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Forces for Economic Recovery :: March 25, 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 Com munit y D e velopm ent S tream ing Media Forefront M agazine 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 > Forces fo r Economic Recovery Forces for Economic Recovery Additional Information Introduction I th in k w e c a n all a g r e e t h a t e c o n o m ic c o n c e rn s a r e n o w to p -o f-m in d fo r a lm o s t e v e ry o n e th e s e day s. W ith o u t q u e s tio n , th e s e a r e h isto ric an d u n p r e c e d e n te d tim e s . Every d ay , I s e e grow ing e v id e n c e o f a w id e s p re a d p u b lic d e s ire to b e t t e r u n d e rs ta n d w h a t is h a p p e n in g , an d w hy. F o r m e , th e c u r r e n t e p is o d e h as b e e n u n lik e an y I h a v 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 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 erio d has c e r ta in ly te s te d m y c o m m itm e n t to “ life lo 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 fe w m o n th s. In d e e d , I h av e s p e n t m an y 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 m y c o lle a g u e s, 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 a n 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 s p e n d in g f a r to o m an y w e e k e n d s revising y o u r b u sin ess s tr a te g ie s . H e re in N o rth w e s t O hio, you f a c e a d d itio n a l c h a lle n g e s as th e re g io n ’s tr a d itio n a l in d u s trie s c o n f r o n t th e ir w o rs t crisis in d e c a d e s a n d as you re d o u b le y o u r e f f o rts to c r e a t e a m o re d iv e rse re g io n a l ec o n o m y . Sandra Pianalto P resident and CEO, Federal Reserve Bank o f Cleveland Regional Growth Partnership T o le d o , Ohio March 25, 2009 In my re m a rk s to d a y , 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 t h a t a r e fa c in g b o th th e U.S. e c o n o m y a n d th e reg io n a l e c o n o m y . 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 fa c in g . P le a s e n o te t h a t th e v iew s I e x p re s s to d a y a r e my ow n an d do n o t n e c e s sa rily r e f le c t th e v iew s o f my c o lle a g u e s in th e F e d e ra l R eserv e S y stem . The Situation - Where Are We? For tw o d ays la s t w e e k , m y F e d e ra l R e serv e c o lle a g u e s a n d I m e t to d iscuss c u r r e n t c o n d itio n s a n d th e e c o n o m ic o u tlo o k . In o u r p ress s ta te m e n t re le a s e d a f te r th e m e e tin g , w e n o te d t h a t s in c e w e la st m e t in Ja n u a ry , th e e c o n o m y h as c o n tin u e d to c o n tr a c t. T h e d a t a on e m p lo y m e n t, h ousing, a n d b u sin e ss in v e s tm e n t c a m e in w e a k e r th a n e x p e c te d . In a d d itio n , e c o n o m ic c o n d itio n s a b ro a d h av e w o rs e n e d . T h e se d a t a co n firm t h a t w e a r e s till in th e m id st o f a s e v e re re c e ssio n . At 16 m o n th s o ld , th e c u r r e n t re c e ssio n h as la s te d b ey o n d th e 1 0 -m o n th a v e ra g e o f th e n a tio n ’s p o st-W o rld W ar II re c e ssio n s. U n fo rtu n a te ly , i t w ill c o n tin u e fo r a w h ile lo n g e r. W h e th e r w e a r e ta lk in g a b o u t a u to sa le s o r in d u s tria l p ro d u c tio n , c o n s u m e r s p e n d in g o r c o n s u m e r c o n fid e n c e , th e s e m e a su re s h av e all p lu n g e d , e i th e r to re c o rd low s o r to low s n o t s e e n in se v e ra l d e c a d e s . http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090325.cfm[4/29/2014 2:00:48 PM] Forces for Economic Recovery :: March 25, 2009 :: Federal Reserve Bank of Cleveland 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. 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 . L ast y e a r , th e n e t w o rth o f U.S. h o u se h o ld s d e c lin e d by m o re th a n 11 trillio n d o lla rs, o r by 18 p e r c e n t. To p u t t h a t in p e r s p e c tiv e , t h a t is c lo s e to a y e a r ’s w o rth of U.S. gross d o m e s tic p ro d u c t. T h e im p a c t o f th is w e a lth loss on th e e n t ir e e c o n o m y h as b e e n d ra m a tic . In th e f o u rth q u a r te r o f la s t y e a r , U.S. GDP s h ra n k a t an a n n u a l r a te o f 6 .2 p e r c e n t. T his w as th e w o rs t q u a r te rly d e c lin e sin c e th e re c e ssio n o f 1 9 8 2 . 