Regional President Speech

SILAS KEEHN REMARKS IOWA BANKERS ASSOCIATION - GROUP III CLEAR LAKE, IOWA MAY 20, 1987 I. INTRODUCTION - BILL BERNAU/NEIL MILNER/TOM KILLEEN A. GIVEN PROBLEMS - SPENDING AS MUCH TIME IN IOWA AS MY SCHEDULE WILL PERMIT II. JUST A FEW COMMENTS ABOUT THE AGRICULTURAL SITUATION A. GROWING CONVICTION THAT THE AG SECTOR IS AT LEAST IN THE ZONE OF STABILITY 1. LAND VALUES - DECLINE HAS CEASED - LEVELLING OFF 2. TRANSACTIONS ARE TAKING PLACE - SOME WITH FARM CREDIT SYSTEM SUBSIDIES - BUT OTHER TRANSACTIONS BASED ON THE AGRICULTURAL VALUE OF THE LAND ITSELF B. COMMODITY PRICES HAVE SHOWN RECENT INCREASES 1. THE FLUCTUATION OF THE PAST WEEK OR SO NOT NECESSARILY INDICATIVE OF TRENDS 2. UPWARD MOVEMENTS WILL PROVIDE A BASIS FOR IMPROVED LAND VALUES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 2 C. EXPORT OPPORTUNITIES 1. OVER THE PAST YEAR OR SO DECLINING 2. THIS YEAR AN OPPORTUNITY FOR GREATER EXPORTS D. NOT SUGGESTING A DRAMATIC CHANGE IN THE OUTLOOK FOR AGRICULTURE 1. THAT WILL CERTAINLY NOT BE THE CASE 2. THE DECLINES HAVE BEEN ARRESTED 3. STABILITY AT ADMITTEDLY A LOW LEVEL, BUT THAT IN ITSELF IS IMPROVEMENT III. LET ME SHIFT TO A LIST OF COMMENTS WITH SPECIFIC APPLICABILITY TO BANKING A. THE CLASSIFICATION OF THE REAL ESTATE OWNED 1. REPOSSESSED REAL ESTATE HAS BEEN CLASSIFIED IN THE EXAMINATION PROCESS 2. WITHIN THE PAST WEEK OR TWO A MEMORANDUM DISTRIBUTED TO THE EXAMINERS PROVIDING THAT THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 3 PROPORTIONATE SHARE OF THE PROPERTY THAT WOULD BE FINANCED NEED NOT BE CLASSIFIED 3. THAT PORTION THAT WOULD NOT BE FINANCED WOULD BE CLASSIFIED 4. EXAMPLE -- 200 - 100 - 80 B. RECENT CIRCULAR DISTRIBUTED BY THE BOARD OF GOVERNORS WITH REGARD TO THE POLICY RELATING TO BANK HOLDING COMPANIES 1. BANK HOLDING COMPANIES ARE TO SERVE AS A SOURCE OF STRENGTH 2. TO THE EXTENT POSSIBLE, PROVIDE FUNDING FOR SUBSIDIARY BANKS C. RISK ADJUSTED CAPITAL 1. VERY ARITHMETIC IN OUR APPROACH 2. CLASSIFICATION OF ASSETS INTO CATEGORIES - DIFFERENT RISK FACTORS FOR EACH CATEGORY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 4 3. INCLUSION OF BOTH BALANCE SHEET ACTIVITY IN THE COMPUTATION OF CAPITAL 4. BANK OF ENGLAND - OTHER CENTRAL BANKS 5. A STEP TOWARD UNIFORMITY IN LOCAL REGULATION D. GROWING RISKS IN THE ELECTRONIC PAYMENTS MECHANISM 1. MECHANICAL RISK - LACK OF COMPATIBILITY IN THE SYSTEM 2. VOLUME/VELOCITY ENORMOUS - 1 TRILLION - 25% OF THE GNP 3. THE SYSTEM DEPENDENT ON THE WEAKEST LINK 4. THE CREDIT ASPECTS OF THIS ISSUE A. OVERDRAFTS GROWING RAPIDLY - EXAMPLE - BANK OF NEW YORK B. THE NEED TO BRING THIS UNDER CONTROL C. INSTALLATION OF THE PAYMENT SYSTEM RISK PROGRAM ABOUT A YEAR AGO Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 5 (1) SUCCESSFUL SO FAR - THE LEVEL OF OVERDRAFTS BEING CONSTRAINED (2) BANKS ARE OPERATING WITHIN THEIR ESTABLISHED CAPS D. INSTALLED A REAL TIME MONITORING SYSTEM ABOUT A MONTH AGO E. CURRENT