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A short history of modern finance | Link by link | The Economist

2008-10-16T22:30:00.000-05:00

A short history of modern finance Link by link The Economist

FRB: Speech Chairman Ben S. Bernanke At the Economic Club of New York, New York, New York Stabilizing the Financial Markets and the Economy

2008-10-15T22:19:00.002-05:00

Chairman Ben S. Bernanke
At the Economic Club of New York, New York, New York
October 15, 2008

Stabilizing the Financial Markets and the Economy

Good afternoon. I am pleased once again to share a meal and some thoughts with the Economic Club of New York. I will focus today on the economic and financial challenges we face and why I believe we are well positioned to move forward. The problems now evident in the markets and in the economy are large and complex, but, in my judgment, our government now has the tools it needs to confront and solve them. Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks. But we will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity.

The crisis we face in the financial markets has many novel aspects, largely arising from the complexity and sophistication of today's financial institutions and instruments and the remarkable degree of global financial integration that allows financial shocks to be transmitted around the world at the speed of light. However, as a long-time student of banking and financial crises, I can attest that the current situation also has much in common with past experiences. As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets. The crisis will end when comprehensive responses by political and financial leaders restore that trust, bringing investors back into the market and allowing the normal business of extending credit to households and firms to resume. In that regard, we are, in one respect at least, better off than those who dealt with earlier financial crises: Generally, during past crises, broad-based government engagement came late, usually at a point at which most financial institutions were insolvent or nearly so. Waiting too long to respond has usually led to much greater direct costs of the intervention itself and, more importantly, magnified the painful effects of financial turmoil on households and businesses. That is not the situation we face today. Fortunately, the Congress and the Administration have acted at a time when the great majority of financial institutions, though stressed by highly volatile and difficult market conditions, remain strong and capable of fulfilling their critical function of providing new credit for our economy. This prompt and decisive action by our political leaders will allow us to restore more normal market functioning much more quickly and at lower ultimate cost than would otherwise have been the case. Moreover, we are seeing not just a national response but a global response to the crisis, commensurate with its global nature.

This financial crisis has been with us for more than a year. It was sparked by the end of the U.S. housing boom, which revealed the weaknesses and excesses that had occurred in subprime mortgage lending. However, as subsequent events have demonstrated, the problem was much broader than subprime lending. Large inflows of capital into the United States and other countries stimulated a reaching for yield, an underpricing of risk, excessive leverage, and the development of complex and opaque financial instruments that seemed to work well during the credit boom but have been shown to be fragile under stress. The unwinding of these developments, including a sharp deleveraging and a headlong retreat from credit risk, led to highly strained conditions in financial markets and a tightening of credit that has hamstrung economic growth.

The Federal Reserve responded to these developments in two broad ways. First, following classic tenets of central banking, the Fed has provided large amounts of liquidity to the financial system to cushion the effects of tight conditions in short-term funding markets. Second, to reduce the downside risks to growth emanating from the tightening of credit, the Fed, in a series of moves that began last September, has significantly lowered its target for the federal funds rate. Indeed, last week, in an unprecedented joint action with five other major central banks and in response to the adverse implications of the deepening crisis for the economic outlook, the Federal Reserve again eased the stance of monetary policy. We will continue to use all the tools at our disposal to improve market functioning and liquidity, to reduce pressures in key credit and funding markets, and to complement the steps the Treasury and foreign governments will be taking to strengthen the financial system.

Notwithstanding our efforts and those of other policymakers, the financial crisis intensified over the summer as mortgage-related assets deteriorated further, economic growth slowed, and uncertainty about the financial and economic outlook increased. As investors and creditors lost confidence in the ability of certain firms to meet their obligations, their access to capital markets as well as to short-term funding markets became increasingly impaired, and their stock prices fell sharply. Prominent companies that experienced this dynamic most acutely included the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the investment bank Lehman Brothers, and the insurance company American International Group (AIG).

The Federal Reserve believes that, whenever possible, the difficulties experienced by firms in financial distress should be addressed through private-sector arrangements--for example, by raising new equity capital, as many firms have done; by negotiations leading to a merger or acquisition; or by an orderly wind-down. Government assistance should be provided with the greatest reluctance and only when the stability of the financial system, and thus the health of the broader economy, is at risk. In those cases when financial stability is broadly threatened, however, intervention to protect the public interest is not only justified but must be undertaken forcefully and without hesitation.

Fannie Mae and Freddie Mac present cases in point. To avoid unacceptably large dislocations in the mortgage markets, the financial sector, and the economy as a whole, the Federal Housing Finance Agency put Fannie and Freddie into conservatorship, and the Treasury, drawing on authorities recently granted by the Congress, made financial support available. The government's actions appear to have stabilized the GSEs, although, like virtually all other firms, they are experiencing effects of the current crisis. We have already seen benefits of their stabilization in the form of lower mortgage rates, which will help the housing market.

The difficulties at Lehman and AIG raised different issues. Like the GSEs, both companies were large, complex, and deeply embedded in our financial system. In both cases, the Treasury and the Federal Reserve sought private-sector solutions, but none was forthcoming. A public-sector solution for Lehman proved infeasible, as the firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid, and the Treasury did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman's acquisition by another firm. Consequently, little could be done except to attempt to ameliorate the effects of Lehman's failure on the financial system. Importantly, the financial rescue legislation, which I will discuss later, will give us better choices. In the future, the Treasury will have greater resources available to prevent the failure of a financial institution when such a failure would pose unacceptable risks to the financial system as a whole. The Federal Reserve will work closely and actively with the Treasury and other authorities to minimize systemic risk.
In the case of AIG, the Federal Reserve and the Treasury judged that a disorderly failure would have severely threatened global financial stability and the performance of the U.S. economy. We also judged that emergency Federal Reserve credit to AIG would be adequately secured by AIG's assets. To protect U.S. taxpayers and to mitigate the possibility that lending to AIG would encourage inappropriate risk-taking by financial firms in the future, the Federal Reserve ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm's owners, managers, and creditors.

AIG's difficulties and Lehman's failure, along with growing concerns about the U.S. economy and other economies, contributed to extraordinarily turbulent conditions in global financial markets in recent weeks. Equity prices fell sharply. Withdrawals from prime money market mutual funds led them to reduce their holdings of commercial paper--an important source of financing for the nation's nonfinancial businesses as well as for many financial firms. The cost of short-term credit, where such credit has been available, jumped for virtually all firms, and liquidity dried up in many markets. By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth.

The Treasury and the Fed have taken a range of actions to address financial problems. To address illiquidity and impaired functioning in commercial paper markets, the Treasury implemented a temporary guarantee program for balances held in money market mutual funds to help stem the outflows from these funds. The Federal Reserve put in place a temporary lending facility that provides financing for banks to purchase high-quality asset-backed commercial paper from money market funds, thus reducing their need to sell the commercial paper into already distressed markets. Moreover, we soon will implement a new, temporary Commercial Paper Funding Facility that will provide a backstop to commercial paper markets by purchasing highly rated commercial paper directly from issuers at a term of three months when those markets are illiquid.

To address ongoing problems in interbank funding markets, the Federal Reserve has significantly increased the quantity of term funds it auctions to banks and accommodated heightened demands for temporary funding from banks and primary dealers. Also, to try to mitigate dollar funding pressures worldwide, we have greatly expanded reciprocal currency arrangements (so-called swap agreements) with other central banks. Indeed, this week we agreed to extend unlimited dollar funding to the European Central Bank, the Bank of England, the Bank of Japan, and the Swiss National Bank. These agreements enable foreign central banks to provide dollars to financial institutions in their jurisdictions, which helps improve the functioning of dollar funding markets globally and relieve pressures on U.S. funding markets. It bears noting that these arrangements carry no risk to the U.S. taxpayer, as our loans are to the foreign central banks themselves, who take responsibility for the extension of dollar credit within their jurisdictions.

The expansion of Federal Reserve lending is helping financial firms cope with reduced access to their usual sources of funding and thus is supporting their lending to nonfinancial firms and households. Nonetheless, the intensification of the financial crisis over the past month or so made clear that a more powerful, comprehensive approach involving the fiscal authorities was needed to address these problems more effectively. On that basis, the Administration, with the support of the Federal Reserve, asked the Congress for a new program aimed at stabilizing our financial markets. The resulting legislation, the Emergency Economic Stabilization Act, provides important new tools for addressing the distress in financial markets and thus mitigating the risks to the economy. The act allows Treasury to buy troubled assets, to provide guarantees, and to inject capital to strengthen the balance sheets of financial institutions. The act also raises the limit on deposit insurance from $100,000 to $250,000 per account, effectively immediately.

The Troubled Asset Relief Program (TARP) authorized by the legislation will allow the Treasury, under the supervision of an oversight board that I will head, to undertake two highly complementary activities. First, the Treasury will use the TARP funds to help recapitalize our banking system by purchasing non-voting equity in financial institutions. Details of this program were announced yesterday. Initially, the Treasury will dedicate $250 billion toward purchases of preferred shares in banks and thrifts of all sizes. The program is voluntary and designed both to encourage participation by healthy institutions and to make it attractive for private capital to come in along with public capital. We look to strong institutions to participate in this capital program, because today even strong institutions are reluctant to expand their balance sheets to extend credit; with fresh capital, that constraint will be eased. The terms offered under the TARP include the acquisition by the Treasury of warrants to ensure that taxpayers receive a share of the upside as the financial system recovers. Moreover, as required by the legislation, institutions that receive capital will have to meet certain standards regarding executive compensation practices.

Second, the Treasury will use some of the resources provided under the bill to purchase troubled assets from banks and other financial institutions, in most cases using market-based mechanisms. Mortgage-related assets, including mortgage-backed securities and whole loans, will be the focus of the program, although the law permits flexibility in the types of assets purchased as needed to promote financial stability. Removing these assets from private balance sheets should increase liquidity and promote price discovery in the markets for these assets, thereby reducing investor uncertainty about the current value and prospects of financial institutions. Unclogging the markets for mortgage-related assets should put banks and other institutions in a better position to raise capital from the private sector and increase the willingness of counterparties to engage. With time, the provision of equity capital to the banking system and the purchase of troubled assets will help credit flow more freely, thus supporting economic growth.

These measures will lead to a much stronger financial system over time, but steps are also necessary to address the immediate problem of lack of trust and confidence. Accordingly, also announced yesterday was a plan by the Federal Deposit Insurance Corporation (FDIC) to provide a broad range of guarantees of the liabilities of FDIC-insured depository institutions, including their associated holding companies. The guarantee covers all newly issued senior unsecured debt, including commercial paper and interbank funding, and it will also cover all funds held in non-interest-bearing transactions accounts, such as payroll accounts. This broad guarantee will be effectively immediately, and fees for coverage will be waived for 30 days. After the 30-day grace period, banks may continue to participate in the guarantee program by paying reasonable fees.

I would like to stress once again that the taxpayers' interests were very much in our minds and those of the Congress when these programs were designed. The costs of the FDIC guarantee are expected to be covered by fees and assessments on the banking system, not by the taxpayer. In the case of the TARP program, the funds allocated are not simple expenditures, but rather acquisitions of assets or equity positions, which the Treasury will be able to sell or redeem down the road. Indeed, it is possible that taxpayers could turn a profit from the program, although, given the great uncertainties, no assurances can be provided. Moreover, the program is subject to extensive controls and to oversight by several bodies. The larger point, though, is that the economic benefit of these programs to taxpayers will not be determined primarily by the financial return to TARP funds, but rather by the impact of the program on the financial markets and the economy. If the TARP, together with the other measures that have been taken, is successful in promoting financial stability and, consequently, in supporting stronger economic growth and job creation, it will have proved itself a very good investment indeed, to everyone's benefit.

Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away. Economic activity had been decelerating even before the recent intensification of the crisis. The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets, and we have seen marked slowdowns in consumer spending, business investment, and the labor market. Credit markets will take some time to unfreeze. And with the economies of our trading partners slowing, our export sales, which have been a source of strength, very probably will slow as well. These restraining influences on economic activity, however, will be offset somewhat by the favorable effects of lower prices for oil and other commodities on household purchasing power. Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning.

Inflation has been elevated recently, reflecting the steep increases in the prices of oil, other commodities, and imports that occurred earlier this year, as well as some pass-through by firms of their higher costs of production. However, expected inflation, as measured by consumer surveys and inflation-indexed Treasury securities, has held steady or eased, and prices of imports now appear to be decelerating. These developments, together with the recent declines in prices of oil and other commodities as well as the likelihood that economic activity will fall short of potential for a time, should lead to rates of inflation more consistent with price stability.

This past weekend, the finance ministers and central bank governors of the Group of Seven industrialized countries met in Washington. We committed to work together to stabilize financial markets and restore the flow of credit to support global economic growth. We agreed to use all available tools to prevent failures that pose systemic risk. We affirmed we will ensure our deposit insurance programs instill confidence in the safety of savings. We agreed to ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources. We further agreed that we would take all necessary steps to unfreeze interbank and money markets, and that we will act to restart the secondary markets for mortgages and other securitized assets. Finally, we recognized that we should take these actions in ways that protect taxpayers and avoid potentially damaging effects on other countries. I believe that these are the right principles for action, and I see the steps announced by our government yesterday as fully consistent with them.

I have laid out for you today an extraordinary series of actions taken by policymakers throughout our government and around the globe. Americans can be confident that every resource is being brought to bear to address the current crisis: historical understanding, technical expertise, economic analysis, financial insight, and political leadership. I am not suggesting the way forward will be easy, but I strongly believe that we now have the tools we need to respond with the necessary force to these challenges. Although much work remains and more difficulties surely lie ahead, I remain confident that the American economy, with its great intrinsic vitality and aided by the measures now available, will emerge from this period with renewed vigor.

FRB: speech by Vice Chairman Donald L. Kohn At the Georgetown University Wall Street Alliance, New York, New York Economic Outlook

2008-10-15T22:15:00.002-05:00

Vice Chairman Donald L. Kohn
At the Georgetown University Wall Street Alliance, New York, New York

October 15, 2008

Economic Outlook

We gather in difficult times for our financial markets and our economy. Recent weeks have seen a sharp intensification of the turmoil in financial markets: There has been a broad-based pullback in risk-taking and a virtual seizing up of term lending to many banks and other financial institutions; interest rates have risen for many borrowers, and credit availability has significantly diminished; and equity prices have fallen sharply, on net. The authorities have responded with a series of forceful and innovative measures that promise to rebuild confidence and free up lending. Tonight I will try to put these developments in the context of the recent course of our economy and its prospects for the future.1

Before commenting on the current situation and its economic implications, I thought it might be useful to begin by giving you my perspective on where the economy stood prior to the recent intensification of financial turmoil. Overall economic activity--as measured by the growth of real gross domestic product (GDP)--held up surprisingly well over the first half of 2008 given the ongoing stresses in broader financial markets and the further rise in oil prices. At the same time, however, a number of disquieting signs lay underneath the surface of the aggregate growth figures. Conditions in housing markets, as had been widely expected, were continuing to deteriorate, with further declines in home sales, new construction, and house prices in most markets. And, while consumer spending posted moderate gains during the spring, it seemed likely that much of that strength stemmed from the sizable tax rebate checks that began to go out to households at the end of April. Meanwhile, on the business side, employers had been reducing payrolls since the turn of the year, industrial production fell from February through May, and many corporations were seeing their profits squeezed by rising costs and weak demand.

During the summer, it became increasingly clear that a downshifting in the pace of economic activity was in train. In particular, the long list of negative factors weighing on domestic demand--including high prices for oil and other commodities, tight credit conditions, and the housing downturn--were beginning to take a significant toll on the economy.

The deterioration was led by a noticeable retrenchment in consumer spending. Although rebate checks continued to provide a boost to incomes in June and July, households were facing some stiff headwinds. Ongoing job losses and sharp increases in energy and food prices subtracted from household purchasing power, declining home prices and falling equity values led to a further drop in household wealth, and consumers remained extremely downbeat about prospects for jobs and income. At the same time, credit became more difficult to obtain as lenders became increasingly concerned about the prospects for loan performance in a softening economy. Many banks and other creditors tightened standards for credit cards and other consumer loans, and some lenders either reduced borrowing limits on or eliminated home equity lines of credit. As a result of all these influences, real consumer outlays fell from June through August, putting real consumer spending for the third quarter as a whole on track to decline for the first time since 1991.

Business investment also appears to have slowed over the summer. Orders and shipments for nondefense capital goods have weakened, on net, in recent months, pointing to a decline in real outlays for new business equipment. Similarly, outlays for nonresidential construction projects edged lower in July and August after rising at a robust pace over the first half of this year. Although the deteriorating sales outlook and increased uncertainty about the economy undoubtedly played a role, the softening in business outlays also appeared to reflect reduced credit availability from banks and other lenders.

In addition, conditions in housing markets have remained on a downward trajectory. Sales and construction of new homes continued to decline over the summer, and while existing home sales showed signs of stabilizing at low levels, many of the sales that did occur appear to have been stimulated by sharp price reductions for distressed properties. National indexes of house prices continued to post sizable declines.

Unfortunately, our trading partners have proven not to be immune from financial turmoil and economic weakness. Incoming data indicate that the pace of activity in many foreign economies slowed in recent quarters, reflecting many of the same forces of credit contraction, rising energy prices, and housing market decelerations that have affected the U.S. economy. This weakening in foreign activity suggests that the support to domestic production from net exports that was evident in the first half of this year is likely diminishing. We can see evidence of this in manufacturing production outside of motor vehicles, which had benefited from the earlier decline in the dollar and strong foreign growth; it fell for a third consecutive month in August, and indications for September suggest a further decline last month, even after excluding the effects of the recent hurricanes and the strike at Boeing.

Meanwhile, inflation remained uncomfortably high through much of the summer. The sharp increases in the prices of oil and many agricultural commodities showed through to consumer food and energy prices, and producers passed through some of their higher input costs into retail prices for "core" goods and services. More recently, however, the prices of oil and other commodities have posted substantial declines, non-oil import prices have edged down, and the prospect of greater slack in resource markets and weak demand seems likely to restrain labor cost pressures and pricing power. Reflecting these developments, inflation expectations appear to have eased a bit.

The weakening U.S. economy and ongoing declines in house prices, with their implications for credit performance, put further pressure on exposed financial institutions over the summer. Investors lost confidence in some of these institutions, which then saw their access to liquidity dry up, causing some to fail and others to require government assistance or to consolidate via their acquisition by healthier institutions.

The speed with which these developments occurred, along with worries about losses throughout the financial system, led banks and other lenders to pull back from extending credit except at the very shortest maturities. As a result, conditions in funding markets deteriorated substantially further in September and early October, with interbank lending rates moving up sharply from already-high levels and spreads over comparable-maturity overnight index swaps widening to unprecedented levels.

In addition, the commercial paper market became severely disrupted as money market mutual funds, the largest investors in that market, substantially reduced their demand in response to outflows and the difficulty of liquidating commercial paper in secondary markets. As a result, yields on commercial paper skyrocketed for most issuers, and funding became increasingly concentrated in paper with overnight maturities. Similarly, interest rates on longer-term corporate bonds rose sharply even for investment-grade firms, and bond markets were closed off to many issuers. These developments quickly led to sharp declines in equity prices more generally, as well as to widespread disruptions in other markets, including the markets for municipal bonds. Market distress fed on itself, as efforts by lenders to protect themselves triggered calls for increased margins, sales of assets that accentuated price declines, large increases in volatility in an uncertain and unfamiliar environment, and a sharp cutback in the willingness to extend credit. Financial stresses have intensified in major foreign economies as well, with many also experiencing a drying up of liquidity in financial markets, sharp increases in the cost of short-term credit, and steep declines in equity prices.

The net result of the erosion of confidence, declines in asset prices, and freezing up of many financial markets has been a marked deterioration in the outlook for economic growth both here and abroad. Already, the latest readings on the U.S. economy have become more downbeat. In the labor market, private payroll employment fell 170,000 in September, a faster pace of decline than had been evident in preceding months, and the Institute for Supply Management survey of conditions in the manufacturing sector turned down sharply. In addition, motor vehicle sales fell to a 12-1/2 million unit pace in September, and today's report on retail sales indicated that purchases of other goods also dropped sharply last month. Meanwhile, pressures in financial markets have undoubtedly further restricted the availability of credit to households and businesses. Indeed, many of our contacts for the Beige Book, which was published today, highlighted tight and tightening credit conditions, and, in increasing numbers, indicated that a lack of credit availability is negatively affecting their customers' ability to spend or impairing their own ability to maintain the normal working capital they need to manage their day-to-day operations.

To combat the increased stresses in financial markets and their effects on the economy, the U.S. authorities, as well as those of many foreign governments, have taken a number of forceful and innovative steps in recent weeks. Of greatest consequence was the passage of the Emergency Economic Stabilization Act (EESA) with its authority for the government to use up to $700 billion to support financial markets. Importantly, the U.S. Treasury has indicated that a significant share of this authority will be used to inject capital into financial institutions. As the turmoil has persisted and deepened, it has become increasingly clear that the fear and uncertainty gripping markets stems from questions about the exposure of many financial intermediaries to losses on mortgages and other loans. Banks and other lenders need greater capital cushions to reassure their counterparties that they will be able to meet their obligations, and they need it soon. The capital purchase plan announced by the Treasury yesterday is a start on building capital and confidence, and, by strengthening lenders, should make it easier for them to access the private capital they also require. In addition, the troubled asset purchase program should help by counteracting the effect of forced sales and impaired market liquidity on asset prices.

Although capital is the bedrock of confidence, it probably will take some time for enough to be raised to completely reassure those who extend funds to many intermediaries. In the meantime, the inability of lenders to fund themselves beyond the very near term creates vulnerability in the financial system and impedes their capacity to make loans to households and businesses to finance the purchases of cars, houses, and business capital. To bridge the gap to stronger capital, the Federal Deposit Insurance Corporation (FDIC) is offering banks and their holding companies an opportunity to issue guaranteed obligations for the next nine months. This guarantee covers the obligations most likely to be withdrawn when confidence erodes, but it is also structured to encourage banks to lengthen the maturity of their borrowing to provide stability, rebuild confidence, and stimulate lending. The FDIC program will operate alongside the earlier Treasury guarantee of money market fund balances designed to stabilize investments in those accounts and hence reduce the need for these funds to liquidate assets.

For its part, the Federal Reserve has greatly expanded its provision of liquidity to banks here and abroad and to other borrowers. We could do so in part because the EESA accelerated the authority for the Federal Reserve to pay interest on reserves. With that power, we can expand our lending and still maintain the federal funds rate target established by the Federal Open Market Committee (FOMC). Under normal circumstances, we face no tension between supplying liquidity and achieving our interest rate objective, because we supply a relatively small amount of funds to the private sector through our open market operations with primary dealers and discount window lending to banks. Over the past 15 months, however, as lenders have become increasingly reluctant to lend to each other, the Federal Reserve has had to take on a much greater role in the financial system to carry out its public policy responsibilities to provide a backstop source of liquidity. At first, we did this by expanding the amount and lengthening the maturity of our lending to banks at the discount window and through our traditional open market operations with dealers. Then, we found that we needed to supply credit against a greater variety of collateral to primary dealers so we opened the discount window to them and expanded our securities lending facilities. And just within the past few weeks we determined that, with normal intermediation increasingly disrupted, economic and financial stability required us to lend to firms that issued commercial paper. At the same time, we have greatly expanded our dollar swaps with foreign central banks to help them meet the dollar funding needs of their domestic banks--needs that have been adding to pressures on our markets here at home.

By opening and expanding these facilities, we are trying to assure banks, dealers, and commercial paper issuers that they can extend credit without worrying about whether they will be able to borrow to fund those loans. We are also trying to assure those who lend to these firms that the borrowers will have a source of funding to pay them back. Clearly, the willingness of the Federal Reserve to lend substantial amounts to more counterparties over longer periods has not, by itself, been sufficient to unlock private credit flows; but Federal Reserve credit has been a critical ingredient in the mix of policy tools.

As I noted earlier, the troubles in the financial markets have spilled over to the economy. Indeed, fear of economic weakness and the associated deterioration in credit quality contributed to the adverse dynamics in credit markets. To counter this dynamic and adjust its policy to the evolving economic outlook, the FOMC reduced the target federal funds rate 50 basis points last week. To be sure, the effects of the easier stance of policy on the cost and availability of credit were overwhelmed last week by the further erosion in confidence. But, over time, lower rates will help to support asset prices and reduce the cost of capital to encourage spending, economic expansion, and job creation.

Importantly, this easing action was taken alongside similar actions by many other central banks. Financial markets are connected around the world by the free flow of capital, and the freezing up of credit has occurred, to one degree or another, in many foreign economies as well as our own. In these circumstances, measures to address financial market problems within each country are likely to be more effective if other countries are also taking similar steps, as they are doing not only in monetary policy but also in their efforts to recapitalize banks, guarantee bank obligations, and shore up the confidence of lenders.

I am optimistic that this multipronged approach is laying the groundwork for a return to more normal functioning in financial markets and a restoration of vigorous economic growth. The initial reaction has been positive, but it will take some time before we know to what extent the current stresses in the financial sector are being resolved. Over time, financial firms will need to bolster profits to offset losses and attract capital, to delever by reducing debt relative to equity, and in many cases to consolidate through mergers and acquisitions. All of this points to a prolonged period of cautious lending and a high cost of capital relative to benchmark interest rates like the federal funds rate, even as market functioning improves.

Similarly, although the adjustment in housing markets is well under way, it likely still has further to go. House prices will probably continue to fall for a while, and inventories of unsold homes, while decreasing, will remain elevated. At some point, however, house prices will begin to stabilize, demand will be bolstered by the lower level of prices and low interest rates, and inventories will come into better alignment with sales. To be sure, any rebound in housing activity will likely be modest, but even a stabilization in housing markets will remove what has been a significant drag on the U.S. economy.

Given the likely drawn-out nature of the prospective adjustments in housing and financial markets, I see the most probable scenario as one in which the performance of the economy remains subpar well into next year and then gradually improves in late 2009 and 2010. As credit restraint abates, the low level of policy interest rates will begin to show through into more accommodative financial conditions. This improvement in financial conditions, together with the gradual stabilization of housing markets and the stimulative effects of lower oil and commodity prices, should lead to a pickup in jobs and income, contributing to a broad recovery in the U.S. economy.

At the same time, inflation seems likely to move onto a downward track. If sustained, the recent declines in commodity prices should soon lead to a sharp reduction in headline inflation. In addition, I expect core inflation to slow from current levels as lower commodity prices and greater economic slack moderate upward pressures on costs. Similar reductions in inflation abroad, as well as the recent appreciation of the dollar, should restrain increases in the prices of imported goods.

I would caution, however, that the uncertainty around my forecast is substantial. The path of the economy will depend critically on how quickly the current stresses in financial markets abate. But these events have few if any precedents, and thus we can have even less confidence than usual in our economic forecasts.

Here's what I do know: The authorities around the world have brought to bear on this situation an array of actions that are unprecedented in scope and force; these actions show every promise of being successful in restoring confidence in lending institutions and freeing the flow of credit to households and businesses; and governments in the United States and elsewhere have shown themselves able to work across political parties and across international boundaries to craft new approaches to problems. As Chairman Bernanke has often remarked, at the Federal Reserve we will utilize all the tools at our disposal to meet our responsibilities for fostering high employment and stable prices. I also know that the U.S. economy has proven itself over the years to be flexible and resilient as well as innovative and productive, qualities which enable it to rebound from serious economic shocks. I am confident that we will emerge from this episode with a stronger and more robust financial system and with a restoration of solid and sustainable economic growth.

Footnotes
1. The views expressed are my own and do not necessarily represent the views of other members of the Board or the Federal Open Market Committee. William Wascher, of the Board’s staff, contributed to these remarks

2008-10-15T07:02:00.000-05:00

White House Press Release October 14, 2008

President Bush Discusses Economy Rose Garden

In Focus: Economy
8:02 A.M. EDT

THE PRESIDENT: Good morning. I just completed a meeting with my working group on financial markets. We discussed the unprecedented and aggressive steps the federal government is taking to address the financial crisis. Over the past few weeks, my administration has worked with both parties in Congress to pass a financial rescue plan. Federal agencies have moved decisively to shore up struggling institutions and stabilize our markets. And the United States has worked with partners around the world to coordinate our actions to get our economies back on track.

This weekend, I met with finance ministers from the G7 and the G20 -- organizations representing some of the world's largest and fastest-growing economies. We agreed on a coordinated plan for action to provide new liquidity, strengthen financial institutions, protect our citizens' savings, and ensure fairness and integrity in the markets. Yesterday, leaders in Europe moved forward with this plan. They announced significant steps to inject capital into their financial systems by purchasing equity in major banks. And they announced a new effort to jumpstart lending by providing temporary government guarantees for bank loans. These are wise and timely actions, and they have the full support of the United States.

Today, I am announcing new measures America is taking to implement the G7 action plan and strengthen banks across our country.

First, the federal government will use a portion of the $700 billion financial rescue plan to inject capital into banks by purchasing equity shares. This new capital will help healthy banks continue making loans to businesses and consumers. And this new capital will help struggling banks fill the hole created by losses during the financial crisis, so they can resume lending and help spur job creation and economic growth. This is an essential short-term measure to ensure the viability of America's banking system. And the program is carefully designed to encourage banks to buy these shares back from the government when the markets stabilize and they can raise capital from private investors.