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 . Every d a y s e e m s to bring m o re n ew s o f lay o ffs, p ay c u ts , o r fu rlo u g h s as c o m p a n ie s s c ra m b le to r e d u c e c o s ts . Since th e b eg in n in g o f th e re c e ssio n in D e c e m b e r 2 0 0 7 , a b o u t 4 . 4 m illion A m erican jo b s h av e b e e n 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 sin 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 . W ell o v e r h a lf o f th o s e losses h av e c o m e j u s t in th e p a s t fo u r 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 8.1 p e r c e n t. O h io ’s u n e m p lo y m e n t r a te , now a t 9 . 4 p e r c e n t, is la rg e r th a n th e n a tio n a l r a te , an d u n e m p lo y m e n t in th e T o le d o a r e a is m uch w o rs e —1 2 .0 p e r c e n t. B eca u se th e G r e a te r T o led o a r e a has a h ig h e r c o n c e n tra tio n o f e m p lo y m e n t in tr a n s p o r ta tio n - r e la te d m a n u fa c tu rin g th a n th e n a tio n as a w h o le , th is reg io n f a c e s e v e n m o re fo rm id a b le c h a lle n g e s. E xports a r e also an im p o r ta n t so u rc e o f jo b s a n d in c o m e to p e o p le in th is reg io n . In p a s t re c e ssio n s, w e h av e b e e n a b le to re ly 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 . 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 ec lin in g a ro u n d th e w o rld . T he In te rn a tio n a l M o n e tary Fund p r o je c ts t h a t th e w o rld e c o n o m y w ill gro w by o nly 0 . 5 p e r c e n t th is y e a r , its slo w e st r a te s in c e W orld W ar II. T h e tu rm o il in th e housing s e c to r , w h ich le d us in to th e re c e ssio n , c o n tin u e s . And i t w ill ta k e so m e tim e b e f o r e th is im p o r ta n t s e c to r reg a in s its h e a lth . H ousing p ric e s a r e s till d e c lin in g in m an y p a r ts of th e c o u n try , housing s ta r ts h a v e fa lle n by m o re th a n 6 0 p e r c e n t 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 r e la tiv e to th e p a c e o f s a le s . At th e c u r r e n t se llin g r a te , it w o u ld ta k e 1 0 m o n th s ju s t to c le a r th e in v e n to ry o f e x istin g h o m es. C re d it c o n s tra in ts re m a in a t th e h e a r t o f th e c u r r e n t c h a lle n g e s to th e housing an d a u to m o tiv e s e c to r s . C re d it is tru ly th e life b lo o d of o u r fin a n c ia l sy ste m . E x ten d in g c r e d it re q u ire s b o th c a p ita l an d c o n fid e n c e , b o th o f w h ich a r e in s h o r t su p p ly to d a y . U n fo rtu n a te ly , t h a t h as 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 siv e fo r m a n y h o u se h o ld s a n d b u sin ess b o rro w e rs. 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 th e r e s t of th is y e a r ? A lthough m y b a s e lin e p ro je c tio n is fo r re a l GDP to w e a k e n f u r th e r in th e f ir s t h alf o f th is y e a r , I e x p e c t it to s ta b iliz e by th e en d o f th e y e a r . I e x p e c t th e e c o n o m y to beg in to re c o v e r n e x t y e a r as th e fisc a l stim u lu s b o o sts s p e n d in g an d as w e w o rk o ff ex c e s s in v e n to rie s . My f o r e c a s t fo r re c o v e ry also p re su m e s th e c u r r e n t a c tio n s u n d e r ta k e n by th e F e d e ra l R e serv e an d th e g o v e rn m e n t a r e su c c e ssfu l in re sto rin g fin a n c ia l s ta b ility . I h av e to w a rn y o u , h o w e v e r, t h a t th is o u tlo o k is s u b je c t to a n u m b e r o f s tro n g d o w n sid e risks. O ne risk t h a t p a rtic u la rly c o n c e rn s m e is w h a t e c o n o m is ts c a ll a “ n e g a tiv e f e e d b a c k lo o p ,” in w h ich w e a k e n in g fin a n c ia l a n d e c o n o m ic c o n d itio n s f e e d o ff o n e