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New York City, May - October 1975 (4)
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New York City, May - October 1975 (4)
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New York City financial crisis
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The original documents are located in Box 78, folder "New York City, May - October
1975 (4)" of the L. William Seidman Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
2p.m.
OF
THE
NYC
2
THE 1789 TREASURY
OFFICE OF THE SECRETARY OF THE TREASURY
WASHINGTON, D.C. 20220
September 19, 1975
MEMORANDUM FOR BILL SEIDMAN
From: Dave Gergen
Subject: Speech for Economic Club of New York
Secretary Simon asked if you would be kind enough
to review this draft and return your comments to his
office. He would very much appreciate it if you could
respond before the end of today.
Many thanks
Digitized from Box 78 of the L. William Seidman Files at the Gerald R. Ford Presidential Library
DRAFT
ADDRESS BY THE HONORABLE WILLIAM E. SIMON 9/19/75
Warna Copt
SECRETARY OF THE TREASURY
TO THE NEW YORK ECONOMICS CLUB
SEPTEMBER 23, 1975
?
I WANT TO THANK EACH OF YOU FOR YOUR KIND INVITATION
TO SPEAK HERE TONIGHT. I HAVE BEEN LOOKING FORWARD TO THIS
OCCASION FOR SOME TIME BECAUSE I COULD THINK OF NO BETTER
FORUM TO DISCUSS A MATTER OF GROWING CONCERN TO MANY OF US
IN THIS CHAMBER: THE CONDITION OF THE NATION'S FINANCIAL
MARKET STRUCTURE.
As YOU KNOW, THERE IS AN OLD ADAGE ON WALL STREET
THAT "THE MARKET IS ALWAYS TELLING YOU SOMETHING." THE
SIGNALS ON ANY SINGLE DAY OR WEEK MAY BE CONFUSING OR
CONTRADICTORY, BUT IF THERE ARE PRONOUNCED TRENDS OVER A
LONG PERIOD OF TIME, YOU CAN IGNORE THEM ONLY AT YOUR OWN
PERIL.
FORD if LIBRARY GERALD
ITSELF IS UNDER INCREASING STRESS, LET ME BE SPECIFIC ABOUT
THE SYMPTOMS THAT CONCERN ME:
*ACCESS TO THE BOND MARKETS TODAY IS FOR ALL PRACTICAL
PURPOSES LIMITED TO ONLY TOP-RATED COMPANIES, EXCEPT IN
RARE INSTANCES, A GOOD COMPANY WITH LESS THAN A PRIME RATING
CAN NO LONGER TAP THE LONG-TERM PUBLIC DEBT MARKET AS A
GERALD
LIBRARY
-
3 - - OR THE NEW GROWIH COMPANY,
On ENENA VERY SOLID 605 NOT
^
SOURCE OF LONG-TERM FUNDS, THE MARGINAL COMPANY HAS
A-RATE.
1
COMPAN
BEEN SHUT OUT ALTOGETHER,
* IN THE EARLY 1960s, THRIFT INSTITUTIONS PAID "FINDERS
FEES" JUST TO HAVE THE CHANCE TO INVEST IN 5-5 1/2% MORTGAGES,
TODAY THEY WORRY ABOUT HANGING ON TO THEIR DEPOSITS WHILE
RELUCTANTLY MAKING A FEW HOME MORTGAGES AND THEIR MORTGAGE
RATES ARE CLOSE TO 10%.
# AT A TIME WHEN OVER 60% OF THE SECURITIES LISTED ON
THE NEW YORK STOCK EXCHANGE ARE CURRENTLY SELLING BELOW BOOK
VALUE, THE STOCK MARKET HAS ALMOST DRIED UP AS A SOURCE OF
NEW LONG-TERM FUNDS,
#
LENDERS ARE INCREASINGLY RELUCTANT TO MAKE LONG-TERM
COMMITMENTS, MANY MORE NEW SECURITIES TODAY ARE OF INTERMEDIATE-
25 30
TERM DURATION (7-10 YEARS) RATHER THAN 30 OR 40 YEARS
DURATION WHICH WERE COMMON NOT THAT LONG AGO,
GERAL
- 4 -
#
THE DEBT DURDEN OF CORPORATIONS HAS INCREASED
PHENOMENALLY OVER THE PAST DECADE SO THAT DEBT RELATIVE TO
EQUITY HAS APPROXIMATELY DOUBLED. SINCE INTEREST COMMITMENTS
ARE FIXED AND MUST BE MET NO MATTER WHAT THE ECONOMIC
CIRCUMSTANCES, BUSINESS FIRMS NOW RUN A SIGNIFICANTLY GREATER
RISK THAT EVEN A MODEST-SIZED BUSINESS CONTRACTION COULD
SHARPLY REDUCE THEIR PROFITS AND COULD EVEN SQUEEZE THEM OUT
OF EXISTENCE,
*
PENSION FUNDS, ESPECIALLY IN THE PUBLIC SECTOR, ARE
WELL SHORT OF BEING FULLY FUNDED, SO THAT SERIOUS QUESTIONS
MUST NOW BE FACED ABOUT THEIR FUTURE, IF THEY ARE TO BE
FUNDED, HOW IS IT TO BE DONE? WHO WILL PAY THE bill? AND
IF THEY ARE NOT TO BE FUNDED, WHAT THEN?