Second, and effective immediately, the FDIC will temporarily guarantee most new debt issued by insured banks. This will address one of the central problems plaguing our financial system -- banks have been unable to borrow money, and that has restricted their ability to lend to consumers and businesses. When money flows more freely between banks, it will make it easier for Americans to borrow for cars, and homes, and for small businesses to expand.

Third, the FDIC will immediately and temporarily expand government insurance to cover all non-interest bearing transaction accounts. These accounts are used primarily by small businesses to cover day-to-day operations. By insuring every dollar in these accounts, we will give small business owners peace of mind and bring stability to the -- and bring greater stability to the banking system.

Fourth, the Federal Reserve will soon finalize work on a new program to serve as a buyer of last resort for commercial paper. This is a key source of short-term financing for American businesses and financial institutions. And by unfreezing the market for commercial paper, the Federal Reserve will help American businesses meet payroll, and purchase inventory, and invest to create jobs.

In a few moments, Secretary Paulson and other members of my Working Group on Financial Markets will explain these steps in greater detail. They will make clear that each of these new programs contains safeguards to protect the taxpayers. They will make clear that the government's role will be limited and temporary. And they will make clear that these measures are not intended to take over the free market, but to preserve it.

The measures I have announced today are the latest steps in this systematic approach to address the crisis. I know Americans are deeply concerned about the stress in our financial markets, and the impact it is having on their retirement accounts, and 401(k)s, and college savings, and other investments. I recognize that the action leaders are taking here in Washington and in European capitals can seem distant from those concerns. But these efforts are designed to directly benefit the American people by stabilizing our overall financial system and helping our economy recover.

It will take time for our efforts to have their full impact, but the American people can have confidence about our long-term economic future. We have a strategy that is broad, that is flexible, and that is aimed at the root cause of our problem. Nations around the world are working together to overcome this challenge. And with confidence and determination, we will return our economies to the path of growth and prosperity.

Thank you.

White House Press Releases

2008-10-15T06:56:00.000-05:00

Speeches & News Releases
October 14, 2008
Text of a Letter from the President to the Speaker of the House of Representatives and the President of the Senate

President Bush Discusses Economy

October 13, 2008
Fact Sheet: Protecting American Innovation

October 11, 2008
President's Radio Address

President Bush Meets with G7 Finance Ministers to Discuss World Economy

Joint Statement of Henry M. Paulson, Jr.,Secretary of the Treasury, and Jim Nussle, Director of the Office of Management and Budget,on Budget Results

2008-10-15T05:43:00.003-05:00

October 14, 2008

HP-1213

Joint Statement ofHenry M. Paulson, Jr.,Secretary of the Treasury, andJim Nussle, Director of the Office of Management and Budget, onBudget Results for Fiscal Year 2008

SUMMARY

The Administration today released the September 2008 Monthly Treasury Statement of Receipts and Outlays of the United States Government[1][1]. The statement shows the actual budget totals for the fiscal year that ended September 30, 2008, as follows:

A deficit of $455 billion, or 3.2 percent of Gross Domestic Product (GDP)
total receipts of $2,524 billion, or 17.8 percent of GDP; and
total outlays of $2,979 billion, or 21.0 percent of GDP.

"This year's budget results reflect theongoing housing correction, and the manifestations of that instrained capital markets and slower growth. We are taking aggressiveactions to stabilize our financial markets and strengthen ourfinancial institutions so they can finance economic growth. While it will take time towork through this period, we will overcome the current challengesfacing our nation.

"The budget results reinforce the need to notonly address short term challenges, but pursue policies that promoteeconomic growth and fiscal responsibility, and address entitlementreform."-Treasury SecretaryHenryPaulson

"The bipartisan stimulus bill and the sloweconomy are the primary reasons for the increase in deficit asreflected in this year's budget results. This increase reinforcesthe need to adopt and maintain policies that promote economic growthand fiscal responsibility, including entitlement reform andpro-growth tax policies. I am confident the economy can return tostronger growth with a declining deficit - after working throughcurrent challenges - if Congress limits wasteful and excessivespending."-OMBDirectorJimNussle

Table 1. TOTAL RECEIPTS, OUTLAYS AND SURPLUS/DEFICIT (-)

Receipts Outlays Surplus/Deficit (-)
FY 2007 Actual. 2,568 2,729 -162
FY 2008 Estimates:
FY 2009 Budget. 2,521 2,931 -410
FY 2009 Mid-Session Review 2,553 2,942 -389
Actual. 2,524 2,979 -455

The FY 2008 unified deficit was $455 billion, or an estimated 3.2 percent of GDP. The deficit was $65 billion higher than projected in the July Mid-Session Review (MSR), because outlays were $36 billion higher than expected and receipts were $29 billion lower than expected. The deficit was also $45 billion higher than projected last February in the FY 2009 Budget, with receipts coming in $3 billion higher and outlays $47 billion higher than projected.

Overall, receipts in FY 2008 were $44 billion, or 1.7 percent, lower than in FY 2007. Receipts were reduced relative to the previous year by the tax rebates and other provisions of the Economic Stimulus Act enacted in February 2008, and by the effects of the current economic slowdown on incomes and corporate profits. Receipts fell from 18.8 percent of GDP in FY 2007 to 17.8 percent of GDP in FY 2008, after rising for the previous four years. This level of receipts is below the 40-year historical average of 18.3 percent of GDP.

Outlays for FY 2008 grew by $249 billion, or 9.1 percent, from FY 2007. The increase was driven by growth in defense outlays, payments of the portion of stimulus tax rebates that was recorded as outlays, and payments by the Federal Deposit Insurance Corporation to resolve recent bank failures. Outlays were also boosted by increases in unemployment, Food Stamp, and Medicaid benefits due to slower economic growth. In addition, the growth rate was influenced by proceeds for spectrum auctions recorded in FY 2007, which held down FY 2007 outlays relative to FY 2008. Overall, outlays increased as a percent of GDP from 20.0 percent in FY 2007 to 21.0 percent in FY 2008. This spending level is above the 40-year historical average of 20.6 percent.

At $455 billion, the deficit for FY 2008 was $293 billion higher than the deficit for FY 2007. The deficit increased to 3.2 percent of GDP, up from 1.2 percent of GDP for FY 2007. As a percentage of GDP, the FY 2008 deficit was the largest since the deficit of 3.6 percent of GDP in FY 2004, but below the peak postwar deficit in FY 1983 (6.0 percent).

Borrowing from the public increased by $768 billion during FY 2008, to $5,801 billion or 40.8 percent of GDP. In addition to the $455 billion needed to finance the deficit, the increase included $300 billion in debt issued through Treasury's new Supplementary Financing Program (SFP). Under the SFP, Treasury issues short-term debt and deposits the cash proceeds with the Federal Reserve for use by the Federal Reserve in its actions to stabilize the financial markets. Although debt held by the public as a percentage of GDP increased from 36.9 percent at the end of FY 2007, it remains below the levels of the 1990s, when debt held by the public averaged 46.1 percent of GDP.

RECEIPTS

Total receipts for FY 2008 were $2,524 billion, $29 billion lower than the MSR estimate of $2,553 billion. Lower-than-expected collections of individual income taxes and corporation income taxes accounted for most of the net decrease in receipts relative to the MSR. Table 2 displays actual receipts and estimates from the MSR by source.

Individual income taxes were $1,146 billion, $23 billion lower than the MSR estimate. Lower-than-estimated withheld tax payments accounted for $16 billion of the shortfall in individual income tax receipts relative to the MSR. Lower-than-anticipated growth in total wages and salaries and a different distribution of that growth among taxpayers, relative to what was assumed in the MSR, contributed to most of the shortfall in withheld tax payments. An accounting adjustment based on more recent data, which reallocated $1 billion less than had been expected in withheld tax payments from the Social Security and Medicare Trust Funds to individual income taxes, also contributed to the shortfall in withheld tax payments. Lower-than-estimated non-withheld payments reduced individual income taxes an additional $7 billion below the MSR estimate. Lower-than-anticipated growth in non-wage sources of income such as capital gains and dividends contributed to this shortfall in non-withheld payments.

Corporation income taxes were $304 billion, $5 billion lower than the MSR estimate. Lower-than-estimated corporate tax payments of $4 billion and higher-than-estimated refunds of $1 billion were responsible for the shortfall in collections relative to the MSR. The ability of corporations affected by Hurricanes Gustav and Ike to delay estimated tax payments otherwise due on September 15th until January 2009 accounted for $2 billion of the shortfall in corporate tax payments. Lower-than-expected corporate profits accounted for the remaining $2 billion shortfall in corporate tax payments.

Social insurance and retirement receipts were $900 billion, $1 billion lower than the MSR estimate. A $2 billion shortfall in State deposits to the unemployment insurance trust fund was partially offset by a $1 billion increase in Social Security and Medicare receipts, relative to the MSR. The increase in Social Security and Medicare receipts was attributable to the lower-than-expected reallocation of withheld tax payments from the Social Security and Medicare Trust Funds to individual income taxes, as described above. Lower-than-expected State tax rates and taxable wages, relative to what was assumed in the MSR, contributed to the shortfall in State deposits to the unemployment insurance trust fund.

Excise taxes were $67 billion, $1 billion lower than the MSR estimate. This decline was in large part attributable to lower-than-expected demand for taxed goods, especially transportation
Other sources of receipts (customs duties, estate and gift taxes, and miscellaneous receipts) were $106 billion, $1 billion higher than the MSR estimate. This was the net effect of lower-than-expected customs duties and deposits of earnings by the Federal Reserve System, which was more than offset by higher-than-expected estate and gift taxes and other miscellaneous receipts (gifts, contributions, fines and penalties).

OUTLAYS

Total outlays were $2,979 billion for FY 2008, which was $36 billion above the MSR estimate. Outlays for many agencies were below MSR estimates, including differences of $2 billion or more in the Departments of Agriculture, Health and Human Services, Labor, and Transportation as well as Other Defense Civil Programs. These lower-than-expected outlays were more than offset by significantly higher-than-expected outlays in the Departments of Defense and the Treasury (interest on inflation-adjusted securities), along with the Federal Deposit Insurance Corporation. Table 3 displays actual outlays by agency and major program as well as estimates from the Budget and the MSR. The largest changes in outlays from the MSR were in the following areas:

Department of Agriculture – FY 2008 outlays for the Department of Agriculture (USDA) were $91 billion, $2.6 billion below the MSR estimate. USDA's actual outlays for its commodity and disaster payments were $1.4 billion lower than projected in the MSR. Programs funded through the Commodity Credit Corporation were $0.6 billion lower due to higher commodity prices and fewer requests from producers for advanced Direct Payments for the 2008 crop year. Outlays for advanced Direct Payments were lower than anticipated potentially due to several factors, including late enactment of the farm bill and producers' choices to defer payments until FY 2009. Finally, delays in making crop disaster quality loss payments reduced FY 2008 outlays by an additional $0.5 billion. These outlays are expected to occur in FY 2009 rather than FY 2008.
Department of Defense – Outlays for the Department of Defense (DOD) were $595 billion, exceeding the MSR estimate by $12.5 billion. The increase over the MSR was primarily due to outlays for operations and maintenance, which were $20.5 billion above the MSR estimate. In the MSR, bridge funding provided by Congress for war-related operations and maintenance was assumed to have a "normal" outlay rate for supplemental appropriations, which turned out ultimately to be too low. The fact that the bridge funding for the war was available early in the fiscal year (mid-November 2007) meant that DOD did not have to use appropriations for its base activities to support the war and could spend base funding for its non-war operational needs, thus increasing total outlays. Partially offsetting the increased outlays for operations and maintenance, outlays for DOD procurement were $11.7 billion lower than the MSR estimated, primarily because of lower-than-anticipated outlays for the Mine Resistant Ambush Protected Vehicles Program.

Department of Education – Outlays for the Department of Education were $66 billion in FY 2008, $1.7 billion below the MSR estimate. These differences were due to three factors. First, while the MSR assumed higher outlays compared to FY 2007 in the Student Financial Assistance account, due to projections of a significant increase in the number of Pell Grant recipients, the actual increase in Pell recipients and costs was lower than anticipated. Second, the MSR estimates failed to reflect an increase in Direct Student Loan volume in the 2008-2009 academic year, resulting in a reduction in net outlays since this program has a negative subsidy. Finally, the value of the on-budget Federal Student Loan Reserve Fund increased more than anticipated. While in prior years the Department of Education did not update the reserve fund valuation estimates, the Department instituted this practice in FY 2008 and will continue it in future years.

Department of Health and Human Services – The Department of Health and Human Services (HHS) had FY 2008 outlays of $701 billion, $5.9 billion less than the MSR estimate. Medicare gross outlays in FY 2008 were $461 billion, about $1.3 billion (0.3 percent) less than MSR estimates. Part A expenditures finished FY 2008 about $1.0 billion above MSR estimates due to slightly higher than projected spending for skilled nursing facility and hospice services. Part D spending finished FY 2008 about $2.5 billion lower than projected in the MSR. Medicaid outlays were $201 billion, $3.5 billion or 1.7 percent below the MSR estimate, due to an unanticipated slowdown in State Medicaid spending over the second half of FY 2008. The HHS actuaries will have a better understanding of the factors contributing to this difference when the final year-end expenditure data are available in about six months.

Department of Homeland Security – Outlays for the Department of Homeland Security were $41 billion in FY 2008, $1.2 billion more than the MSR estimate. The difference was attributable primarily to faster-than-expected outlays in the aviation security account in the Transportation Security Administration, which spent $1.0 billion more than projected in the MSR.

Department of Housing and Urban Development – Outlays for the Department of Housing and Urban Development were $49 billion in FY 2008, $1.4 billion below the MSR estimate. Slower-than-expected outlays of Community Development Block Grant disaster supplemental funds accounted for $1.0 billion of the $1.4 billion difference. These disaster funds were obligated to the Gulf Coast States after the 2005 hurricanes, but the States did not expend the funds as quickly as projected. The remaining difference in outlays was mainly due to slower spending in the Tenant-Based Rental Assistance and Housing Certificate Fund accounts.

Department of the Interior – Outlays for the Department of Interior were $9.9 billion, or $1.0 billion less than the MSR estimate. The main driver was outlays for the Bureau of Reclamation, which were $0.6 billion less than estimated due to slower-than-expected spending of prior year appropriations. Fish and Wildlife Service outlays were $0.3 billion below estimates for several reasons, including slower obligations for operations (due to project delays as a result of hurricanes and flooding), and grant programs. In addition, land acquisition programs had difficulty finding willing sellers. The net reduction in outlays also reflected an increase in proprietary offsetting receipts of $0.2 billion (3.6 percent) over the MSR estimates, primarily due to greater onshore oil and gas receipts.

Department of Labor – FY 2008 outlays for the Department of Labor were $59 billion, $2.2 billion below the MSR estimate. The major contributors to this difference were the Unemployment Trust Fund and the Pension Benefit Guaranty Corporation. Actual outlays for the Unemployment Trust Fund were $0.9 billion (2 percent) below the MSR, largely because of lower-than-projected outlays for the Emergency Unemployment Compensation program that was enacted in late June. Actual outlays for the Pension Benefit Guaranty Corporation were $0.7 billion (34 percent) below the MSR, largely because of a change in accounting guidance that requires PBGC and other agencies to no longer mark holdings of zero coupon bonds to market each month.

Department of State – Outlays for the Department of State were $18 billion in FY 2008, $1.6 billion below the MSR estimate. Outlays for Administration of Foreign Affairs were $1.0 billion below the MSR estimate, primarily due to slower-than-expected spending on capital construction projects and higher-than-expected receipts in the Department's Working Capital Fund. In addition, outlays for International Organizations and Conferences were $0.6 billion lower than the MSR estimate because bills from the United Nations for international peacekeeping missions were still in process at the end of the fiscal year.

Department of Transportation – Outlays for the Department of Transportation were $65 billion in FY 2008, $2.7 billion below the MSR estimate. The decrease was due to slower-than-anticipated obligation and spending of funds for transit formula grants, surface transportation safety bureaus, and Federal Aviation Administration capital investments.

Department of the Treasury – Actual outlays for the Department of the Treasury were $549 billion, $12.2 billion higher than the MSR estimate. Interest on the public debt, which includes interest paid to government accounts as well as interest paid to the public, was $451 billion, $10.1 billion higher than the MSR estimate. Of this $10.1 billion difference, $9.7 billion was due to the increase in interest paid to the public on inflation-indexed Treasury securities resulting from faster-than-expected inflation in the Consumer Price Index, and $0.5 billion related to higher interest paid to trust funds and other government accounts, such as Federal retirement funds. Higher-than-projected interest paid to credit financing accounts ($0.7 million) and lower-than-anticipated offsetting receipts of interest from credit financing accounts ($1.8 billion) added to the higher-than-estimated Treasury outlays. Finally, the portion of Treasury's outlays for the Economic Stimulus Act of 2008 that was attributed to child tax credits ($2.3 billion) was lower than anticipated, but recovery rebates were higher than projected ($1.3 billion), resulting in a net decrease of $1.0 billion in projected outlays.

Department of Veterans Affairs – Outlays for the Department of Veterans Affairs were $85 billion, $1.0 billion lower than estimated in the MSR. This difference results primarily from lower-than-anticipated outlays for veterans' benefits and for departmental administration. Within veterans' benefits, compensation and pension payments were $0.2 billion less than anticipated. In addition, spending on readjustment benefits was $0.2 billion less than anticipated. Within departmental administration, spending on major construction lagged $0.2 billion behind the MSR estimate.

Army Corps of Engineers – Actual outlays for the Army Corps of Engineers were $5.1 billion, $1.5 billion lower than the MSR estimate. A number of factors contributed to this discrepancy, including: overly optimistic assumptions about the spending of supplemental funds; an extensive storm season that slowed down a number of project operations; and higher-than-expected reimbursements, also due to storm-related reimbursable activity. The two accounts with the greatest difference between the estimates and year-end actuals were the Construction and the Operation and Maintenance accounts. Actual outlays for the Construction account were $0.7 billion below the MSR estimate and actual outlays for the Operation and Maintenance account were $0.4 billion below the MSR estimate, both due to higher-than-expected reimbursements. Outlays for the Flood Control and Coastal Emergencies account were $0.2 billion lower than the MSR estimate.

Other Defense Civil Programs – Actual outlays for Other Defense Civil programs were $46 billion, $3.2 billion below the MSR estimate. This was almost entirely the result of $3.1 billion in higher-than-anticipated interest earnings for the DOD Medicare-eligible retiree health care fund.

International Assistance Programs – Outlays for International Assistance Programs were $11 billion in FY 2008, $1.0 billion below the MSR estimate. Within this amount, outlays for the Foreign Military Sales program were $1.4 billion lower than the MSR estimate due to lower-than-expected disbursements from the Foreign Military Sales Trust Fund for the purchase of military equipment and services. These lower outlays were offset by a net increase of $0.4 billion above the MSR resulting from higher-than-estimated outlays in a number of other foreign assistance accounts.

Federal Deposit Insurance Corporation – The Federal Deposit Insurance Corporation (FDIC) had actual outlays of $18 billion, $15.2 billion higher than the MSR estimate. Subsequent to the preparation of the MSR estimates, the FDIC made deposit insurance claim payments related to the failures of IndyMac Bank and other smaller depository institutions. Almost $11 billion of the increase was attributable to insurance losses and $4 billion was attributable to higher-than-expected working capital needed to resolve the bank failures.

National Credit Union Administration – The National Credit Union Administration (NCUA) had actual outlays of $1.0 billion, $1.3 billion higher than the MSR estimate. The additional outlays resulted primarily from the unexpected use of the NCUA Central Liquidity Facility (CLF) by Natural Person Credit Unions (NPCU), which are non-corporate member credit unions. Loan disbursements from the CLF are recorded on a cash basis due to the program's statutory exemption from the Federal Credit Reform Act. The MSR did not estimate that the CLF would be used. During September, however, NPCUs applied for loans from the facility and as of September 30, 2008, the CLF had $1.1 billion in short-term loans outstanding. These loans are expected to be repaid in FY 2009. The NCUA also experienced about $0.2 billion in insurance losses and related resolution expenses in FY 2008 in addition to what was forecast in the MSR.
Railroad Retirement Board – FY 2008 outlays for the Railroad Retirement Board (RRB) of $9 billion were $2.9 billion higher than estimated in the MSR. This was the result of market losses on non-Federal securities held by RRB. The Railroad Retirement and Survivors Improvement Act of 2001 permitted assets of Tier II of the Railroad Retirement program to be invested in private equities. Net returns for FY 2008 on non-Federal securities, including unrealized gains and losses, were $2.9 billion lower than estimated in the MSR.

Undistributed Offsetting Receipts – Undistributed offsetting receipts were $278 billion in FY 2008, $16.8 billion below the MSR estimate. Offsetting receipts are deducted from gross outlays in calculating net outlays; therefore, reductions in these receipts increase outlays and the deficit. Proceeds from spectrum auctions related to the digital television transition were $15.1 billion less than estimated in the MSR. While total auction bids exceeded expectations, these bids are not recorded as receipts until license applications are approved and licenses are issued. The MSR assumed that licenses accounting for the bulk of the auction revenue would be issued in FY 2008, but only $1.8 billion of licenses were actually issued by the end of the fiscal year. The remaining licenses will be issued in FY 2009, at which point these offsetting receipts will be recognized, lowering net outlays and the deficit. Interest received by on- and off-budget trust funds was $2.9 billion lower than the MSR estimate, due primarily to lower-than-estimated interest earnings for the Civil Service Retirement and Disability Fund. Partially offsetting these lower receipts, employee contributions to the military retirement fund account were $1.6 billion above the MSR estimate. The actual collections exceeded the MSR estimate because the MSR underestimated contributions due to mobilized reservists.

-30-

[1][1] The September 2008 Monthly Treasury Statement of Receipts and Outlays of the United States Government containing these results can be found on the Financial Management Service website at www.fms.treas.gov/mts.

REPORTS
Table II
Table III

Statement by Secretary Henry M. Paulson, Jr. on Actions to Protect the U.S. Economy

2008-10-15T05:40:00.001-05:00

October 14, 2008

HP-1205

Statement by Secretary Henry M. Paulson, Jr. on Actions to Protect the U.S. Economy

Washington, DC-- Treasury today issued the following statement by Secretary Henry M. Paulson, Jr. on actions to protect the economy and restore confidence and stability to our financial markets:

America is a strong nation. We are a confident and optimistic people. Our confidence is born out of our long history of meeting every challenge we face. Time and time again our nation has faced adversity and time and time again we have overcome it and risen to new heights. This time will be no different.

Today, there is a lack of confidence in our financial system – a lack of confidence that must be conquered because it poses an enormous threat to our economy. Investors are unwilling to lend to banks, and healthy banks are unwilling to lend to each other and to consumers and businesses.

In recent weeks, the American people have felt the effects of a frozen financial system. They have seen reduced values in their retirement and investment accounts. They have worried about meeting payrolls and they have worried about losing their jobs. Families all across our Nation have gone through long days and long nights of concern about their financial situations today, and their financial situations tomorrow. Without confidence that their most basic financial needs will be met, Americans lose confidence in our economy, and this is unacceptable.

President Bush has directed me to consider all necessary steps to restore confidence and stability to our financial markets and get credit flowing again. Ten days ago Congress gave important new tools to the Treasury, the Federal Reserve and the FDIC to meet the challenges posed to our economy. My colleagues and I are working creatively and collaboratively to deploy these tools and direct our powers at this disruption to our economy.

Today we are taking decisive actions to protect the US economy. We regret having to take these actions. Today's actions are not what we ever wanted to do – but today's actions are what we must do to restore confidence to our financial system.

Today I am announcing that the Treasury will purchase equity stakes in a wide array of banks and thrifts. Government owning a stake in any private U.S. company is objectionable to most Americans – me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable. When financing isn't available, consumers and businesses shrink their spending, which leads to businesses cutting jobs and even closing up shop.

To avoid that outcome, we must restore confidence in our financial system. The first step in that effort is a plan to make capital available on attractive terms to a broad array of banks and thrifts, so they can provide credit to our economy. From the $700 billion financial rescue package, Treasury will make $250 billion in capital available to U.S. financial institutions in the form of preferred stock. Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes during the period that Treasury holds equity issued through this program. In addition, taxpayers will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions. We expect all participating banks to continue and to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure. Foreclosures not only hurt the families who lose their homes, they hurt neighborhoods, communities and our economy as a whole.

While many banks have suffered significant losses during this period of market turmoil, many others have plenty of capital to get through this period, but are not positioned to lend as widely as is necessary to support our economy. Our goal is to see a wide array of healthy institutions sell preferred shares to the Treasury, and raise additional private capital, so that they can make more loans to businesses and consumers across the nation. At a time when events naturally make even the most daring investors more risk-averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.

Nine large financial institutions have already agreed to participate in this program. They have agreed to sell preferred shares to the US government, on the same terms that will be available to a broad array of small and medium-sized banks and thrifts across the nation. These are healthy institutions, and they have taken this step for the good of the U.S. economy. As these healthy institutions increase their capital base, they will be able to increase their funding to U.S. consumers and businesses.

I am joined here this morning by Chairman Bernanke and Chairman Bair, who have also taken extraordinary actions to support investor confidence in our financial system, so that funds will again flow through our banks to the U.S. economy. Each of them will describe their actions.
Combined, our actions are extensive, powerful and transformative. They demonstrate that the government will do what is necessary to restore the flow of funds on which our economy depends and will act to avoid, where possible, the failure of any systemically important institution.

These three steps significantly strengthen financial institutions and improve their access to funding, enabling them to increase financing of the consumption and business investment that drive U.S. economic growth. Market participants here and around the world can take confidence from the powerful actions taken today and our broad commitment to the health of the global financial system.

We are acting with unprecedented speed taking unprecedented measures that we never thought would be necessary. But they are necessary to get our economy back on an even keel, and secure the confidence and future of our markets, our economy and the economic well-being of all Americans.

FRB Press Release: Chairman Ben S. Bernanke Remarks At the President’s Working Group Market Stability Initiative Announcement

2008-10-15T05:34:00.001-05:00

Chairman Ben S. Bernanke
Remarks
At the President’s Working Group Market Stability Initiative Announcement
October 14, 2008

Good morning. Before I begin, I want to express my appreciation of my colleagues, Secretary Paulson and Chairman Bair, for their efforts in what has been an extraordinary collaboration. As Americans well know, the challenges evident in the financial markets and in the economy are large and complex, but I believe that the steps taken today will help us to overcome them. Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks. But we will not stand down until we have achieved our goals of repairing and reforming our financial system and thereby restoring prosperity to our economy.

Over the past year, the Federal Reserve has actively used all its powers and authorities to try to help our economy through this difficult time. And central banks around the world have consulted closely and cooperated in unprecedented ways to reduce strains in financial markets and to bolster our economies. We will continue to do so. However, clearly the time had come for a more comprehensive and broad-based solution.

History teaches us that government engagement in times of severe financial crisis often arrives very late, usually at a point at which most financial institutions are insolvent or nearly so. Waiting too long to act has usually led to much greater direct costs of the intervention itself and, more importantly, magnified the painful effects of financial turmoil on households and businesses. That is not the situation we face today. Fortunately, the Congress and the Administration have acted at a time when the great majority of financial institutions, though stressed by highly volatile and difficult market conditions, remain capable of fulfilling their critical function of providing new credit for our economy. The Congress's prompt and decisive action in passing the financial rescue legislation made possible the critical steps that have been announced this morning. I also find it heartening that we are seeing not just a national, but a global response to the crisis, commensurate with its global nature. Indeed, this past weekend, the finance ministers and central bankers of the Group of Seven industrialized countries announced a set of principles embodying a comprehensive approach to dealing with the crisis. The steps we are taking today are fully consistent with those principles.

As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets, which has had cascading and unwelcome effects on the availability of credit and the value of savings. The actions today are aimed at restoring confidence in our institutions and markets and repairing their capacity to meet the credit needs of American households and businesses. The voluntary equity purchase program will strengthen financial institutions' capacity and willingness to lend. The guarantee of the senior debt of all FDIC-insured depository institutions and their holding companies will restore the confidence of these institutions' creditors and reinvigorate the crucial inter-bank lending markets. Additionally, the Federal Reserve is pressing forward with its facility to provide a broad backstop for the commercial paper market, so vital to the functioning of our businesses.

Policymakers here and around the globe have taken a series of extraordinary steps. Americans can be confident that every resource is being brought to bear: historical understanding, technical expertise, economic analysis, and political leadership. I am not suggesting the way forward will be easy. But I strongly believe that the application of these tools, together with the underlying vitality and resilience of the American economy, will help to restore confidence to our financial system and place our economy back on a path to vigorous, healthy growth.

FRB Press Release:Commercial Paper Funding Facility

2008-10-15T05:32:00.000-05:00

Press Release

Release Date: October 14, 2008
For release at 8:30 a.m. EDT

The Federal Reserve Board on Tuesday announced additional details regarding the Commercial Paper Funding Facility (CPFF), including that it would begin funding purchases of commercial paper on October 27, 2008.

The Board authorized the CPFF on October 7, 2008 under Section 13(3) of the Federal Reserve Act to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby increase the availability of credit for businesses and households.

Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of unsecured and asset-backed commercial paper from eligible issuers through its primary dealers. The CPFF will finance only highly rated, U.S. dollar-denominated, three-month commercial paper.
The attached terms-and-conditions and questions-and-answers documents describe the terms and operational details of the facility, which were determined after consultation with commercial paper issuers and dealers.

