Central Banking and Credit Allocation, Part 2

our next speaker when university forum is a former member of the board of governors of the federal reserve system who has some controversial ideas on central banking and credit allocation dr andrew of bremmer is now a professor of business administration at harvard he received his phd degree from harvard as been awarded twelve honorary degrees and it is a former fulbright fellow at the university of bombay he became a member of the federal reserve board in nineteen sixty six serving there until nineteen seventy four when he joined the harvard faculty in other areas of government service dr bremmer has been associated with the us commerce department is assistant secretary for economic affairs and as deputy assistant secretary in nineteen sixty three he was named government man of the year by the national business league dr bremmer visited ut austin in the spring of nineteen seventy five as a guest of the finance department we presented now his address on central banking in crowded allocation as recorded at that time and planning for this lecture suggested to

me that there might be some interest and my views on an allegation that i had had some say about that i want i am still happen that in february nineteen seventy five i was called before the congressional committees are far beyond third attempt to implement a proposal i've made five years ago and i won't talk about that it was one of the few proposals made in recent years to be that way with others are converts monetary policy and the history of that proposal i thought might be of some interest to be an hour or so i want to say something about the bases only change and focus which i visited before the congressional committee i've ever and why i did so says start off by saying that i advocate get down again in early nineteen seventy quite

explicit about it in a proposal i mean it's alice's fell from april one nineteen seventy three by the way of a fancy with april fool's day iii i assume that's why the proposal has gotten the reception i said says his focus is implementing monetary policy does is art require users on my abilities of a new supplementary series on assets they want to extend it or maintenance of the members of the villagers says i want to do that because i felt the merger it needed some kind of market oriented device which would moderate the adverse effects are monitoring restraint on certain sectors of the economy that decision there haven't been through the experience with monitors trade

in nineteen sixty six or nineteen sixty nine in general if you look at the record this is what you say when the federal reserve shift to a policy are rich dry farming policy of relative ease the impact on various sectors of the economy is most money that they were not as farce that the housing sector and ends up receiving a shoe all the shale rock every of the credit in some cases absolutely smaller share our band was a case that appeared monday we know that can be traced to the institutions respond that much of the house remained the same loan associations film and also that the structure of their portfolios in long term members with an asset turnover rate much lower than for commercial banks so that the average maturity of

their assets and they were at ninety is becoming arid with something far as commercial banks so if you look at these wars of farms into the how vincent dylan ocean very sharp cycle which are mirror images of the overall rate of economic activity so that during a period of expansion in economic activity that oppression money and capital markets for the fall and the housing will go down the ability of fondue other sectors of the economy especially the business either maret us financially so i concluded we need some device to break that might suggest this is the most of manners or there were quotas follows us say that the center is their march to increase fletcher on the mining capital markets over our stabilization

but it was to make certain that the impacts say on housing on state local government or wrong other sectors that i find it difficult to compete for funds would be national and the senators are going to have a demo reviewer of requirement or maybe even as you will reserve requirements on an asset for the growth in assets represented by the lending activities you so ma is on the books of the banks state local government securities my vote for rations sorghum and we operate on the assets are no sect as which should be discouraged art would have a higher ratio and these could be there we say quickly that this runs counter to use as many people who think about the role of central bankers think that central banks overly concerned with me or arm on him and rate of growth of money supply and that's that some others would

modify that to say the fed should be concerned with the availability of credit generally the concerned about the availability of credit in particular sectors recognize that i can and i disagree with the record shows that whenever of the you have as to what several banks are open to all central banks especially in western europe and in developing countries have to be concerned with the generalized the national fabric and availability of credit in particular sectors your question is how do they go about exhibiting that can send us in a few minutes something about the way the voters are exhibited that concern in nineteen seventy four and why i think it was a mistake to let me hasten to say that the proposal i've put forward in nineteen seventy there is a system of different reserve requirements encountered a great deal of difficulty is

very interested i made that speech in april nineteen seventeen within three weeks around the federal jury system various president and others were making speeches to assure the public at the veteran german general did not support that city's demand brenda's dreadful it's very interesting to go and look at the appearance before the various banking association of the country the metadata prof witte we don't support that but in nineteen eighties sagging seventy one in spring and then hear senate approach my introduced the deal which with some modifications would dampen it as he might put forward you might be interested in knowing how that proposal received when voters are fast there were seven members of the board board ended up voting for three against a crush my bill which would have permitted myself in the reserve requirements the eye naturally was among

the three members who voted for the other two members governors robertson who was then vice chairman and naval who was then a member of the board our pets and reservations about the bailout that they thought the principle was all right are we compromise downtown center proxmire warned it salmon offer burnt a need to appear together and debate before the committee he asked substance of the proposal we often didn't think that would be a nice thing to do i'm on i wouldn't mind i thought i'd meditates on our but we come from it appeared one we can i pick the next week but the argument against that proposal so when opera theatre specific pressures from the constituencies who would like to have more great shows on their particular message you can