#
IN SOME INSTANCES, WHOLE INDUSTRIES SUCH AS THE
AIRLINES AND UTILITIES ARE NOW HAVING SERIOUS FINANCIAL
ROBLEMS,
- 5 -
#
THE CAPITAL BASE OF COMMERCIAL BANKS HAS SO SHRUNK
RELATIVE TO DEPOSITS THAT THE FEDERAL RESERVE HAS SEEN FIT
TO "ENCOURAGE" BANKS TO ADOPT A MORE PRUDENT EXPANSIONARY
PHILOSOPHY,
Too MANY
*
LESS THAN PRIME-RATES COMPANIES ARE VIRTUALLY
DEPENDENT NOW ON SHORT-TERM BANK BORROWING FOR WHAT AMOUNTS
TO LONG-TERM EXPANSION NEEDS,
*
MANY STATE AND LOCAL SUBDIVISIONS ARE UNDER INCREASING
FINANCIAL PRESSURE, WITH NEW YORK CITY OF COURSE CLEARLY
HAVING EXTENDED ITSELF BEYOND REASONABLE LIMITS,
*
AND WITH THE RECOVERY STILL IN ITS EARLY STAGES,
INTEREST RATES ARE NOW AT LEVELS WHICH 10 YEARS AGO WOULD
UNREALISTIC SPERHAPS
HAVE BEEN CONSIDERED, POSSIBLE ONLY AT THE VERY PEAK OF A
VERY STRONG ECONOMIC EXPANSION,
I DO NOT MEAN TO CAST A PALL OF GLOOM OVER OUR FUTURE
ECONOMIC HOPES. THE RECOVERY THAT BEGAN EARLIER THIS YEAR
- 6 -
CHOOSE OUR POLICIES
PROMISES TO BE VIGOROUS AND HEALTHY, IF WE MANAGE IF WISELY,
IT SHOULD ALSO BE DURABLE AND LASTING, BUT I DO THINK IT
IS ESSENTIAL THAT WE FACE UP TO THE PROBLEMS THAT ARE
ACCUMULATING IN OUR FINANCIAL MARKETS AND THAT WE ACT MORE
DECISIVELY TO ELIMINATE THE UNDERLYING CAUSES. WE MUST
PROVIDE AN ENVIRONMENT IN WHICH THE NATURAL SELF-CORRECTIVE
FORCES OF THE MARKET PLACE CAN FUNCTION. IF WE FAIL IN
THAT EFFORT -- IF WE ALLOW THE CONDITIONS OF RECENT YEARS TO
FESTER AND SPREAD -- THEN I THINK WE ARE INVITING MUCH MORE
SERIOUS TROUBLE ONLY A FEW YEARS FROM NOW. THE FINANCIAL
MARKETS WILL NOT, NOR SHOULD THEY BE EXPECTED TO TOLERATE
A LONG PERIOD OF SEVERE AND UNRELIEVED PRESSURE.
LET US TURN THEN TO A CONSIDERATION OF THE CAUSES
WHICH LIE BENEATH OUR PRESENT TROUBLES AND WHAT MUST BE DONE
TO RELIEVE THEM.
GREAT FORD LIBRARY
ORIGINS OF THE FINANCIAL STRESS
THE CAUSES ARE MANY AND COMPLEX. THEY REQUIRE A CAREFUL
ANALYSIS OF THE PAST ECONOMIC, POLITICAL AND SOCIAL TRENDS --
A TASK THAT SOME HISTORIANS CAN DEAL WITH IN A THOROUGH
WAY AT SOME FUTURE DATE. STILL, THERE ARE SOME IMMEDIATELY
IDENTIFIABLE ECONOMIC REASONS WHICH HAVE OBVIOUSLY CONTRIBUTED
TO THE CURRENT STRAINS IN THE FINANCIAL SYSTEM, REASONS WHICH
ARE BASIC AND INTERRELATED: NAMELY, THE EXTRAORDINARILY HIGH
RATES OF INFLATION EXPERIENCED IN RECENT YEARS AND THE
SHORT SIGHTED GOVERNMENT AND PRIVATE POLICIES WHICH HAVE
CONTRIBUTED TO THE INFLATION.