Commercial Paper Funding Facility
Terms and conditions FAQs
2008 Monetary Policy Releases

Treasury Announces TARP Capital Purchase Program Description

2008-10-15T05:28:00.001-05:00

October 14, 2008
HP-1207

Treasury Announces TARP Capital Purchase Program Description

Washington- Treasury today announced a voluntary Capital Purchase Program to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy.

Under the program, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms as described in the program's term sheet. The program will be available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities that elect to participate before 5:00 pm (EDT) on November 14, 2008. Treasury will determine eligibility and allocations for interested parties after consultation with the appropriate federal banking agency.

The minimum subscription amount available to a participating institution is 1 percent of risk-weighted assets. The maximum subscription amount is the lesser of $25 billion or 3 percent of risk-weighted assets. Treasury will fund the senior preferred shares purchased under the program by year-end 2008. Institutions interested in participating in the program should contact their primary federal regulator for specific enrollment details.

The senior preferred shares will qualify as Tier 1 capital and will rank senior to common stock and pari passu, which is at an equal level in the capital structure, with existing preferred shares, other than preferred shares which by their terms rank junior to any other existing preferred shares. The senior preferred shares will pay a cumulative dividend rate of 5 percent per annum for the first five years and will reset to a rate of 9 percent per annum after year five. The senior preferred shares will be non-voting, other than class voting rights on matters that could adversely affect the shares. The senior preferred shares will be callable at par after three years. Prior to the end of three years, the senior preferred may be redeemed with the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred or common stock. Treasury may also transfer the senior preferred shares to a third party at any time. In conjunction with the purchase of senior preferred shares, Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15 percent of the senior preferred investment. The exercise price on the warrants will be the market price of the participating institution's common stock at the time of issuance, calculated on a 20-trading day trailing average.

Companies participating in the program must adopt the Treasury Department's standards for executive compensation and corporate governance, for the period during which Treasury holds equity issued under this program. These standards generally apply to the chief executive officer, chief financial officer, plus the next three most highly compensated executive officers.

The financial institution must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. Treasury has issued interim final rules for these executive compensation standards.

Nine large financial institutions already have agreed to participate in this program, moving quickly and collectively to signal the importance of the program for the system. These healthy institutions have voluntarily agreed to participate on the same terms that will be available to small and medium-sized banks and thrifts across the nation.

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REPORTS
Public Term Sheet

Federal Reserve Board of Governors Speeches & Press Releases

2008-10-15T05:20:00.001-05:00

Recent Speeches

October 14, 2008
Chairman Ben S. Bernanke
Remarks
At the President’s Working Group Market Stability Initiative Announcement
October 7, 2008
Chairman Ben S. Bernanke
Current Economic and Financial Conditions
At the National Association for Business Economics 50th Annual Meeting, Washington, D.C.

Monetary Policy Press Releases

October 14, 2008
FOMC authorizes an increase in the size of its temporary reciprocal currency arrangement with the Bank of Japan
October 14, 2008
Minutes of Board discount rate meetings, August 18 through September 15, 2008
October 14, 2008
Board announces additional details regarding the Commercial Paper Funding Facility (CPFF)
October 14, 2008
Joint statement by Federal Reserve, U.S. Department of the Treasury, and Federal Deposit Insurance Corporation (FDIC)
October 13, 2008
Federal Reserve and other central banks announce further measures to provide broad access to liquidity and funding to financial institutions

Treasury Press Releases October 10-14, 2008

2008-10-15T05:12:00.002-05:00

10/14/2008 Treasury Requests Public Input on Guaranty Program for Troubled Assets
10/14/2008 Joint Statement on FY 2008 Budget Results
10/14/2008 Treasury Hires Custodian Under Emergency Economic Stabilization Act
10/14/2008 Dep Sec Kimmitt Remarks at the Palestinian Business and Investment Forum
10/14/2008 U.S. Government Actions to Strengthen Market Stability
10/14/2008 Treasury Announces Executive Compensation Rules Under the EESA
10/14/2008 Treasury Announces TARP Capital Purchase Program Description
10/14/2008 Joint Statement by Treasury, Federal Reserve and FDIC
10/14/2008 Paulson Statement on Actions to Protect the U.S. Economy
10/13/2008 PWG Announcement on Market Stability Initiative
10/13/2008 Treasury and Infrastructure Consortium for Africa Host Africa Power Symposium
10/13/2008 Dep Sec Kimmitt Remarks on Policy Principles for SWFs and Recipient Countries to the USCIB
10/13/2008 Treasury Hires Investment Adviser Under the EESA
10/13/2008 Plenary Remarks by Asst Sec Lowery at Annual IMF and World Bank Meetings
10/13/2008 Interim Asst Sec Kashkari Remarks on Implementation of Economic Stabilization Act
10/12/2008 Paulson Statement at Development Committee Meeting
10/11/2008 Kimmitt Statement on IWG Agreement on Generally Accepted Principles and Practices for SWFs
10/11/2008 Secretary Paulson Statement at the IMFC Meeting
10/10/2008 Paulson Statement Following G7 Meeting
10/10/2008 G7 Plan of Action
10/10/2008 Joint Statement by Treasury Secretary Paulson and Education Secretary Spellings
10/10/2008 PWG Issues 4th Quarter Policy Statement Update
10/10/2008 Treasury Department Public Engagements Schedule
10/09/2008 Interim Asst. Sec. Kashkari to Deliver Remarks

US Senate Banking, Housing, and Urban Affairs Committee

2008-10-09T21:32:00.003-05:00

US Senate Banking, Housing, and Urban Affairs Committee

http://banking.senate.gov/public/index.cfm?FuseAction=Articles.Home

October 2008
3rd - DODD STATEMENT ON HOUSE PASSAGE AND PRESIDENT'S SIGNATURE OF THE EMERGENCY ECONOMIC STABILIZATION ACT
1st - STATEMENT OF SENATOR DODD ON SENATE PASSAGE OF THE EMERGENCY ECONOMIC STABILIZATION ACT
1st - DODD ANNOUNCES LAUNCH OF HOPE FOR HOMEOWNERS PROGRAM
1st - EMERGENCY ECONOMIC STABILIZATION ACT OF 2008

CBO Director's Blog

2008-10-09T21:21:00.001-05:00

http://cboblog.cbo.gov/?p=177
Source: CBO Director's Blog

Monthly budget review: FY 2008 deficit of $438 billion
October 7th, 2008
CBO released its Monthly Budget Review today. Based on data from the Daily Treasury Statements, CBO estimates that the federal budget deficit was about $438 billion in fiscal year 2008, $276 billion more than the shortfall recorded in 2007. (The Treasury Department will report the actual deficit for fiscal year 2008 later this month.)

Relative to the size of the economy, that deficit was equal to 3.1 percent of gross domestic product, up from 1.2 percent in 2007. (The average deficit over the preceding five years, 2002-2006, was 2.6 percent of GDP.) The $438 billion figure is about $31 billion more than the $407 billion deficit CBO projected this summer, primarily because revenues are lower than we anticipated and spending for defense and deposit insurance is turning out to be higher.

CBO estimates that receipts in 2008 were about $44 billion (or 1.7 percent) below receipts in 2007, falling from 18.8 percent of GDP in 2007 to about 17.7 percent of GDP in 2008. Corporate income taxes declined the most, falling by about $65 billion (18 percent), due largely to weakness in corporate earnings throughout the fiscal year. Individual income tax receipts declined by about $19 billion (or 1.6 percent) relative to receipts in fiscal year 2007, reflecting $62 billion in tax rebates (from the economic stimulus legislation) that were recorded as offsets to revenues. In contrast, receipts of social insurance (payroll) taxes rose by about $31 billion (or 3.5 percent), and other receipts increased by about $9 billion (or 5.4 percent).

Spending rose by about 8 percent. Contributing significantly to the growth in spending were outlays for tax rebates (those rebates that were recorded on the spending side of the budget because they exceeded the recipients’ income tax liability), for deposit insurance, and for national defense.

Speech: Repercussions from the Financial Shock

2008-10-09T21:02:00.001-05:00

http://www.minneapolisfed.org/news_events/pres/stern10-09-08.cfm

Repercussions from the Financial Shock

Gary H. SternPresidentFederal Reserve Bank of Minneapolis
National Investor Relations InstituteMinneapolis, Minnesota October 9, 2008 [PDF]

Introduction

Over the past 14 months, many financial markets and large financial institutions have been buffeted by a severe financial shock, a shock unprecedented in my tenure as a Reserve Bank president. The disruptions intensified over the summer and persist to this day, despite considerable injections of liquidity on our part and other actions intended to ameliorate the situation. Indeed, the Federal Reserve has undertaken a wide range of extraordinary actions to respond to conditions in the financial markets over the last year or so. Given the tools available to the Federal Reserve and our mission, we have largely focused our efforts on increasing the availability of liquidity to financial institutions. Without trying to be comprehensive, I would note the following:

We have added liquidity by easing the terms of our discount window lending to traditional users including reducing prices and lengthening maturities for example. We have also rolled out new ways to provide this credit including auctioning it off. More dramatically we have allowed certain securities firms, the so-called primary dealers, to access our credit facilities. Finally, in two cases, we used our lending powers to facilitate the orderly resolution of financial firms whose failure otherwise posed systemic risks. I could point to other actions, such as increasing our coordinated lending of dollars with other central banks and prospective entry into the commercial paper market, but suffice it to say the Federal Reserve has responded to unprecedented times with equally unprecedented actions. And, of course, we have reduced the Federal funds rate target from 5 1/4 percent in September 2007 to 1 1/2 percent today.

Making progress against the turmoil at hand is certainly the top priority at this stage. But soon enough policymakers will want to identify fundamental reforms that reduce the likelihood that we will face another period of financial instability. In this spirit, in my comments this afternoon I want to consider the repercussions of this turmoil from two distinct perspectives: first, I want to discuss its implications for regulatory, supervisory, and financial stability policies going forward; and, second, I want to consider its implications for the current and prospective economic environment.

To preview my major themes, I will suggest that the too-big-to-fail (TBTF) problem, with which I have long been concerned, has been exacerbated by actions taken over the past year to bolster financial stability. These actions were fully appropriate against the background of the risks at hand, and it is essential that they succeed, but going forward they will require policies to address spillovers and to reduce the likelihood of full protection of uninsured creditors of large, complex financial institutions. I will elaborate specific proposals in a few minutes, but let me underscore one point: it is critical that we address TBTF because, if left unchecked, it could well be a major source of future instability.

As to economic prospects, I have been convinced for some time that financial conditions in the wake of the shock are reminiscent of, although certainly not identical to, those prevailing during the “headwinds” episode of the early 1990s. At the least, that experience provides a useful framework for analysis of the current state of the credit markets, the economy, and intermediate-term prospects. And before proceeding further, let me also remind you of the usual caveat: I am speaking only for myself and not for others in the Federal Reserve System.

The Expanded Safety Net and Too-Big-To-Fail

In our Bank's 2007 annual report, I expressed concern about the expansion of the safety net for large financial firms and, particularly, its potential to dull the market forces that would otherwise serve to constrain excessive risk taking. Although the annual report essay was released just a few months ago, the financial safety net has expanded appreciably since then. The dimensions of the too-big-to-fail problem have increased once again.

At the same time, however, there has been progress in beginning to develop a policy framework to address TBTF and to enhance market discipline. Policymakers have begun to focus more explicitly on minimizing the fallout, or “spillovers,” from a financial firm's impairment as they consider how to improve financial stability and to reduce the moral hazard incentives for excessive risk taking inherent in TBTF.

Naturally, I view these latter developments positively. In 2004 I co-authored, with Ron Feldman, a book entitled Too Big to Fail, the Hazards of Bank Bailouts. In that work, we emphasized that “policymakers should give highest priority to reforms limiting the chance that one bank's failure will threaten the solvency of other banks.” We came to that conclusion using the following logic:

Policymakers provide financial support to weak but systemically important financial firms to contain spillovers;

Reducing the fallout from financial firm failures undermines the principal rationale for extraordinary government support;

Creditor expectations of receiving government support will diminish (and market discipline will increase) as policymakers have less reason to provide such support.

This reasoning can contribute to agreement on a general policy framework to address TBTF, but such a framework is not a sufficient base for reform. Government agencies charged with addressing instability and related TBTF concerns, and private sector groups and firms critical to that effort, require specific recommendations. We have long had a list of specific reforms to address TBTF, but heretofore we have not prioritized those proposals. So of the many recommendations we made, where would we have policymakers start? We would begin the effort to manage TBTF with an approach we call systemic focused supervision (SFS).

Systemic Focused Supervision

In general, SFS attempts to focus supervision and regulation efforts on spillover reduction, and it consists of three pillars: early identification, enhanced prompt corrective action (PCA), and stability-related communication. In particular, SFS uses the information-gathering and analytical skills of supervisors to better understand how one firm's impairment might spread to other firms or markets; it relies on the enforcement capabilities of regulation (combined with market information) to close firms before they incur losses that could bring down their peers; and it extends central bank communication techniques to financial-stability-related efforts.
This program builds on the strength and current direction of supervision and regulation to focus across firms and on the interconnections in the banking and financial system as a whole, rather than concentrating on supervisory assessment of single firms. Combined, these efforts constitute important actions in a long-term effort to limit the spillovers from the failure or impairment of a systemically important financial institution. Let me now describe what I see as the basics of the three components.

Early Identification. This is a process to identify and to respond, where appropriate, to the material exposures between large financial institutions and between these institutions and capital markets. By material, we mean a sufficient exposure such that problems at one of these financial institutions could significantly impair other depository institutions and/or normal market functions.

Early identification could take many forms. Supervisors might begin by examining the performance of a number of large financial institutions subject to a series of shocks. The shocks could include large losses to a given type of loan or security on the firms' balance sheet, or a significant drop in the availability of funding. The results of this examination would provide policymakers with a sense of which stresses lead to significant problems at the firms. A second step is to determine how the material difficulties of one of these large institutions would affect the others. At a minimum, this would involve determining how much the failing institution owes the others at the end of the business day, what form the exposure takes, how much the exposure varies over time, and so on.

The goals of the exercise I just described (1) to give policymakers a sense of the type of events that are not likely to cause severe impairment, thus permitting them to avoid support and (2) to identify those exposures that might bring down the firm, and thus are deserving of closer policy scrutiny and response. As an essential part of this effort, supervisors should consider how they will make assessments of spillover potential at the time a financial institution experiences serious difficulty. Supervisors must determine what type of information they will need in short order from financial institutions during a period of turmoil, what information they can actually get, and develop a plan to address gaps that are identified. Closing these gaps means that policymakers can make informed judgments at the time of failure and, where possible, identify and resolve those issues that would otherwise lead to provision of extraordinary support.

Enhanced Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 implemented PCA. Like many so-called “structured early intervention and resolution (SEIR)” regimes, PCA works by requiring supervisors to take prespecified actions against a bank as its capital falls below certain levels. A bank whose capital declines below a given level, for example, would have its ability to pay dividends constrained. In the extreme, chartering authorities will close banks whose capital levels fall below the lowest established trigger and who cannot raise additional capital.

Closing banks while they still have positive capital, or at most a small loss, can reduce spillovers in a fairly direct way. If a bank's failure does not impose large losses, by definition it cannot directly threaten the viability of other institutions that have exposure to it. Thus, PCA is an important tool to manage systemic risk.

However, many observers, including some of the most zealous advocates of using a SEIR regime in the United States, view PCA as inadequate because it relies, in great part, on the so-called book value of capital. This capital measure, particularly for bank loans, often reflects a “rearview mirror” or historical assessment of the bank's assets. Such assessments may, at times, prove excessively generous. Using PCA triggers based on more forward-looking measures of bank solvency could help to address this shortcoming.

Data from financial markets offer one source of forward looking measures of a bank's condition; market participants do not always get their forecast right but they do appear to incorporate assessments of the future prospects of firms in their pricing decisions. This suggests that an enhanced PCA regime relying on both book value capital and market measures of risk—such as subordinated debt spreads, prices of credit default swaps, and/or equity values, among others—would enhance the current regime. In fact, the original proposals for SEIR in the U.S. used market measures of bank net worth to provoke supervisory action. In practice this could mean that some combination of market signals and accounting measures of insolvency could lead to the timely closure of a bank.

Incorporating market signals into PCA certainly has potential downsides. Like other reforms that increase market discipline, enhanced PCA may force firms into resolution, and potentially into the sale of troubled assets, precisely when the financial system seems most vulnerable. This observation suggests the need to average market measures over time to smooth out short-run volatility, or to rely on peer comparisons, for example, so as to avoid overreaction. I would also note that enhanced PCA assumes a bank-like resolution regime, something that does not yet exist outside of the banking venue.

Communication. The first two pillars of SFS seek to focus supervision and to increase market discipline. But creditors will not know about efforts to limit spillovers, and will not change their expectations of support, absent explicit communication by policymakers about these activities.

What form might that communication take?

In general, we have suggested that this communication possess several attributes. First, it should be released routinely, like the semi-annual Humphrey-Hawkins testimony, so that interested parties can rely on it. Second, it should disclose information on stability related activity at an early stage, even if it is work in progress. Such a strategy would provide creditors with a richer sense of the changes underway. Finally, we think the communication should explicitly link the activity underway to the goal of reducing spillovers, thus raising the feasibility and prudence of putting creditors at greater risk of loss.If we take a step back and reflect on these proposals, at the end of the day SFS is all about preparation—preparation from two distinct, but closely-related, perspectives. The underlying idea is, before severe problems arise, to identify potential vulnerabilities and spillovers, and to select market signals to enhance PCA. And, secondly, specific, regular communication is necessary to prepare creditors for the change in regime and to encourage changes in their expectations and behavior.

The general cross-institution focus of SFS has similarities to what is often called macro prudential supervision. But just as I view SFS as building on current trends in safety and soundness supervision, effective SFS must have a strong foundation in the supervision of an individual financial institution, what some call “micro prudential supervision.” Implementation of SFS requires supervisory staff to maintain a strong grasp of the operational activities and the inherent risk profile of the financial institutions they supervise as well as the risk management systems these firms employ. Put another way, I think SFS has the best chance of meeting objectives if it becomes part and parcel of core supervisory operations; I have some concern about the value of SFS if it becomes an appendage to “routine” supervision carried out by macro prudential specialists.

Carrying out early identification, for example, requires a detailed understanding of how large financial institutions conduct their business, strong grasp on the financial reporting/MIS of the financial institutions under review, clear and routine communication with their management, and sufficient supervisory experience to evaluate the data/information provided by the financial institution. Enhanced PCA will maintain a supervisory capital measure. This requires supervisory evaluation of a financial institution's capital position which necessitates reviews of asset quality and the allowance for loan losses, among other items. Even robust communication will benefit from integration with institution specific supervision.

Headwinds and the Economy

Let me now move onto the second topic, namely the implications of the past year of financial turmoil for the economy. I suggested at the onset that a useful framework for thinking about this issue was the headwinds episode of the early 1990s. In that period, credit became expensive and, in some cases, unavailable, even for relatively high quality borrowers. These credit conditions restrained consumer spending and business investment, and as a consequence, the recovery from the recession of 1990-91 was initially quite subdued. Eventually, of course, the economy performed very well over much of the 1990s, despite a rather rocky start.

I think that today's circumstances align, although not perfectly, with the experience of the early 1990s. There is no doubt that a variety of potential borrowers are finding funding more difficult and expensive to obtain. Moreover, while there was a significant contraction in residential construction activity in the late 1980s and early 1990s, the recent correction in this sector has been more severe, especially with the decline in housing values, and is continuing.

It is important to bear in mind, however, that many “initial conditions” prevailing prior to this financial shock were perceptibly better than in the early 1990s. Unemployment, interest rates, and inflation were all lower at the outset of the latest period of turmoil than in the previous headwinds episode. Equally important, the financial condition of both most banking and nonfinancial businesses was relatively healthier at the onset of recent problems.

In my judgment, the 1990s headwinds episode continues to provide a valuable reference point for thinking about economic prospects. For the near-term, I think that this framework suggests further declines in employment and likely softness in consumer spending, with a diminution of inflation, absent a resurgence in energy and other commodity prices.

It is worth recalling that the recession of 1990-91 was brief but not especially mild. Depending on how one reads the data, headwinds restrained the pace of the ensuing expansion of the early 1990s from 12 to 36 months. Something similar is certainly conceivable today. However, in considering these prospects, we should note that, despite early challenges, the 1990s turned out to be an excellent decade for the U.S. economy by almost all metrics. The underlying flexibility and resilience of the economy are intact, and these characteristics should ultimately prevail.

Conclusion

Let me quickly wrap this up, before turning to your comments and questions. I have commented on two significant repercussions of the major financial shock which first struck the economy about 14 months ago. First, in view of what we have seen at some large financial institutions and in some funding markets, the need to address TBTF through a framework which reduces spillovers is critical, and we propose systemic focused supervision as a constructive first step in this process. Second, given the headwinds associated with the financial shock, the economy appears likely to be restrained until these conditions improve, and that will take some time.

Whiteouse Press Release: President Bush discusses Emergency Stabilization Act of 2008

2008-10-08T22:59:00.003-05:00

For Immediate Release

Office of the Press Secretary

October 7, 2008

President Bush Discusses Emergency Economic Stabilization Act of 2008 Guernsey Office Products, Inc.Chantilly, Virginia

Video (Windows) Presidential Remarks Audio Photos
Fact Sheet: Taking Urgently Needed Action to Stabilize Our Markets In Focus: Economy

2:00 P.M. EDT

THE PRESIDENT: Thank you all. (Applause.) Thank you very much. David, thank you for the introduction, and thank you for the warm welcome. I'm pleased to be here at Guernsey Office Products. I want to thank all of you all for working hard to make this visit as comfortable as it is. It's not easy to host the President; I understand. (Laughter.) But thank you very much, David, for being an entrepreneur, a dreamer, a doer, and for providing people stable work.

It's interesting to know that Guernsey is a trusted name throughout the Washington area. You sell everything from office supplies to coffee products to furnishings. David is a good marketer; he said, listen, I understand you're going to be retiring here pretty soon. (Laughter.) Do you need some furniture in your new digs in Texas? (Laughter.)

I met David at the White House earlier and it was my honor to welcome him to the White House compound. And I appreciate you welcoming me here to your business.

I know that small businesses like Guernsey around the nation are feeling the impact of the financial crisis. And I appreciate you giving me a chance to come and visit with you about what the government is going to do, how we're going to address the challenge, and how we're going to get this economy back on track.

There's no doubt that people from all walks of life and all aspects understand that we're having serious times. Families are squeezed by the high price of gasoline, and feeling the pinch of food prices and monthly mortgage payments. Workers are anxious about whether their paychecks will stretch. Some workers are anxious about whether or not they're going to keep their jobs.

We also know that we're the most dynamic economy in the world, that we have been through tough times before, and that we're going to come through this time again. Our entrepreneurial system has delivered unparalleled levels of productivity and growth and prosperity. During my presidency, we have faced tough times after the terrorist attack of 9/11 and we came through strongly. And we're going to come through this. No question the times are tough, but no question America will emerge. And yet, we got some work to do, and that's what I want to share with you.
The immediate challenge facing the economy is a lack of credit. The problem became clear when the housing market declined, and complex financial assets related to home mortgages dropped in value. People put together securities based upon mortgages, and when the mortgage's value went down, so did those securities. And this led banks that owned the securities to suffer losses. And then they found themselves short on capital. Some banks have failed. And other banks, in reaction, have restricted lending to businesses and to each other. And that's the definition of a credit crunch: people just are not lending.

Nations around the world, especially in Europe, are facing severe shortages of their own. So this isn't a problem just in the United States; it's a problem that is worldwide.

To some people, the credit crunch might sound simply like technical talk; it's a technical matter. But the people who work in Guernsey, you understand that credit is the fuel that drives economic expansion and job creation. And here's how: See, when credit runs dry in one part of our economy, there's a chain reaction. So you want to sell a desk to somebody. That person needs to borrow the money in the short term to buy the desk. And yet, because the credit has tightened, because some banks are lending, a potential customer doesn't have the money to buy your desk, and that affects you. So a lot of the talk that you're hearing about credit crunches applies directly to your business here at Guernsey. It hurts your suppliers. It affects the entire economy.

Similar stories play out not only in businesses like Guernsey, but all across the economy. And if the credit crunch were allowed to worsen, the outcome would become much worse, with widespread job losses, and this country could be in possibly a painful and deep recession.

So I decided to do something about it. As you know, I'm a market-oriented person. I believe markets ought to be allowed to work -- until I was convinced that this time the government needed to act, and needed to act boldly, in the face of a significant problem. So I went to Congress and I asked Congress to pass a rescue package. And there were some tough moments in the negotiations, as you might remember. Nevertheless, Republicans and Democrats did come together to pass a good bill that will enable us to handle this challenge head on.

Now, the plan will provide the government a range of tools to help banks rebuild capital, for example, so they can help move credit that will enable people to buy your desks; that it will make it more likely people are going to have less job insecurity. When you're building desks and selling desks, you find work and you keep work.

The bill ensures that responsible, hardworking Americans are protected. I mean, one thing is for certain, we don't want your money to reward failed executives. There's oversight as the bill gets implemented. In other words, people in Washington will worry whether there's too much power in the Treasury, therefore, let's have reasonable oversight. And I agree, I think that makes a lot of sense.

It temporarily expands federal insurance; bank and credit union deposits of up to $250,000. That's important. In essence, it's a safeguard for a lot of small businesses and a lot of families. In other words, if you've got cash in a bank of up to $250,000, it's safe. The FDIC has never failed to make good on its promise, and it won't fail to make good on its promise.

These are urgently needed steps. They will help bring stability to the volatile markets. They'll help protect 401(k)s and retirement accounts. And as the markets begin to stabilize, it will help markets overseas.

I have been in close contact with European leaders -- I was on the phone with them this morning -- to ensure that our actions are closely coordinated. We live in a globalized world. We want to make sure that we're effective at what we do. Once we made the decision that there is a role for the federal government to move to stabilize the markets we want to make sure that all of us move in the best coordinated way as possible.

Interestingly enough, the finance ministers from the G7 and other leading nations will be here in Washington this weekend to make sure that the response is coordinated.

It's going to take time for these actions that I've described to you in the bill to have full effect. You want to make sure that when we move, we move effectively. You want to make sure that the plan is well thought-out and well delivered. Thawing the freeze in the financial system is not going to happen overnight, but it will be a process that unfolds over several stages. And obviously the first stage began last Friday, when I signed the rescue package into law.

And so the Treasury Department is moving aggressively to implement the new authorities. In the meantime, the Federal Reserve and the FDIC will use their powers to help stabilize the markets. Just this morning, the Federal Reserve announced action to provide additional liquidity to credit markets. The federal government moved -- Federal Reserve moved to try to free up liquidity so that this credit crisis begins to unwind.

A few weeks from now the main elements of the new legislation will begin to kick into gear. And as banks rebuild their capital, they'll be able to increase lending to each other and begin approving new loans for families and businesses. It's not going to happen all at once; it will be a gradual process and it's going to take time to have its full effect.

As the banking sector and the market for troubled assets recover, the government will begin to recoup some of the taxpayers' funds invested in the recovery. In other words, some of these assets that were taken are at a depressed value. Home ownership -- homeowners -- home prices are down, the value of the assets are down. Eventually, we expect that much, if not all, of the tax dollars will be recouped.

The financial troubles are the most urgent challenges facing our economy today, but they're not the only ones. And we'll spend a little time talking about them, and then I'll be glad to answer some questions if you have any.

One pressing concern is obviously the cost of energy. The cost of energy affects families, but it affects businesses as well, like Guernsey, which rely on energy to ship and make your products. High energy costs obviously are attributable to the high price of oil and natural gas. And that's why this administration, in working with Congress, has dramatically expanded funding for research into alternatives, including hybrid car batteries, fuels like ethanol and biodiesel, solar and wind power, and safe and nuclear power -- safe and clean nuclear power.

The rescue package I signed last week extended tax incentives to alternative energy sources. In other words, the rescue package was just not aimed at dealing with the financial issues; it was aimed at dealing with the energy issues, too, to help encourage alternative energy so we become less dependent on foreign oil. However, in the meantime, we need to be drilling. I mean, I'd rather us drill here than send our money overseas. And we can do so in environmentally friendly ways. Congress responded to the will of the people by lifting the ban on offshore energy exploration, which is good. It's going to take a while to go through all the permitting and all the environmental regulations, but nevertheless, a step was -- a positive step was taken to become less dependent on foreign oil.

Another issue is home foreclosures, and there's a smart way to deal with that. The truth of the matter is, people -- some people bought home far beyond their means. Some people bought homes to simply speculate. But there's also a lot of sensible homeowners who can make ends meet with just a little bit of help, and that's what we want. We want people -- to help people stay in their homes. And so we've created what's called HOPE NOW, which brings together homeowners, lenders, mortgage services and others to find ways to prevent foreclosures, to help people work through the current mortgage issues.

I told you that mortgages were bundled up into securities that banks bought, and as those securities went down in value, it affected the banks' balance sheets. Well, interestingly enough, when you securitize mortgages and sell them, it means that the people who originated your mortgage is -- no longer owns the paper. And so a lot of people say, who can I talk to to help me refinance my home? Where do I go? And so the HOPE NOW allowance -- Alliance is an opportunity to say to folks, here's how you can find ways to renegotiate your paper -- renegotiate your note. And it's working.

