o n d h a lf o f th e y e a r re lie s on fo u r fo rc e s . T h e f ir s t fo rc e a t w o rk is e x p a n sio n a ry m o n e ta ry a n d fisc a l p o lic ie s. To c o u n te r a c t re c e ssio n s, th e F e d e r a l R eserv e a n d g o v e rn m e n t e n titie s p u rsu e p o lic ie s t h a t lo w e r in te r e s t r a te s a n d s tim u la te sp e n d in g . T h e F e d e ra l R e serv e has b e e n e n g a g e d in a v e ry siz a b le c r e d it e x p a n sio n p ro g ra m fo r m o re th a n a y e a r a n d , as you know , C ongress a n d th e A d m in istra tio n h av e d e v e lo p e d a v ery siz a b le stim u lu s p a c k a g e . I w ill h av e m o re to sa y a b o u t th e F e d e ra l R e se rv e ’s sp e c ific a c tio n s to e n s u re a d e q u a te liq u id ity , e x p a n d c r e d it, a n d r e s to r e s ta b ility in a f e w m in u te s. B ut in g e n e ra l, e x p a n sio n a ry m o n e ta ry a n d fisc a l p o lic ie s h av e alw ay s p la y e d a s u b s ta n tia l ro le to r e in v ig o ra te th e e c o n o m y w h e n U.S. h o u se h o ld s a n d b u sin e sse s a r e r e lu c ta n t to sp e n d . T h e se c o n d fo rc e w e s e e in m o st re c o v e rie s is a b o o s t fro m th e ho u sing s e c to r d u e to lo w e r m o rtg a g e r a te s . L ow er m o rtg a g e r a te s o rd in a rily r e s u lt fro m m o n e ta ry policy stim u lu s, b u t I am sin g lin g th is o u t as a s e p a r a te f o rc e in m y p r o je c te d re c o v e ry b e c a u s e t h e r e a r e s e v e ra l f e d e r a l g o v e rn m e n t p ro g ra m s d e s ig n e d to re d u c e m o rtg a g e r a te s a n d s tim u la te housing d e m a n d . T he housin g c o n tra c tio n has b e e n so s te e p t h a t its e v e n tu a l b o tto m in g o u t w ill b e s e e n as an e s p e c ia lly im p o r ta n t p o sitiv e d e v e lo p m e n t in th is c y c le , as in d ic a te d e a r lie r . T h e th ird f o rc e a t w o rk is a m o re in ta n g ib le o n e - it is th e e n tr e p r e n e u r ia l c h a r a c t e r o f A m erican b u sin e sse s. In th e d e p th s o f a re c e ssio n , it is u n d e r s ta n d a b le t h a t p e o p le a r e fo c u se d on risk a v e rsio n , b u t c u rio u sly e n o u g h , th is is also o n e o f th e w ellsp rin g s of re c o v e ry . T h o se lo n g -d e la y e d in v e s tm e n t p lan s b e c o m e m o re a n d m o re a p p e a lin g as th e b o tto m , o r tro u g h , o f th e re c e ssio n b e c o m e s m o re an d m o re likely. In o th e r w o rd s, if you d o n ’t ju m p a t an o p p o rtu n ity , s o m e o n e e ls e w ill. E x am ples o f th is c a n b e fo u n d in e v e ry re c e ssio n , b u t c o n s id e r a n o th e r v e ry d iffic u lt p e rio d fo r th e U.S. econom y: th e e a rly 1 9 7 0 s . It w a s a tim e w h e n w a g e a n d p ric e c o n tro ls w e r e in tro d u c e d a n d th e http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090218.cfm[4/29/2014 2:01:03 PM] Economic Stress and Forces for Recovery :: February 18, 2009 :: Federal Reserve Bank of Cleveland lo n g -e s ta b lis h e d link b e tw e e n th e d o lla r a n d gold h a d c o lla p s e d . B e tw e e n N o v em b e r 1 9 7 2 an d D e c e m b e r 1 9 7 4 , th e Dow Jo n e s In d u stria l A v erag e p lu n g e d m o re th a n 4 0 p e r c e n t ,1 th e in fla tio n r a te m o re th a n tr i p l e