THE INFLATION AND ITS IMPACT ON FINANCIAL MARKETS DID
NOT JUST HAPPEN BUT WERE THE NATURAL AND LARGELY PREDICTABLE
RESULT OF A SERIES OF OCCURRENCES WHICH FOR THE MOST PART
COULD HAVE BEEN AVOIDED:
LIBRARY
- 8 -
FIRST, OUR FEDERAL GOVERNMENT HAS BEEN LIVING BEYOND
ITS MEANS FOR FAR TOO LONG, IN FISCAL YEAR 1962 THE FEDERAL
BUDGET EXCEEDED $100 BILLION FOR THE FIRST TIME IN HISTORY,
By FISCAL YEAR 1971 IT EXCEEDED $200 BILLION. By FISCAL
YEAR 1975 IT EXCEEDED $300 BILLION AND A FIGURE OVER $400
BILLION IN FY 1977 IS NOW CERTAIN, IN OTHER WORDS FEDERAL
GOVERNMENT OUTLAYS FOR THE PAST DECADE HAVE BEEN GROWING AT
A RATE OF OVER 10% PER YEAR OR ALMOST 25% MORE THAN THE GROWTH
OF THE TOTAL ECONOMY. As A RESULT, THE GOVERNMENT'S REGULAR
BUDGET AGENCIES AS WELL AS THE OFF-BUDGET AGENCIES -- THE
CREATURES SET UP A FEW YEARS AGO PARTLY TO AVOID THE DISCIPLINE
OF THE BUDGET PROCESS -- HAVE TOGETHER BEEN FORCED TO BORROW
OVER A THIRD OF A TRILLION DOLLARS FROM OUR PRIVATE MONEY
MARKETS OVER THE PAST DECADE -- MONEY THAT MIGHT OTHERWISE HAVE
BEEN USED TO BUILD NEW PLANTS AND TO CREATE NEW JOBS IN THE
PRIVATE SECTOR. IT IS NO WONDER THAT INFLATION HAS ACCELERATED
AND INTEREST RATES HAVE RISEN TO RECORD LEVELS, SUCH HUGE
SIZED BORROWINGS PUT PRESSURE ON FINANCIAL MARKETS AND
GERALA FORD
- 9 -
INTEREST RATES, WHEN THE U.S. TREASURY GOES TO THE HEAD OF
THE LINE TO MEET ITS BORROWING NEEDS -- AS IT ALWAYS DOES --
AND WHEN THOSE NEEDS ARE CONTINUALLY OVERSIZED, THEN INTEREST
RATES ARE NATURALLY DRIVEN UP, SOME PRIVATE NEEDS to UNFULFILLED
AND PRIVATE INVESTMENT SUFFERS, THIS IS THE ESSENCE OF THE
"CROWDING OUT" PROBLEM THAT I BEGAN POINTING TO LAST YEAR
AND WHICH HAS NOW so OBVIOUSLY SURFACED IN OUR MARKETS,
SECOND, THERE HAS BEEN AN EXCESSIVE EXPANSION OF THE
MONEY SUPPLY OVER THE PAST DECADE RELATIVE TO SUSTAINABLE
NEEDS, ULTIMATELY THIS EXPANSION ALSO SERVES TO RAISE THE
RATE OF INFLATION AND INTEREST RATES, A GOOD DEAL OF THIS
MONETARY EXPANSION, I MIGHT ADD, IS RELATED TO THE CHRONIC
FEDERAL BUDGET DEFICITS BUT ANOTHER PART IS ALSO ATTRIBUTABLE
TO POLICIES WHICH TRIED TO FINANCE OUR WAY QUICKLY OUT OF
RECESSION. THESE POLICIES HAVE SHOWN THEMSELVES TO HAVE
BEEN LATE IN TIMING AND FAR OFF THE MARK QUANTITATIVELY IN
TERMS OF NEED. NEEDLESS TO SAY, THIS PROCESS HAS CONTRIBUTED
GERALD
IBRARY
- 10 -
$
TO THE APPARENT INCREAING VOLATILITY OR STOP-GO NATURE OF
THE GOVERNMENT'S ECONOMIC POLICIES,
THIRD, THE HIGHER RATE OF INFLATION IN RECENT YEARS
HAS RAISED THE DOLLAR COST OF PHYSICAL INVESTMENT NEEDS,
THOSE HIGHER COSTS, COUPLED WITH ACCOUNTING PROCEDURES THAT
ARE UNABLE TO ADJUST TO HIGH RATES OF INFLATION AND A TAX
STRUCTURE THAT IS BIASED AGAINST EQUITY FINANCING, HAVE
FORCED COMPANIES TO SEEK MORE AND MORE EXTERNAL FINANCING,
PARTICULARLY IN THE DEBT MARKETS, IN TURN, THERE HAVE BEEN
GROWING DISTORTIONS IN CORPORATE BALANCE SHEETS AND INCREASING
ILLIQUIDITY WITHIN THE COMPANIES THEMSELVES, THIS PROCESS
HAS PROCEEDED TO THE POINT WHERE IT IS QUESTIONABLE WHETHER
MANY CORPORATIONS WILL HAVE THE ABILITY TO FINANCE THE
RECORD CAPITAL NEEDED IN THE DECADE AHEAD.
FOURTH, THE HIGHER INFLATION PLUS THE GREATER VOLATILITY
IN FINANCIAL MARKETS RELATED TO GOVERNMENT POLICIES HAS
FORD
UNDERSTANDABLY MADE LENDERS MORE LEARY ABOUT LONG-TERM
- 11 -
COMMITMENTS. HIGHER INTEREST RATES ARE DEMANDED AND RECEIVED
TO HEDGE AGAINST FUTURE INFLATION AND TO COMPENSATE FOR
HIGHER RISK. MOREOVER, SHORTER MATURITIES AND GREATER
CALL PROTECTION ARE ROUTINELY REQUESTED IN ORDER TO BE HEDGE.
AGAINST THE POSSIBILITY THAT
MIGHT BE
PROTECTED IN CASE FUTURE RATES OF INFLATION SHOULD PROVE - TO
THOSE
BE DIFFERENT FROM THAT ANTICIPATED.
FIFTH, THE COMBINATION OF ALL OF THESE CONDITIONS HAS
CAUSED CORPORATE TREASURERS TO FOCUS ONLY ON VERY PROMISING
PROJECTS WITH HIGH RETURNS, ACCENTUATING THE PATTERN OF
UNDERINVESTING IN RECENT YEARS,
HAVE WE SEEN
AN Excess
WHAT THEN DO-WE-SEE IN OUR ECONOMY?