And by the way, we got another initiative out of the Federal Housing Administration, and all these programs have so far helped more than 2 millions Americans stay in their homes. In other words, there's an ongoing attempt to help people who need just a little help to be able to pay off their mortgages. And by the way, most people are paying off their mortgages, which ultimately means these mortgage-backed securities, the value that we may end up owning will be recouped. And that's why I say there's a good chance the taxpayers will get their money back.

Every American knows the burden of taxes. During the tough economic time, that burden falls especially hard. A lot of people are wondering whether or not their taxes are going to go up. One of the interesting things about the package I signed is that it does prevent the Alternative Minimum Tax from kicking in, which would have cost 26 million Americans $2,200 apiece. During this economic uncertainty, we don't need to be raising taxes.

And so the bill was more than just the rescue plan. The bill helped deal with Alternative Minimum Tax that would have kicked in, that would have affected a lot of you in this room. And the truth of the matter is I think Congress ought to send a signal when they come back next year, and say, look, we're going to make all the tax relief we passed permanent, so there's not any doubt in anybody's mind.

Finally, we need to deal with exports. A bright spot in the economy has been that we've exported a lot of goods overseas. People are buying our products. They should; we make great products and we got great workers. Last year about half of our growth was attributable to exports, and so it makes sense for Congress to continue to open up markets in places like Colombia, or Panama, or South Korea. Take Colombia, for example. Most of their goods come into our economy duty free, and yet our goods are taxed in Colombia. I can't understand why Congress wouldn't want to at least level the playing field for our workers, to simply send them a message: Treat us the way we treat you. That's all we want. Give us a fair chance so we can export our goods.

Exports are a very important part of our economy, and Congress ought to work hard to expand markets. We'll work through this. We're taking aggressive steps. And it's not an easy problem. No question about it, it's tough times. But I am confident in the long term for this country. I'm confident that the steps we've taken are bold and necessary. And more importantly, I'm confident in the resiliency and the spirit of the American people and the workers.

This isn't the first time the American economy has faced challenges. And it's not going to be the first time that we have in a recovery come out better, either. You got a motto here at Guernsey that says, "No matter what your clients need, your answer is the same: We can do that." That ought to be a good motto for the United States right now. We can do it. (Applause.)

Let me -- I'll answer some questions. So, like -- it's hard to ask the President questions, I know. (Laughter.)

Yes, David.

Q Mr. President, your words are certainly very reassuring. Every time we open up a newspaper, or we turn on the TV today and see all this impending financial doom -- and I think it's enough to make people want to dig a foxhole and hide under. What would be your advice to the small business community, in terms of the actions going forward, to dovetail with what you're trying to accomplish here?

THE PRESIDENT: Well, first of all, I would -- I think it's, first, important to recognize what the problem is. And if a small business owner is worried about getting credit to be able to roll over inventory, or to make payroll, my first question as a small business owner is: "What are you going to do about it, President Bush?" And the answer is, one, recognize the problem and start freeing up some credit into the economy to start unsticking it.

And it's going to take a while. And the truth of the matter is until you see that credit begin to get easier, you're going to have doubts as to whether or not the government has got an effective plan. But I believe the steps we're taking will free up the credit. It took a while to get it frozen; it's going to take a while to get it unstuck. And the Fed took a big step today.

And my -- the other thing is, David, is that obviously there's something resilient in your spirit; otherwise you wouldn't have started this business in the first place. And as you can testify, running a small business is full of all kinds of challenges. And it hasn't been an easy path to success. You've met challenges before, and a successful businessperson will meet them again. And I know you'll adjust your business according to -- according to the circumstances. In the meantime, have faith that this economy is going to recover over time. And when it does, you're going to be in a good position to take advantage of an expanding economy.

I wish I could snap my fingers and make what happened stop. But that's not the way it works. And I told you, I made a decision that is really opposite of my philosophy. I basically believe if people make bad decisions in the marketplace, they ought to fail. The problem is, in this case, failure would have cost you. What appeared to be something that might have been isolated in New York, would have cost you the job. And that was unacceptable to me.

And that's why I made the decision I made. And believe me, I fully understand a lot of small business owners saying, wait a minute, I met the payroll; or people such as yourself, I pay my mortgage, I pay my bills -- what are you doing? And what I'm doing is, I'm taking the action necessary to make sure that this financial system doesn't collapse, so you don't get hurt.

And, listen, I understand America's frustrations -- better than you can possibly know. I went home out there to west Texas where I was raised. Some old guy said, you know, hey, man, what are you doing? (Laughter.) And I said, I'm recognizing reality, that this is a serious economic situation that requires strong government action. And that's what we've taken.

And so the answer to your question is, let -- give this time -- give this plan time to get these credit markets eased up so that normal business can begin. And it's -- you know, there's a lot of uncertainty and a lot of worry, and I understand that. It's one of the reasons I came here to talk about the deal.

Yes, ma'am.

Q Mr. President, thanks for being here. And thank you for the opportunity. I am -- (inaudible) -- for a small business telephone company installing phone systems in the region. But just as importantly, I'm Chairman of the Dulles Regional Chamber of Commerce. We're a chamber made up of small and medium-sized businesses. We're located here in the Dulles corridor. We know that this is one of the key places in the country to locate your business. We are very proud that last week we hit the 1,000 mark with members, meaning we're the largest chamber in Fairfax County.

What our board of directors would like to ask you today, on their behalf, today I'd like to know, what would you recommend and give us as advice that we can do to help our members sustain the next period of time in this economic climate? What would you advise us to do as a chamber of commerce?

THE PRESIDENT: I would advise you -- a week ago I would advise you to write your congressman and tell him to vote for the plan. (Laughter.) Now I would advise the president to make sure that which you do -- that which the -- the powers inherent in the bill, when we do something, they're effective.

It's interesting, I met with some of the local business folks today. And a man wisely said, okay, now that you've got the plan, where's the action? And as I said in my remarks, that we're -- we want to make sure that when we move, we move effectively and -- so that the consequences are positive. And so what I would do is I would tell your president to not be hasty, and have a good team of people put together a strategy that will address the root cause of the problem.

In the meantime, I would remind people that we have been through tough times before. You know, one of the things I'm concerned about is the psychology of people. They're basically saying, oh, this is just too tough. The good news is in America we generally don't do that. The good news in America is we say, we're going to deal with the circumstances and we're going to deal with them in a resolute fashion.

But, you know, we're just going to have to work our way through this. And it's -- and I'm confident we'll succeed. I really am. It's not going to be easy, because all this -- everybody got kind of interwoven. And it's hard to explain to people how this happened. The truth of the matter is, the government in good conscience tried to encourage people to buy homes. But the problem is that the financial institutions in Washington -- Fannie Mae and Freddie Mac -- just were basically unregulated to the point where they wrote a lot of product that was untrustworthy over time.

And, you know, the tendency in politics is to try to blame somebody else -- and I'm certainly not doing this at this point in time -- but we did try to pass regulation that basically said to Fannie and Freddie: Stay in your lane and focused on your core mission. But that's not what happened, and now we have to deal with the consequences. And a lot of people own this paper that devalued in value, which is causing financial institutions to recoup.

There's very little that you can advise your members of until this credit crisis eases, because your members are going to be asking you, what did he tell you about easing the credit. Because until credit eases, it's going to be hard for businesses to feel confident to move. And that's -- the whole purpose of coming today was to tell you, one, we recognize the credit problem; and two, we're taking bold action to deal with it.

Yes, ma'am. You got a follow -- that's what we call a follow-up. (Laughter.)

Q Well, I think it's also important that as members that we learn to work together, and that we re-look at everything that we buy and look within our membership, and that all of us in America become partners with each other to help each other's business, because we're all in it together.

THE PRESIDENT: You answered your own question very well. (Laughter.) No wonder you're the head of the Chamber of Commerce. (Laughter.)

Yes, sir.

Q Mr. President, what do you think is going to happen to my 401(k) and other people's retirement plan?

THE PRESIDENT: I think in the long run they're going to be fine because the stock markets will reflect real value. In the short term, they're going to take a hit.

And so the question is, how fast can we get credit in the economy to get this economy moving again? And there's a lot of aspects of the economy that are suffering right now -- housing market, for example. A lot of people wonder what happened. Well, what happened was, they overbuilt -- or we overbuilt -- built too many homes relative to the number of buyers. And until that overhang gets worked off, the housing market is going to remain soft. The positive news is, long-term mortgage rates are dropping. In other words, money is becoming cheaper to buy a mortgage. And over time, the housing market will begin to recover. That will help the economy recover. Easing the credit will help the economy recover, and the values in the stock market will recover, as well.

But no question in the short term, if you're -- the value of your 401(k), if you're in stocks, is going to go down. Question is, how fast can we recover this economy? I believe we got -- I know we've had a very powerful economy. After all, we grew 52 uninterrupted months of job growth. And when we recover, we're going to have a powerful economy again. We're a productive country. We're an entrepreneurial country. The small business sector is strong. And right now we're in tough, tough times, no question about it. But you can't convince me that in the long run, that we're not going to get back on our feet again. And if anybody ever says that, they don't understand the American spirit.

Yes, sir.

Q Mr. President, I've followed your whole tenure in office pretty closely, and I was pretty surprised that you signed the bill. But you just made a very strong argument as to why you signed it, and you laid out the different --

THE PRESIDENT: You sound like the guys I grew up with in West Texas, you know. (Laughter.)

Q You really did a great job, because I was -- I really wasn't convinced until I just heard you speak.

THE PRESIDENT: Well, thank you.

Q Does anything in the bill or anything that you're working with right now have -- to simplify the understanding of the general public, in terms of the Fair Credit Act, passed in 1970, and the amendment passed in 2003, as to how people can understand credit? Because it's very difficult to understand credit unless you do your homework.

THE PRESIDENT: Yes, I'm telling you, it's really hard to understand credit.

Q I mean, yes, it's just very difficult, and, I mean, unless, you know, unless you know how to use the Internet very well, unless you have the -- you know, unless you have the ambition to do so, you're not really going to take the initiative. And then that's how you can get in a credit crunch, because you might have something on your credit report or something that reflects negatively, and the CRA, the credit reporting agencies, they're not going to do anything about it.

THE PRESIDENT: Yes. No, that's an interesting question. I'm sure Congress will revisit the 2003 law. One of the things we pressed is financial literacy so that people understand what they're dealing with in the first place. And I really suspect that when we dig into the mortgage issue that people were buying mortgages that they had no idea they're going to reset. In other words, somebody went out there and said, here, you got yourself low interest rates, but they forgot to tell them in two or three years' time that interest rate was going go bump up, and it caught people by surprise.

And we need to have a full analysis of the credit rules and -- on how people are dealt with, as well as transparency in the mortgage industry. But a lot of it has to do with financial literacy. People just aren't sure what the language is that they're dealing with.

I appreciate your comments on the rescue package. I really meant what I said, that I'm a firm believer that if people make mistakes in the business world, that -- if you make bad decisions, that they ought to suffer the economic consequences. But the problem was, in this case, you would suffer them.

My pals say, and I understand this, I fully believe this, that, how can you possibly stand there and let Wall Street do what they did? Listen, people are angry about the fact that people look like they're dragging out money when there's failure. I understand that. I don't mind rewarding success. It's when people make money off failure. And I think there's going to be a -- there needs to be a reassessment of these packages. There needs to be a reassessment of how interconnected people became; how they made promises that they were not in a capital position to fix.

Step one is to fix the immediate, solve this thing. And step two is to make sure we don't get tomorrow where we are today, without creating a regulatory regime that inhabits -- inhibits small business growth. And I think it's going to be -- it's a real challenge.

But my immediate concern is solving today, is to make sure the plan -- first of all, last week was getting the plan passed, which happened last Friday -- it may seem like a month ago, but it's -- (laughter) -- last Friday -- and getting it implemented, and working with our partners overseas to make sure the effort is as coordinated as possible so we can be effective.

And the definition of "effective" from a small business perspective is when you begin to see credit ease. And we understand that. And we're trying to move as quickly as we can to get credit moving in a way that people say, okay, now I see what they're trying to do.

Yes, sir.

Q First of all, I want to just say thank you very much for understanding the importance of credit. My name is Mike Gray. We're next door. The company's called Exhibit Edge. My wife is the owner, Beth Gray, of the company.

THE PRESIDENT: That's a smart move. (Laughter.) She just doesn't want to take in front of all the cameras, so you're her spokesperson.

Q Yes, sir. I just want you to emphasize how important freeing up credit is.

THE PRESIDENT: Yes, thank you.

Q I mean, just to give you some quick numbers. We're a $3.5 million dollar company, and we rely on a $500,000 home credit line to support our business, which means we have to roll this money over six, seven times a year. That's how much we need this credit. And now the -- we've got a notice or a letter from a bank -- or from the bank that runs our credit line -- that says home values are going down a little bit, and if you pay down your principle a little, we're not going to give you quite as much back. And so our strategy is don't pay it down, to keep it maxed out all the time.

And so we're comfortable now, and we're able to take care of our business by doing this. But it's so important for you to emphasize the need that small businesses have for the use of that credit. And I thank you so much. You're really working hard --

THE PRESIDENT: Thanks for hanging in there.

Q Absolutely. You, too.

THE PRESIDENT: It's also important for, obviously, consumers to be able to borrow money to buy a car. Credit is what makes our system going. And when credit freezes, it creates a standstill. And when people stand still, it just begins to shut down the economy. And that's why we're moving as hard as we're moving. And somebody asked me: "Is it going to work?" This is the best shot we've got. And it's a big, bold move. And it's -- I listened to a lot of smart people about what to do. And it was a -- hard for Congress to swallow, because I understand there's a lot of skepticism about the government making a big, bold move. But you're the kind of guy that was represented by the yes votes when they said, I'm worried about credit freezing; what are you going to do about it?

And so, what I'm trying to describe to you today -- I hope I'm getting through to the people listening, as well -- is that we're trying to address this guy's problem, and trying to address small businesspeople's problem all around the country with something that will be effective when it comes to freezing up credit.

All right, you know what -- yes, sir. About to say I enjoyed it, but -- (laughter.)

Q Mr. President, is my bank account safe?

THE PRESIDENT: Yes, it is, up to $250,000. We went from $100,000 to $250,000. That is a very good question. You know, a lot of Americans are hearing these stories and they're wondering whether or not their money is safe. And you're insured up to $250,000. We raised it from $100,000 to $250,000. And it's just essential that the American people know that the FDIC has never failed on meeting that obligation, and it's darn sure not going to fail now.

It's -- these are tough times, no question about it. I know a lot of folks around the country have got questions. And part of addressing these tough times is to, you know, is to focus on the core problem. And the core problem, as this good man talked about, was getting credit moving so consumers and businesses have got the capability of realizing their -- in the case of a small business, their plans and their ability to grow and to meet demand. And that's what we're -- that's what we're addressing.

I thank you for giving me a chance to come by and visit with you. I love coming to places where we're on the front lines of economic progress. The truth of the matter is, the small business owner and the small business sector really provide the backbone of the American system. You've been asked a lot during these times, but I've got great faith in the small business sector. And when government gives you -- helps you get that capital you need, the small business sector is going to help us lead out -- help lead us out of the situation we're in today.

I know that the days are dim right now for a lot of folks, but I firmly believe tomorrow is going to be brighter. And I thank you for having that resiliency and that drive to hang in there and help this economy grow and recover.
God bless you. (Applause.)
END 2:35 P.M. EDT

Speech by Charles I. Plosser President FRB Philadelphia

2008-10-08T19:51:00.004-05:00

The Limits of Central Banking

Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of PhiladelphiaNew York Office of the Council on Foreign Relations, October 8, 2008

Introduction

Today I want to discuss the importance of thinking realistically about the central bank's capabilities as we look beyond the current turmoil to the future of the Federal Reserve's responsibilities for monetary policy and financial stability. The financial turmoil of the past year and the consequent restructuring in the marketplace have prompted calls for the Fed to assume expanded responsibilities. Some envision the Fed's becoming the supervisor and regulator of a broad array of financial firms in order to ensure financial stability.

Yet, before we seek to dramatically expand the Fed's responsibilities, I believe it is important to recognize that there are limits to what central banking can do, and this has implications for what central banking should do.

The Fed needs to be accountable for meeting its goals. Yet, we must take care to set reasonable expectations for what a central bank can achieve. We must recognize that over-promising can erode the credibility of a central bank's commitment to meet any of its goals, whether for monetary policy or financial stability. My comments today will touch on both of these central bank responsibilities.

What Monetary Policy Can and Cannot Do

Let me start with monetary policy. Much of the public discussion of the Federal Reserve's monetary policy seems to assume that the Fed's job is to stabilize the economy against macroeconomic shocks — such as a sharp rise in the price of oil or a sharp drop in the housing market. The impression one gets is that, if the Fed were simply quicker or smarter or given more regulatory powers by Congress, we could always counteract the adverse effects of these shocks and easily achieve monetary policy's dual mandate to keep the economy growing with full employment and little or no inflation.

However, I see two problems with this view. First, it fails to recognize the difference between what the Fed can do in the long run and what it might be able to do in the short run. Second, it assumes the Fed has the ability to stabilize the economy against the adverse effects of almost all macroeconomic shocks. On both counts, this view seriously overstates the true capability of the Fed or any central bank in modern market economies.

In truth, the only thing that sound monetary policy can affect in the long run is the rate of inflation. Changes in monetary policy can affect real economic activity, such as the unemployment rate or output growth, but only temporarily and with considerable uncertainty as to timing and magnitude. Consider the case where economic activity is slowing or declining. If we increase the money supply to lower interest rates or to keep them low, we may temporarily boost economic activity because it may take a while for prices to respond to the additional amount of money in circulation. The temporary boost occurs with a so-called "long and variable" lag. Indeed, the effect of lower interest rates on economic activity may not be felt for nine to 18 months. Eventually, though, prices will rise, the purchasing power of money will erode, and the boost to economic activity will fade away. Moreover, the effect on the real economy can be completely offset if inflation expectations rise in reaction to the accommodation. That is why we place considerable stress on our credibility and commitment to keep inflation low and stable.

The task is further complicated when one realizes that all sorts of shocks are simultaneously buffeting the economy. Shocks can occur to specific sectors or specific regions. Some may be large and some may be small. Some may be positive and boost economic growth, while others may be detrimental to growth. If monetary policy responded to one shock in an attempt to offset its possible effects, it may aggravate the effects of another shock.

Thus, monetary policy's ability to neutralize the impact of shocks is actually quite limited. Successfully implementing such an economic stabilization policy requires predicting the state of the economy more than a year from now with a high degree of accuracy — including anticipating the nature, timing, and likely impact of future shocks. The truth is that economists simply do not possess the knowledge to make forecasts with such accuracy. Attempts to stabilize the economy will, more likely than not, end up providing stimulus when none is needed, or vice versa. Indeed, aggressive attempts at stabilization can, in fact, increase volatility rather than reduce it.
In many cases the effects of shocks to the economy simply have to play out over time, so that markets eventually adjust to a new equilibrium. For example, monetary policy cannot keep the prices of gasoline and home heating oil at the low levels they were when crude oil was $30 a barrel. And monetary policy cannot reverse the sharp declines in housing prices over the past year. Monetary policy simply cannot eliminate the need for households or businesses to make real adjustments when such shocks occur.

This doesn't mean monetary policy should be unresponsive to changes in broad economic conditions. The best strategy is to set our policy instrument — the federal funds rate — consistent with controlling inflation over the intermediate term. This implies that the target federal funds rate will vary with the overall outlook for the economy. By keeping inflation stable when shocks occur, monetary policy can foster the conditions that enable households and businesses to make the necessary adjustments to return the economy to its sustainable growth path — although depending on the nature of the shock, this new growth path may be lower, higher, or the same as its previous growth path. But monetary policy itself does not determine this sustainable path.

For example, if an adverse productivity shock results in a substantial reduction in the outlook for economic growth, then real, or inflation-adjusted, interest rates tend to fall. As long as inflation is at an acceptable level, the appropriate monetary policy is to reduce the federal funds rate to facilitate the adjustment to lower real interest rates. Failure to do so could result in a misallocation of resources, a steadily declining rate of inflation, and, perhaps, even deflation.

Conversely, when the outlook for future economic growth is revised upward, real market interest rates will tend to rise. Provided that inflation is at an acceptable level, we would want to facilitate this adjustment by raising the federal funds rate. Failure to do so would again result in a misallocation of resources and, in this case, a steadily rising rate of inflation.

In both cases, I view changes in the Fed's target interest rate as responding to economic conditions in order to keep inflation low and stable. Monetary policy is not "trading off" more inflation for less unemployment in order to stabilize the economy against an adverse shock, nor is it "trading off" more unemployment for less inflation when there is a favorable shock to the economy. The empirical support for such a trade-off is tenuous at best, and the empirical support for the view that central banks can favorably exploit such a potential trade-off is even weaker.

Asking monetary policy to attempt to offset the effects of adverse shocks to the economy is unlikely to work, and it will surely exact a toll in terms of higher inflation. This is particularly troublesome, since it would undercut the hard-earned credibility of the Fed's commitment to control inflation. This loss of credibility could lead to more variability in the public's expectations about future inflation. As we saw in the late 1970s and early 1980s, such an unanchoring of inflation expectations makes it more difficult and costly to reduce inflation when it is too high. This, in turn, would also make it harder to achieve maximum sustainable growth, the other part of our dual mandate, since high and variable inflation makes adjustments in labor and product markets more costly.

This is not a new concern. In his presidential address to the American Economic Association over 40 years ago, Milton Friedman cautioned the economics profession:

"...we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve, and, as a result, in danger of preventing it from making the contribution that it is capable of making." 1

This caution is well worth remembering as it is still relevant today.

Of course, Friedman also recognized that some shocks might require a response — in particular, those that, in his words, "offer a 'clear and present danger.'" In my view, shocks that put the stability of the financial system at significant risk require a response. Indeed, over the past year, the Federal Reserve has aggressively eased monetary policy and employed innovative liquidity tools to help mitigate the effects of the financial turmoil.

Financial Stability, Regulation, and the Fed's Role

The widespread effects of this financial turmoil have focused attention on the role of central banks in supporting financial stability.

The Fed, as lender of last resort, has undertaken several liquidity measures intended to address extreme financial stress to forestall contagion and mitigate systemic risk. One role financial intermediaries perform is bearing and managing the liquidity risk that arises from funding long-term assets with short-term liabilities. Businesses are able to get funding for projects that may not pay off until sometime in the future, and financial intermediaries are able to meet savers' withdrawals of funds with retained earnings or by selling off liquid assets. In most cases, this maturity transformation works fine.

However, if depositors and other liability holders suddenly demand large withdrawals, an intermediary may be forced to sell long-term assets at prices below their value if they were held to maturity. The intermediary's illiquidity problem could turn into a solvency problem, eventually leading to the intermediary's failure. Such failures have the potential to cascade throughout counterparties, ultimately leading to a major breakdown of borrowing and lending in the economy. In times of crisis, such as the situation we have found ourselves in this past year, the Fed must act as lender of last resort to provide liquidity.

Since the summer of 2007, we have set up various channels through which financial institutions can borrow from the Fed against a wide range of collateral. This has provided direct liquidity to financial institutions, thereby helping to meet our responsibility for ensuring financial stability. I want to stress that the Fed has sought to ensure that solvent institutions facing temporary liquidity problems remain solvent. The intention was not to prop up insolvent institutions. Similarly, I want to emphasize that, although the Fed has played a role in the resolution of systemically important financial firms, the intention has been to protect the orderly functioning of the money market and thus to stem systemic risk to the broader economy — not to address the solvency issues of individual institutions.

Our preference is to allow market forces to handle any required restructuring in the financial services industry. However, in some cases this is not possible when the risks to financial stability are too high.

Regardless of our intentions, we need to recognize that by taking these actions, we create expectations about future interventions and who will have access to central bank lending. These expectations, in turn, can create moral hazard by influencing firms' risk management incentives and the types of financial contracts they write, which may ultimately increase the probability and severity of future financial crises.

Going forward, just as we should avoid setting unrealistic expectations for monetary policy, we should also avoid encouraging unrealistic expectations about what the Fed can do to combat financial instability. As I have argued, in times of financial crisis, a central bank should act as the lender of last resort by lending freely at a penalty rate against good collateral. Yet, recent experience suggests we need to clarify what the Fed can and cannot be expected to do in today's complex financial environment.

The events of the past year underscore the importance of carefully assessing the current financial regulatory structure. Regulatory reforms should aim to lower the chances of financial crisis in the first place, for example, by setting capital and liquidity standards that encourage firms to appropriately manage risk. We should consider market structures, clearing mechanisms, and resolution procedures that will reduce the systemic fallout from failures of financial firms. Indeed, it would be desirable to be in an environment where no firm was too big, or too interconnected, to fail.

Yet regulatory reforms must recognize that modern financial systems will never be immune to financial problems. Encouraging the belief that any system of financial regulation and supervision can prevent all types of financial instability would be a mistake. Instead, our goal should be to lower the probability of a financial crisis and the costs imposed from any troubled financial institution.

As we move forward with regulatory reforms, we must carefully consider the role the Fed should play and our responsibilities for promoting financial stability.

The Fed has learned much over the past two decades about how to conduct monetary policy more effectively. I believe the general principles for sound monetary policy are just as applicable to our responsibilities for promoting financial stability and fulfilling our role as lender of last resort.

In conducting monetary policy, we have learned that clearly stating our policy objectives; taking a systematic approach to achieving these objectives; and committing to this systematic approach over time, even when it seems expedient to abandon it, can deliver better growth and inflation outcomes. In addition, as my colleague here on the podium, Alan Blinder, has stressed, central bankers must be as transparent as possible and communicate their views on monetary policy clearly to the public, to whom we must be accountable.2

I believe that these principles should also apply to our lending polices. In particular, I believe that the central bank should clearly state objectives and set boundaries for its lending that it can credibly commit to follow. Clarifying the criteria on which the central bank will intervene in markets or extend its credit facilities is not only essential but critical. Intervening too often or expanding too broadly the set of institutions that have regular access to the central bank's credit facilities can create moral hazard, distort the market mechanism for allocating credit, and thereby increase the probability and severity of a future financial crisis. Thus, a too liberal lending policy would undermine our lending policy's intended goal of financial stability. Of course, announcing the central bank's criteria ex ante does not commit it to act as stated in every case, but it does raise the costs of deviating from the criteria.

Experience has also shown that when a central bank can conduct its monetary policy independently of the fiscal authority and political influence, it can achieve better outcomes because it is able to take a longer-term perspective in pursuing its objectives. This principle of central bank independence is crucial.

In setting our lending policies we must avoid taking actions that stray into the realm of allocating credit across sectors of the economy, which in my view is appropriately the purview of the market. But if government must intervene, it should be the responsibility of the fiscal authority. Expanding the types of assets on the Fed's balance sheet from Treasury securities to a wider array of assets, including loans to a wider variety of institutions, as we have done over the past year in pursuit of financial stability, does raise concerns in my mind, in part because it increases the number of entities that may seek to influence Fed policies. The Fed needs to operate independently from these pressures and resist them when they arise so that its policies benefit society at large over the longer term and not any particular constituencies in the near term.

Another consideration in setting the Fed's financial stability and regulatory responsibilities is how they interact with our monetary policy goals. Expanding the Fed's regulatory responsibilities too broadly increases the chances that there will be short-run conflicts between our monetary policy goals and our supervisory and regulatory goals. It is particularly important that any such expansion not undermine the credibility of our commitment to price stability. For example, it would be a mistake for the central bank to pursue an inflationary monetary policy in order to temporarily alleviate funding pressure on financial institutions. While financial institutions might be better off in the short run, higher inflation would hurt them as well as the rest of the economy in the long run.

As we consider the Fed's financial stability and regulatory responsibilities, we must also be careful not to compromise the Fed's independence. Nor should we undertake tasks that would undermine our ability to meet our dual-mandate objectives of ensuring price stability and fostering sustainable economic growth.

Conclusion

To sum up, the past year has been a challenging time for the U.S. economy and for policymakers. The Fed responded to the deteriorating economic outlook and continued stresses in financial markets with its monetary policy and liquidity facilities. Restructuring is occurring in the financial services industry, and it is clear that when some normality returns to the markets — which eventually it surely will — some type of regulatory reform will be needed.

Some people may think expanding the Federal Reserve's regulatory and supervisory authority would prevent the types of financial crises we have been experiencing this year. Yet, I have tried to raise some cautionary flags about going beyond the limits of what a central bank can and should do. A modern financial system cannot be immune to all financial stress. Setting up expectations that the Fed will surely be unable to fulfill would undermine our ability to achieve our primary monetary policy and financial stability objectives. Regulatory reforms should aim to reduce the probability and economic severity of future periods of instability but should not be expected to eliminate them entirely.

As legislators consider regulatory reforms, they should avoid giving the Fed new missions or goals that conflict with the one goal that is uniquely the responsibility of a central bank — price stability. No other institution is charged with this objective, and no other institution can deliver it.

1 Milton Friedman, "The Role of Monetary Policy," American Economic Review, 58:1 (March 1968), pp. 1-17.

2 Alan Blinder, Central Banking in Theory and Practice, The MIT Press, Cambridge, MA, 1998.
The views expressed today are my own and not necessarily those of the Federal Reserve System or the FOMC.

