Chairman Sarbanes, Senator Gramm, members of the Committee, I very much appreciate your expeditious consideration of my nomination to be a member of the Federal Reserve Board. I have enjoyed a productive working relationship with this Committee and its staff over a number of years. Should the Senate confirm my nomination to the Board, I very much look forward to continuing to work with you to promote a strong economy and a robust financial system that serves the needs of all Americans. I am most grateful to President Bush for this nomination and deeply honored by his judgment that my abilities and experience will help the Board to carry out the critical responsibilities you, the Congress, have entrusted to it. Having spent my working life at the Federal Reserve, I may be more aware than most nominees who come before you of both the challenges and the rewards of the position to which I aspire.
Our economy has made considerable progress over the last two decades toward the goals you have set for monetary policy of maximum employment, stable prices, and moderate long- term interest rates. We have enjoyed two exceptionally long economic expansions punctuated by relatively mild recessions, an inflation rate that has reached what many would consider to be a zone of price stability, and relatively low long-term interest rates that have helped to promote wider home ownership. Technological innovation, deregulation, and globalization, by fostering greater economic and financial flexibility and resiliency and more rapid increases in productivity, largely account for this favorable performance. But the conduct of monetary policy surely also has played a role in establishing a background conducive to economic vitality. This policy has been marked by a balancing of discipline and flexibility the discipline of focusing on long-run price stability as a necessary precondition for maximum employment and moderate long-run interest rates, and the flexibility within that long-term discipline to counter disturbances to the economy and financial markets that might threaten maximum sustainable employment as well as stable prices.
Going forward, in order to do its part in promoting good economic performance, the Federal Reserve will continue to be faced with the need to analyze and adapt to a dynamically changing economy and financial markets. Innovation and deregulation in markets and the globalization of finance are affecting the flow of funds between savers and spenders and the distribution of risks and returns in the financial system. These changes, in my view, have not detracted from the effectiveness of monetary policy, and they have increased both economic efficiency and financial stability. But they have also opened the economy to new kinds of influences and they are altering the channels through which policy affects the economy. In just the last few years, our financial and economic stability has been challenged by crises originating in East Asia and Russia, and by huge variations in asset prices here and abroad as investors strove to peer through considerable fog to evaluate the implications of rapidly changing technologies and market structures. The significance of those asset price movements has been magnified by the growing importance of wealth to household financial conditions. Policymakers have been required to decipher the shifting forces driving the economy and to adjust policy, sometimes rapidly, to provide a counterweight to developments that threatened to undermine economic performance. Where possible, those policy adjustments have been forward- looking anticipating the effects of economic forces so as to forestall emerging instabilities. It is a process in which I have been deeply involved, working with policymakers and staff, and I would welcome the opportunity in a new role to bring my experience and expertise to bear on the difficult, but fascinating, issues that confront the Federal Reserve's conduct of monetary policy.
The increasing volume of finance flowing through securities markets, the spread of wealth to more Americans, and the growing prominence of global investors in our financial markets have put an additional premium on the ability of the Federal Reserve to explain its policy to the public. More people from more diverse backgrounds are making important decisions based on their expectations of policy actions and their effects. When savers and borrowers understand how the Federal Reserve sees the forces developing in the economy relative to its objectives, interest rates and other prices in financial markets are more likely to be set in a way that helps to achieve these objectives. I have worked extensively in my career at the Federal Reserve to help policymakers explain monetary policy. While we have made considerable progress in recent years, improving the clarity, completeness, and timeliness of our various public statements is an ongoing process that must be continued.
As the Congress recognized when it created the Federal Reserve, economic stability rests on a foundation of financial stability. In no area of Federal Reserve responsibilities do changing market structures pose a bigger challenge than in carrying out the supervision and regulation of banks and holding companies. Changes in the legislative framework for the financial sector in recent years have allowed consolidation within the banking sector and, now, between banking and other financial service providers, permitting markets to realize economies of scale and scope in the delivery of financial services. This consolidation, along with the proliferation of new instruments to price and trade various aspects of risk, I believe, promotes sounder, more diversified, institutions and a system in which both those supplying and using savings have many more alternatives. The regulatory implementation of these new laws needs to allow the markets to evolve with changing preferences and technologies, while preserving competition in the delivery of services and financial stability. It also must protect against the effective spread of the safety net beyond the core depositories for which Congress intended special protection. No depository institution should be insulated from market forces by being considered "too big to fail." But because banks do have access to the safety net, market signals are muted by moral hazard. Moreover, as institutions become more complex and deal in a great number of new instruments, markets and managers may find it difficult to evaluate some risks accurately, increasing the chances for unexpected losses. In order to promote efficient resource allocation and maintain financial stability, supervisors must anticipate potential problem areas and must put in place oversight structures that build on existing market signals and risk management and simulate market pressures where those signals are inadequate.
The growing access to credit markets for all our citizens is another very positive development in our financial system. It has resulted from efforts to eliminate discriminatory practices along with the recognition by lenders that profitable opportunities exist in making credit available to those with lower income and wealth. But regulators, borrowers, and lenders are still adjusting to the expansion of the market. Many borrowers in the so-called subprime segment of the credit markets are having difficulty servicing the additional debt, more difficulty than lenders anticipated, resulting in the need for supervisory actions for a number of bank lenders. In addition, it has increased the opportunities for unscrupulous lenders to take advantage of less well-informed consumers. Clearly, efforts to educate credit users better should have important payoffs. More generally, the key in this area is to find the difficult balancing point for regulation that allows the markets to generate the greatest number of legitimate alternatives for borrowers while proscribing clearly abusive practices.
Meeting these various challenges will require a strong Federal Reserve System. You have such an institution now. It is widely respected and relied upon, not only to follow the appropriate policies but for its advice in a variety economic and financial matters. Although the Federal Reserve tends to speak with one voice, in my experience decisions are preceded by healthy give-and-take among policymakers with diverse views supported by talented and dedicated staff. Should the Senate see fit to confirm my nomination, I am looking forward to adding my own perspective to that dialogue as a policymaker and will do my best to pass on to future generations an institution just a strong as the one its current and past leaders have bequeathed to this generation of Americans.
Thank you. I would be pleased to answer any questions you might have.
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