A-PLAGUE
OF
STOP-GO
BEHAVIOR, SECULARLY RISING INTEREST RATES, SLOW REAL GROWTH,
Disappointing
POOR WORKER PRODUCTIVITY, HISTORICALLY HIGH RATES OF
INFLATION AND A BODY POLITIC CALLING FOR SOME QUICK CURE ALL THAT
DOESN'T EXIST, IT SHOULD COME AS NO SURPRISE THAT OUR
FINANCIAL STRUCTURE -- STILL A WONDER IN TERMS OF GROSS
CREDIT FLOWS AND ALLOCATION -- IS FEELING THE STRAIN, WE
LIBRARY
12
REALLY HAVE OURSELVES TO BLAME FOR THIS PREDICAMENT. IT
TOOK MANY YEARS TO DEVELOP, BUT AT THE SAME TIME, WITH SOME
PATIENCE, THE DIFFICULTIES CAN BE REVERSED,
THE FUTURE DEMANDS ON THE FINANCIAL STRUCTURE
THE BASIC ECONOMIC FUNCTION OF THE FINANCIAL STRUCTURE
IS, OF COURSE, TO FACILITATE THE ENORMOUS FLOW OF CAPITAL
WITHIN OUR ECONOMY, IT IS THE TRANSMISSION MECHANSIM THAT
ENCOURAGES THE ACCUMULATION OF REAL PHYSICAL CAPITAL -- FACTORIES
HOUSING, TOOLS, ET CETERA, THAT CAPITAL IN TURN CREATES
NEW JOBS, ENABLES WORKERS TO BECOME MORE PRODUCTIVE AND
GENERATES A HIGHER REAL LIVING STANDARD, HELPS US TO MEET
FOREIGN COMPETITION, CONTAINS THE PACE OF INFLATION,
PROMOTES A GROWING ECONOMY, AND ENABLES US TO MEET EXPANDING
DEMANDS FROM THE PUBLIC, INVESTMENT CAPITAL THUS PROVIDES
THE DRIVING FORCE BEHIND ECONOMIC GROWTH, AND IT CAN WORK
EFFECTIVELY ONLY IF OUR FINANCIAL MARKETS ARE WORKING
SMOOTHLY,
LIBRARY
- 13 -
THE ISSUE THEREFORE IS TO GAUGE THE FUTURE NEEDS FOR
CAPITAL IN OUR SYSTEM AND THEN SEE WHETHER THE FINANCIAL
STRUCTURE IS CAPABLE OF HANDLING THE FINANCING FLOWS REQUIRED
FOR THAT INVESTMENT, IN MY JUDGMENT, THE ANSWER IS THAT
THE FINANCIAL SYSTEM CAN RISE TO THIS CHALLENGE, BUT ONLY
IF WE CHART A NEW AND SIGNIFICANTLY DIFFERENT COURSE IN OUR
GOVERNMENT POLICIES,
THE FUTURE NEEDS FOR CAPITAL -- THE SO-CALLED "CAPITAL GAP 0
SHORTAGE" IF YOU WILL -- ARE ENORMOUS,
THE MOST IMMEDIATE NEED FOR MORE CAPITAL IS TO CREATE
JOBS FOR OUR RAPIDLY GROWING LABOR FORCE. BETWEEN NOW AND
1985 THE LABOR FORCE WILL EXPAND BY ROUGHLY 15 MILLION
PERSONS, IN ADDITION, THERE ARE AT LEAST 3-4 MILLION
UNEMPLOYED PERSONS IN THE LABOR FORCE TODAY WHO MUST ALSO
JOBS
HAVE JOBS. By COMPARISON TO THE 18-19 MILLION THAT THAT WILL
THUS BE NEEDED IN THE COMING DECADE, OUR ECONOMY CREATED
- 14 -
16
APPROXIMATELY
MILLION JOBS DURING THE PAST DECADE
AND FOR THE MOST PART THAT WAS DURING A PERIOD THAT WAS
CHARACTERIZED BY STEADY ECONOMIC GROWTH. THE TASK AHEAD IS
THUS VERY FORMIDABLE INDEED.
IN ADDITION TO THE CHALLENGE OF CREATING NEW JOBS, A
SECOND BROAD SET OF CAPITAL NEEDS AHEAD CENTER AROUND
SPECIFIC PUBLIC POLICY OBJECTIVES: THE DEVELOPMENT OF NEW
ENERGY RESOURCES TO BECOME MORE SELF-SUFFICIENT; AN IMPROVEMENT
IN THE QUALITY OF OUR ENVIRONMENT; SAFER WORKING CONDITIONS
TO PROTECT THE WELL BEING OF OUR LABORERS; AND THE PROVISION
OF MORE AND BETTER QUALITY HOUSING TO SATISFY THE NEEDS OF
A GROWING POPULATION. CLEARLY, THESE REQUIREMENTS ARE NOT
ABSOLUTE AND THE LIST CAN BE EXPANDED, FURTHERMORE, THERE IS
NO SINGLE "CORRECT" DOLLAR TOTAL THAT CAN BE IDENTIFIED WITH
THESE OUTLAYS. BUT WE KNOW THAT THE LEVELS ARE EXTRAORDINARY,
SOME
IN THE ENERGY FIELD ALONE, MADY ESTIMATES OF CAITAL NEEDS
CLOSE TO
OVER THE COMING DECADE ARE INSURE OF $1 TRILLION.