Source: Philadelphia FRB - http://www.philadelphiafed.org/publications/speeches/plosser/2008/10-08-08_council-on-foreign-relations.cfm

Prepared Statement by Treasury Under Secretary David H. McCormick in Advance of G-7 Finance Ministers and Central Bank Governors Meeting

2008-10-08T19:44:00.002-05:00

October 8, 2008 hp1190

Prepared Statement by Treasury Under Secretary David H. McCormick in Advance of G-7 Finance Ministers and Central Bank Governors Meeting

WASHINGTON – Good afternoon. The G-7 Finance Ministers and Central Bank Governors will hold their next meeting here at the Treasury Department on October 10, amid the IMF and World Bank Annual meetings. The G-7 meeting will be heavily focused on current economic conditions, financial market developments, and our collective and individual policy response to recent financial market turmoil.

Secretary Paulson will share with his G-7 colleagues that this is a very challenging period for the United States and that we are focused on the immediate need to stabilize our financial system. Unprecedented stresses in financial markets, concerns about counterparty risk and tight credit markets overall are making it difficult for citizens to access credit and for businesses to finance day-to-day business operations. Meanwhile, Europe and Asia are also facing economic and financial challenges and the macroeconomic landscape has deteriorated in recent weeks.

This background underscores what I believe will be one of the central key messages for the weekend -- the turmoil is a global phenomena. We are all affected by it, and strengthened international collaboration is needed now more than ever to find collective solutions to achieve stable and efficient financial markets and restore the health of the world economy. The Secretary and I have been in regular contact with our G-7 and other international counterparts and Friday's meeting will provide us with a timely opportunity to further strengthen our collaboration.

The G-7 are working individually and collectively across four fronts: liquidity, capital, market stability, and our regulatory response.

The world's central banks have acted together to provide additional liquidity for financial institutions. The Federal Reserve established swap lines with nine central banks. Also, Treasury implemented a temporary guaranty program for the U.S. money market mutual fund industry.
To bolster capital in the financial system, the Administration worked with Congress to develop a $700 billion program for addressing the problem of these illiquid assets on the balance sheets of financial institutions. This will help reduce an enormous source of uncertainty in the markets and stimulate capital raising. We know other countries are considering appropriate programs given their national circumstances and we look forward to working with them as they move forward with their plans. We, and our European counterparts, have also acted swiftly on a case-by-case basis to address destabilizing financial conditions in a number of institutions in the U.S. and Europe.

In the area of market stability, the SEC and its counterparts in several countries around the world have taken measures to address market abuse. The United States has raised its deposit insurance limits and the EU member states have raised individual deposit limits to an EU-wide minimum.

Finally, we have worked to develop a comprehensive, international regulatory response to ensure these same mistakes are not repeated. In this context, at our April meeting, the G-7 endorsed a series of FSF proposals to address the causes of the financial market turmoil and set forth a 100-day agenda for priority actions. The 100-day agenda was initiated on time and we are encouraged by the progress so far to meet the FSF's recommendations. On Friday, FSF Chairman Mario Draghi will discuss what has been achieved, describe what more needs to be done this year, and lay out an agenda for 2009. The U.S. the President's Working Group on Financial Markets reviewed policy issues and issued recommendations in March that include important steps very much in line with the FSF to improve market transparency and disclosure, risk awareness and risk management, capital and regulatory policies, practices regarding the use of credit ratings, and market infrastructure for over-the-counter derivatives products.

The turmoil also affects emerging markets. Because of that reality, the IMF and FSF will co-host tomorrow a meeting on the recent financial turmoil and policy responses. Secretary Paulson will attend and is committed to reaching out to emerging market economies, especially given their increasingly prominent global role.

While our discussions will center on the global economic and financial developments, the G-7 will also discuss issues pertaining to the IMF and World Bank. The U.S. will underscore that the IMF must play a critical role in global economic and financial sector surveillance and must continue to modernize itself to remain legitimate. We will emphasize the need for firm implementation of the IMF's new exchange rate surveillance decision. The U.S. will express support for the proposed World Bank voice and vote package to enhance the participation of the poorest member countries, especially in Africa. We view the reforms as an important step forward in improving the Bank's accountability to its shareholders.

We are pleased that the International Working Group of Sovereign Wealth Funds reached a landmark agreement on a set of Generally Accepted Principles and Practices which will enable SWFs to demonstrate their strong stake in promoting open and stable global financial markets. The G-7 will also welcome next week's inaugural meetings of the new climate funds, including the Clean Technology Fund (CTF). The CTF will support policy measures and investment projects to help developing countries lower their emissions trajectories. While these are also important issues, these are extraordinary times and the predominant focus of the meeting will be financial market turmoil. In this context, after the meeting, Secretary Paulson will host a G-7 dinner on lessons learned from country experiences with bank resolution.

Secretary Paulson will be meeting bilaterally with a number of his counterparts from within and outside the G-7. He will also attend a breakfast meeting of the International Monetary and Financial Committee of the IMF and host a roundtable meeting with the Finance Ministers from a number of Western Hemisphere countries to discuss key economic issues impacting the region.

US Treasury Press Release 10/08/2008: Statement by Secretary Henry M. Paulson, Jr. on Financial Markets Update

2008-10-08T19:39:00.001-05:00

October 8, 2008 hp1189

Statement by Secretary Henry M. Paulson, Jr. on Financial Markets Update

Washington, DC-- Good afternoon. Last Friday Congress finalized and President Bush signed into law the bipartisan Emergency Economic Stabilization Act. The EESA provides the Treasury, the Federal Reserve and the FDIC with important new authorities to complement existing ones. We will continue to coordinate with other federal regulators to use these tools to implement our strategy to address the four key challenges in our financial markets today - confidence, capital, systemic risk and liquidity. Although we are facing particularly difficult circumstances, I remain confident that we will work through this challenge, as we have always successfully worked through every economic challenge in the history of the United States. We are a strong and wealthy nation, with the resources to address the needs we face. I am confident that, with the right public policy response, time and effort, we will conquer these challenges as well.

U.S. and global financial markets continue to be severely strained. A chain of events caused by the ongoing housing correction has reverberated through U.S. banks and financial institutions, and has seriously impacted the underlying economy, reaching American households and businesses. A root cause of this situation is the housing correction and a lack of confidence in mortgage assets, as well as a lack of confidence in many of the financial institutions that hold these assets. Because of this widespread uncertainty, investors are hesitant to commit capital to financial institutions. Investor confidence is critical to restore liquidity and enhance the stability of our financial system.

This financial market turmoil is now directly affecting more families and businesses. When banks can not finance at reasonable levels, and can not or are not willing to lend, everyone in our economy who depends on credit suffers. The capital markets are the pipes through which money flows to finance student loans, car loans, home loans and small businesses' payroll and inventory. And uncertainty and a lack of confidence have clogged our basic financial plumbing. While our actions have been aimed at restoring financial markets and institutions, our purpose is to prevent financial market difficulties from further impacting businesses and families across the country.

New Authorities Needed to Address Challenges

Over the last six months, the U.S. Government has addressed a number of significant problems on a case by case basis. In my judgment, these actions, a number of which were quite significant, were necessary but not sufficient. By September, uncertainty had led to a credit market freeze and it became clear that we needed to take a systemic approach on a significant scale, to get at the underlying cause of much of this turmoil.

We went to Congress and asked for broad new authorities to address the current troubles affecting our financial markets, including the root cause of the financial system freeze --- the illiquid mortgage assets weighing on bank balance sheets. And Congress met the very difficult challenge of providing these authorities by passing the EESA.

Specifically, the EESA empowers Treasury to use up to $700 billion to inject capital into financial institutions, to purchase or insure mortgage assets, and to purchase any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability. The new law also gives the Federal Reserve the authority to pay interest on reserves, and temporarily increases FDIC and NCUA deposit insurance from $100,000 up to $250,000.

Two days ago the members of the President's Working Group on Financial Markets, the PWG, made clear that we will coordinate the use of our existing and new authorities to restore market confidence by strengthening financial institutions, preventing systemic impact from bank failures, increasing liquidity to financial markets and keeping mortgage credit available and affordable.

Strengthening Financial Institutions

The Treasury Department is moving rapidly to implement the EESA to help strengthen financial institutions while also protecting taxpayer interests. As I have said before, the ultimate taxpayer protection will be a stable financial system that supports normal economic activity.

Towards that goal, the EESA adds broad, flexible authorities for Treasury to buy or insure troubled assets, provide guarantees, and inject capital. We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size. We will design programs that encourage healthy institutions to participate. Much attention has focused on the use of auctions to purchase troubled assets from financial institutions. We are moving as quickly as possible to organize and implement the most effective process possible. We expect it will be several weeks before our first purchase.

Consistent with EESA, I have appointed an interim Assistant Secretary to manage the program and begin its rapid implementation. I am currently working with the President to identify a leader to submit for confirmation, as called for in the legislation, to manage the program and help ensure its long-term success. I will also consult with congressional leaders and Senator McCain and Senator Obama during this process. It is our intent to have an appointee confirmed by the Senate as soon as possible, and I look forward to working with the Senate when they return in November, to ensure we maintain strong leadership and continuity for this unprecedented effort.

We have also identified and retained other very experienced interim leaders for the office, including an interim Chief Financial Officer. We have published guidelines on our procurement and conflict management processes. We have already sent out several essential Requests for Proposals that require 48 hour turnaround so we can contract with private sector experts --- some even as early as later this week --- who will bring complementary skills and expertise to the Treasury team.

We have several policy teams designing detailed programs to purchase mortgage-backed securities, whole loans, and equity-related instruments. In addition, we have begun work on compliance, executive compensation guidelines, foreclosure mitigation, and oversight. Our teams have already been working with Treasury's Inspector General and are scheduled to meet with the General Accounting Office. Yesterday, we held our first meeting of the program's Oversight Board and we are committed to transparency in all aspects of the program.

We will implement our new authorities with one simple goal – to restore capital flows to the consumers and businesses that form the core of our economy.

Prevent Systemic Impact from Bank Failures

One thing we must recognize – even with the new Treasury authorities, some financial institutions will fail. The EESA doesn't exist to save every financial institution for its own sake.
Therefore, a second prong in our strategy is designed to mitigate financial market disruption when a bank fails. In addition to insuring deposits up to the new, temporary level of $250,000, the FDIC has the ability to use its insurance fund and its substantial lines of credit with the Treasury to address systemic financial risk that may be posed by a bank failure.

It is the policy of our federal government to use all resources at its disposal to make our financial system stronger. In light of current conditions, the FDIC, with the full support of the Fed and the Treasury, will use its authority and resources, as appropriate to mitigate systemic risk, by, as appropriate, protecting depositors, protecting unsecured claims, guaranteeing liabilities and adopting other measures to support the banking system.

Increasing Liquidity to Financial Markets

As we address issues of capital and financial strength in our banks, we must also address the liquidity of our markets. The Federal Reserve has introduced innovative facilities and policies to enhance the liquidity that is vital to market stability, and has frequently done so in coordination with the European Central Bank. Today's announcement of a coordinated rate cut, including Europe, China and other large economies, is a welcome sign that central banks around the world are prepared to take the necessary steps to support the global economy during this difficult time. The EESA granted the Fed permanent authority to pay interest on depository institutions' required and excess reserve balances held at the Federal Reserve. This will allow the Fed to expand its balance sheet to support financial stability while maintaining its monetary policy priorities.

In recent weeks, the commercial paper market has suffered severe stress and illiquidity. Businesses ranging from financial institutions to industrial companies rely on the commercial paper market every day to fund their business activities. In particular, financial institutions sell commercial paper, and use the funds to lend to millions of consumers and businesses across the nation. In the wake of the uncertainty surrounding financial institution balance sheets, many investors are reluctant to buy commercial paper from financial institutions – in essence, unwilling to hold this unsecured debt for any significant length of time, even when the particular institution is healthy, because of the fear of not having access to liquid markets.

Yesterday, the Federal Reserve announced a new facility to provide a liquidity backstop to U.S. issuers of commercial paper. Through a special purpose vehicle the Fed will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. I expect this initiative to significantly improve the availability of funding for financial institutions and corporations that depend on the commercial paper market. Until those that depend on commercial paper can issue it again in significant maturities, funding pressures will continue to ripple through our economy, dramatically shrinking the availability of credit to support families and businesses.

Mortgage Credit Availability and Affordability

As I have long said, the housing correction is the root cause of the current financial market turmoil. We must continue to keep mortgage credit available and support the housing market, so that we can more quickly turn the corner on the housing correction.

To provide critical additional funding to our mortgage markets, FHFA has directed Fannie Mae and Freddie Mac to increase their purchases of agency mortgage-backed securities (MBS). Supporting the availability of mortgage finance is the mission of the GSEs. There is headroom of over $150 billion between the current GSE portfolios and their regulatory limit. FHFA will supervise the growth in these portfolios, under its expanded authorities to monitor GSE risk-management. We also expect Fannie and Freddie to increase direct support to the mortgage market through their ongoing securitization activities.

To further support the availability of mortgage credit, Treasury also has established a program to purchase agency MBS directly. The program began in September. This will complement the capital provided by the GSEs and help facilitate mortgage availability and affordability.
Stabilizing Fannie and Freddie to support mortgage availability has been constructive. As the rest of our markets experienced increased turmoil the interest rate on a 30-year fixed rate mortgage has come down from its peak of 6.6 percent earlier this year to as low as 5.9 percent this week – a decrease that helps American households reduce monthly mortgage payments and increases the potential for more homeowners to refinance mortgages at lower rates. As Treasury and the GSEs increase their purchases, mortgage affordability should improve for Americans. If we were not actively engaged at the GSEs, we would have expected that rate to increase and further slow the progress of the housing correction.

International Coordination

We see evidence every day that world economies and financial markets are more connected and interdependent than at any time in history. Economic momentum has slowed substantially across the industrialized countries as a consequence of the ongoing financial turmoil, the acute stresses facing our financial institutions, continuing housing markets adjustments in the United States and other countries, and volatile – albeit moderating – commodity prices. Emerging markets are also beginning to show signs of slowing. We see evidence that the freezing of credit markets is having a tangible impact on the everyday lives of citizens all around the world.

Addressing these challenges requires the dramatic steps we are taking here in the United States and it requires strong international partnerships. Governments have and must continue to take individual and collective actions to provide much-needed liquidity, strengthen financial institutions through the provision of capital and the disposition of troubled assets, prevent markets abuse, and protect the savings of our citizens.

We must also take care to ensure that our actions are closely coordinated and communicated so that the action of one country does not come at the expense of others or the stability of the system as a whole.

Over the past twelve months President Bush and I have been in regular contact with our international counterparts, and we have collaborated in a variety of ways. This weekend I will be meeting with my G-7 colleagues to discuss the steps that each of us are taking to confront this crisis and ways to further enhance our collective efforts. In addition, in consultation with Brazil, the G-20 President, I am calling for a special meeting of the G20 that will include senior finance officials, central bankers, and regulators from key emerging economies to discuss how we might coordinate to lessen the effects of global market turmoil and the economic slowdown on all of our countries.

Although the tasks are not easy, I am regularly heartened as I work with my international colleagues who are also committed to securing stability and growth in their domestic economies, and to promoting the orderly functioning of the international financial system.

The Road Ahead

While most Americans understand that economic cycles occur, we are experiencing some extraordinary and difficult challenges at home and abroad – challenges that make it clear Congress was correct to take swift and bold action, and that we have no time to waste implementing the new law. We also know that getting it right is as important as getting it done quickly. We can and will do both. The Presidents Working Group on Financial Markets and all financial regulators are working together to achieve our necessary goal of restoring stability and orderliness to our financial markets. Every effort will require careful analysis, deliberation and transparency, and some measure of patience from the American people as we create the most effective process possible.

We have already taken a number of extraordinary bold actions on the liquidity front that I am convinced have been exactly the right policy steps, including the emergency action to provide a guarantee to our money market funds, actions to stabilize the GSEs and drive down mortgage rates, and the Fed's new program to provide 90-day liquidity to commercial paper issuers.

It is the policy of the federal government to use all resources at its disposal to make our financial system stronger, to safeguard depositors and savers, to help ensure an adequate flow of credit, and to minimize systemic risk. The Congress has recently provided the Treasury with broad powers to acquire financial assets, to make capital available, and to strengthen the balance sheets of individual institutions. The Federal Reserve has also been given new authority to ensure that the system has sufficient liquidity. The FDIC has the authority and the access to resources necessary to protect the banking system. The Treasury, the Federal Reserve and the FDIC will use all their authorities to promote the process of repair and recovery and to contain risks to the financial system that might arise from problems at individual institutions.

But patience is also needed because the turmoil will not end quickly and significant challenges remain ahead. Neither passage of this new law nor the implementation of these initiatives will bring an immediate end to current difficulties. It will take time and bipartisan leadership, cooperation and collaboration, as well as well-conceived and executed policies to overcome the challenges our nation is facing. And we will overcome them. Despite our problems, the U.S. economy is the largest and wealthiest in the world. We will, as we have in the past, emerge stronger and better able to provide new opportunities for our workers and increased prosperity for our families. Thank you.

US Treasury Press Release

2008-10-08T19:37:00.000-05:00

October 8, 2008 HP-1188

Treasury Announces Conclusion of Enrollment Period for Temporary Money Market Guarantee Program and Technical Correction

Washington- The Treasury Department announced today a technical correction that would permit additional money market funds to participate in Treasury's Temporary Money Market Fund Guarantee Program. Funds that have a policy of maintaining a stable net asset value or share price that is greater than $1.00 and had such policy on September 19, 2008 are now eligible to participate, provided the fund meets all of the other original requirements.

The enrollment deadline for these funds that are now eligible as a result of this technical correction is 11:59 p.m. Washington, DC time on October 10, 2008.

This technical correction does not extend the original deadline for funds that maintain a stable share price of $1.00 and that qualified under the program originally announced on September 29, 2008. As previously announced, the enrollment period for Treasury's Temporary Money Market Fund Guarantee Program will close today at 11:59 p.m. Eligible funds should ensure that the required documentation is delivered to Treasury by the deadline.

US Treasury Press Release 10/08/2008 Statement on Treasury market conditions and debt management actions

2008-10-08T19:32:00.000-05:00

October 8, 2008 HP-1186

Acting Assistant Secretary for Financial Markets Karthik Ramanathan Statement on Treasury market conditions and debt management actions

Washington –Treasury closely monitors conditions in the Treasury securities market as well as financing markets. Treasury realizes that the depth and liquidity of the Treasury market benefits investors both domestically and globally.

To address upcoming borrowing needs and further enhance liquidity in the Treasury market, Treasury will reopen multiple securities which have created severe dislocations in the market causing acute, protracted shortages.

In addition, Treasury along with the Interagency Market Surveillance Work Group will be monitoring situations in which aged settlement fails are not cleared and will encourage actions by market participants, including the use of netting and bilateral processes, cash settlement, negative rate repo trading, margining of aged settlement fails, and identifying pair-offs.

Treasury along with the other members of the Interagency Market Surveillance Work Group, including the Securities and Exchange Commission, the Commodities and Futures Exchange Commission, the Board of Governors of the Federal Reserve, and the Federal Reserve Bank of New York will initiate meetings with the private sector – notably with members of the Securities Industry and Financial Markets Association (SIFMA) and the Treasury Market Practices Group (TMPG) - to clearly and definitively identify remedies to prevent a reoccurrence of these situations in the future.

In addition, private sector participants should take additional steps from a monitoring and supervisory perspective to ensure that settlement fails do not reach levels that impact financing markets.

FRB Press Release

2008-10-08T19:29:00.000-05:00

Press Release

Release Date: October 8, 2008
For immediate release

The Federal Reserve Board on Wednesday approved actions by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco, decreasing the discount rate at the Banks from 2-1/4 percent to 1-3/4 percent, effective immediately.

The Board also approved an action by the Board of Directors of the Federal Reserve Bank of St. Louis, decreasing the discount rate at the Bank from 2-1/4 percent to 1-3/4 percent, effective October 9, 2008.
2008 Monetary Policy Releases

FRB Press Release 10/08/2008 Joint Statement by Central Banks - Coordinated Rate Cut

2008-10-08T19:23:00.002-05:00

Press Release

Release Date: October 8, 2008
For release at 7:00 a.m. EDT

Joint Statement by Central Banks

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

Federal Reserve ActionsThe Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.
Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent. In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston.

Information on Actions Taken by Other Central BanksInformation on the actions that will be taken by other central banks is available at the following websites:

Bank of Canada

Bank of England

European Central Bank

Sveriges Riksbank (Bank of Sweden)

Swiss National Bank (51 KB PDF)

Statements by Other Central Banks

Bank of Japan (65 KB PDF)

Chairman Ben S. Bernanke At the National Association for Business Economics 50th Annual Meeting, Washington, D.C. October 7, 2008

2008-10-08T05:20:00.003-05:00

http://www.federalreserve.gov/newsevents/speech/bernanke20081007a.htm

Chairman Ben S. Bernanke
At the National Association for Business Economics 50th Annual Meeting, Washington, D.C.
October 7, 2008
Current Economic and Financial Conditions
Good afternoon. I am pleased to have once again the opportunity to address the National Association for Business Economics. My remarks today will focus on recent developments in the financial sector and the economy and on the challenges we face.

As you know, financial systems in the United States and in much of the rest of the world are under extraordinary stress, particularly the credit and money markets. The losses suffered by many banks and nonbank financial firms have both constrained their ability to lend and reduced the willingness of other market participants to deal with them. Great uncertainty about the values of financial assets, particularly more complex and opaque assets, has made investors extremely reluctant to bear credit risk, resulting in further declines in asset prices and a drying up of liquidity in a number of funding markets. Even secured funding has become expensive and difficult to obtain, as lenders worry about their ability to sell collateral in illiquid markets in the event of default. In addition, many securitization markets, such as the secondary market for private-label mortgage-backed securities, remain closed or impaired.

Considerable experience in both industrialized and emerging economies has shown that severe financial instability, together with the associated declines in asset prices and disruptions in credit markets, can take a heavy toll on the broader economy if left unchecked. For this reason, the Federal Reserve, the Treasury, and other agencies are committed to restoring market stability and are working assiduously to ensure that the financial system is able to perform its critical economic functions. Recent actions by the Congress have given the Treasury new tools and resources to address the stressed conditions of our financial markets and institutions. The Federal Reserve has also been granted a new authority, the ability to pay interest on bank reserves, which will allow us to expand our lending as needed to support the system while better managing the federal funds rate. These tools will provide important additional support for the government's efforts to strengthen financial markets and the economy.
Let me briefly review recent financial developments. On the heels of nearly a year of stress in credit markets, investors' and creditors' concerns about funding and credit risks at financial firms intensified over the summer as mortgage-related assets deteriorated further, economic growth slowed, and uncertainty about the economic outlook increased. As investors and creditors lost confidence in the ability of certain firms to meet their obligations, their access to capital markets as well as to short-term funding markets became increasingly impaired and their stock prices fell sharply. Among the companies that experienced this dynamic most forcefully were the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac; the investment bank Lehman Brothers; and the insurance company American International Group (AIG).

The Federal Reserve believes that, whenever possible, such difficulties should be addressed through private-sector arrangements--for example, by raising new equity capital, as many firms have done, by negotiations leading to a merger or acquisition, or by an orderly wind-down. Government assistance should be provided with the greatest reluctance and only when the stability of the financial system, and thus the health of the broader economy, is at risk. In those cases when financial stability is threatened, however, intervention to protect the public interest may well be justified.

Fannie Mae and Freddie Mac present cases in point. The Federal Reserve had long warned about the systemic risks posed by these companies' large portfolios of mortgages and mortgage-backed securities, as well as the problems arising from the conflict between shareholders' objectives and the government's goals for the two firms. Given the scale of losses in their portfolios, raising enough new capital from private investors was infeasible. The firms' size and their government-sponsored status precluded a merger with, or acquisition by, another company. To avoid unacceptably large dislocations in the mortgage markets, the financial sector, and the economy as a whole, the Federal Housing Finance Agency (FHFA) put Fannie and Freddie into conservatorship and the Treasury, drawing on authorities recently granted by the Congress, made financial support available. The Federal Reserve, acting in a consultative role, worked closely with FHFA in evaluating the GSE portfolios and capital positions. Based on the joint findings of the agencies, we supported FHFA's decision to place the companies into conservatorship as necessary and appropriate, given their conditions and systemic importance. The government's actions appear to have stabilized the GSEs, although like virtually all other firms they are experiencing effects of the current crisis. Nonetheless, we already have seen benefits of their stabilization in the form of lower mortgage rates, which should help the housing market.

The difficulties at Lehman and AIG raised somewhat different issues. Like the GSEs, both companies were large and complex and deeply embedded in our financial system. In both cases, as the firms approached default, the Treasury and the Federal Reserve sought private-sector solutions, but none was forthcoming. Attempts to organize a consortium of private firms to purchase or recapitalize Lehman were unsuccessful. With respect to public-sector solutions, we determined that either facilitating a sale of Lehman or maintaining the company as a free-standing entity would have required a very sizable injection of public funds--much larger than in the case of Bear Stearns--and would have involved the assumption by taxpayers of billions of dollars of expected losses. Even if assuming these costs could be justified on public policy grounds, neither the Treasury nor the Federal Reserve had the authority to commit public money in that way; in particular, the Federal Reserve's loans must be sufficiently secured to provide reasonable assurance that the loan will be fully repaid. Such collateral was not available in this case. Recognizing that Lehman's potential failure posed risks to market functioning, the Federal Reserve sought to cushion the effects by implementing a number of measures, including substantially broadening the collateral accepted by the Fed's Primary Dealer Credit Facility (PDCF) and Term Securities Lending Facility (TSLF) to ensure that the remaining primary dealers would have uninterrupted access to funding.

In the case of AIG, the Federal Reserve and the Treasury judged that a disorderly failure of AIG would have severely threatened global financial stability and the performance of the U.S. economy. That judgment reflected our assessment of prevailing market conditions, AIG's central role in a number of markets other firms use to manage risks, and the size and composition of AIG's balance sheet. To avoid the default of AIG, the Federal Reserve was able to provide emergency credit that was judged to be adequately secured by the assets of the company. To protect U.S. taxpayers and to mitigate the possibility that lending to AIG would encourage inappropriate risk-taking by financial firms in the future, the Federal Reserve further ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm's owners, managers, and creditors.

AIG's difficulties and Lehman's failure, along with growing concerns about the U.S. housing sector and economy, contributed to extraordinarily turbulent conditions in global financial markets in recent weeks. Equity prices have fallen sharply, the cost of short-term credit, where such credit has been available, has spiked, and liquidity has dried up in many markets. One money market fund's losses forced it to "break the buck"--that is, the value of its assets fell below par--an event that triggered extensive withdrawals from a number of money market funds. Those funds responded to the surge in redemptions by attempting to reduce their holdings of commercial paper and large certificates of deposit issued by banks. Some firms that could not roll over maturing commercial paper drew on back-up lines of credit with banks just as the banks were finding it even more difficult to raise cash in the money markets. At the same time, a marked increase in the demand for safe assets--a flight to quality and liquidity--resulted in a further drop in the value of mortgage-related assets and sent the yield on Treasury bills down to a few hundredths of a percent.

Developments during the summer pressured not only nonbank financial firms, but also a number of depository institutions, including Washington Mutual (WaMu) and Wachovia. In recent weeks, these two institutions suffered deposit outflows and reduced access to wholesale funding. The Office of Thrift Supervision, WaMu's regulator, closed that company and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver; the FDIC immediately sold the institution to JPMorgan Chase. In the case of Wachovia, to avoid serious adverse effects on economic conditions and financial stability, the Secretary of the Treasury, in consultation with the President and on the recommendation of the Federal Reserve and FDIC, authorized the FDIC to use its funds to facilitate the sale of that company's banking operations without loss to creditors. Both Citicorp and Wells Fargo have offered to buy the company and negotiations are continuing. Most importantly, however, in either case all depositors and creditors of Wachovia are fully protected, and depositors and other customers will experience no interruption in banking services.

By potentially restricting future flows of credit to households and businesses, the developments in financial markets pose a significant threat to economic growth. The Treasury and the Fed have taken a range of actions to address the very tight funding conditions that now prevail. For example, the Treasury implemented a temporary guarantee program for balances held in money market mutual funds, helping to stem the outflows from these funds and thus reducing their need to sell assets into already distressed markets. The Federal Reserve has taken a number of steps, including putting in place a temporary lending facility that provides financing for banks to purchase high-quality asset-backed commercial paper from money market funds. The Fed has also significantly increased the quantity of funds it auctions to banks and has accommodated heightened demands for funding from banks and primary dealers; as of last Wednesday, our various lending facilities, including our securities lending program, were providing more than $800 billion of liquidity to the financial system. To address dollar funding pressures worldwide, we have significantly expanded reciprocal currency arrangements (so-called swap agreements) with foreign central banks. These agreements enable the foreign central banks to provide dollar funding to financial institutions in their jurisdictions, which helps to improve the functioning of dollar funding markets globally. In addition, this morning the Federal Reserve announced a new facility that will help provide liquidity to term funding markets by purchasing three-month commercial paper and asset-backed commercial paper directly from eligible issuers.