d ,2 a n d th e u n e m p lo y m e n t r a t e ju m p e d fro m 5 .3 p e r c e n t to 7 .2 p e r c e n t .3 You m ig h t th in k t h a t n o b o d y in th e ir rig h t m ind w o u ld la u n ch a b u sin ess a t su ch a tim e . B ut you w o u ld b e w ro n g . C o n sid er th r e e c o m p a n ie s t h a t g o t th e ir s t a r t d u rin g th is p eriod : F e d e ra l E xpress, M icrosoft, a n d S o u th w e st A irlines. W hile e v e ry c o m p a n y ’s fo u n d in g is u n iq u e , th e r e is also a co m m o n d e n o m in a to r - th e fo u n d e rs b e lie v e th e y c a n im p ro v e on an ex istin g p ro d u c t, o r th e y b e lie v e th e y h av e an e n tir e ly n e w p r o d u c t to o ffe r. T h e o p p o rtu n ity w a s j u s t to o good to pass up. T h e th r e e fo rc e s I h av e m e n tio n e d c o m e in to p lay in n e a rly all tra n s itio n s fro m re c e ssio n to re c o v e ry , b u t I am ad d in g a f o u rth fo rc e - n am ely , t h a t th e fin a n c ia l m a rk e t tu rm o il w ill g ra d u a lly su b sid e . E conom ic g ro w th d e p e n d s c ritic a lly on a w e ll-fu n c tio n in g fin a n c ia l sy ste m t h a t c a n tr a n s f e r c a p ita l fro m sa v e rs to e n tr e p r e n e u r s a n d e s ta b lis h e d b u sin e sse s. T h e F e d e ra l R e serv e c le a rly u n d e rs ta n d s t h a t h e a lth y fin a n c ia l m a rk e ts a r e e c o n o m ic en a b le rs; th e y h e lp to in c re a s e th e d e m a n d fo r all p ro d u c ts a n d s e rv ic e s in o u r ec o n o m y . O ur a c tio n s a r e a v ita l p a r t o f th e n a tio n a l e c o n o m ic re c o v e ry p ro g ra m . W e a r e ta k in g b old s te p s to p u t th e c r e d it m a rk e ts b a c k in to good w o rk in g o r d e r , an d to s u p p o rt an in c re a s e in b a n k le n d in g . W e a r e a d d re ssin g la rg e a n d c o m p le x p ro b le m s, an d w e a r e e x te n d in g an d e x p a n d in g o u r p ro g ra m s as n e c e s sa ry . I am co n v in c e d t h a t m o re p ro g re ss m u s t b e m a d e , a n d t h a t m o re p ro g re ss w ill b e m a d e . The Federal Reserve in Action H ere a r e so m e s p e c ific a c tio n s t h a t w e a t th e F e d e ra l R e serv e h av e b e e n ta k in g to g e t th e e c o n o m y b a c k on its f e e t . W e h av e m a d e th e la rg e s t c u ts in o u r in te r e s t r a te ta r g e t in o u r h isto ry . W e h av e lo w e re d th e f e d e r a l fu n d s r a t e ta r g e t by a b o u t 5 0 0 b asis p o in ts sin c e A ugust 2 0 0 7 - re d u c in g th e r a te fro m 5 - 1 / 4 p e r c e n t to a ra n g e o f 0 to 1 / 4 p e r c e n t. I am o f te n a sk e d if su c h a low f e d e r a l fu n d s r a te t a r g e t m e a n s th e F e d e ra l R eserv e h as run o u t o f a m m u n itio n to c o u n te r th e e c o n o m ic tu rm o il. T h e a n s w e r to t h a t q u e s tio n is no! W e s till h a v e o th e r policy to o ls a t o u r d isp o sal. F irst, w e a r e using o u r n o rm a l le n d in g a u th o rity to e x te n d c r e d it in s ig n ific a n t a m o u n ts to c o m m e rc ia l b an k s. In n o rm a l c irc u m s ta n c e s , w e le n d o v e rn ig h t. In th is p e rio d o f tu rm o il, w e h av e e x te n d e d th e te rm o f o u r loans to 9 0 d ays to h e lp b an k s e x te n d c r e d it to th e ir c u s to m e rs fo r lo n g e r p e rio d