GERALD LISBARY
- 15 -
WHEN THE TWO BROAD CATEGORIES OF NEEDED CAPITAL FOR THE
LABOR FORCE AND FOR SPECIFIC PUBLIC POLICY GOALS ARE ADDED,
THE TOTAL PRIVATE INVESTMENTOUTLAYS REACH A TOTAL SOMEWHERE
BETWEEN $4-4 1/2 TRILLION OVER THE NEXT DECADE. By STARTLING
CONTRAST, THE CUMULATIVE TOTAL OVER THE PAST DECADE WAS
$1.5 TRILLION, THUS, YOU CAN SEE THAT OUR CAPITAL EXPENDITURES
ROUGHLY
IN THE DECADE AHEAD WILL HAVE TO BE THREE TIMES AS LARGE AS
1
THOSE OF THE PAST DECADE,
WHETHER THE FINANCIAL MECHANISM CAN HANDLE THE HUGE FLOW
OF SAVINGS, INVESTMENT AND CREDIT ASSOCIATED WITH THE CAPITAL
NEEDS OUTLINED ABOVE WITHOUT BECOMING MORE ILLIQUID, BRITTLE
AND LESS FLEXIBLE IN WITHSTANDING EXTERNAL ADVERSE SHOCK IS
AN OPEN QUESTION, THE RISE IN CORPORATE DEBT OVER THE PAST
DECADE WITH ITS FIXED OBLIGATION $ TO PAY RAISES CLEAR QUESTIONS
ABOUT THE ABILITY TO FINANCE FUTURE CAPITAL OUTLAYS. IT IS
A LOT
JUST NOT CLEAR WHETHER THE SYSTEM CAN ACCOMMODATE MUCH MORE
h
DEBT, INDEED, THE SHEER EXPANSION OF CORPORATE DEBT RELATIVE
GERALL
LIBRARY
- 16 -
TO ASSETS OR EQUITY ON THE BALANCE SHEET WILL CAUSE CREDIT
RATINGS TO DETERIORATE AND INTEREST COSTS TO RISE, CHRONIC
FEDERAL BUDGET DEFICITS WHICH DRAIN THE SAVINGS POOL OR CROWD
OUT PRIVATE BORROWERS WOULD MEAN LESS INVESTMENT, LOWER
PRODUCTIVITY AND HIGHER INFLATION. THIS WOULD PUT SEVERE
STRAIN ON THE TRADITIONAL THRIFT INSTITUTIONS AND ESPECIALLY
ON THE OUTLOOK FOR HOUSING,
IN MY VIEW, AS I HAVE SAID, OUR ABILITY TO MEET THESE
CAPITAL REQUIREMENTS AND THE ABILITY OF THE FINANCIAL SYSTEM
TO ACCOMMODATE THESE NEEDS WILL ONLY BE ASSURED IF THERE ARE
SOME RATHER PRONOUNCED SHIFTS IN PUBLIC POLICY. WHAT WE
NEED IS A FINANCIAL MECHANISM CONDUCIVE TO GROWTH AND THAT
MECHANISM IS PLAINLY NOT COMPATIBLE WITH AN ENVIRONMENT OF
HIGH INFLATION, SLOW GROWTH AND ERRATIC STOP-GO GOVERNMENT
POLICIES,
GENERAL POLICY NEEDS
I WOULD LIKE TO OFFER FOUR CONCRETE SUGGESTIONS FOR
GENAL FORD
- 17 -
FUTURE POLICY DIRECTIONS,
FIRST, I BELIEVE WE MUST ELIMINATE THE STOP-GO BEHAVIOR
ON THE PART OF THE GOVERNMENT IN SETTING AND PURSUING
ECONOMIC POLICIES, SUCH POLICY CHANGES ARE TYPICALLY A
RESPONSE TO SHORT-RUN DEVELOPMENTS IN THE ECONOMY AND IT IS
NOT UNCOMMON FOR THE ECONOMY TO FOLLOW A ZIGZAG COURSE. BECAUSE
THERE IS TYPICALLY A LAG BETWEEN THE DEVELOPMENT OF A NEW
POLICY AND ITS IMPACT ON THE ECONOMY, ABRUPT POLICY CHANGES
TEND TO COME TOO LATE TO ACCOMPLISH THEIR ORIGINAL GOAL AND
CAN OFTEN WORK AT CROSS PURPOSES WITH CURRENT NEEDS. INDEED,
SINCE THE MID-60s, RATHER THAN ACTING TO STABILIZE THE ECONOMY,
TENDED TO
SUCH SHIFTS HAVE ACCENTUATED THE ECONOMY'S BASIC CYCLICAL
TO SOME EXTENT THEY
SWINGS, AND HAVE BECOME DESTABILIZING.
SPECIFICALLY, IT SEEMS TO ME THAT THE MIX OF MACRO-
STABILIZATION POLICIES OF THE PAST SHOULD BE RADICALLY
A
SHIFTED AWAY FROM THE PATTERN WHICH HAS EMPHASIZED GENERAL
TAX CUTS TO STIMULATE THE ECONOMY AND TIGHT MONEY TO SLOW
LIBRARY
- 18 -
IT DOWN. OVER TIME, SUCH A MIX CREATES AN INADVERTANT
BUT STILL PRONOUNCED ANTI-INVESTMENT BIAS TO GOVERNMENT
POLICIES WHICH ARE TOTALLY INAPPROPRIATE TO OUR LONG-TERM
CAPITAL NEEDS AND TO THE VERY FUNCTIONING OF OUR FINANCIAL
STRUCTURE, AT A MINIMUM, THE GROWTH IN GOVERNMENT SPENDING
MUST BE BROUGHT INTO CLOSER LINE WITH THE GROWTH OF THE
ECONOMY AND AN APPROPRIATE NET BUDGET BALANCE MUST BE EFFECTED.