The expansion of Federal Reserve lending is helping financial firms cope with reduced access to their usual sources of funding. Recently, however, our liquidity provision had begun to run ahead of our ability to absorb excess reserves held by the banking system, leading the effective funds rate, on many days, to fall below the target set by the Federal Open Market Committee. This problem has largely been addressed by a provision of the legislation the Congress passed last week, which gives the Federal Reserve the authority to pay interest on balances that depository institutions hold in their accounts at the Federal Reserve Banks. The Federal Reserve announced yesterday that it will pay interest on required reserve balances at 10 basis points below the target federal funds rate, and pay interest on excess reserves, initially at 75 basis points below the target. Paying interest on reserves should allow us to better control the federal funds rate, as banks are unlikely to lend overnight balances at a rate lower than they can receive from the Fed; thus, the payment of interest on reserves should set a floor for the funds rate over the day. With this step, our lending facilities may be more easily expanded as necessary. So long as financial conditions warrant, we will continue to look for ways to reduce funding pressures in key markets.

Economic activity had shown signs of decelerating even before the recent upsurge in financial-market tensions. As has been the case for some time, the housing market continues to be a primary source of weakness in the real economy as well as in the financial markets. However, the slowdown in economic activity has spread outside the housing sector. Private payrolls have continued to contract, and the declines in employment, together with earlier increases in food and energy prices, have eroded the purchasing power of households. This sluggishness of real incomes, together with tighter credit and declining household wealth, is now showing through more clearly to consumer spending. Indeed, since May, real consumer outlays have contracted significantly. Meanwhile, in the business sector, worsening sales prospects and a heightened sense of uncertainty have begun to weigh more heavily on investment spending as well.
The intensification of financial turmoil and the further impairment of the functioning of credit markets seem likely to increase the restraint on economic activity in the period ahead. Even households with good credit histories are now facing difficulties obtaining mortgage loans or home equity lines of credit. Banks are also reducing credit card limits, and denial rates on automobile loan applications reportedly are rising. Businesses, too, are confronting diminished access to credit. For example, disruptions in the commercial paper market and tightening of bank lending standards have made it more difficult for businesses to obtain the working capital they need to meet everyday operating expenses such as payrolls and inventories.
All told, economic activity is likely to be subdued during the remainder of this year and into next year. The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth. To support growth and reduce the downside risks, continued efforts to stabilize the financial markets are essential. The Federal Reserve will continue to use the tools at its disposal to improve market functioning and liquidity.

Inflation has been elevated, reflecting the steep increases in the prices of oil, other commodities, and imports that occurred earlier this year, as well as some pass-through by firms to consumers of their higher costs of production. However, more recently, the prices of oil and other commodities, while remaining quite volatile, have fallen from their peaks, and prices of imports show signs of decelerating. In addition, expected inflation, as measured by consumer surveys and inflation-indexed Treasury securities, has held steady or eased. These recent developments, together with economic activity that is likely to fall short of potential for a time, should lead to rates of inflation more consistent with price stability. Still, the inflation outlook remains highly uncertain, in part because of the extraordinary volatility of commodity prices. We will need to continue to monitor price developments closely.

Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate.

The intensification of the financial crisis in recent weeks made clear that a more powerful and comprehensive approach involving the fiscal authorities was needed to solve these problems. On that basis, the Secretary of the Treasury, with the support of the Federal Reserve, went to the Congress to ask for a substantial program aimed at stabilizing our financial markets. As you know, last week the Congress passed and the President signed the Emergency Economic Stabilization Act. This legislation provides important new tools for addressing the distress in financial markets and thus mitigating the risks to the economy. The act adds broad, flexible authorities to buy troubled assets, to provide guarantees, and to directly strengthen the balance sheets of individual institutions. Notably, the legislation establishes a new Troubled Asset Relief Program, or TARP, under which the Treasury is authorized to purchase as much as $700billion of troubled mortgages, mortgage-related securities, and other financial instruments from financial firms that are regulated under U.S. law and have significant operations in the United States. The act also raises the limit on deposit insurance at banks and credit unions from $100,000 to $250,000 per account, a step that should reinforce depositors' confidence in the security of their funds and thus help to stabilize depository institutions. And, as I mentioned, the act provides the Federal Reserve the authority to pay interest on reserves, which will allow us to better manage the federal funds rate as we provide liquidity to the markets. We will begin exercising that authority this week.

The TARP's purchases of illiquid assets from banks and other financial institutions will create liquidity and promote price discovery in the markets for these assets. This in turn will reduce investor uncertainty about the current value and prospects of financial institutions, enabling banks and other institutions to raise capital and increasing the willingness of counterparties to engage. More generally, increased liquidity and transparency in pricing will help to restore confidence in our financial markets and promote more normal functioning. With time, strengthening our financial institutions and markets will allow credit to begin flowing again, supporting economic growth.

The interests of taxpayers are carefully protected under this program. First, the Congress has required extensive controls and oversight to ensure that the allotted funds are used appropriately and effectively. Second, the $700 billion allocated by the legislation is not an authorization to spend but rather an authorization to purchase financial assets. The Treasury will be a patient investor and will likely hold these assets for an appreciable period of time. Eventually, however, some assets will mature, and the Treasury will choose to sell others to private investors. Financially, in the long run, the taxpayer may come out either ahead or behind in this process; in light of the many uncertainties, no assurances can be given. But the ultimate cost of the program to the taxpayer will certainly be far less than $700 billion. Third, and most important, restoring the normal flow of credit is essential for economic recovery. If the TARP promotes financial stability, leading ultimately to stronger economic growth and job creation, it will have proved a very good investment indeed, to everyone's benefit.

To be sure, there are many challenges associated with the design and implementation of the TARP, including determining which assets will be purchased and how prices will be determined. The Treasury, with the advice and cooperation of the Federal Reserve, is working to address these challenges as quickly as possible. It is unlikely that a single method will be used for acquiring assets; inevitably, some experimentation will be necessary to determine which approaches are most effective. Importantly, the legislation that created the TARP does provide sufficient flexibility to allow for different approaches to solving the problem--subject, of course, to the close oversight that will ensure that the program's funds are used in ways that are in the interest of taxpayers.

These are momentous steps, but they are being taken to address a problem of historic dimensions. In one respect, however, we are fortunate. We have learned from historical experience with severe financial crises that if government intervention comes only at a point at which many or most financial institutions are insolvent or nearly so, the costs of restoring the system are greatly increased. This is not the situation we face today. The Congress and the Administration chose to act at a moment of great stress, but one at which the great majority of financial institutions have sufficient capital and liquidity to return to their critical function of providing new credit for our economy. The steps being taken now to restore confidence in our institutions and markets will go far to resolving the current dislocations in the markets. I believe that the bold actions taken by the Congress, the Treasury, the Federal Reserve, and other agencies, together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery.

FOMC Minutes September 16, 2008

2008-10-08T05:13:00.003-05:00

Press Release

Release Date: October 7, 2008
For release at 2:00 p.m. EDT
The Federal Reserve Board and the Federal Open Market Committee on Tuesday released the attached minutes of the Committee meeting held on September 16, 2008.

The minutes for each regularly scheduled meeting of the Committee ordinarily are made available three weeks after the day of the policy decision and subsequently are published in the Board's Annual Report. The description of economic and financial conditions contained in these minutes is based solely on the information that was available to the Committee at the time of the meeting.

The FOMC minutes can be viewed on the Board's website at http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.
Minutes of Federal Open Market CommitteeSeptember 16, 2008: 237 KB PDF HTML

Federal Reserve Monetary Policy Press Releases October 7, 2008

2008-10-07T12:28:00.001-05:00

October 7, 2008
Federal Reserve announces results of auction of $150 billion in 85-day credit held on October 6, 2008
October 7, 2008
Board announces creation of the Commercial Paper Funding Facility (CPFF) to help provide liquidity to term funding markets
October 7, 2008
Federal Reserve and other central banks announce schedules for term and forward auctions of U.S. dollar liquidity for fourth quarter

Federal Reserve Monetary Policy Press Releases October 6, 2008

2008-10-07T03:43:00.002-05:00

October 6, 2008
Federal Reserve will offer $150 billion in 85-day credit through its Term Auction Facility today
October 6, 2008
Board announces that it will begin to pay interest on depository institutions' required and excess reserve balances
September 29, 2008
Federal Reserve Ready to Provide Liquidity in Wachovia Transition

US Treasury Press Release

2008-10-07T03:34:00.003-05:00

October 6, 2008 HP-1184
Kashkari Appointed Interim Assistant Secretary for Financial Stability

Washington– Secretary Henry M. Paulson, Jr. today designated Neel Kashkari as the Interim Assistant Secretary of the Treasury for Financial Stability pursuant to the Emergency Economic Stabilization Act of 2008. In this capacity, Kashkari will oversee the Office of Financial Stability including the Troubled Asset Relief Program.

Kashkari is currently Assistant Secretary of the Treasury for International Economics and Development. In this role, he is responsible for developing and executing policies for the Department to foster a more conducive investment climate for the U.S., as well as to support global economic growth. He will continue to hold this position, but while acting in his new role, his International Affairs responsibilities will be delegated to Assistant Secretary for International Affairs Clay Lowery.

Kashkari joined the Treasury Department in July 2006 as Senior Advisor to Secretary Paulson. In that role, he was responsible for developing the President's Twenty in Ten energy security plan, enhancing Treasury's engagement with India, particularly in the area of infrastructure development, and developing and executing the Department's response to the housing crisis, including the formation of the HOPE NOW Alliance, the development of the subprime fast-track loan modification plan, and Treasury's initiative to kick-start a covered bond market in the United States.

Prior to joining the Treasury Department, Kashkari was a Vice President at Goldman, Sachs & Co. in San Francisco, where he led Goldman's IT Security Investment Banking practice, advising public and private companies on mergers and acquisitions and financial transactions. Prior to his career in finance, Kashkari was a R&D Principal Investigator at TRW in Redondo Beach, Californiawhere he developed technology for NASA space science missions such as the James Webb Space Telescope.

Originally from Stow, Ohio, Kashkari graduated from the University of Illinois at Urbana-Champaign with a Bachelor's and Master's degree in Engineering. He also received an M.B.A. in Finance from the Wharton School. He and his wife reside in Maryland.

US Treasury Press Release

2008-10-07T03:32:00.002-05:00

October 6, 2008 HP-1182
Acting Under Secretary for Domestic Finance Anthony RyanRemarks at the Investment Company Institute’s Equity, Fixed Income and Derivatives Market Conference in New York

New York - Good afternoon. I appreciate the opportunity to be with you today. At the Treasury Department we appreciate the efforts that the Investment Company Institute has taken recently and encourage this important work to continue.

Our economy has been facing a prolonged period of uncertainty and our financial markets are experiencing unprecedented and extraordinary challenges. In the past few months, the federal government has taken many steps to protect our economy and our citizens from the financial market turmoil. However, as participants in and beneficiaries of open, robust global capital markets -- you too have an important role to play.

Let me begin by discussing the current state of play in Washington. The last few months have been a whirlwind of activity and the Treasury, along with the Fed and other government regulators, have been working to resolve challenges.

When I joined Secretary Paulson for his transition to the Treasury Department in July of 2006, we expected to face challenges, but few predicted the magnitude, breadth and severity of what we have been confronting over the past year.

While these are challenging times, I am confident we will emerge from this current period with stronger capital markets, stronger financial institutions and an even more robust economy.
That being said, make no mistake, there is a great deal of work ahead of us. It will take our collective best efforts and a good deal more time.

Last week, Congress passed and the President signed into law the Emergency Economic Stabilization Act of 2008, paving the way for the Treasury to begin standing up a new program.
While we have been taking proactive steps over the last few weeks to prepare and begin to design a program, much of the hard work is yet to come. With its enactment into law, Treasury has moved into implementation mode.

When we emerge from the turmoil, we should expect the financial landscape to be quite different. Certain financial instruments, structures and institutions will not survive. The practices defining the new environment will reflect changed conditions brought about by many of the lessons learned. Market participants and regulators will have re-defined the practices and rules by which we operate.

The challenge for all of us is executing this transition – from the excesses of past --- through the turmoil of the present ---- to the model of the future.

Today, I would like to discuss two key topics. First, I would like to discuss a policy framework for how we can work together to execute this transition, and second, a practical effort to expedite the process while mitigating the negative economic consequences.

Let me begin with the policy framework. Science often provides us with models that can serve as useful analogies. To help illustrate my point, I'll borrow from the work of Alfred Wegener, the geologist who first proposed the scientific theory of plate tectonics. The ground underneath our feet is shifting. Like an earthquake, the pressure had built up for years, there were warning signs and tremors, and now the rift has been exposed.

The balanced tension within our financial market system was weakened by deficiencies on both sides, and the resulting chasm has emerged. How will this be filled? Who will fill it? When will stability be restored? These are important questions. Just as in nature, there is no predetermined solution.

As it relates to the capital markets from a public policy perspective, we must restore equilibrium. We must strike the optimal balance between private-sector market discipline and regulatory oversight. Aligning the interests of the private sector and the public sector is critical to the long term success of our economy. When market discipline and regulatory oversight is balanced, market participants better manage risks, financial institutions operate in a safer and sounder manner and our economy is served by more competitive, innovative and efficient capital markets.

Equilibrium in this context translates to market stability. Market discipline failed us. It is not the time to point fingers at any one group of market participants. There's enough blame to go around. We need to focus on moving forward and each party must contribute to the effort.

Regulatory efforts were also compromised. Rules, guidance and oversight did not mitigate failures of market discipline. So here too, regulators need to be part of the solution. Both market practices and regulatory practices must be reviewed with a critical eye towards improvement and materially strengthened.

The U.S. Treasury plays an important role in the formation of financial policy and regulatory structure. We need to ensure this leadership is maintained and enhanced. At Treasury, we are addressing both tactical and strategic challenges. Moreover, we have been confronting these challenges in collaboration with the regulatory community – both at home and abroad, as well as the private sector. The public and private sector must share the responsibility to address the challenges, define and design the best collective prudent practices, and most importantly, implement these new policies. In doing so, we will enhance investor confidence, market stability and improve liquidity.

One of my roles at the Treasury is to coordinate the efforts of the President's Working Group on Financial Markets (PWG). In March, the PWG issued its "Policy Statement on Financial Market Developments," which contained an analysis of underlying factors that contributed to the market turmoil. We identified weaknesses in global markets, financial institutions, and regulatory policies, and made a set of comprehensive recommendations to address those weaknesses. Since that time, the PWG has worked to ensure the implementation of its recommendations.

Later this week, the PWG will release an update on the progress that has been made since we originally issued our statement and recommendations. The PWG recommendations focused on six areas: mortgage origination, improving investors' contributions to market discipline, reforming the ratings process and practices regarding structured credit, strengthening risk management practices, enhancing prudential regulatory policies, and enhancing the infrastructure in the OTC derivative market. The PWG recommendations cover the practices of a broad array of market participants, as well as supervisors, addressing all links in the securitization chain: mortgage brokers, mortgage originators, mortgage underwriters, securitizers, issuers, credit rating agencies, investors, and regulators.

While progress has been made, more must follow. Let me highlight four areas:

1. Transparency and disclosure. Many of the weaknesses in the market and the resulting challenges in addressing them were exacerbated by complexity and opacity. The best antidote to opacity is transparency and better and more useful disclosure. Issuers and underwriters must provide such disclosure, and investors and asset managers must demand, use, and independently evaluate information more effectively.

2. Risk awareness. Regulators and all market participants must be more aware of, and better able to respond to, risks. Credit rating agency practices must revaluate their methodologies and practices, and the users of their services must rely less on, and appreciate more the limitations of ratings products.

3. Risk management. We need improved risk management practices by investors and financial institutions, and continued review and guidance from regulators, including the areas of exposure aggregation, concentration risk, and stress testing. Risk management is everyone's business.

4. Capital and liquidity management. Well-capitalized and liquid institutions are better prepared to deal with challenges and enhance market confidence. We need improved practices in capital and liquidity management to ensure that cushions are sufficiently robust to absorb extreme system-wide shocks.

Recent market events have also highlighted that our existing financial regulatory structure is sub optimal and that comprehensive regulatory reform is required to restore confidence in financial markets and institutions. Our 21st century global capital markets and financial services industry remains regulated largely by outdated 20th century laws and structures.

Earlier this year, the Treasury published a blueprint that would modernize our financial regulatory structure. Our current regulatory framework is not optimally positioned to address the dynamism of the modern financial system. Given the diversity of market participants, the constant innovation undertaken by market practitioners, the growing complexity of financial instruments, and the convergence of financial intermediaries and trading platforms – all within a global context – establishing a more robust, nimble regulatory structure is critical.

One of the recommendations in the Financial Regulatory Blueprint was the creation of a market stability regulator with broad powers focusing on the overall financial system. The market stability regulator would have the ability to evaluate the capital, liquidity, and margin practices across the entire financial system and their potential impact on overall financial stability.

To do this effectively, the market stability regulator would collect information from commercial banks, broker dealers, insurance companies, hedge funds, and commodity pool operators. Rather than focus on the health of a particular organization, the market stability regulator would focus on whether a firm's or industry's practices threaten overall financial stability. It would have broad powers and the necessary corrective authorities to deal with deficiencies that pose threats to our financial stability.

While the Treasury Department commenced our work on the Regulatory Blueprint before the financial market turmoil began, the current turmoil has proven the necessity for this kind of regulatory oversight and monitoring. Credit and liquidity conditions, as well as capital requirements are at the heart of the challenges our financial system still faces.

We all realize that as a result of the many excesses, significant deleveraging, and the corresponding actions taken by market participants, our credit and cash markets have effectively been locked up. Just as anxious neighbors lock their doors, anxious market participants have locked down our markets. An unwillingness to extend credit to counterparties and extreme risk aversion has closed the financial community --- compromising its ability to function and choking economic growth. While a key can unlock a door, there is no single key to unlock our financial markets. The lock is too complex. A host of complementary actions will be required to open credit markets and restore the flow of capital.

The second topic I want to discuss is our effort to expedite the transition while mitigating the negative economic consequences.

As we've worked through this period of market turmoil, we have acted on a case-by-case basis --- addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it could sell some of its assets in an orderly manner. We have also taken a number of proactive, tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the U.S. money market mutual fund industry.

Despite these steps, more efforts are needed. We saw market dislocations reach a new level last month, and we must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil.

And that root cause is the illiquid mortgage-related assets that are choking off the flow of credit. This flow of credit is vitally important to our economy. We must address this underlying problem, and restore confidence in our financial markets and financial institutions so they can perform their mission of supporting future prosperity and growth for all Americans.

We proposed and recently received legislation to establish a troubled asset relief program, one that is sufficiently large to have an impact, and one that includes features to protect the taxpayer to the maximum extent possible.

The current situation is already posing great risk to the taxpayer. When the financial system doesn't work as it should, the ability of consumers and businesses to finance spending, investment and job creation – as well as the personal savings of Americans - are threatened.
The ultimate protection to the taxpayer will be enhanced market stability. A continuing series of financial institution failures and frozen credit markets is certainly not in our nation's interest.

Congress and the Administration have now come together quickly and effectively to enact this new legislation. We now need to complete our preparations, and begin to implement the multi-dimensional program.

There is no one-size-fits-all solution to alleviating the stress in our financial system. Each situation will be different and we must implement this new program with a strategy that allows us to adapt to changing circumstances and conditions, and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets.

In the coming days we will hire the expertise to help us optimally design and implement our new authorities. Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy.

Summary
Never more than today has it been more evident that what happens in our financial markets affects not only Americans in all 50 states, but people and markets around the world.

Only through stable markets and sound financial institutions can capital be available for small and large companies to borrow and grow, for the entrepreneur to start a new business, for families to buy homes and cars and pay for their children's educations. When people and companies save, borrow, and invest, they place their trust in our markets and our financial institutions.

Our country must continue our strong record of confronting challenges, developing solutions, and being innovative and competitive. By doing so, we will work through the current challenges and facilitate sustainable economic growth. We must redouble our efforts to ensure that our financial markets are the strongest in the world and inspire confidence by market participants.

Progress will not come in a straight line, and we need to remain focused as we work through these challenges. Policymakers and regulators must remain vigilant, use all available tools and as necessary seek new ones, not merely to address immediate concerns but also to close the rift that was created by the breakdown of robust market and regulatory practices. We must realize that our nation's economy is dependent on healthy, well functioning financial markets where credit flows from providers to users of capital in an orderly manner.

I believe that the United States is on the right path to resolving market disruptions and building a stronger financial system. Increasingly, our capital markets will reflect the underlying economy, and here we are fortunate that our long-term fundamentals are strong. Thank you.

US Treasury Press release

2008-10-07T03:00:00.001-05:00

October 6, 2008hp-1179
Procurement Authorities and Procedures
Washington, DC-- In implementing the Emergency Economic Stabilization Act of 2008, Treasury has available two mechanisms for engaging private-sector firms. These mechanisms are financial agent authority, and procurement under the Federal Acquisition Regulation. Treasury will make a determination on which of these authorities best applies on a case by case basis.

Financial Agent Authority
Treasury has long had the statutory authority to retain financial agents to provide services on its behalf. The Act broadens that authority to encompass all reasonable duties related to the Act that may be required and permits the retention of a broader class of financial institutions as agents. In general, financial agent authority will be used when a firm is needed to conduct transactions on Treasury's behalf, for example where Treasury needs the services of an asset manager.

Selection of financial agents will occur through processes which will be posted on the Treasury website. Although the process may be tailored to a specific situation, typically Treasury prepares a notice to interested and qualified financial institutions, evaluates the response to that notice, and negotiates one or more financial agency arrangements.

Procurement Contracts under the Federal Acquisition Regulation
Treasury also may obtain supplies or services using a procurement contract under the Federal Acquisition Regulation (FAR). In general, the FAR requires the solicitation of offers from all interested sources. However, competition for procurements may be limited for various reasons, including in circumstances of unusual or compelling urgency. Certain procurements may be set aside for certain small businesses. Due to the paramount need for expeditious implementation of the Secretary's authorities under the Act, Treasury anticipates that a number of contracts will be awarded through other than full and open competition, using the previously established FAR provisions applicable under conditions of unusual and compelling urgency. Information on contracts awarded by Treasury will be posted at http://www.blogger.com/cgi-bin/redirect.cgi?http://www.fedbizopps.gov/ (Federal Business Opportunities website) and/or at https://www.fpds.gov/ (Federal Procurement Data System).

Additionally, the Act grants to the Secretary of the Treasury the authority, under certain specified conditions, to waive specific provisions of the FAR.

Where applicable, procurement opportunities will be posted athttp://www.blogger.com/cgi-bin/redirect.cgi?http://www.fedbizopps.gov. Businesses may submit capability statements to the Department's Office of the Procurement Executive at ootpe@do.treas.gov.

For information on how small businesses can participate in Treasury contracting, contact Treasury's Office of Small and Disadvantaged Business Utilization atTreasuryOSDBU@do.treas.gov.

US Treasury Press Release

2008-10-07T02:55:00.003-05:00

October 6, 2008 HP-1177
Statement by the President’s Working Group on Financial Markets

Washington, DC-- The President's Working Group on Financial Markets issued the following statement today:

Conditions in U.S. and global financial markets remain extremely strained. The President's Working Group on Financial Markets (PWG) is working with market participants and regulators globally to address the current challenges and restore confidence and stability to financial markets around the world. With the passage of the Emergency Economic Stabilization Act of 2008 (EESA), Congress has granted important new authorities to the Treasury, Federal Reserve, and the FDIC. These new authorities will be employed in conjunction with existing authorities to restore market confidence by strengthening the balance sheets of financial intermediaries and improving overall market functioning. The diversity of institutions and markets under stress, and the magnitude and complexity of the adjustment underway, requires that the tools available to policymakers, regulators and supervisors be used in forceful and coordinated ways across regulatory and supervisory agencies in the United States and throughout the world. This will involve moving with substantial force on a number of fronts. These broad initiatives are outlined below.

Strengthening Financial Institutions
The Treasury Department will move rapidly to implement the new authorities in EESA to help strengthen financial institutions that are struggling with troubled assets and/or need to raise capital. It will be done in a transparent and methodical fashion. In the coming days, Treasury will work with the Federal Reserve and other financial regulators to develop strategies that deploy these tools to maximize their effectiveness in strengthening the financial system while protecting the taxpayers' interests.

The new legislation adds broad, flexible authorities to allow Treasury to buy troubled assets and provide guarantees, and address capital raising. The new legislation also enables Treasury to directly strengthen the balance sheet of individual institutions. These authorities allow Treasury to act to remove some of the uncertainty regarding financial strength, and provide financial institutions with greater operating flexibility and enhance their ability to raise additional capital in the private marketplace.

FDIC Stand-alone Assistance
The FDIC has broad powers to protect depositors and mitigate instability in our banking system. In addition to the coverage that it provides to insured deposits, the FDIC has the ability to use its insurance fund and its substantial lines of credit with the Treasury to address the risk to the financial system posed by the possible failure of a bank.

As the regulatory community confronted the risks posed by a potential failure of Wachovia Corporation, the Board of the FDIC, the Board of Governors of the Federal Reserve System, and the Secretary of the Treasury in consultation with the President determined that they should invoke the systemic risk exception to the traditional bank resolution process.

We will work together in the future where similar approaches are necessary for the stability of the financial system.

When systemic risk determinations are necessary and appropriate in the future, the FDIC will use its authority and its resources, on an open or closed-bank basis, to protect depositors, guarantee liabilities, facilitate orderly wind downs, mergers, or adopt other stabilizing measures.

Increasing Liquidity to Financial Markets
With regard to liquidity, the Federal Reserve has introduced a series of innovative facilities and policies to enhance liquidity in our markets. These include the Term Auction Facility, Primary Dealer Credit Facility, Term Securities Lending Facility, and Currency swaps.

The Federal Reserve will continue to take a leadership role with respect to liquidity in our markets. It is committed to using all of the tools at its disposal to provide the increased liquidity that is now required for the effective functioning of financial markets. In this regard, the authority to pay interest on reserves that was provided by EESA is essential, because it allows the Federal Reserve to expand its balance sheet as necessary to support financial stability while conducting a monetary policy that promotes the Federal Reserve's macroeconomic objectives of maximum employment and stable prices.

The Federal Reserve and the Treasury Department are consulting with market participants on ways to provide additional support for term unsecured funding markets.

Cash / Money Markets
Bank deposits and money markets funds play an important role in the savings and investing of Americans. These savings and investment vehicles are critical to investor confidence. They also provide funds for financing activity that is so critically important to our credit markets.
Last month, the Treasury Department announced a temporary guarantee program for money market mutual funds. That program began operations last Monday. This action was complemented by the Federal Reserve providing additional liquidity to money market mutual funds with their Asset Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility (AMLF) program, which has brought liquidity to the ABCP market. Today, the Federal Reserve is taking additional actions to enhance the flexibility of bank holding companies to provide support to their bank sponsored funds.

In addition, the Securities and Exchange Commission and the FASB issued a clarification regarding the valuation of assets, including commercial paper, during such periods of market stress.

In addition, the recent legislation temporarily increases the amount that the FDIC insures in bank and thrift deposits from $100,000 to $250,000. The legislation also increases the FDIC's ability to borrow from the Treasury if needed.
Collectively these actions should enhance market stability and investor confidence in such funds

Mortgage Markets
We are committed to seeing the housing GSEs serve their public purpose of providing stability, liquidity, and affordability to the housing market. The Federal Home Loan Bank System continues to be an important source of liquidity to the banking system in support of housing finance. To provide critical additional funding to our mortgage markets, Fannie Mae and Freddie Mac are increasing their purchases of agency mortgage-backed securities (MBS).
FHFA has directed the two companies to implement such a purchase program immediately. We also expect each company to continue to increase its direct support to the mortgage market through their ongoing securitization activities.

Treasury too has established a backstop secured credit facility for the housing GSEs. In addition, to increase the availability of capital for new home loans, Treasury expanded the agency MBS purchase program we announced in September. This will complement the capital provided by the GSEs and will help facilitate mortgage availability and affordability.

Market Integrity
Confidence is also enhanced by vigorous law enforcement so that those who invest know there is someone who is looking out for them. The SEC and Commodity Futures Trading Commission (CFTC) bring hundreds of cases every year directed at protecting investors. This past fiscal year the SEC returned approximately $1 billion to injured investors just as it did the year before. In the past few months, the SEC with others in law enforcement, have restored liquidity to Auction Rate Security investors in the largest securities buyback in the nation's history with tens of billions of dollars of liquidity being restored to tens of thousands of investors. The CFTC this year obtained more than $630 million in penalties against those attempting to manipulate the commodity markets and defraud customers as it continues to aggressively pursue its ongoing national crude oil investigation aimed at protecting the nation's energy markets. The SEC and CFTC have dozens of ongoing investigations related to the current market conditions and are using all of their tools to vigorously protect investors and maintain the integrity of our capital markets.

Clearing and Settlement Systems
Regulators are closely monitoring clearing and settlement systems to ensure their proper functioning as we encourage further centralized clearing for other financial instruments to bring enhanced transparency and counterparty risk management to those markets.

While addressing our challenges, we must also remind investors and lenders that we have a resilient and diverse economy and workforce. We have faced economic and financial market challenges in the past. Each time we have worked through them and emerged with stronger financial institutions and regulatory policies. While it will take time and a lot of hard work, we are confident that this time will be no different.

Leadership has been shown with decisiveness and determination by the public sector. Together, we can greatly improve the functioning of markets and move forward to rebuilding our great capital markets.

US Treasury Press Release

2008-10-07T02:52:00.002-05:00

October 6, 2008HP-1176
Acting Under Secretary for Domestic Finance Anthony RyanStatement on Debt Management and theEmergency Economic Stabilization Act

WASHINGTON –To address the increased funding needs posed by the Emergency Economic Stabilization Act and consistent with our operating principle of transparency, Treasury is announcing that it will be making adjustments to the auction calendar.