a n o th e r a n d b e c o m e http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090325.cfm[4/29/2014 2:00:48 PM] Forces for Economic Recovery :: March 25, 2009 :: Federal Reserve Bank of Cleveland m u tu a lly rein fo rcin g . How Do Sick Economies Get Better? W ith all o f t h a t b a d n ew s, it m ay b e h a rd to en v isio n a re c o v e ry ta k in g h old. B ut th e e c o n o m y w ill re c o v e r, an d m y o u tlo o k fo r re c o v e ry 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 licies. T h e se e x p a n sio n a ry 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 in rein v ig o ra tin g th e e c o n o m y w h e n U.S. h o u se h o ld s an d b u sin e sse s a re r e lu c ta n t to s p e n d . T he s itu a tio n w e fin d o u rse lv e s in to d a y is no e x c e p tio n . C o n se q u e n tly , th e F e d e ra l R e serv e h as b e e n e n g a g e d in a v e ry s iz a b le c r e d it e x p a n sio n p ro g ram fo r m o re th a n a y e a r a n d , as you know , C ongress an d th e A d m in istra tio n h a v e e n a c te d a v ery siz a b le stim u lu s p a c k a g e . I e x p e c t th e s e in itia tiv e s to c o n trib u te sig n ific a n tly to an in c re a s e in o v e ra ll e c o n o m ic a c tiv ity , a n d o u r re c o v e ry d e p e n d s on th e ir su c c e ss. 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 fro m m o n e ta ry policy stim u lu s. In a d d itio n , in th is re c e ssio n , s e v e ra l p ro g ra m s h av e b e e n p ro p o se d to f u r th e r re d u c e m o rtg a g e r a te s a n d to s tim u la te housing d e m a n d . T h e A d m in istra tio n h as r e c e n tly a n n o u n c e d a s tr a te g y to m a k e h o m e o w n e rsh ip m o re a f fo rd a b le fo r f ir s t- tim e h o m e b u y e rs, an d to h e lp m illions o f d is tre s s e d h o m e o w n e rs d e a l w ith b u rd e n so m e m o rtg a g e p a y m e n ts . B eca u se p ro b le m s in th e hou sin g m a rk e t h av e b e e n a t th e h e a r t o f w h a t trig g e re d th is re c e ssio n , re s to rin g s ta b ility in housing w ill b e e q u a lly c r itic a l to o u r e c o n o m ic re c o v e ry . S tab ilizin g housing p ric e s w ill h e lp ste m f o re c lo s u re s , sh o re up c o n s u m e r c o n fid e n c e , a n d b o ls te r b a n k b a la n c e s h e e ts by p re v e n tin g an y f u r th e r d e c lin e in th e v a lu e o f housing a s s e ts h eld by b an k s. 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 la n s b e c o m e m o re an 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 a p p ro a c h e s . 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. In N o rth w e st O hio, you a r e no s tr a n g e r s to o p p o rtu n ity . In J a n u a ry of th is y e a r , 1 6 p a te n ts w e r e g r a n te d in th e w e s te r n Ohio tri-c o u n ty a r e a , proving t h a t d e s p ite th e m an y c h a lle n g e s th e reg io n c o n tin u e s to f a c e , you a r e s till d re a m in g , p la n n in g , an d in n o v a tin g . For e x a m p le , X unlight (S u n lig h t) C o rp o ra tio n h as tr ip le d its w o rk fo rc e o v e r th e p a s t y e a r th a n k s to in n o v a tiv e te c h n o lo g y , a sk illed w o rk fo rc e , a n d th e use o f lo c al v e n d o rs. T h e firm h as a t tr a c t e d n a tio n a l a t te n t io n a n d b ro u g h t in te r n a tio n a l in v e s tm e n t to th e reg io n . U n iv ersities an d e c o n o m ic d e v e lo p m e n t o rg a n iz a tio n s a r e play in g a s ig n ific a n t ro le in fo s te rin g th is c r e a tiv e e d g e . T h e U n iv ersity of T o led o h as b e c o m e a le a d e r in s o la r e n e rg y re s e a rc h a n d has c o m m itte d to p re p a rin g s tu d e n ts fo r s c ie n c e , te c h n o lo g y , e n g in e e rin g an d m a th c a r e e r s o v e r th e n e x t fiv e y e a rs . W h a t a g r e a t r e c ip e fo r su c c e ss a n d a re m in d e r t h a t e v e n in ch a lle n g in g tim e s , o p p o rtu n itie s a r e o u t th e r e to s e t th e g ro u n d w o rk fo r re c o v e ry . T h e fin a l f o rc e t h a t w ill h e lp us m ove fro m re c e ssio n to re c o v e ry is a g ra d u a l d e c lin e in fin a n c ia l m a rk e t tu rm o il. 