IN FACT, WE SHOULD AIM FOR A SURPLUS BUDGET POSITION AT FULL
EMPLOYMENT IN ORDER TO REDUCE THE DRAIN ON THE PRIVATE
SAVING STREAM AND TO PROVIDE FUNDS FOR FUTURE CAPITAL GROWTH,
THE COUNTRY CANNOT AFFORD TO HAVE THE TREASURY USE ITS
MUSCLE TO CROWD OUT PRIVATE BORROWERS, To DO SO WOULD
FRUSTRATE THE ACCUMULATION OF SUFFICIENT CAPITAL RESOURCES
RELATIVE TO OUR NEEDS AND WOULD IMPOSE GROWING PRESSURE ON
AN ALREADY WEAKENED FINANCIAL MECHANISM,
SECONDLY, WE MUST MAINTAIN A CONSISTENT EFFORT TO LOWER
THE RATE OF INFLATION -- NOT JUST TO THE 6-8% RANGE BUT
GERALD
- 19 -
EVENTUALLY TO SOMETHING MUCH LOWER.
[
AND WITH THAT EFFORT,
WE MUST ALSO LOOSEN THE GRIP OF THE INFLATIONARY PSYCHOLOGY
THAT IS NOW SO STRONG,
PARTS OF OUR FINANCIAL STRUCTURE AS
IT NOW EXISTS WILL NOT REMAIN VIABLE EVEN WITH SUSTAINED
HIGH SINGLE-DIGIT INFLATION, LET ALONG A DOUBLE-DIGIT PACE,
FURTHERMORE, THE HIGH INFLATION IS DISTORTING THE WORKINGS
OF THE MARKET MECHANISM IN THAT:
--- IT ENCOURAGES LENDERS TO DEMAND VERY HIGH RATES
OF INTEREST IN REFLECTION OF EXPECTED HIGH FUTURE RATES OF
INFLATION, AND
-- IT DISCOURAGES BORROWERS FROM UNDERTAKING INVESTMENT
ARE MUCH
PLANS BECAUSE FUTURE RETURNS AS N LESS PREDICTABLE,
A THIRD SET OF ACTIONS WHICH ARE CLEARLY NEEDED IS TO
ELIMINATE EXCESSIVE GOVERNMENT REGULATIONS IN MANY SECTORS SO
THAT RESOURCES CAN BE ALLOCATED MORE EFFICIENTLY AND WITHOUT
THE ENORMOUS UNNECESSARY COSTS THAT ARE NOW PASSED ON TO
GERALD
LIBRARY
- 20 -
THE CONSUMER. RAILS, TRUCKING, AIRLINES, NATURAL GAS --
ALL OF THESE AND MORE ARE NOW SUFFERING UNDER THE HEAVY HAND
OF THE GOVERNMENT. LET US AT THE SAME TIME RESIST SEDUCTIVE
CALLS TO RETURN TO WAGE-PRICE CONTROLS "TO SLOW INFLATION AND
LOWER UNEMPLOYMENT." THE SO-CALLED BENEFITS ARE SHORT-LIVED
AND ARE FAR LESS THAN THE SERIOUS LONG-TERM COSTS AND
DISTORTIONS SUCH CONTROLS BRING ABOUT, CAN THERE BE ANY
DOUBT THAT IN THE LONG RUN CONTROLS CONTRIBUTE TO SHORTAGES,
MORE INFLATION AND A HIGHER UNEMPLOYMENT RATE? THE LESSONS
OF HISTORY, I WOULD SUGGEST, ARE ABUNDANTLY CLEAR,
FOURTH, THE TAX STRUCTURE ITSELF MUST BE CHANGED TO
END THE TAX BIAS AGAINST EQUITY CAPITAL, THE TAX DEDUCTABILITY
FEATURE OF INTEREST PAYMENTS HAS CREATED A STRONG EMPHASIS
UPON DEBT FINANCING -- so MUCH so, AS I HAVE NOTED, THAT
SHARP DISTORTIONS HAVE APPEARED ON CORPORATE BALANCE
SHEETS, To REDRESS THIS GROWING FINANCIAL DIFFICULTY, TO
BERALD
- 21 -
OF
INCREASE THE SUPPLY TO TOTAL SAVING IN THE ECONOMY, AND TO
TREAT THE INCOME FROM CAPITAL ON A MORE EQUITABLE BASIS,
THE ADMINISTRATION PRESENTED TO THE CONGRESS LAST JULY 31
THE "CORPORATE INTEGREATION" PLAN, IT IS MOST IMPORTANT
THAT PROPOSALS SUCH AS THESE BE ENACTED INTO LAW TO DEAL
WITH THE SERIOUS AND GROWING CORPORATE FINANCE PROBLEMS,
OTHERWISE THE CAPITAL NEEDS OF THE NEXT DECADE WILL NOT BE
MET.
FINALLY, THERE MUST BE A RESTRUCTURING OF PUBLIC ECONOMIC
OFTEN
POLICY-MAKING AWAY FROM SHORT-RUN, A POLITICALLY MOTIVATED
REACTIONS TO DEVELOPMENTS IN THE ECONOMY, To ADVOCATE A
CHANGE IN BASIC POLICY BASED ON THE LATEST MONTHLY INFLATION
FIGURE, OR THE LAST 10 DAYS ANNUAL RATE OF AUTO SALES, OR
LAST WEEK'S CHANGE IN THE MONEY SUPPLY IS AN INAPPROPRAITE
WAY OF DECIDING SENSIBLE AND EFFECTIVE GOVERNMENT POLICIES.
SUCH A "REACTION RESPONSE" WILL NOT ONLY CONTRIBUTE TO MORE
GERALD
MORE VOLATILE AND ERRATIC ECONOMIC BEHAVIOR BUT IN THE
LONG RUN WILL ADVERSELY AFFECT THE STABILITY OF THE ECONOMIC
SYSTEM ITSLEF AND DO FURTHER DAMAGE TO THE FINANCIAL STRUCTURE.