Treasury will continue to increase auction sizes of our bills and coupon securities and continue to issue cash management bills. As has been the case over the past year, some of these cash management bills may be longer-dated. Treasury is also considering its options regarding the frequency and issuance of additional nominal coupons, including a reintroduction of the 3-year note, beginning in November 2008. Any change to the auction calendar will be communicated per standard practice as part of the next Quarterly Refunding announcement on Wednesday, November 5.

This announcement is being made at this time and outside the customary Quarterly Refunding announcements to allow Treasury to adequately respond to the near-term increase in borrowing requirements and to give the market participants notice of the potential changes.

Treasury Statements & Press Releases Week of September 28, 2008

2008-10-07T02:04:00.006-05:00

Remarks from Octpber 3 Economic Briefing

“Recent data reflect the impact of the housing correction and financial market strains. The troubled assets relief program will help to stabilize markets and thereby lend support to broader economic activity.” - Assistant Secretary Phillip Swagel, October 3, 2008

The U.S. economy is fundamentally strong, but the housing correction, credit turmoil, and high oil prices are weighing on growth this year and short-term risks are to the downside. The Economic Stimulus Act of 2008, signed into law on February 13, will help protect the strength of our economy as we weather the housing downturn and other challenges. This agreement includes short-term incentives to bolster business investment and consumer spending to keep our economy growing and creating jobs this year.

U.S. Economic Strength
Employment Fell in September: Job Growth: Payroll employment fell by 159,000 in September, following a decrease of 73,000 in August. The United States has added about 7.5 million jobs since August 2003. Employment increased in 27 states and the District of Columbia over the year ending in August. (Last updated: October 3, 2008)

Unemployment: The unemployment rate was 6.1 percent in September, unchanged from August but 1.4 percentage point higher than a year ago. (Last updated: October 3, 2008)

Growth Was Solid in Q2:Real GDP: Real GDP growth in Q2 was 2.8 percent at an annual rate, up from 0.9 percent growth in Q1. Consumer spending added 0.9 percentage points to growth in the first quarter and net exports added 2.9 percentage points. These positives were partly offset by the continued drag from housing and a large inventory reduction. (Last updated: September 26, 2008)

Signs of Economic Strength Include Exports and Low Core Inflation:Exports: Strong global growth is boosting U.S. exports, which grew 11 percent over the past 4 quarters. (Last updated: September 26, 2008)Inflation: Core inflation remains contained. The consumer price index excluding food and energy rose 2.5 percent over the 12 months ending in August. (Last updated: September 16, 2008)

The Economic Stimulus Package Will Provide a Temporary Boost to Our Economy: The package will help our economy weather the housing correction and other challenges. The Economic Stimulus Act of 2008, signed into law by President Bush has two main elements—stimulus payments so that working Americans have more money to spend and temporary tax incentives for businesses to invest and grow. Together, the legislation will provide about $150 billion of stimulus for the economy in 2008, providing a meaningful boost to the U.S. economy in 2008.(Last updated: February 29, 2008)

Pro-Growth Policies Will Enhance Long-Term U.S. Economic Strength:We made significant progress on the deficit. The FY07 budget deficit was down to 1.2 percent of GDP, from 1.9 percent in FY06. Much of the improvement in the deficit reflects strong revenue growth, which in turn reflects strong economic growth. The economic stimulus package and the slowing economy contribute to the near-term budget deficit. The Mid-Session Review of the Budget projects that the deficit will be 2.7 percent of GDP in FY08 and 3.3 percent of GDP in FY09. Looking ahead, higher spending on entitlement programs dominates the future fiscal situation; we must squarely face up to the challenge of reforming these programs.

http://www.treas.gov/economic-plan/

October 3, 2008HP-1175
Paulson Statement on Emergency Economic Stabilization Act
Washington- By acting this week, Congress has proven that our Nation's leaders are capable of coming together at a time of crisis, even at a critical stage of the political calendar, to do what is necessary to stabilize our financial system and protect the economic security of all Americans.

The American people will appreciate the leadership of their elected representatives and senators who took bold action to help stem a severe credit crunch that threatens to cost many jobs and undermine access to credit for working Americans.

This bill contains a broad set of tools that can be deployed to strengthen financial institutions, large and small, that serve businesses and families. Our financial institutions are varied – from large banks headquartered in New York, to regional banks that serve multi-state areas, to community banks and credit unions that are vital to the lives of our citizens and their towns and communities. Each institution has its own unique benefits, and their collective strength makes our financial system more resilient, and more innovative. The challenges our institutions face are just as varied – from holding illiquid mortgage backed securities, to illiquid whole loans, to raising needed capital, to simply facing a crisis of confidence. This diversity of institutions and challenges requires that we deploy the tools in this rescue package, in combination with the tools the Fed, the Treasury, the FDIC and other bank regulators already have, in a variety of ways that addresses each of these needs and restores the ability of our financial system to fuel our broader economy.

There is no one-size-fits-all solution to alleviating the stress in our financial system. Each situation will be different and we must implement these new programs with a strategy that allows us to adapt to changing circumstances and conditions, and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets.

We will move rapidly to implement the new authorities, but we will also move methodically. In the coming days we will work with the Federal Reserve and the FDIC to develop strategies that deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system, so it can continue to play its necessary and vital role supporting the U.S. economy and American jobs. Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy.

October 3, 2008HP-1173
Under Secretary David H. McCormick Remarks atWharton’s Eleventh Annual Investment Management ConferenceResponding to Today’s Market Turmoil

Philadelphia - These are incredibly challenging and unprecedented times for the United States. Over the last twelve months, we have witnessed one of the most significant periods of economic turmoil that has ever faced our country, and I have had the opportunity to see first hand how our country's leaders have responded. Today I'd like to share my views on how we arrived at this place, what we have done about it up to this point, and what else we must do to stabilize our markets and ensure America's long term prosperity.

The seeds of the challenges we face today were sown many years ago, beginning with a gradual weakening of lending practices by banks and financial institutions and by greater willingness by borrowers to take out mortgages they couldn't afford. These factors, combined with growing complexity and opaqueness in our capital markets, are at the heart of the current crisis.

We are now paying the price. We've seen the results for homeowners in higher foreclosure rates affecting individuals and neighborhoods. We are now seeing the impact on struggling financial institutions. These weak loans started a chain reaction, and in recent weeks, our credit markets have tightened dramatically with even some non-financial companies around the country having difficulties financing their day-to-day business operations. These effects are already beginning to trickle down and affect all parts of the U.S. economy.

In response to this worsening situation, the U.S. government has taken bold and decisive actions in recent months to stabilize the markets, mitigate the impact on our financial system and the U.S. economy, and address the underlying sources of market uncertainty.

Root Causes of the Market Turmoil
How did we get to this point? The story begins with a decade of benign economic conditions marked by low interest rates, low inflation, and less volatile asset markets, which led many to ignore the "risk" half of the risk-reward equation at the heart of financial markets. Investors around the world, who in preceding years had enjoyed above-historical returns on most assets, continued reaching for ever-higher gains. The financial-services industry created a variety of complicated new products to meet this demand. Regulators and investors alike showed a growing complacency toward risk. These factors blended into a dangerous cocktail of underlying conditions ripe for instability.

This imbalance between risk and reward was most evident in the U.S. housing market, where lenders significantly loosened credit standards, particularly for a new generation of adjustable-rate mortgages. Yet aggressive financial innovation went well beyond mortgages. Banks and brokers created an alphabet soup of products with simple names like CDOs, CLOs, and SIVs, which were in fact complex and opaque investment products and structures. Credit-rating agencies responsible for assessing and rating these assets, as well as investors who purchased them, failed to question the chances of these underlying investments going bad.

Last summer these vulnerabilities in our financial system became clear. Looser credit standards in the housing market combined with an end to rapid home-price appreciation led to a significant rise in delinquent mortgages. This in turn contributed to immediate and unexpected losses for investors and a reconsideration of the risk-reward relationship--first in housing, and soon after, across all asset classes. The shaken investor confidence in housing assets had a domino effect throughout world markets, ratcheting up demand for cash and liquidity, and curtailing the pace of the new lending and investment necessary for strong growth to continue.

Actions to Mitigate Risk and Stabilize Markets
Recognizing the risk to the U.S. economy of the housing downturn, the Administration and Congress acted quickly earlier this year to pass a $150 billion stimulus bill. At Treasury, we brought together mortgage providers through the HOPE NOW alliance to help families avoid foreclosure on their homes. Yet, as we seek to minimize the impact of the housing correction on the economy, we must avoid impeding its progress. The sooner we turn the corner on housing, the sooner we will see home values stabilize, the sooner we will see more people buying homes, and the sooner housing will once again contribute to economic growth.

In the financial markets, progress has not moved in a straight line, and additional challenges clearly lie ahead. There have been some positive developments. In the past year, for example, U.S. financial institutions (often under new management) have recorded losses of over $300 billion and raised over $200 billion in new capital. Yet, the events of the last few weeks – where we have acted on a case-by-case basis to address destabilizing financial conditions in a number of institutions – demonstrate continued weakness across the financial services sector.

In March, the Federal Reserve took unprecedented action to ensure an orderly resolution for Bear Stearns, and in September, authorities around the world took steps to mitigate the impact of the bankruptcy of Lehman Brothers, America's fourth largest investment bank. That same week, the Federal Reserve provided funding to American International Group (AIG) to address the systemic risk that would have resulted from a sudden collapse of the firm. And last week, the FDIC brokered a deal and supported the sale of Wachovia's banking operations to Citigroup in order to prevent its failure following the earlier collapse of Washington Mutual. In each of these cases, policymakers attempted to strike a careful balance of mitigating systemic risk while promoting market discipline, holding investors and management teams responsible, while protecting blameless consumers from collateral damage.

And we are not alone. Europe and Asia are also suffering through their own financial turmoil. In recent days, the United Kingdom, Iceland, Belgium, the Netherlands, Luxemburg, France and Germany have all intervened to support troubled institutions. And last week, we also saw how rumors precipitated a run on Hong Kong's Bank of East Asia. We see from these examples that our financial markets are more global and more interdependent than at any time in history.

The cases of the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, deserve special mention, particularly given their significance to investors around the world. The GSEs have become the largest sources of mortgage finance in the United States, touching roughly 70 percent of mortgages originated. Not surprisingly, the prolonged housing correction weakened their financial condition, and both institutions faced a loss of investor confidence. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that if either of them were to fail, it would have far reaching effects on the U.S. and global economies. Business finance would be more difficult to obtain, constraining job creation and making it harder for Americans to get home loans, auto loans, and consumer credit.

This past summer, investors began to express growing concerns over the stability of Fannie and Freddie and the ambiguity over the scope and certainty of government support for these institutions. In response, Secretary Paulson asked Congress for authorities regarding Fannie Mae and Freddie Mac in order to help stabilize our financial markets and support our housing market. Congressional leaders acted promptly and decisively with the needed legislation, and in the days and weeks that followed, Jim Lockhart, the director of the GSE's regulator, the Federal Housing Finance Agency (FHFA), Federal Reserve Chairman Bernanke, and Secretary Paulson concluded they needed to act decisively to avert instability in our markets. As a first critical step, the FHFA put Fannie and Freddie into conservatorship, allowing for the government to take temporary control and make needed changes at both institutions.

In a complementary step, Treasury established contractual Preferred Stock Purchase Agreements with both institutions under which it committed up to $100 billion per institution to ensure that each GSE maintains a positive net worth. These Preferred Stock Purchase Agreements are intended to explicitly address the underlying ambiguities in the GSE Congressional charters and to give the holders of Fannie Mae and Freddie Mac debt confidence in the promise of government support for their investments. Because the U.S. Government created these ambiguities and the resulting uncertainty, Secretary Paulson felt strongly that we had a responsibility to address the systemic risk posed by the scale and breadth of the agency debt.

The terms of these purchase agreements provide taxpayers significant protection. The existing common and preferred shareholders of the GSEs will lose 100 percent of their investment before the American taxpayers lose a penny. Moreover, as part of the terms of the agreement, Treasury has received from each company $1 billion in senior preferred stock and warrants providing options to purchase up to 79 percent of the companies' outstanding shares.

Second, Treasury established a new, temporary credit facility for Fannie Mae, Freddie Mac, and the Federal Home Loan Bank to fund, if necessary, their regular business activities. Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase mortgage-backed securities issued by the GSEs, thereby providing additional capital to the mortgage marketplace.

These steps are the best means of protecting taxpayers and stabilizing our markets, but they leave for future policymakers fundamental decisions about the role and structure of these enterprises. Our recent actions have afforded a "time out" – providing the stability, time, and flexibility for Congress and the next Administration to address the inherent conflict in the GSE charters that require them to serve the interests of private investors and the broader public.

A Comprehensive Policy Response
Despite the hardening of the government's support and involvement in Fannie Mae and Freddie Mac, and the decisive resolutions of Bear Stearns, Lehman Brothers, AIG, Washington Mutual, and Wachovia, investors have become increasingly concerned over the possibility of other failing financial institutions. And, this has made them increasingly reluctant to extend credit.

This has led to sharp increases in the cost of credit for financial and non-financial companies, increasing the risk that corporate America would be unable to roll over maturing corporate debt. Given this environment, it was necessary for U.S. authorities to act decisively and comprehensively to provide capital, liquidity, and smooth market operations with the goals of stabilizing the markets and addressing the underlying sources of uncertainty. The three components of the plan rolled out two weeks ago by Secretary Paulson and Chairman Bernanke seek to achieve these goals.

First, central banks from around the world have acted together to provide additional liquidity for financial institutions. The Federal Reserve has established swap lines with nine central banks to reduce pressures in global short-term U.S. dollar markets. Additionally, Treasury implemented a temporary guaranty program for the U.S. money market mutual fund industry, which has experienced funding problems in recent weeks. This temporary $50 billion guaranty program offers government insurance that was previously unavailable in order to address concerns about whether these investments are safe and accessible.

Second, we have put forward a plan to provide much needed capital to address the root causes of the current stress in our financial system – the ongoing housing correction and the consequent buildup of illiquid mortgage-related assets. These troubled assets remain frozen on the balance sheets of banks and other financial institutions, constraining the flow of credit that is so vitally important to our economic growth. The failure to address this root cause would mean that every aspect of our financial and funding markets, ranging from consumer credit to money market funds, would continue to be impaired.

The Administration has worked with Congress to develop a $700 billion comprehensive program for addressing the problem of these illiquid assets on the balance sheets of institutions within the financial system. This will help reduce an enormous source of uncertainty in the markets and stimulate the raising of capital within the financial services sector. In addition, the bill will help ensure the availability of credit so American families can meet their daily needs and American businesses can make purchases, ship goods, and meet their payrolls. A failure to act comprehensively and decisively could have dire consequences for the U.S. economy and all Americans. This plan also sends a strong signal to markets around the world that the United States is serious about restoring confidence and stability to our financial system.

Third, we have taken steps to improve market operations and market integrity. As an example, the Securities and Exchange Commission took temporary emergency action to prohibit short selling in financial companies to protect the integrity and quality of the securities market and strengthen investor confidence. The SEC's exceptional actions were joined by regulators in the UK, France, Germany, and other countries who also imposed restrictions on short selling.

A Possible Turn Inward
In addition to the things we must do, there are also things we must avoid. Our recent downturn has contributed to a climate of increased distrust and anxiety among Americans that is fueling support for protectionist policies. The benefits of trade and open investment are being openly questioned across the political spectrum, and this rhetoric is particularly pronounced on Capitol Hill. There is reluctance, for example, to pass the pending trade agreements with Colombia, Panama, and Korea, and there are concerns over foreign investment in U.S. companies, despite the clear and unequivocal benefits of both to the United States. These trends, dangerous at any time, could be devastating in this period of heightened market uncertainty and fragility.

This trend is all the more concerning because trade and investment play such an important role in the competitiveness and success of the U.S. economy. Overseas sales by U.S. companies account for about 50 percent of all U.S. exports, and the profit growth of U.S. companies comes chiefly from the global sales. Remarkably, exports now account for 13% of the U.S. GDP – the highest level in history. Moreover, foreign-owned firms in the US employ more than 5 million workers directly and another 5 million indirectly, and these jobs pay on average a quarter more than jobs created by U.S.-owned companies.

However, these facts are understandably lost on many Americans who have been negatively affected by the dynamism and speed of global markets. With this in mind, we must work to build public support for openness in this era of globalization, even as we acknowledge and take steps to mitigate some of its negative consequences of dynamic global competition. This too must be a priority as we work through the economic challenges that lie ahead.

Conclusion
Ladies and Gentleman, now is the time to act quickly, decisively, and collaboratively with regulators and market participants around the world to restore stability and confidence to our markets. It will no doubt take time to work through the excesses that were built up over a number of years. U.S. policymakers are decisively implementing policies that address our short-term economic challenges and rebuild faith in the market. When we emerge from this difficult period – and we will emerge both wiser and stronger – our next task will be to strengthen our financial regulatory structure to guard against such excesses in the future.
The interdependence of our global economy makes this challenge more complex, and it also makes our work with international counterparts to promote growth and financial stability all the more important. I'm confident that our leaders and our great country are up to this pressing challenge.

Thank you.

October 3, 2008 HP-1172
Treasury Distributes 1.147 Million Additional Stimulus Checks in September
Washington, DC--The Treasury Department announced today that it distributed 1.147 million stimulus payments, totaling $672 million in the month of September. As of the end of September, a total of 115.957 million payments have been distributed totaling $94.061 billion since disbursements started April 28.

While mass disbursement of stimulus checks ended July 11, small batches of payments continue to be sent out to American households. The Treasury Department will announce updates monthly until the end of the year. The Treasury Department also reminds Americans, especially those seniors and veterans who do not normally file a tax return, to file a return by the October 15th filing deadline to receive a stimulus payment this year.

October 2, 2008HP-1174
Assistant Secretary Clay Lowery Remarks on Sovereign Investingat the Third Columbia Investment Conference
New York - It's a pleasure to join you today and to participate in this conference on sovereign investing. The schedule that you have put together over the last couple of days appears intense and focuses on many of the issues that we have been trying to address within the U.S. Government for the last couple of years – how do we view sovereign investing in the United States.

Recent Developments
Before discussing the primary motivation of your conference, however, let me first take a moment to acknowledge the context in which today's discussion on sovereign investment takes place. As you all know, we are in the midst of an historic reassessment of risk by the world's financial markets, triggered by the bursting of the U.S. housing bubble and the subsequent steep decline in U.S. housing prices. The U.S. government has taken a number of bold steps to stabilize markets, mitigate the impact of a number of failing or troubled institutions, and address the underlying sources of market uncertainty. We are working to resolve the current crisis and re-establish stability. No doubt there will be much analysis of the current crisis in the months and years ahead. But one fact is already clear: opaqueness in our capital markets and inadequate supervision and risk management on the part of financial sector participants contributed to the crisis. When we emerge from this difficult period, our next task will be to strengthen the financial regulatory structure to forestall such excesses in the future. The interdependence of our global economy makes this challenge more complex, and it also makes our work with international counterparts to promote openness and financial stability all the more important.

The current crisis also serves as a reminder that the enemy of financial policymakers is complacency and the friend is to worry about vulnerabilities. It puts a premium on constantly thinking about "what is around the corner?" and how should we address the issues that such analysis reveals. Otherwise, those vulnerabilities can manifest themselves in front of your eyes as an outright crisis.

One of those vulnerabilities that we see in the United States has been the rise of protectionist sentiment, in many respects, epitomized in the rhetoric surrounding international investment. While I'd like to think that in times of economic difficulties, it would be enough to remind people that international investment fuels our own economic prosperity by bringing new technology and business methods and by providing healthy competition that fosters innovation, productivity gains, lower prices, and greater variety for consumers. Or I'd like to think that it would be enough to recall that over 5 million Americans are employed by foreign-owned companies, and foreign-owned companies pay on average 25 percent more than U.S. companies. I, unfortunately, realize that I would be wrong – it is not enough.

Therefore, let me try to explain how we are attempting to "see around corners" when it comes to sovereign wealth funds and CFIUS.

Sovereign Wealth Funds (SWFs)
Sovereign wealth funds have garnered much attention in the past year, both for their growing relevance as global financial market participants and for their recent investments in major financial institutions. For instance, according to Monitor Group, in the first half of 2008 alone, sovereign wealth funds invested $24 billion in 23 deals in the financial sector. These investments come on top of a flurry of deals involving financial institutions at the end of 2007.
SWFs are not a new phenomenon, but their rapid growth both in number and size is relatively new, and a trend that is expected to continue. From the current estimated level of roughly $3 trillion, the IMF and private sector analysts project SWF assets could reach $7 to $11 trillion or more in the next five years. Even though many sovereign investors have been around for decades, the expected growth of sovereign wealth fund assets, the number of new sovereign wealth funds and recent "headline" deals involving SWFs have all contributed to an intensified interest in sovereign wealth fund activities among public and private actors, alike. This interest often manifests itself in the form of questions about the "true" motivations for sovereign wealth fund investments; the degree of control a sovereign could exercise over the investment target; as well as the processes by which recipient countries – the United States, in particular – review sovereign investments for national security concerns.

So what do we know about sovereign wealth funds and their investments?

The IMF recently published a Survey of SWF Institutional and Operational Practices that provides a good baseline of information – in aggregate – on 20 different sovereign wealth funds. While the data set is limited, the results provide additional information about SWF objectives and roles in policy making; data availability; and asset allocation. For instance, two-thirds of responding SWFs have long term savings/stabilization as their operating mandate and do not generally engage directly in macroeconomic policies. Most of the respondents make data available to national compilers of macroeconomic statistics, but not necessarily to the public. The majority of respondents use external asset managers to some degree, while SWFs that are established as separate legal entities typically are permitted higher allocations to alternative asset classes.

In addition to this survey, it is pretty clear that SWFs are in principle long-term investors that historically have maintained their strategic asset allocation in the face of short-term losses. They typically are not highly leveraged. SWF managers generally have a higher tolerance for risk than reserve managers and seek higher returns by investing in a wider range of asset classes. They have access to, and frequently make use of, well-regarded private fund managers, consultants, administrators and custodians. SWFs as a group, but particularly the more longstanding funds, generally have a track record of making investment decisions on economic and financial grounds.

US Treasury Response
It is this last area that has probably raised the most concerns – do SWFs invest for some sort of political and strategic purpose or do they invest to maximize returns. In the U.S. Government, our view was that we needed to address this concern head on and do it in a way that would not resort to protectionist measures.

Our thinking led us to proposing approaches that are measured, multilateral, and maintain openness. This is in the best interest of participants on both sides of the investment equation -- countries that have these funds and countries in which these funds invest. Recognizing that better understanding and communication is necessary on both sides of the investment relationship, Treasury has undertaken substantial outreach to strengthen communication with SWFs and build support for multilateral initiatives. These efforts included agreement in March with Singapore and the United Arab Emirates on a set of principles that would create a strong incentive among SWFs and recipient countries to hold themselves to high standards.

Generally Accepted Principles and Practices
More robustly, Treasury proposed a large multilateral effort to develop voluntary best practices for SWFs. Roughly one year later, officials from 23 countries are prepared to unveil an historic agreement among the world's major sovereign wealth funds. This agreement represents a milestone in enhancing the openness and transparency of the global financial system and in promoting open investment worldwide.

The IMF facilitated the establishment of a group of 23 countries with SWFs, the International Working Group of Sovereign Wealth Funds or "IWG." The IWG drafted and agreed on the Generally Accepted Principles and Practices or "Santiago Principles" in less than half a year – an impressive achievement given the number of participants, the complexity of the issues and the unchartered territory that the agreement represents for a number of sovereign wealth funds. The group welcomed input from recipient countries as the group deliberated, demonstrating a collaborative spirit and a common interest in a credible product.

The Principles will be released publicly during the IMF's annual meeting next weekend. Broadly speaking, it is a voluntary framework that consists of principles and supporting commentary, which will guide SWFs in establishing sound practices in three key areas:

Legal framework and coordination with macro policies;
Institutional and governance framework; and
Investment framework, including risk management.

Adoption of the Principles by SWFs will address many of the key issues that have been dealt with only at the discretion of each individual fund up until now: for instance, what is the policy purpose of an SWF? What guides specific investment decisions? What stance does an SWF take with regard to voting shares? And how does an SWF manage risk? In the process, the Principles will also directly address financial stability and investment issues raised by the rapid growth in the size and number of SWFs.

Even though the Principles are not yet public, the process and substance behind it are already bearing fruit. In June, the Abu Dhabi Investment Authority (ADIA) – one of the world's largest sovereign wealth fund and also co-chair of the IWG – expanded the amount of information available through its website to include information on its Investment Strategy, Governance and Organizational Structure. Just last week, the Government of Singapore Investment Corporation (GIC), also one of the largest SWFs, disclosed for the first time its asset composition and historical returns.

The Principles demonstrate a significant positive shift in SWF practices relative to current practices--but useful work remains to be done. Their effectiveness in helping to reduce protectionist pressures and contribute to global financial stability ultimately will depend on their widespread adoption by SWFs. We expect SWF ownership of the Principles – a key goal of our original proposal – will lead to a high rate of implementation among participating SWFs. Early adherents will serve as an example to other SWFs, and result in a rise to the top in institutional and operational practices among the vast majority of funds. We expect the successor to the Working Group will continue to meet to consider implementation issues and proposals for further work.

When Treasury first started looking at the issue of sovereign wealth funds in great detail, some observers worried that an "overemphasis on transparency of SWFs alone may lead to unnecessary conflicts with allies." A leading economic thinker noted that it was the unwillingness of sovereign wealth funds to agree to standards openly that raises concerns about sovereign wealth fund motivations. Still others concluded that "a global solution to SWF concerns is unlikely to emerge," given a lack of international consensus regarding foreign investment rules.
They were right to be cautious – even pessimistic – with regard to the chances of reaching agreement on a wide-ranging set of principles, among a diverse group of countries, each with unique institutional arrangements, objectives and disclosure requirements. Such long odds makes the Working Group's achievement that much more impressive. We commend the IMF's efforts in convening and supporting the group's work, and IWG members for reaching consensus on a wide-ranging and groundbreaking agreement. Their efforts demonstrate a collaborative spirit and common interest in a credible product. Now it is up to SWFs to implement the Principles in support of maintaining an open and stable global financial system.

Recipient Country Policies
Committee on Foreign Investment in the United States (CFIUS) and Regulations
When I think of our work on SWFs, I like to think of it as the U.S. Government being proactive, "seeing vulnerabilities around the corner", and designing policy responses that are prudent, and hopefully coherent.

When I think of the other major area of foreign investment in the United States – CFIUS – I also think about the word "proactive," but as a lesson. As folks are probably pretty aware, Dubai Ports World became a major issue in 2006. The reasons it became an issue is a study in itself, but the important part of that "experience" are the lessons learned. And the key lesson is to be proactive.

As we have done for SWFs, policy makers need to see around the corners and think proactively about the vulnerabilities that can arise from an issue and the consequences. While Dubai Ports World was a painful episode (almost like being hit by a truck), it also lead to strong proactive work that has ensured the continuation of our long-standing open investment policy.

Instead of taking Thomas Friedman's thoughts of a few days ago and curling up into the fetal position…we figured that we had to address the two important challenges before us: restore confidence that the United States remains open to foreign investment and restore confidence that our national security process is thorough, accountable, and targeted.

While there were many concerns raised about the Dubai Ports World transaction, the most significant were the apparent lack of accountability, the lack of communication with Congress, and the lack of clarity in terms of the law. To reform those problems, we focused on two key actions: getting our house in order and revising the legal context within which CFIUS operates.

Getting our house in order: In over two years, we have made it our mission at Treasury to fix the problems that I just identified. We reorganized the Department and our procedures so that accountability is now at the highest levels within Treasury; we changed our practices and now keep Congress informed of every transaction after we have concluded the examination; and we remade the inter-agency process so that key responsibilities of agencies are clear so as to improve coordination and make decision making more efficient.

Revising the legal context within which CFIUS operates: Given that this is a law school and I'm not a lawyer, I thought about skipping this part -- but instead -- I'll summarize the legal context in two areas.

First, we worked hard with Congress to re-write the CFIUS statute, and that law passed with wide bipartisan support last year. The law:

Maintains a very selective focus on only the cases that raise genuine national security concerns.
Formalizes the current practice of seeking to resolve any concerns, rather than prohibiting transactions.

Maintains strict deadlines: First-stage security reviews must be completed within 30 days. Second-stage investigations must be completed within 45 days, and any action by the President must be taken within 15 days following the conclusion of an investigation.
Provides Congress with an extensive annual report detailing CFIUS activities and the cases it reviews.

Second, in April of this year, we proposed a rewrite of the 1992 regulations. Our aim was to provide as much clarity as possible while still providing the government with the flexibility it needs to protect national security. We have received a number of comments on the regulations from a broad array of public and private entities, both domestic and international. We are carefully reviewing those comments, and will issue final regulations soon, as well as separate guidance on the types of transactions that CFIUS has reviewed and that have raised national security considerations. The guidance will help investors and their counsel decide whether or not to file a voluntary notice requesting CFIUS review of their transactions.

At Treasury, we believe that these reforms have built confidence in our ability to carry out the important role that Congress and the President have entrusted to the CFIUS process. In addition, we now have an important message – backed up by statistics – that we have been delivering to both domestic and international audiences, demonstrating that the new and improved CFIUS operates fully within the context of the U.S. commitment to open investment.