see a parade homebuilders and others home finance and tides coming into the reserve bank's coming into the fed reserve board trying to push weight decision makers to establish more a show on the ocean and we had a huge talk and the definition of state assets in the hospital versus the racetrack and so long ago there was a substantive questions i felt that if they did have to go that for many growers gathered for canada or even then leave it to the bank is there some are objections from the borscht that's an economist in the system are which ran roughly as followers sides differential reserve requirements would make it one difficult to control the monitor addicts and our internet cafe on boards testimony on the bbc page after page description of the kind of difficulties that would be raised mainly technical i would say these two are serious reservations but

then their reservations with family resort yes sorcery lines that side you are on the prowl not to show up every object to make sure that it was all well sam nineteen seventy one as i said the talks might be a was the board took a position against it are forty three in nineteen seventy four and royce than raising a member of the banking committee committee in the house are not been chairman introduced a bill which to try to take account of some of the reservations raised by the board previously and now this time they will i was in the summer of nineteen seventy four and i've voted in favor vote in october and within that is spray enough positions and nothing happened and then in the verdict on a nineteen seventy five are essentially

the nineteen seventy four worst deal was we introduced this time the board voted seventeen to the substance of the issue is a rare however artfully we differential impact on monetary restraint on particular sectors is as clear today as it was in nineteen sixty nine the evidence from nineteen seventy four is quite painful it takes different forms for example in nineteen seventy four real problem with not so much housing and sought because mechanisms had been designed whereby the federal housing agency would bar foreign banks from the men who are as an elbow they did suffer we get rich rich this time the problem arose because of that real estate investment trusts are the problem also knows because many of the banks and agricultural

communities have found that it's much more profitable to put their phones in the federal funds market and then into local customers so they can often does got into our car are reacting with a great deal of army a distressed when i learn at the fed reserve was right in the midst of credit allocation nineteen seventy four without any genuine guidelines seem determined the array of priorities cemetery what happened our arrest rate the real estate investment trust and the fetus and the point of it that i had a hand in two of these not interfere in the late spring of nineteen a midnight spring of nineteen seventy four we became convinced that the real estate investment trust would not be able to roanoke worship at the corner they

would have to go to the banks for accommodation how about any form also works up to the discussion a debate within the fed reserve especially the board a policy was devised where by the message when i went aboard staff to the president the reserve bank and then on to the commercial banks these sensitive to the only other real estate investment trust and let me assure you know that as a result of that informant counseling which was understood and that the commercial bank ended up and in several billions of dollars in real estate investment trust the yarn with a white woman dr the bank of a special issue all the banks were induced to remain in dissipation pulcini where the bank they put together such food to finance real estate investment trust some of the smaller lightly get out

you're not allowed to get out across the pressure was on the mystery and i testified that there's credit allocation by the federal reserve to with our one explicit initiatives you then do sharing private lenders to behave in a way which ended up with necessities bars in favor or oppose i supported and three because the attrition in the commercial paper market would've led to the collapse of a substantial number and that were contaminated with an ethicist and generate it would've meant to adverse consequences for the economy as a whole so i thought it was appropriate to moderate that's being let me assure you doing time i was continuing to preach about the need to have a systematic guidelines should have some clear establishment of our augustine was with one another one however i thought was ah not with

war first i did know about and think about it maybe before he could probably prince that down wondering about it i was troubled as well it seems that on a particular day and the summer of nineteen seventy four a group of caffeine does when into the sec and ended up talking to offer burnt and they explained their plot say and that they couldn't get a commendation de la torre is now being kept on a full of artists it would be and forced to sell them and lost as they needed increased credit availability commercial banks to carry their stuff without any reference to the boy as a hole without any systematic and now esses of the situation the chairman of the centers are ongoing asia south america for reserve bank president say and that i had come to his attention that certain calif leaders were having trouble to the commercial

banks or the mayor whalen the fact that it was highly desirable to accommodate their local customs well it if you were the president of the fed reserve bank got such a letter from the chairman of the fed reserve board one way for you interpret that and that fayette was asked to tell a commercial banking and then when accountants and that issue liu that's precisely what happened now i'm a genius written up for sometime forbes magazine in early february had a long article on this film and i understand that members of the senate are born very upset about this and chairman of phil i'm a genius in my testimony before the committee to answer the chairman made that available to the committee and art that said precisely paddy's and no i didn't tell the reserve bank presidents detail the commercial banks and then when a caliphate