CONCLUDING COMMENTS
WHAT DOES ALL THIS MEAN? IT SEEMS TO ME THAT THE MARKET
TODAY IS MOST ASSUREDLY TELLING US SOMETHING ABOUT THE BEHAVIOR
OF OUR ECONOMIC AND FINANCIAL SYSTEM, SOMETHING IS UNQUESTIONAB
OUT OF BALANCE, THIS CERTAINLY DOES NOT MEAN THAT COLLAPSE OR
EVEN CRISIS IS NEAR AT HAND NOR THAT THE FINANCIAL SYSTEM
CANNOT PLAY ITS PART IN BRINGING ABOUT THE HUGE SAVINGS AND
INVESTMENT NEEDS OF THE NEXT DECADE, BUT IT DOES MEAN THAT
WE HAVE TO CHANGE OUR WAYS. INFLATION MUST BE SHARPLY
REDUCED. GOVERNMENT POLICIES MUST BE REDIRECTED TOWARD A
LONGER-TERM TIME HORIZON AND SHIFTED TOWARD A BETTER MIX OF
FISCAL AND MONETARY POLICIES THAN EXISTED OVER THE PAST
DECADE, THE TAX BIAS AGAINST CAPITAL FORMATION MUST BE
REDRESSED.
LIBRARY
MORE VOLATILE AND ERRATIC ECONOMIC BEHAVIOR BUT IN THE
LONG RUN WILL ADVERSELY AFFECT THE STABILITY OF THE ECONOMIC
SYSTEM ITSLEF AND DO FURTHER DAMAGE TO THE FINANCIAL STRUCTURE,
CONCLUDING COMMENTS
WHAT DOES ALL THIS MEAN? IT SEEMS TO ME THAT THE MARKET
TODAY IS MOST ASSUREDLY TELLING US SOMETHING ABOUT THE BEHAVIOR
OF OUR ECONOMIC AND FINANCIAL SYSTEM, SOMETHING IS UNQUESTIONAB
OUT OF BALANCE. THIS CERTAINLY DOES NOT MEAN THAT COLLAPSE OR
EVEN CRISIS IS NEAR AT HAND NOR THAT THE FINANCIAL SYSTEM
CANNOT PLAY ITS PART IN BRINGING ABOUT THE HUGE SAVINGS AND
INVESTMENT NEEDS OF THE NEXT DECADE, BUT IT DOES MEAN THAT
WE HAVE TO CHANGE OUR WAYS. INFLATION MUST BE SHARPLY
REDUCED. GOVERNMENT POLICIES MUST BE REDIRECTED TOWARD A
LONGER-TERM TIME HORIZON AND SHIFTED TOWARD A BETTER MIX OF
FISCAL AND MONETARY POLICIES THAN EXISTED OVER THE PAST
DECADE. THE TAX BIAS AGAINST CAPITAL FORMATION MUST BE
REDRESSED.
IF THESE STEPS ARE TAKEN, WE CAN LOOK FORWARD TO
BETTER GROWTH, MORE JOBS, HIGHER INCOMES, A CLOSER FULFILLMENT
OF OUR BROAD PUBLIC POLICY GOALS, A LOWER RATE OF INFLATION,
A MORE STABLE ECONOMIC SYSTEM AND A ROBUST FINANCIAL STRUCTURE,
IF THROUGH INERTIA, POLITICAL DIFFERENCES OR PLAIN MISJUDGMENT
WE FAIL TO ACT RESPONSIBLY, THEN WE CAN LOOK FORWARD TO
CONTINUED TROUBLE, WORSE INFLATION, LOWER GROWTH, FRUSTRATED
AMBITIONS, CONTINUED EROSION OF OUR FINANCIAL BASE AND
ULTIMATELY, A GROWING INSTABILITY IN OUR POLITICAL SYSTEM.
THE LATTER SCENARIO ADMITTEDLY SOUNDS PESSIMISTIC, BUT
IT IS CERTAINLY NOT INEVITABLE, WE KNOW FAIRLY WELL HOW
WE GOT INTO THE CURRENT ECONOMIC SITUATION, IT HAS NOT
RESULTED FROM A RANDOM SERIES OF "BAD LUCK" EVENTS BUT
RATHER FROM MANY YEARS OF SHORTSIGHTED POLICIES, WE ALSO
KNOW HOW TO GET OUT OF THE CURRENT SITUATION IF WE PURSUE
SOUND, PRUDENT POLICIES, THIS WILL REQUIRE PATIENCE,
UNDERSTANDING AND SUPPORT FROM THE PUBLIC, BUT I HAVE
FORD LIBRARY
FAITH THAT WE CAN RESPOND TO THIS CHALLENGE AND SUCCESSFULLY
MEET THE CURRENT AND FUTURE NEEDS THAT WE ALL KNOW EXIST,
THANK YOU,
# # # #
GERAL LIBRARY
FOR RELEASE ON DELIVERY
NYC
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE JOINT ECONOMIC COMMITTEE
WEDNESDAY, SEPTEMBER 24, 1975, 11:00 A.M.