Let me assert that CFIUS is an efficient, disciplined process that reviews only a small number of transactions. CFIUS is narrowly focused on national security risks posed by the specific transaction under review, not broader considerations such as economic security, industrial policy or "national interest."

To provide some statistical proof of this assertion, Thomson Financial reports that in 2007, there were over 11,000 mergers and acquisitions in the United States, of which about 2,000 involved foreign acquirers. CFIUS reviewed only 138 transactions covered by the statute, or fewer than 7% of these foreign acquisitions. Six cases went to investigation, and none of the six required a Presidential decision. Over 80 percent of the cases were closed out within the 30 days of the beginning of the CFIUS examination. In other words, barely more than 1% of all cross border mergers and acquisitions in our country had a national security review that lasted longer than 30 days and 0% of all cases were blocked by the Federal Government.

In 2007, less than one-fifth of the covered transactions that CFIUS reviewed involved a foreign government-controlled acquirer, and even fewer cases involved sovereign wealth funds. Foreign government control is a factor that CFIUS considers in its review of covered transactions, and under FINSA, acquisitions by foreign-government controlled entities are subject to clearance by higher level officials. Nevertheless, CFIUS reviews have not prevented acquisitions by foreign government-controlled companies from proceeding, including within 30 days in numerous cases in which that is appropriate.

In sum, the nature and practice of CFIUS demonstrates that the United States continues to welcome foreign investment. President Bush reaffirmed our commitment to open investment in a statement in May 2007 in which he said we welcome foreign investment in this country and will work to ensure fair treatment and equitable opportunity for our investors abroad.

Conclusion
I'd like to close by summarizing just how far we've come in dealing with the consequences of higher levels of foreign investment, including sovereign investment. As noted, there was great skepticism with regard to the willingness of sovereign wealth funds to voluntarily participate in a process premised on greater transparency. Likewise, the firestorm surrounding the 2006 Dubai Ports World transaction severely damaged confidence in the CFIUS process and increased the risk of a protectionist response. Yet on both counts, we are in a substantially better place then most observers would have guessed two years ago.

Sovereign wealth funds have sought to address the underlying concerns about their investment intentions by voluntarily adopting a framework of sound principles and practices, and increasing the amount of information available about their operations. Likewise, the United States has comprehensively reformed our own processes for reviewing foreign investment, in a manner which reassures foreign investors that the United States remains open to foreign investment, while clearly prioritizing national security. No doubt, the issues surrounding sovereign foreign investment will continue to evolve. But I am confident that the structures and processes currently in place are capable of adjusting to these changes, and sufficiently robust to respond in a manner consistent with our open investment policy objectives.

Progress toward greater transparency and accountability on the part of sovereign wealth funds and recipient countries alike place these actors at the forefront of a move toward greater transparency among financial market participants more broadly. These efforts will build confidence on both sides of the investment relationship and support the future stability of the global financial system.

I would be happy to take any questions from the audience.

October 1, 2008 2008-10-2-11-44-54-4819
Statement by Secretary Henry M. Paulson, Jr.on Emergency Economic Stabilization Act Vote
Washington, DC-- Secretary Henry M. Paulson, Jr. made the following statement on the Senate vote on the Emergency Economic Stabilization Act of 2008:

I commend the Senate for tonight's strong, bipartisan vote. This sends a positive signal that we stand ready to protect the U.S. economy by making sure that Americans have access to the credit that is needed to create jobs and keep businesses going. I urge the House to act promptly to pass this bill.

October 1, 2008
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S.reserve assets totaled $72,988 million as of the end of that week, compared to $72,087 million as of the end of the prior week.

September 30, 2008 HP-1170
Assistant Secretary Swagel to Hold Monthly Economic Briefing
Assistant Secretary for Economic Policy Phillip Swagel will hold a media briefing to review economic indicators from the last month and discuss the state of the U.S. economy. The event is open to the media:
Who Assistant Secretary for Economic Policy Phillip Swagel
What Economic Media Briefing
When Friday, October 3, 10:00 a.m. EDT
Where Treasury DepartmentMedia Room (4121)1500 Pennsylvania Avenue, NWWashington, D.C.
Note Media without Treasury press credentials should contact Frances Anderson at (202) 622-2960, or Frances.Anderson@do.treas.gov with the following information: full name, Social Security number, and date of birth.

September 29, 2008 hp1168
Statement by Secretary Henry M. Paulson, Jr. on Emergency Economic Stabilization Act Vote
Washington, DC-- Secretary Henry M. Paulson, Jr. made the following statement on the Emergency Economic Stabilization Act of 2008 vote in the House:

I'm disappointed in today's vote, but leaders on both sides of the aisle worked hard. I've spoken to them and I know they share my great disappointment.

We have experienced significant turmoil in our financial markets in the last few days, including the collapse of Washington Mutual and Wachovia here and the failure of two major financial institutions in Europe. Markets around the world are under stress, and that reduces the availability of credit that businesses across America depend on to meet payroll and to purchase inventories.

Families, too, feel the credit crunch as it becomes more difficult to get car loans or a student loan.
I and my colleagues at the Fed and the SEC continue to address the market challenges we are facing on a daily basis. I am committed to continuing to work with my fellow regulators to use all the tools available to protect our financial system and our economy.

Our tool kit is substantial but insufficient. Therefore, I will continue to work with Congressional leaders to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people by limiting the prospects of further deterioration in our economy.
We've got much work to do. This is much too important to simply let fail.

September 29, 2008 HP-1167
Statement by Assistant Secretary Michele Davis onEmergency Economic Stabilization Act Vote
Washington, DC-- Treasury Assistant Secretary for Public Affairs and Director of Policy Planning Michele Davis issued the following statement on the Emergency Economic Stabilization Act of 2008 vote:

"The Secretary will be consulting with the President, the Chairman of the Federal Reserve, and Congressional leaders on next steps. In the meantime, we stand ready to work with fellow regulators and use all the tools at our disposal, as we have over the last several months, to protect our financial markets and our economy."

September 29, 2008 hp-1163
Frequently Asked Questions About Treasury’s Temporary Guarantee Program for Money Market Funds
How does an investor sign up to participate in the Treasury's Temporary Guarantee Program for Money Market Funds?

While the program protects the shares of all money market fund investors as of September 19, 2008, each money market fund makes the decision to sign up for the program. Investors cannot sign up for the program individually.

How will investors know if their money market fund participates in the program?
Investors should contact their money market fund directly to determine if it is participating in the program.

What type of funds does the program cover?

All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, are publicly offered, are registered with the Securities and Exchange Commission and maintain a stable share price of $1 will be eligible to participate in the program. This includes both taxable and non-taxable funds.

Is an investor in a fund that is managed like a money market fund but that is not registered with the SEC covered?

No, the program only covers money market funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, are publicly offered, are registered with the Securities and Exchange Commission and maintain a stable share price of $1 will be eligible to participate in the program. This includes both taxable and non-taxable funds.

When will my fund be covered by the program?

Each fund must decide to participate in the program. If your fund participates in the program, your investment as of September 19, 2008 will be covered.

How much of an investor's money market fund is insured? What happens if the number of shares held in an investor's account increase above the level at the close of business on September 19, 2008? What happens if the number of shares held in an investor's account decreases below the level at the close of business on September 19, 2008?

The program provides a guarantee based on the number of shares held at the close of business on September 19, 2008. Any increase in the number of shares held in an account after the close of business on September 19, 2008 will not be guaranteed. If the number of shares held in an account fluctuates over the period, investors will be covered for either the number of shares held as of the close of business on September 19, 2008 or the current amount, whichever is less.
Examples include:
If an investor owned 100 shares in a money market fund as of close of business September 19, 2008, but owns 50 shares on the day the guarantee payment is made, after the fund breaks the buck, then that investor will be guaranteed for 50 shares.
If an investor owned 100 shares in a money market fund as of close of business September 19, 2008, but owns 150 shares on the day the guarantee payment is made, after the fund breaks the buck, then that investor will be guaranteed for 100 shares. The fund, upon liquidation, will distribute proceeds to the shareholder for the additional 50 shares, at net asset value.
If an investor owned 100 shares in a fund as of close of business September 19, 2008, subsequently sold 50 shares and later bought 25 shares, the investor owns 75 shares on the day the guarantee payment is made and will be guaranteed for 75 shares.
If an investor owned no shares in a fund as of close of business September 19, 2008, but owns 100 shares on the day the guarantee payment is made, none of the investor's shares are guaranteed by the program and the investor will receive the net asset value directly from the fund.

What if another fund in an investor's fund family breaks the buck before this program starts? Is the investor covered?

The program provides a guarantee on a fund-by-fund basis up to the amount of shares held as of the close of business on September 19, 2008. The performance of a different fund, even one in the same fund family of the investor's fund, doesn't affect the investor's fund's eligibility. Investors should contact their fund to determine if their fund participates in the program.

When does the program terminate?

The program is designed to address temporary dislocations in credit markets. The program will be in effect for an initial three month term, after which the Secretary of the Treasury will review the need and terms for the program and the costs to provide the coverage. The Secretary has the option to extend the program up to the close of business on September 18, 2009. In order to maintain coverage, funds would have to renew their participation in the program after each extension. If the Secretary chooses not to extend the program at the end of the initial three month period, the program will terminate.

Who provides this guarantee? Are investors able to get all of their money back whenever they want?

The U.S. Treasury Department, through the Exchange Stabilization Fund, is providing this guarantee. In the event that a participating fund breaks the buck and liquidates, a guarantee payment should be made to investors through their fund within approximately 30 days, subject to possible extensions at the discretion of the Treasury.
Is shareholder in a fund that broke the buck before September 19, 2008 covered?
No. This does not meet the program's eligibility criteria noted above.

What should shareholders in a participating fund that breaks the buck do? Who should they call?
If your fund enrolled in the program you will be covered and do not need to take any action. Shareholders should contact their fund directly.

Who should a fund contact if it has further questions about this program?

Please e-mail the Treasury Department atmoneymarketfundsguaranteeprogram@do.treas.gov.

September 29, 2008 hp-1161
Treasury Announces Temporary Guarantee Program for Money Market Funds
Washington- The U.S. Treasury Department today opened its Temporary Guarantee Program for Money Market Funds. The U.S. Treasury will guarantee the share price of any publicly offered eligible money market mutual fund – both retail and institutional – that applies for and pays a fee to participate in the program.

All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, maintain a stable share price of $1, and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program. Treasury first announced this program on Friday, September 19.

The temporary guarantee program provides coverage to shareholders for amounts that they held in participating money market funds as of the close of business on September 19, 2008. The guarantee will be triggered if a participating fund's net asset value falls below $0.995, commonly referred to as breaking the buck.

The program is designed to address temporary dislocations in credit markets. The program will exist for an initial three month term, after which the Secretary of the Treasury will review the need and terms for extending the program. Following the initial three month term, the Secretary has the option to renew the program up to the close of business on September 18, 2009. The program will not automatically extend for the full year without the Secretary's approval, and funds would have to renew their participation at the extension point to maintain coverage. If the Secretary chooses not to renew the program at the end of the initial three month period, the program will terminate.

To participate in the program, the Treasury Department will require money market funds with a net asset value per share greater than or equal to $0.9975 as of the close of business on September 19, 2008, to pay an upfront fee of 0.01 percent, 1 basis point, based on the number of shares outstanding on that date. Funds with net asset value per share of greater than or equal to $0.995 and below $0.9975 as of the close of business on September 19, 2008, will be required to pay an upfront fee of 0.015 percent, 1.5 basis points, based on the number of shares outstanding on that date. These fees will only cover the first three months of participation in the program.

Funds with a net asset value below $0.995 as of the close of business on September 19, 2008, may not participate in the program.

While the program protects the accounts of investors, each money market fund makes the decision to sign-up for the program. Investors cannot sign-up for the program individually. Funds should apply by October 8, 2008 for the program using the forms on the program webpage: http://www.blogger.com/cgi-bin/redirect.cgi?http://www.treas.gov/offices/domestic-finance/key-initiatives/money-market-fund.shtml.
Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS issued guidance that confirmed that participation in the temporary guarantee program will not be treated as a federal guarantee that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.

President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund to guarantee the payment

The Exchange Stabilization Fund was established by the Gold Reserve Act of 1934, as amended, and has approximately $50 billion in assets. This Act authorizes the Secretary of the Treasury, with the approval of the President, "to deal in gold, foreign exchange, and other instruments of credit and securities" consistent with the obligations of the U.S. government in the International Monetary Fund to promote international financial stability. More information on the Exchange Stabilization Fund can be found athttp://www.blogger.com/cgi-bin/redirect.cgi?http://www.treas.gov/offices/international-affairs/esf/

September 28, 2008 HP-1162
Statement by Secretary Henry M. Paulson, Jr. on Emergency Economic Stabilization Act
Washington, DC -- Treasury issued the following statement by Secretary Henry M. Paulson, Jr. on the Emergency Economic Stabilization Act of 2008:

I thank my colleagues on both sides of the aisle for their hard work over a very short time period to craft strong legislation that will enable us to strengthen our financial markets and promote the flow of credit to businesses and consumers that is so vital to our economic growth and prosperity. This bill provides the necessary tools to deploy up to $700 billion to address the urgent needs in our financial system, whether that be by purchasing troubled assets broadly, insuring troubled assets, or averting the potential systemic risk from the disorderly failure of a large financial institution. I am confident this legislation gives us the flexibility to unclog our financial markets and increase the ability of our financial institutions to deliver the credit that will help create jobs. We are taking the steps needed to be ready to begin implementing this legislation as soon as it is signed.

Members on both sides were focused on the right things – creating an effective program that can be implemented quickly and effectively, and doing everything possible to protect the taxpayers.
Quick, effective and bipartisan action sends a signal to investors large and small, here and abroad, that we are committed to taking the necessary actions to protect our financial system and our economy. The American people will recognize the leadership you have all shown to protect them – to preserve their access to credit, and preserve jobs.

Paulson Statement on Emergency Economic Stabilization Act

2008-10-05T10:48:00.002-05:00

HP-1175: Paulson Statement on Emergency Economic Stabilization Act
US Treasury Press Release

October 3, 2008
HP-1175

Paulson Statement on Emergency Economic Stabilization Act

Washington- By acting this week, Congress has proven that our Nation's leaders are capable of coming together at a time of crisis, even at a critical stage of the political calendar, to do what is necessary to stabilize our financial system and protect the economic security of all Americans.
The American people will appreciate the leadership of their elected representatives and senators who took bold action to help stem a severe credit crunch that threatens to cost many jobs and undermine access to credit for working Americans.

This bill contains a broad set of tools that can be deployed to strengthen financial institutions, large and small, that serve businesses and families. Our financial institutions are varied – from large banks headquartered in New York, to regional banks that serve multi-state areas, to community banks and credit unions that are vital to the lives of our citizens and their towns and communities. Each institution has its own unique benefits, and their collective strength makes our financial system more resilient, and more innovative. The challenges our institutions face are just as varied – from holding illiquid mortgage backed securities, to illiquid whole loans, to raising needed capital, to simply facing a crisis of confidence. This diversity of institutions and challenges requires that we deploy the tools in this rescue package, in combination with the tools the Fed, the Treasury, the FDIC and other bank regulators already have, in a variety of ways that addresses each of these needs and restores the ability of our financial system to fuel our broader economy.

There is no one-size-fits-all solution to alleviating the stress in our financial system. Each situation will be different and we must implement these new programs with a strategy that allows us to adapt to changing circumstances and conditions, and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets.
We will move rapidly to implement the new authorities, but we will also move methodically. In the coming days we will work with the Federal Reserve and the FDIC to develop strategies that deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system, so it can continue to play its necessary and vital role supporting the U.S. economy and American jobs. Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy.

Fed Chairman Ben Bernanke Presents Semi-Annual Monetary Policy Report to Congress

2008-02-27T23:28:00.000-06:00

Some links to examine Wednesday, February 27, 2008 testimony from Chairman Bernanke. The market believes the Fed will cut rates by 25 basis points. Time will tell if growth is really a more pressing problem than stabilization. We seem to be facing stagflation but that is a topic for another time.

Federal Reserve Board - Monetary Policy Report to the U.S. Congress February 27, 2008

Testimony Chairman Ben S. Bernanke - Semiannual Monetary Policy Report to the Congress - Before the Committee on Financial Services, U.S. House of Representatives February 27, 2008

Bloomberg.com
Articles:
Bernanke Signals Fed Prepared to Lower Rates Again (Update6) By Craig Torres and Scott Lanman Feb. 27, 2008
Dollar Trades Near Record Low Against Euro on Rate Differential By Kosuke Goto and Ron Harui Feb. 28, 2008

MarketWatch
Articles:
THE FED -Bernanke signals Fed to stay on easing course: Inflation risk remains a secondary concern behind stimulating growth By Greg Robb, MarketWatch 11:52 a.m. EST Feb. 27, 2008
CAPITOL REPORT - FOMC sets informal inflation target of 1.5% to 2% - Analysis: Bernanke pushes Fed as far as possible on formal goal By Rex Nutting, MarketWatch 10:28 a.m. EST Feb. 27, 2008
MARKET SNAPSHOT - U.S. stocks shift as profit-takers follow Fed chief By Kate Gibson, MarketWatch 4:32 p.m. EST Feb. 27, 2008
Predictions of rate cuts and inflation on rocky ride: Odds of rate cuts, then rate hikes, dance around on slew of economic news By Laura Mandaro, MarketWatch 5:05 p.m. EST Feb. 26, 2008

Commentary:
Audio Commentary: Battipaglia: Analysts are too optimistic Feb. 27, 2008
Audio Commentary: Kellner: We are facing 'stagflation' Feb. 27, 2008

New York Times (may require a subscription or registration)
Articles:
Fed Chief Signals He’s Open to More Rate Cuts By Edmund L. Andrews February 27, 2008
Bernanke Says Sagging Growth Is Chief Concern By Edmund L. Andrews
February 28, 2008

TheStreet.com
Market Features: Bernanke Signals More Rate Cuts By Nat Worden 02/27/08 - 12:12 PM EST

Wall Street Journal (may require a subscription or registration)
Articles:
Bernanke Hints at More Rate Cuts Amid Multiple Economic Risks By Tom Barkley and Brian Blackstone February 27, 2008 4:26 p.m.

Economics Blog:
Real Time Economics: Analysis of Major Themes in Bernanke’s Testimony February 27, 2008, 12:22 pm
Real Time Economics: Bernanke Flashback: The Financial Accelerator February 27, 2008, 12:15 pm
Real Time Economics: Bernanke to Banks, Fannie, Freddie: Dilute Your Shareholders February 27, 2008, 11:40 am
Real Time Economics: Fed Critiques: Too Timid or Too Aggressive? February 27, 2008, 9:24 am
Washington Post
Bernanke Signals Rate Cuts On Concern About Economy By Neil Irwin Washington Post Staff Writer Thursday, February 28, 2008

Yahoo! News
Investors Business Daily: Bernanke Suggests Further Rate Cuts As Economy Falters By Scott Stoddard Feb 27, 6:27 PM ET
Economy quotes from Wednesday hearing By The Associated Press Wed Feb 27, 4:05 PM ET
Bernanke says weak growth may prompt fresh rate cuts By Justin Cole AFP February 28, 2008
Bernanke says Fed prepared to help U.S. economy By (Reuters) Mark Felsenthal Wed Feb 27, 5:48 PM ET

International Views
FT.com (may require a subscription or registration)
Articles:
Dollar hits new low as Fed signals rate cut By Krishna Guha in Washington February 27 2008
UK Timesonline
Articles:
Uneasy Ben Bernanke gives the green light for fresh interest rate cut Gary Duncan, Economics Editor - The Times February 28, 2008
UK Telegraph
Articles:
US fed chief Bernanke hints at more rate cuts By James Quinn, Wall Street Correspondent Last Updated: 12:57am GMT 28/02/2008

Bloggers
ECONOMIST’S VIEW February 27, 2008 - Bernanke's Testimony before the House Financial Services Committee (includes access to video of testimony)

14 Tennessee bonds affected by major insurer's downgrade - Nashville, Tennessee - Thursday, 12/20/07 - Tennessean.com

2007-12-20T06:24:00.001-06:00

14 Tennessee bonds affected by major insurer's downgrade - Nashville, Tennessee - Thursday, 12/20/07 - Tennessean.com

Thursday, 12/20/07

BY STEPHEN BERNARD Associated Press

NEW YORK — A major insurer of bonds was downgraded to "junk" status on Wednesday, a move that could potentially cost banks and local governments billions of dollars.
Credit rating agency Standard & Poor's slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade "CCC" from investment grade "A." S&P cited concerns about increasing claims from defaults on mortgage-backed bonds, and the risk that those claims could drain the bond insurers of needed capital.

- follow link for story from Tennessean

Bond insurers had made guarantees on collateralized debt obligations (CDOs) (aka - mortgage backed securities). These bonds created by placing mortgages in trusts then selling the pay outs in the form of a bond to investors have the threat of default hanging over them. Something like a trillion dollars in CDOs have been insured by bond insurance companies. The assets the insurers have to back these payment guaranties are something like $20 billion. The downgrades taking place are due to the lack of assets. The default potential is an impact of the subprime crisis. The structure of these CDOs is such that the risk can't be determined now.

The downside is bond insurers insure governments allowing the insurers credit rating to stand for the government's, permitting it to pay a lower interest rate. The stock market had already priced these uncertainties into insurers share price dropping them. Now the rating agencies are getting nervous and starting to question or in this case actually lower the insurers debt rating.

Local government will need to work on improving their debt ratings because the insurers may not be there to provide a higher bond rating. The market has already raised the yield on insured bonds. More and more bond issuers are not using insurance when issuing new bonds because of this. This decreases the available market for municipal bonds because many investors require a bond to have an A or AA before they will buy it. This also means debt costs tax and rate payers more. Perhaps this will lead to an improvement in municipal financial management since that is what ratings are based on.

Would a massive tax break increase inflation?

2007-08-18T08:15:00.000-05:00

"Would a massive tax break increase inflation?" I saw this question on Yahoo Answers. This is a good general question because there is a lot of discussion concerning this issue.

Yes, a massive tax cut coupled with deficit spending would result in a small increase in (price levels) inflation with a caveat. The caveat is that the change in price level depends upon whether the government borrows to finance the deficit or it creates money. If money creation is the means of financing the deficit then yes a tax cut could increase inflation dramatically. A tax cut coupled with no deficit spending would no impact on inflation.

Fiscal policy is the use of government taxation and expenditure policies for the purpose of achieving macroeconomic goals.1

Inflation is an increase in the average level of prices of goods and services. Inflation can either be due to an increase in price level caused by excessive aggregate demand (demand-pull inflation) or due to an increase in the price level caused by an increase in the cost of production [supply-side] (cost-push inflation). In the case of demand-pull inflation the Aggregate Demand (AD) curve would shift rightward from AD0 to AD1 establishing a new equilibrium point that has shifted upward along the Aggregate Supply curve from equilibrium point E0 to E1 that would represent a higher equilibrium price with a higher level of output. In the case of cost-push inflation, the Aggregate Supply (AS) curve would shift leftward from AS0 to AS1 establishing a new equilibrium point that has shifted upward along the Aggregate Demand curve from equilibrium point E0 to E1 that would represent a higher equilibrium price with a lower level of output (as price increased demand decreased on the AD curve).2

Would a massive tax cut bring inflation? All things remaining the same, in the short run if the tax cut is coupled with a budget deficit, the budget deficit should lead to an increase in demand and thus in output. In the long run, changes in fiscal policy have no effect on output. The continuing need to borrow may increase long-term interest rates. The increase in interest rates offset the direct expansionary effect of lower taxes. The “crowding out” effect of government borrowing requiring a larger share of monies available for investment from the capital markets would reduce capital available for investment in the private sector. This lessens the opportunity for the growth of output in the private sector. This lowers output in the long run. 3

Deficit spending impact on demand is less than one would anticipate because expectations concerning future tax increases have changed. People should save more in anticipation of higher taxes in the future.4 This saving leads to a reduction in consumption leading to a decrease in demand over time.

The net effect of an increase in government deficits financed by borrowing due to a tax cut in the short run is: 1. Increase in output, 2. Small increase in price level, and 3. increase in interest rates. The net effect of an increase in government deficits due to a tax cut in the long run is: 1. No impact on output (return to normal level), 2. Small increase in price level, and 3. Increase in interest rates.

Money creation as the means of financing could actually lead to hyper inflation. Money creation is really more of a monetary policy issue.

My though is that reducing government spending wisely (we need services the government provides) coupled with decreases in taxes would be good for our economy and way of life.

Note 1: Bradley R. Schiller; The Economy Today 4th Edition, 1989; Chapter 7, p 149
2: Schiller, Chapter 7, p 170
3: Blanchard, Oliver; Macroeconomics, 1997, Chapter 29, p 588, 589
4: Blanchard, Chapter 29, p 589

Fiscal Wake-Up Tour

2007-07-24T06:12:00.000-05:00

Last week, I had the privilege to attend the Nashville stop of the Fiscal Wake-Up Tour. I am simply going to discuss my thoughts on the issues raised at this event. If you are interested you need to do more research on the issues explored by the Fiscal Wake-Up Tour on your on to come to an informed decision.

U.S. Comptroller David Walker with the help of the Concord Coalition, Brookings Institute, and Heritage Foundation has been to 22 cities in 21 states to make citizens aware of the pending crisis: federal spending on entitlement programs, such as Medicare, Social Security, and Medicaid; and interest on the federal deficit is increasing faster than the most optimistic hopes for federal revenue growth. Another part of this crisis is the rapid increase in the cost of health care and the coming retirement of the baby boomers.

The Concord Coalition is viewed as a nonpartisan public policy organization with the Heritage Foundation being a conservative think tank and the Brookings Institute a liberal think tank. What all three of these organizations have in common is a realization that federal spending on these programs and interest on debt is unsustainable. Comptroller Walker and the Government Accountability Office are spearheading this education effort.

What does this mean to you and me? Federal programs we all are eligible for at retirement such as Social Security and Medicare will either have to be curtailed in the future or supported by general taxes. The economy will be adversely affected by continuing borrowing to support deficit spending. This will impact our capital markets crowding capital for business investment. Another impact is on our national security, foreigners are holding higher and higher percentages of the federal debt. This will increase their influence in politics of our country.

State and local governments will be effected by a decrease in federal funds. This will mean to continue state and local programs at the same level of service will require increased taxes. The same is true for the federal government if it tries to maintain the same level of services.

These are not easy issues to deal with. The longer we wait the harder and more expensive it will be to deal with these problems. What can you do today? Educate yourself about this pending crisis and let your elected officials know that you want them to act. It will take hard choices to solve this problem. As was stated at this meeting, we cannot grow our way out of the crisis. Let them know your ideas on solving these problems.

Placeholder

2005-11-13T21:19:00.000-06:00

This week I have not really had time to think about what I need to say. We really need to delve into what a public good is. Once we have a few basic ideas, we can look at how things really work.

I also need to state that my view point is that of the U.S. system of government. This makes a difference in our discussion of public policy. We live in a capitalistic society with a democratic republic. These principles will steer our us in our journey through economics in public policy.

Finally, economics are frequently not inlcuded in policy discussions. This means that we can look some issues from a different perspective. We will probably be introduced to some side issues such as accountability and public financial management.

I will search for some issues that can commonly be discussed that are current events to help carry us through our journey by illustrating the ideas we will touch. Until next week.

What is government?

2005-11-05T18:34:00.000-06:00

Before we can explore the economics of public policy further, we need to understand government. What is government?

Often you hear people saying government should be run more like a business. There is a distinct difference between the objectives of a business and a government. A business exists to produce and sell goods and services in the market creating a profit for its owners. A government provides goods and services to its citizens that generally cannot be provided through market forces. Citizens involuntarily provide the revenues necessary to provide goods and services through taxes and fees.

Governments provide public goods. Public goods can be thought of as those goods and services that cannot effectively be provided by the market (e.g. police and fire protection, national defense, civil law, and a myriad of others). Once police protection is provided everyone shares in it equally whether they pay for it or not. This is an example of a pure public good. The idea of a public good is one of the challenges we will be examining in looking at economics as public policy.

Public finance is the study of government budgeting of revenues and expenditures. You could say this is microeconomics for governments. This will be part of our look at economics as public policy as well.

I have been slow in doing anything with this site but I will try to post something at least once a week. This discussion is meant more for regular citizens who have not been exposed to many of these ideas or views on public policy. Feel free to comment.

Hello!

2004-09-20T05:49:00.000-05:00

I've just started a blog to post my views on public policy. Frankly, you will see whatever strikes my fancy. I work in the area of public financial management and am fascinated by the process in which the public and their elected officials come to policy decisions. Often times I wonder about the drivers of decisions and how we get there. Will you get any deep insights from me? Probably not.

To utilize another’s statement with a modification - Money is the mother's milk of public policy. As you may remember from taking an introductory economics course, human desires are unlimited but resources are not. This leads to the idea of opportunity cost. This means if I have one dollar I can use it to buy a candy bar or a coke. If I buy one I give up the opportunity to consume the other. The idea is that we as rational economic men will choose whatever gives us the greatest satisfaction. The same decision goes on in public policy; scarce resources are allocated to different activities (programs) to provide satisfaction.

The question is how do we get there and what are the constraints?I hope we can look at this decision process together and come to a better understanding of it and how we can impact these decisions.