PROPOSAL OUT FOR COMMENT TO FURTHER REDUCE THE OVERDRAFT LIMIT E. REGULATORY REFORM 1. THE FINANCIAL SYSTEM HAS CHANGED DRAMATICALLY - LEGISLATION HAS LANGUISHED 2. THE REGULATORY STRUCTURE HAS NOT BEEN MODIFIED TO ADDRESS THE CHANGES 3. WE HAVE SOME CHOICES HERE - NOT EASY 4. RE-REGULATION/RE-STRUCTURING THE INDUSTRY AS IT WAS A DECADE AGO SEEMS MOST UNLIKELY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 6 5. AS FINANCIAL ENTITIES GROW LARGER AND MORE COMPLEX, INCREASINGLY WE WILL BE FACED WITH THE QUESTION OF JUST HOW TO DEAL WITH OUR REGULATORY RESPONSIBILITY A. SAFETY AND SOUNDNESS B. MONETARY AGGREGATES/PAYMENTS MECHANISM OR BROADER SYSTEMIC ISSUES C. IF THE FORMER, NARROW REGULATION PERHAPS ADEQUATE D. IF THE LATTER, AND AT THE END OF THE DAY WHETHER WE LIKE IT OR NOT WE TEND TO BE FACED WITH THE LATTER, THEN BROADER MORE COMPREHENSIVE REGULATION BY THE CENTRAL BANK IS APPROPRIATE E. WE HAVE A LONG WAY TO GO ON THIS ONE BUT IT IS BECOMING A VERY PRESSING ISSUE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 7 IV. LET ME SHIFT 10 SOME COMMENTS ABOUT THE ECONOMY A. I WON'T SPEND TIME ON A FORECAST FOR 1987 - LITTLE THAl I CAN ADD TO WHAT YOU ALREADY KNOW 1. BROADLY, 1987 - REPLAY OF 1986 2. SOME IMPORTANT SHIFTS UNDERLYING THAT BROAD EXPECTATION A. EXPANSION WILL CONTINUE B. CLEARLY WE ARE IN A LONG PERIOD OF ECONOMIC GROWTH - 17 CONSECUTIVE QUARTERS - SECOND LONGEST SINCE WW-II C. QUANTITATIVELY THIS HAS BEEN AND CONTINUES TO BE A COMPARATIVELY STRONG CYCLE 1. EMPLOYMENT - 13 MILLION - 102 MILLION 2. JAPAN/WESTERN EUROPE - 3 MILLION 3. THE ___ NUMBERS OF 300,000 4. INDUSTRIAL PRODUCTION AT RECORD LEVELS A. EMPLOYMENT SHIFT - THE MANUFACTURING SECTOR OPERATING AT RECORD LEVELS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 8 5. GNP IN REAL TERMS AT RECORD LEVELS 6. THE INFLATION RATE DOWN A. LAST YEAR'S GOOD RESULTS ENERGY/FOOD RELATED B. WILL BE HIGHER THIS YEAR, SAY, 3-1/2 - 4% C. THE UNWINDING OF THE POSITIVE EFFECTS FROM OIL AND FOOD PRICES THAT WE EXPECTED LAST YEAR 7. AUTOMOTIVE SALES A. SAY, 10.3 MILLION B. 4TH CONSECUTIVE YEAR 8. HOME STARTS A. SAY, 1.6 TO 1.7 MILLION THIS YEAR B. 5TH YEAR 9. ANY TIME THESE SECTORS DO THIS WELL, INDICATIVE OF A STRONG ECONOMY 10. THESE ARE VERY POWERFUL NUMBERS - IN A BROAD NATIONAL PERSPECTIVE THIS HAS BEEN A VERY, VERY STRONG CYCLE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 9 A. UNDERNEATH THESE VERY POSITIVE NUMBERS - VERY UNEVEN B. THE MIDWEST HAS HAD MORE THAN I TS SHARE - HEAVY INDUSTRY - AND MOST IMPORTANTLY, THE AGRICULTURAL SECTOR V. BUT WHILE THE TRADITIONAL INDICATERS LOOK STRONG AND WHILE WE HAVE EVERY EXPECTATION THAT THE EXPANSION WILL CONTINUE AT LEAST THROUGH THIS YEAR, THE RISE OF IMBALANCES HAS BECOME VERY THREATENING A. THE COMMON DENOMINATOR - THE BUILDUP OF DEBT THROUGH ALL SECTORS OF OUR ECONOMY B. CONTINUING FISCAL DEFICIT - THOUGH THIS FISCAL YEAR AND THE NEXT FISCAL YEAR WILL SHOW IMPROVEMENT OVER THE $220 BILLION FOR FISCAL 1986 1. WE HAVE NEVER DONE THIS BEFORE - THE CLEARLY HISTORICAL RECORD - DEFICITS/DEBT - 2-1/4 TRILLION - THE COMPOUNDING EFFECT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 10 C. THE REVERSAL ON THE TRADE ACCOUNTS RESULTING IN THE TRADE DEFICIT - THE LARGEST EXTERNAL DEBTOR - $250 BILLION - LARGER THAN BRAZIL AND MEXICO COMBINED 1. WE HAVE BECOME HIGHLY RELIANT ON THE INTERNATIONAL MARKETS 2. WE ARE LIVING BEYOND OUR MEANS - CONSUMPTION HAS OUTPACED DOMESTIC PRODUCTION 3. OUR HIGH STANDARD OF LIVING HAS BEEN SUPPORTED BY THE INTERNATIONAL MARKETS - UNLIKELY THAT THEY WILL BE WILLING TO CONTINUE TO SUPPORT OUR STANDARD OF LIVING 4. CLEARLY WE WILL HAVE TO UNWIND THIS IMBALANCE - COMPLETELY UNREALISTIC TO THINK THAT WE CAN CONTINUE WITH THIS LARGE DEFICIT 5. WE MAY JUST NOW BE EXPERIENCING THE EARLY SIGNS OF WHAT IS GOING TO BE A DIFFICULT, PERHAPS THE MOST DIFFICULT, ADJUSTMENT THAT WE HAVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 11 EXPERIENCED - AS A SOCIETY I DO NOT THINK THAT WE UNDERSTAND THE FULL RAMIFICATIONS OF JUST HOW DIFFICULT THIS ADJUSTMENT IS GOING TO BE D. CONSUMER DEBT HAS RISEN TO RECORD LEVELS 1. OUR HIGH CONSUMPTION RATES HAVE BEEN FINANCED WITH GROWING LEVELS OF INSTALLMENT DEBT 2. SAVINGS LEVELS AT RECORD LOWS E. CORPORATE DEBT HAS ALSO RISEN TO VERY HIGH LEVELS - RECORD AMOUNT IN 1984 (ALMOST $200 BILLION) - '85/'86 ONLY SLIGHTLY LESS 1. CORPORATE TAKEOVERS FINANCED WITH DEBT 2. CORPORATE AMERICA HAS DECAPITALIZED ITSELF F. WE HAVE BECOME A DEBT-DRIVEN SOCIETY 1. SURPRISING IN LIGHT OF THE LOWER RATE OF INFLATION 2. A CRITICAL ISSUE - SO MANY SECTORS OF OUR ECONOMY HAVE BECOME HIGHLY SUSCEPTIBLE TO ADVERSITY IN THE EVENT OF A RECESSION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 12 3. THE ECONOMIC CLOCK IS TI CK I NG HERE AND I WORRY ABOUT THE ABILITY OF OUR DEBT-DRIVEN ECONOMY TO SERVICE THESE LOADS IF CASH FLOW FALTERS G. AND SHOULD WE GO INTO A RECESSION WITH A FEDERAL DEFICIT ALREADY SO HIGH 1. IT IS DI FF ICU LT TO SEE JUST HOW FI S CAL POL ICY COULD RESPOND - HOW MUCH MORE COULD WE PUT INTO THE SYSTEM WITHOUT DRIVING THE TREASURY DEBT TO A TOPPLING LEVEL VI. AND WHILE WE DEAL WITH THESE ISSUES, WE MUST BE MINDFUL OF THE GLOBAL RAMIFICATION OF SO MANY ECONOMIC ISSUES A. THE EXTERNAL DEBTS OF THE LESSER DEVELOPED COUNTRIES 1. REFINANCING PROBLEMS 2. CONTINUED ECONOMIC EXPANSION IN THE MARKETS INTO WHICH THE LESSER DEVELOPED COUNTRIES EXPORT PRODUCTS 3. EVENT EARLIER THIS WEEK DRAMATIZE SOME OF THESE ISSUES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 13 B. CLEARLY WE HAVE BECOME AN INTEGRAL PART OF A GLOBALIZED ECONOMY - PERHAPS THE MOST SIGNIFICANT DEVELOPMENT OF THE DECADE OF THE '80S 1. IN THE 160S AND 170S WE STILL HAD STRONG ECONOMIC AND MANUFACTURING MOMENTUM REMAINING FROM THE POST-WAR PERIOD - WE CONTINUE TO BE MAJOR EXPORTER - OUR AGRICULTURAL SECTOR ALSO HAD EXPORT STRENGTH 2. BUT ALL THAT IS CHANGED - OUR TRADE DEFICIT TELLS THE STORY - OUR EXPORT SECTORS FULLY EXPOSED TO THE CRUCIBLE OF THE INTERNATIONAL MARKETPLACE 3. EXTENSIVE OUT-SOURCING IN THE PRODUCTION PROCESSES HAS BROUGHT FOREIGN GOODS INTO ALL PHASES OF OUR DOMESTIC PRODUCTION 4. IMBALANCES BECOME GLARINGLY APPARENT C. BUT I HAVE BECOME GROWINGLY OPTIMISTIC REGARDING OUR OPPORTUNITIES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 14 1. MANY MANUFACTURERS HAVE DRAMATICALLY MODIFIED THEIR PRODUCTION PROCESSES 2. SIGNIFICANTLY REDUCED THEIR PRODUCTION COSTS AND BREAK-EVEN LEVELS 3. WITH THE MAJOR REDUCTION IN THE VALUE OF THE DOLLAR (THOUGH ADMITTEDLY NOT AGAINST ALL CURRENCIES), I THINK OUR DOMESTIC OPPORTUNITIES HAVE GREATLY IMPROVED 4. AND CERTAINLY OUR OPPORTUNITIES TO COMPETE ONCE AGAIN IN OUR OWN DOMESTIC MARKETS HAS SIGNIFICANTLY IMPROVED 5. WHAT I AM SUGGESTING IS THAT THE SHIFT IN THE TRADE ACCOUNTS, WHICH IS CRITICAL TO OUR EXPECTATION THAT THE EXPANSION WILL CONTINUE AT LEAST THROUGH 1987 AND INTO 1988, IS DEPENDENT ON THIS MAJOR SHIFT IN THE TRADE ACCOUNTS - INCREASED EXPORTS AND DECREASED IMPORTS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 15 6. ONLY IN THIS WAY WILL WE ACCOMPLISH THE ADJUSTMENT THAT I MENTIONED A MOMENT AGO - THE REDUCTION IN OUR RELIANCE ON THE EXPORT MARKETS TO SUPPORT OUR HIGH CONSUMPTION LEVELS VII. LET ME CONCLUDE WITH PERHAPS THE MOST DIFFICULT ISSUE OF ALL - THE INTERNATIONAL POLITICAL CONSIDERATIONS OF OUR CURRENT PROBLEMS A. TO BE REPETITIVE AND TO SAY THE OBVIOUS, IT IS CLEAR THAT THE ECONOMIES OF THE WORLD HAVE BECOME GLOBALLY INTEGRATED 1. PRODUCTS AND MONEY MOVE RELATIVELY FREELY ACROSS BORDERS 2. BUT ECONOMIC/FISCAL AND MONETARY POLICIES DO NOT A. THERE IS A SENSE THAT AT THIS MOMENT IN TIME WE ARE AT SOMETHING OF AN IMPASSE B. BUT WE ARE TALKING ABOUT VERY, VERY DEEP POLITICAL ISSUES HERE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CLEAR LAKE, IA. 5/20/87 PAGE 16 3. IT WILL BE CRITICALLY IMPORTANT THAT THE MAJOR COUNTRIES OF THE WORLD DEVELOP A WAY OF COORDINATING AND COOPERATING IN THEIR POLICY DETERMINATIONS 4. IF WE DON'T, THE RISK OF PROTECTIONISM GROWS AND I DON'T THINK I NEED TO SPEND TIME DEALING WITH THE CONSEQUENCES OF PROTECTIONIST LEGISLATION 5. BUT IF THE MAJOR NATIONS ARE ABLE TO FIND A WAY OF RESOLVING THEIR POLITICAL DIFFERENCES AND COOPERATING AMONGST THEMSELVES A. THIS WILL BEGIN TO PUT SOME OF THE IMBALANCES THAT I HAVE TOUCHED UPON (MOST PARTICULARLY THE DEBT ISSUES) IN A MORE REALISTIC PERSPECTIVE B. AND PROVIDE THE BASIS FOR A LONG, CONTINUING AND HIGHLY REWARDING ECONOMIC EXPERIENCE THANK YOU * * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1987, May 19). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19870520_silas_keehn

@misc{wtfs_regional_speeche_19870520_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1987},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19870520_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}