but the fact of the lead in fact that in nature and then the needs and the fact that a call attention to the need for a commercial bank and he says the local customers the message it cannot be oblivious of them and it's a jewish song violets and that suggestions by the fed on what can be taken sooner so you know the net result was that in some by this perception of lending requirements of reserve ability to move up a few notches on the matter of preferred customer well i had i did have a baby with that but i did have something to do with it obviously some office in nineteen seventy four sam obvious to me after a survey with me do

on the public utility finance in a narrator making problems are obvious to me that dozens of public utilities are selected country would not be able to fund their debts so they would come into the market in nineteen seventy four nines and the farm with local politicians may know three and four percent of all which they would now have to refinance are the goodwill or eight and nine and they couldn't possibly do this so they wouldn't have to remind one worn by credit so long fought in mind as you didn't call a conference and watch head of public utilities and the us and its allies dr problems according to reduce and about the need to be sensitive and we didn't tell the bank of colombian learning from intelligence

we're never shared in this message and the fed has been engaging in this kind of consular activities these kinds of necessity as councilman by way i think to be rational i think we need a system how do you choose between one group another how do you explain to the public why is favored over the marsh to no central bank credit is going into the city but their fate is influencing their way to private lenders nate as arm given the fact that the fed has been told to live too far systematic reserve requirements which was that market mechanisms of doing is i am switch an earthenware instead look put together a volunteer city megan verlee have a

set i left to fit it a little bit last year sent an advisory council drew up some guidelines on bank lending now all of us you know that the federal advisory council does not an easy actions sell its unexpected i mean if the merger board once every corner but while they have the huge in sort of clear that they do oppose gun like a considerable afternoon seth losure board made a public send these are useful guidelines to help banks lived through the spirit of inflation and credit which try to assure that are equitable sharing of credit in some guidelines identified loans which were two types of hunger to be deferred above all be identified types of orange which you dish dirt mr lodi live when out in september it was in january that the boys

began to do get reports on the way the banks were given diana waterman reports so i suggested in my testimony that they say it should take those lazy guidelines improve them because some armor right it's all the more foolish now making precision to be increased and the fed should publish the public on the series of guidelines or credit allocation by or banks like its member banks i suggested those guidelines should be exposed what the congress when the public in the federal register after pro recommit theodore institute a nation get monthly reports from the banks and how they are responding at least for a couple years i think the fed would you sam

objectively known chandler may not be so objective an invitation but at least the public wouldn't know what the thick thinks the priorities over me and obvious would minimize the chance of a particular constituency wandering the ending given the media are missing a member of the fed investigate into a favorable this would be roughly parallel to the old volunteer foreign creditor strive for ray you said rad for skinny guy lyon no new objectives that they knew what was expected i administer that forever mid nineteen sixty eight was ended in nineteen nineteen seventy four robertson an island and i think on the records most bankers would agree that it was a hat on an impeccable fashion than that there were no longer the favorite to that i think that steam could be

made or that had been modified of course but i think it would woodwork now what are my expectations first i expect if they have to be confronted with the question of credit allocation white on through the rest of this day bill was defeated in congress this time i don't think the fed ought to take comfort from that the fed is not to incentivize some kind of three one is that we impose on the microbes that are bigger bet that congress is technically incompetent to do this you know technically in a real sense operation in congress or have oversight but not to be so i have been written this we have to think about these devices otherwise imposition of thing should be inefficient initially on why you will end up with

specific guidelines about hospital versus restrained which wow that's my view it's been the pentagon when the possibility of them at this team i have in mind until all the bank's son of a sudden the us federal reserve purposes not up oh yes it would be possible for our regulations i admitted now which have some of the same kind of characteristics net result is that i don't know if you have reserve a crime is now may penalize member banks vs non members and those in smaller banks and increasing that it's either get bigger all can afford to be outside to join

our existing or infirmity those banks was good not one in nearby de leon our priorities with the island this is something that we have less control over juarez presumably would be able to go to about banks not subject as we get somewhat more favorable treatment and that's to reduce them to look for funds at the banks not something to be with sam i'm not worried about that except on rounds of equity round of fishes that management because the small banks would have the funds available in a way now you know i read although the nomination outright they got less than half of the children are banks in the sixties he writes in a country less than half the banks in the country or members of the major banks which are members account for steel about seventy percent or more so we would end

up with less attention to also remember banks not only carry the burdens of the federal reserve member sherry with this being withdrawn but they also it benefits go in march and money in some other place which is true for big bang that i've always taken the view even back in nineteen seventy that the scheme or to be applied to all commercial that and say well what about as a nails and i would make the same stage at the margin that was andrew brenner former member of the board of governors of the federal reserve system and now a professor of business administration at harvard sacra bremer's remarks on proposed new methods of central banking and credit allocation or record in the spring of nineteen seventy five at the university of taxes at austin a university forum producer says program is produced by katie fm

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