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 can 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 an d b u sin e sse s. As you know , p o lic y m a k ers a r e w o rk in g h a rd to b re a k th e c u r r e n t logjam t h a t e x ists in fin a n c ia l m a rk e ts . W e a r e ta k in g b old s te p s to p u t th e http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090325.cfm[4/29/2014 2:00:48 PM] Forces for Economic Recovery :: March 25, 2009 :: Federal Reserve Bank of Cleveland 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 r t an in c re a s e in b a n k le n d in g . 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 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 ut w h e n 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 , an d c r e d it risk c a u s e d b an k s an d o th e r le n d e rs to lim it c r e d it, e v e n w h en th e y h ad 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 eserv e d e v e lo p e d a s e c o n d s e t o f policy 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 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 . T h e TALF is d e s ig n e d to bring in v e sto rs b a c k in to th e s e c u ritiz a tio n m a rk e ts , w h ich is a v ita l s te p to e n a b le banks to s e c u r e o u ts id e fu n d in g fo r th e ir le n d in g p ro g ra m s. In v esto rs w ill b e a b le to b o rro w fro m th e F e d e ra l R eserv e a t a fa v o ra b le r a te o f in te r e s t to fu n d th e p u rc h a se o f th e s e s e c u r itie s , using th e s e c u r itie s th e m s e lv e s as c o lla te r a l. W hile in v e sto rs a r e o f c o u rs e s till e x p e c te d to s h o u ld e r r e a s o n a b le risks, th e te rm s o f th e s e loans r e d u c e in v e s to rs ’ d o w n sid e risk. T he goal o f th e TALF is to r e s to r e c o n fid e n c e to th e s e c u ritiz a tio n m a rk e t. In its f ir s t p h a s e , w h ich w as la u n c h e d j u s t la s t w e e k , th e TALF is s u p p o rtin g m a rk e ts fo r n ew ly issu ed c o n s u m e r c r e d it a n d fo r s tu d e n t, a u to , a n d b u sin e ss lo a n s. A se c o n d p h a s e w ill a d d f u r th e r s u p p o r t to s o m e o f th e s e m a rk e ts a n d h e lp m o rtg a g e s e rv ic e rs w o rk w ith h o m e o w n e rs to p r e v e n t a v o id a b le fo re c lo s u re s. In a d d itio n , th e F e d e ra l R eserv e e x p e c ts to e x p a n d th e ra n g e of e lig ib le s e c u r itie s w ith in th e TALF to h e lp r e s t a r t th e m a rk e ts fo r c e r ta in s e c u r itiz e d loans a lre a d y b ein g h eld by fin a n c ia l in s titu tio n s . I firm ly b e lie v e t h a t all o f th e s e s te p s a r e c ru c ia l to e n s u re t h a t m a jo r in v e sto rs a r e a b le to s u p p o r t th e fin a n c ia l s y s te m ’s a b ility to g e t c r e d it flow ing ag ain . 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 h a v e a n n o u n c e d p la n s to p u rc h a s e u p to $ 1 .2 5 trillio n o f m o rtg a g e -b a c k e d s e c u r itie s 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 by th e e n d o f th e y e a r . 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 e r r a te s . W hen w e f ir s t a n n o u n c e d p la n s to p u rc h a s e th e s e s e c u r itie s , in la te N o v em b e r o f la s t y e a r , th e c o s t o f m o rtg a g e loan s b e g a n to d e c lin e , an d r a te s c o n tin u e d to fa ll as w e b e g a n to p u rc h a s e th e s e s e c u ritie s . http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090325.cfm[4/29/2014 2:00:48 PM] Forces for Economic Recovery :: March 25, 2009 :: Federal Reserve Bank of Cleveland For e x a m p le , th e 3 0 - y e a r fix e d , c o n v e n tio n a l m o rtg a g e lo an r a te w as a little a b o v e 6 p e r c e n t la s t N o v em b er, an d as o f la s t w e e k , it a v e ra g e d j u s t u n d e r 5 p e r c e n t. T h e F e d e ra l R e serv e also a n n o u n c e d its in te n tio n to b eg in p u rch a sin g up to $ 3 0 0 billion o f lo n g e r-te rm T