David W. Mullins Jr.
When I appeared before you seeking confirmation of my appointment to the Board last year, I spoke briefly in my opening remarks on what I thought should be the basic goals in the two major areas of Federal Reserve activity: monetary policy and financial regulation. The last year has indeed been a challenging one on both fronts. With your indulgence, I would like to revisit these topics from the perspective of a year later.
On the first topic, monetary policy, I believe that the Federal Reserve should seek to maximize sustainable economic growth. Inflation is detrimental to this objective. Steady, credible policies with respect to the growth of money and credit should contribute to fostering sustainable economic growth with progress toward price stability. Of course, fiscal policy, international influences, and economic shocks play important roles in affecting the path of the economy as well.
On a conceptual level, monetary policy is straightforward. However, the past year demonstrates the practical complexities encountered in conducting monetary policy. Not long after I arrived at the Board, we were confronted by a series of extraordinary events that presented a challenging mix of risks for the economy and financial markets. In short order, we were confronted with the conflict in the Persian Gulf, the associated spike in world oil prices and collapse of consumer confidence; the fiscal policy debate in the Congress that presented markets with the prospect of budgetary paralysis; and, of course, the stresses in our financial system, which led to what is commonly referred to as the credit crunch. This environment was indeed a complex financial and economic one that faced the Federal Reserve as the economy moved into recession in the second half of 1990.
In response, the Federal Reserve has sought to counteract the contractionary forces in the economy, utilizing open market operations, along with cuts in the discount rate and reduced reserve requirements, to bolster growth in money and credit. As you know, the economy responds with a lag to monetary policy actions, and the stimulative effects of these actions are working their way through the economy and will continue to do so in the months ahead. While inflationary pressures appear to have diminished in recent months, we must continue to be sensitive to the risks that inflation poses to the objective of fostering economic growth in both the long run and the near term.
Although the past year has been marked by economic shocks and recession, recent developments have been encouraging and suggest that the economy may well have bottomed. The prospects now seem favorable for a recovery that leads into a longer-term period of economic expansion and progress toward price stability. I believe, as my colleagues do, that we must continue to assess developments carefully and stand prepared to take appropriate action to foster such an outcome.
FINANCIAL SERVICES REFORM
When I was last before this committee, I spoke of the need for comprehensive modernization of the regulation of our financial services system. In the past year, the need for such reform has been underscored by stresses within the financial system and pressures on the Federal Deposit Insurance Corporation's (FDIC's) bank insurance fund. Because constraints in credit availability within the banking system have a potentially contractionary influence on the economy, they have been an important consideration in making monetary policy. Stresses in the financial system have also been a focal point of our work in the field of banking supervision and regulation.
I believe that these difficulties are symptomatic of a more fundamental problem-outmoded financial services regulation created more than half a century ago. Technology and innovation have radically altered the financial landscape, resulting in increased competition for banks and diminished competitive opportunity in traditional banking markets. The expansion of the federal safety net has shielded banks from the remedial effects of competition for funds in the financial marketplace, and regulatory discipline has often not been timely and efficient.
We, at the Board, have devoted considerable time to analyzing and debating the causes and potential remedies for the problems facing the banking system. I, like my colleagues, strongly support the thrust of the Administration's proposal for comprehensive financial services reform. The Administration's proposal is designed to deal with each of the components of the problem-to limit the expansion of the federal safety net, to enhance supervision and establish a system in which regulators will implement prompt, progressively more aggressive, corrective action as institutions weaken, and most important, to broaden competitive opportunity for banks. Within the context of strict protections designed to contain the spread of the federal safety net, to limit potential taxpayer exposure, and to enforce essential standards of safety and soundness; the proposal allows banking institutions to apply their resources and expertise over the full range of financial activities without artificial geographical constraints.
In my view such reform is long overdue. To be effective, reform must address the fundamental causes of the difficulties facing the banking industry. I believe that the root cause of these difficulties is diminished competitive opportunity. Broadened competitive opportunity, both in terms of activities and geographical scope, is needed to enhance the long-term competitiveness of the U.S. banking industry and ensure its long-term stability. A strong, competitive banking industry is the best protection for taxpayers exposed through the federal safety net. As our recent experience with the credit crunch illustrates, a strong and vital financial services industry is also an important contributor to economic stability and growth.
Therefore, it is encouraging to see comprehensive financial services reform on the Congress's agenda this year. I believe that the Administration and the Congress deserve credit for their willingness to confront this-complex and difficult legislative task. 1, as well as my colleagues, support this effort and will seek to be helpful in advancing the enactment of comprehensive reform.
There is clearly no shortage of work for the Federal Reserve and the Congress, as we seek to create a vibrant economy and a vital, world-class financial system. I have found my experience on the Board over the past year both challenging and personally rewarding. I hope that I have made some positive contribution to policy formation as well. I appreciate the opportunity to serve the public in this position of responsibility. If I am confirmed as Vice Chairman, I shall devote my energy and abilities to this additional responsibility and shall look forward to working with my colleagues on the Board and with this committee on the important and difficult financial and economic issues facing our nation.
I know that I have only skimmed the surface of the issues confronting us today, and I shall be happy to answer any questions the committee may have.
|Printer friendly Cite/link Email Feedback|
|Title Annotation:||Statements to the Congress|
|Publication:||Federal Reserve Bulletin|
|Date:||Aug 1, 1991|
|Previous Article:||Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System.|
|Next Article:||Monetary policy report to the Congress.|