s o f tim e . P roviding liq u id ity to b anks is im p o r ta n t, b u t as th e fin a n c ia l m a rk e t tu rm o il w o rs e n e d , c o n c e rn s a b o u t c a p ita l, a s s e t q u a lity , a n d c r e d it risk c a u s e d b an k s a n d o th e r le n d e rs to lim it th e ir w illin g n ess to e x te n d c r e d it, e v e n w h e n th e y h a d e n o u g h liq u id ity . To a d d re s s th is issu e, th e F e d e ra l R e serv e d e v e lo p e d a s e c o n d s e t o f p o licy to o ls to m o re d ire c tly s u p p o r t b o rro w e rs a n d in v e sto rs in key c r e d it m a rk e ts. O ne e x a m p le o f th is a p p ro a c h is a fu n d in g fa c ility know n as TALF, o r th e T erm A sse t-B ac k ed S e c u ritie s Loan F acility , w h ich w ill likely b e in o p e r a tio n w ith in th e n e x t fe w w e e k s. Like m a n y a s s e t m a rk e ts , th e m a rk e t fo r s e c u r itie s b a c k e d by c o n s u m e r c r e d it has b e e n tr o u b le d fo r so m e tim e . T h e se in s tru m e n ts http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090218.cfm[4/29/2014 2:01:03 PM] Economic Stress and Forces for Recovery :: February 18, 2009 :: Federal Reserve Bank of Cleveland fu n d a s u b s ta n tia l s h a re o f c o n s u m e r c r e d it, in c lu d in g a u to lo an s, s tu d e n t lo a n s, an d c r e d it c a rd d e b t. In th e fo u rth q u a r te r o f la st y e a r , s e c u ritiz a tio n s in p a r ts o f th is m a rk e t c a m e to a c o m p le te h a lt. T h e se d isru p tio n s h a v e im p o r ta n t m a c ro e c o n o m ic im p lic a tio n s. TALF is d e s ig n e d to re in v ig o ra te buying a n d se llin g in th e s e c u ritie s m a rk e ts . S p ecifically , TALF w ill allo w h o ld e rs o f a s s e t- b a c k e d s e c u r itie s to b o rro w fro m th e F e d e ra l R e serv e using th e s e s e c u ritie s as c o lla te r a l. Loan a m o u n ts w ill ty p ic a lly b e b e tw e e n 8 5 a n d 9 5 p e r c e n t o f a s e c u r ity ’s v a lu e , fo r te rm s o f th r e e y e a rs . A m a jo r fo cu s o f th e n e w fin a n c ia l s ta b ility a n n o u n c e m e n ts la s t w e e k w as a sig n ific a n t e x p a n sio n o f TALF - fro m th e o rig in a lly a n n o u n c e d $ 2 0 0 billion to $1 trillio n . Also, a d d itio n a l a s s e t- b a c k e d se c u rity c la sse s a r e b ein g c o n s id e re d , in c lu d in g c o m m e rc ia l m o rtg a g e -b a c k e d s e c u r itie s . W e b e lie v e th is in te rv e n tio n to s u p p o r t c r e d it m a rk e ts w ill m a k e a big d if fe r e n c e in sta b iliz in g th e ec o n o m y . T h e F e d e ra l R eserve's th ird policy to o l is th e d ir e c t p u rc h a s e o f c e r ta in kinds o f lo n g e r-te rm s e c u r itie s fo r o u r p o rtfo lio . For e x a m p le , w e r e c e n tly a n n o u n c e d p la n s to p u rc h a s e up to $ 6 0 0 billion in h o u s in g -re la te d d e b t fro m g o v e rn m e n t-s p o n s o re d e n te r p ris e s . This p ro g ra m is in te n d e d to im p ro v e th e flo w o f c r e d it to h o m e b u y ers a n d e n c o u ra g e e x istin g h o m e o w n e rs to r e fin a n c e a t lo w er r a te s . M o rtg ag e r a te s d e c lin e d sig n ific a n tly on th e a n n o u n c e m e n t of th is p ro g ra m , a n d a p p lic a tio n s fo r m o rtg a g e re fin a n c in g h av e su rg ed . T h e F e d e ra l R e se rv e ’s th r e e s e ts o f po licy to o ls - le n d in g to fin a n c ia l in s titu tio n s , p roviding liq u id ity d ire c tly to key c r e d it m a rk e ts , a n d buying lo n g e r-te rm s e c u r itie s - h a v e a co m m o n f e a tu r e . T hey r e p r e s e n t o u r a b ility to a c q u ire a s s e ts in w ay s t h a t lo w e r in te r e s t r a te s a n d e a s e c r e d it c o n d itio n s in a ra n g e o f m a rk e ts e v e n w h e n th e f e d e r a l fu n d s r a te is n e a r z e ro . O ur a c tio n s h av e b e e n ag g re ssiv e an d u n p r e c e d e n te d . S in ce O c to b e r 2 0 0 7 , th e F e d e ra l R e se rv e ’s b a la n c e s h e e t has grow n fro m $ 8 5 5 billion to a lm o s t $ 2 trillio n re fle c tin g th e m a g n itu d e o f th e c h a lle n g e s fa c in g th e U.S. fin a n c ia l sy ste m . Conclusion L et m e c o n c lu d e w ith an o b s e rv a tio n . W e a r e in th e m id st o f th e m o st tro u b lin g p e rio d th e U.S. fin a n c ia l s e c to r has e x p e r ie n c e d sin c e th e 1 9 3 0 s , a n d w e re a lly d o n ’t know how m an y m o re c h a p te r s rem a in in th is d ra m a . T h e e p is o d e has s e rv e d as a p o w e rfu l re m in d e r t h a t a lth o u g h m a rk e t p a r tic ip a n ts h av e b e c o m e m o re s o p h is tic a te d , w e a r e s till v u ln e ra b le to e x tr e m e m a rk e t v o la tility a n d la rg e -s c a le fin a n c ia l d is tre s s . B ut w e n e e d to r e m e m b e r t h a t in crisis th e r e is also o p p o rtu n ity . During a n o th e r p e rio d o f e c o n o m ic crisis, P re s id e n t W o o d ro w W ilson re m in d e d A m erican s t h a t w e m u st a c t c o lle c tiv e ly . W ilson w as P re s id e n t o f th e U n ited S ta te s w h e n th e F e d e ra l R e serv e S ystem w as c r e a te d in 1 9 1 3 . T h e n , as now , A m eric a f a c e d d a u n tin g c h a lle n g e s. B ut W ilson w a s u n ru ffle d . In his f ir s t In au g u ral A d d ress, W ilson said , sp e a k in g o f all A m erican s, “W e sh a ll d e a l w ith o u r e c o n o m ic sy stem as it is a n d as it m ay b e m o d ifie d , n o t as it m ig h t b e if w e h ad a c le a n s h e e t o f p a p e r to w rite upon; an d s te p by s te p w e sh a ll m a k e it w h a t it sh o u ld b e ....” I re m a in c o n f id e n t t h a t w e w ill g e t th ro u g h th is d iffic u lt p erio d to g e th e r . And I w a n t a s s u re you t h a t th e F e d e ra l R e serv e is a c tiv e ly w o rk in g to r e s to r e g ro w th in o u r e c o n o m y w h ile m a in ta in in g a low an d s ta b le in fla tio n r a te . http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090218.cfm[4/29/2014 2:01:03 PM] Economic Stress and Forces for Recovery :: February 18, 2009 :: Federal Reserve Bank of Cleveland ■ 1 h ttp : / / w w w .d iin d e x e s .c o m / m d s id x / in d e x .c f m ? e v e n t= sh o w a v g D e c a d e s& d e c a d e = 1 9 7 0 # d o w d ia rv e T ■ 2 h ttp : //w w w .m is e r v in d e x .u s /ir b v m o n th .a s p [ j 1 ■ 3 h ttp : / /w w w .m is e r v in d e x .u s /u r b v m o n th .a s p c f Careers | Diversity | Privacy | Terms of Use | Contact Us | Feedback | RSS Feeds http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090218.cfm[4/29/2014 2:01:03 PM]
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