re a s u ry s e c u r itie s . T h e a n n o u n c e m e n t h a d an im m e d ia te e f f e c t on T re a s u ry y ie ld s. Low er in te r e s t r a te s on th e s e T re a s u ry s e c u ritie s e n c o u ra g e in v e sto rs to p u rc h a se o th e r kinds o f in v e s tm e n ts , w h ich w ill im p ro v e c o n d itio n s in th e p riv a te c r e d it m a rk e ts . T h e se th r e e s e ts o f policy to o ls - le n d in g to fin a n c ia l in s titu tio n s , p ro viding liq u id ity d ire c tly to key c r e d it m a rk e ts v ia s te p s su c h as th e TALF, an 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 h ey r e p r e s e n t o u r e f f o rts to 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 . C o llec tiv e ly , o u r a c tio n s h a v e b e e n a g g re ssiv e a n d u n p r e c e d e n te d . Since 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 h as grow n fro m $ 8 5 5 billion to a lm o s t $ 2 trillio n , an d w ith o u r r e c e n t a n n o u n c e m e n ts , w e a r e p r e p a re d to e x p a n d it f u rth e r . In a d d itio n to th e s e policy to o ls , w e c a n also u tiliz e o u r su p e rv iso ry re so u rc e s a n d a u th o rity to im p ro v e b a n k le n d in g a n d th e flo w o f c r e d it. T h e F e d e ra l R e serv e an d o th e r b a n k re g u la to rs a r e s tre s s te s tin g th e la rg e s t banks to e n s u re t h a t th e y h a v e th e c a p ita l th e y n e e d to o p e r a te sa fe ly . T h e s u r e s t sign t h a t a re c o v e ry is on its w ay an d t h a t fin a n c ia l m a rk e ts a r e on th e m e n d w ill b e an in flo w o f p riv a te c a p ita l in to th e b an king sy ste m an d a b r o a d - b a s e d in c re a s e in b a n k le n d in g . Since th e b eg in n in g o f th e y e a r , w e h a v e s e e n d e c lin e s in c o m m e rc ia l an d in d u s tria l loans as w e ll as lo a n s fo r c o m m e rc ia l r e a l e s t a t e . On th e o th e r h a n d , c o n s u m e r an d r e s id e n tia l m o rtg a g e loans a r e ag ain in c re a sin g , p a rtic u la rly fo r re fin a n c in g . As e c o n o m ic co n d itio n s s ta b iliz e , m o re h o u se h o ld s an d b u sin e sse s w ill h a v e th e c o n fid e n c e to b o rro w , a n d m o re b o rro w e rs w ill b e c o m e b e t t e r c r e d it risks. Both d e v e lo p m e n ts w ill c o n tr ib u te to e c o n o m ic g ro w th . 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 F ranklin D elano R o o sev elt h a rn e s s e d th e still-n o v e l te c h n o lo g y o f rad io to a d d re s s th e A m erican p e o p le . He u se d w h a t b e c a m e know n as “ fire s id e c h a ts ” to te ll p e o p le in an o p e n an d h o n e s t w a y how w e co u ld w o rk as o n e c o u n try to m ove fo rw a rd . H ere is w h a t P re s id e n t R o o sev elt h ad to sa y in o n e o f his fire s id e c h a ts in th e e a rly su m m e r o f 1934: “ In o u r e f f o rts fo r re c o v e ry w e h a v e a v o id e d on th e o n e h a n d th e th e o ry t h a t busin ess sh o u ld an d m u st b e ta k e n o v e r in to an a l l e m b ra c in g G o v e rn m e n t. W e h av e a v o id e d on th e o th e r h a n d th e e q u a lly u n te n a b le th e o ry t h a t it is an in te r f e r e n c e w ith lib e rty to o f fe r re a s o n a b le h e lp w h e n p riv a te e n te r p r is e is in n e e d o f h e lp . T he c o u rs e w e h av e fo llo w e d fits th e A m erican p r a c tic e o f G o v e rn m e n t - a p r a c tic e o f ta k in g a c tio n s te p by s te p , o f re g u la tin g o n ly to m e e t http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090325.cfm[4/29/2014 2:00:48 PM] Forces for Economic Recovery :: March 25, 2009 :: Federal Reserve Bank of Cleveland c o n c r e te n e e d s - a p r a c tic e o f c o u ra g e o u s re c o g n itio n o f c h a n g 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 —e a c h o f us c o n trib u tin g o u r p a r t to th e e c o n o m ic re c o v e ry . And I 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 a n d s ta b le in fla tio n r a te . 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