NEW YORK CITY'S FINANCIAL SITUATION
MR. CHAIRMAN AND MEMBERS OF THIS DISTINGUISHED COMMITTEE:
I AM HERE TODAY AT THE EXPRESS INVITATION OF THE
CHAIRMAN, WHO HAS CALLED UPON ME TO TESTIFY ABOUT THE POSSIBLE
IMPACT OF A FINANCIAL DEFAULT BY NEW YORK CITY,
THIS IS AN OCCASION THAT NONE OF US CAN WELCOME. ALL OF
US SHARE THE HOPE THAT A DEFAULT CAN BE AVOIDED. PERSONALLY,
I AM CONFIDENT THAT IF THE PROPER STEPS ARE TAKEN, DEFAULT
WILL BE AVOIDED. ONE OF THE GREAT PLEASURES IN MY LIFE WAS
TO SPEND SOME 20 YEARS WORKING IN THE FINANCIAL COMMUNITY IN
GENALE FORD
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DOWNTOWN MANHATTAN. I GAINED FROM THAT EXPERIENCE NOT ONLY
A LOVE FOR THE CITY BUT ALSO ENORMOUS RESPECT FOR THE WISDON
AND STRENGTH OF ITS PEOPLE, I SINCERELY BELIEVE THAT IF
THOSE GREAT RESOURCES ARE PROPERLY MARSHALED, NEW YORK CITY
WILL EMERGE FROM ITS CURRENT DIFFICULTIES.
As YOUR INVITATION TO ME RECOGNIZES, HOWEVER, IT IS
ALSO IMPORTANT THAT WE SEEK TO UNDERSTAND WHAT THE IMPLICATIONS
WOULD BE IF DEFAULT DOES OCCUR. I AM SURE THAT THE MEMBERS
OF THIS COMMITTEE, AS WELL AS THE AMERICAN PEOPLE, WANT THIS
INQUIRY TO BE AS HONEST AND OBJECTIVE AS POSSIBLE. THIS
CANNOT BE A TIME WHEN WE DELUDE OURSELVES WITH EXCESSIVE
OPTIMISM AND THUS FAIL TO ACT WISELY, By THE SAME TOKEN, WE
SHOULD NOT ENGAGE IN EXCESSIVE PESSIMISM, IMPASSIONED
STATEMENTS THAT A DEFAULT WOULD HAVE CATASTROPHIC CONSEQUENCES
FOR THE FINANCIAL MARKETS AS WELL AS THE ECONOMY -- STATEMENTS
WHICH HAVE NO FOUNDATION IN OBSERVABLE FACTS -- CAN ONLY MAKE
GERALD
THE SITUATION WORSE, THIS IS A TIME, THEN, FOR AN HONEST
APPRAISAL, DEVOID OF EMOTIONALISM OR PARTIASANSHIP, My
TESTIMONY TODAY IS OFFERED IN THAT SPIRIT.
THE FEDERAL GOVERNMENT HAS BEEN SERIOUSLY CONCERNED
WITH THE PROBLEMS ASSOCIATED WITH NEW YORK CITY'S FINANCES
FOR A LONG WHILE. WE HAVE HELD REPEATED MEETINGS WITH
THE LEADERS OF NEW YORK CITY, THE MUNICIPAL ASSISTANCE
CORPORATION, AND NEW YORK STATE. A CONSIDERABLE AMOUNT
OF STAFF TIME WITHIN THE TREASURY DEPARTMENT HAS BEEN
DEVOTED TO THIS MATTER. AT THE PRESIDENT'S DIRECTION, I
HAVE ESTABLISHED AN INFORMAL, INTER-AGENCY TASK FORCE,
CHAIRED BY MY UNDER SECRETARY EDWIN H. YEO III, TO CLOSELY
MONITOR THIS SITUATION ON A DAILY BASIS AND TO DEAL WITH
EVERY ASPECT OF A POTENTIAL DEFAULT BY THE CITY. THE
EVALUATIONS AND THE PLANS OUTLINED IN MY TESTIMONY THIS
MORNING ARE THE PRODUCT OF THOSE EFFORTS,
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OUR BASIC CONCLUSIONS, WHICH I SHALL EXPAND UPON IN
A FEW MOMENTS, ARE THESE:
FIRST, ALTHOUGH THE CHALLENGES AND THE TASKS AHEAD
ARE GREAT, NEW YORK CITY, WITH THE ASSISTANCE OF NEW YORK
STATE, HAS BOTH THE MECHANISMS AND THE RESOURCES TO AVOID
DEFAULT.
SECOND, IF DEFAULT WERE TO OCCUR DESPITE THEIR BEST
EFFORTS, ITS EFFECTS WOULD PRIMARILY BE LEGAL IN CHARACTER:
THE BASIC SERVICES OF THE CITY SHOULD REMAIN INTACT,
THIRD, WHILE A DEFAULT COULD ADVERSELY AFFECT THE
CAPITAL MARKETS, THOSE MARKETS HAVE ALREADY ADJUSTED TO
THAT POSSIBILITY TO SOME EXTENT AND THE EVENT OF DEFAULT
WOULD REQUIRE ONLY A MODERATE DEGREE OF FURTHER ADJUSTMENT,
IN OTHER WORDS, THE EFFECTS OF DEFAULT UPON THE CAPITAL
MARKETS WOULD BE TOLERABLE,
FOURTH, A' DEFAULT WOULD CAUSE LITTLE, IF ANY, DAMAGE
GERALD FORD LIBRARY
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TO OUR OVERALL FINANCIAL STRUCTURE: THE BANKING SYSTEM WOULD
REMAIN INTACT; NO BANK CUSTOMERS WOULD LOSE THEIR DEPOSITS;
AND THE SYSTEM WOULD CONTINUE TO BE ABLE TO PROVIDE CREDIT
TO ALL LEVELS OF THE ECONOMY, INCLUDING CONSUMERS,
FIFTH, THE COSTS AND RISKS ASSOCIATED WITH ANY PROGRAM
TO PROVIDE SPECIAL FEDERAL FINANCIAL ASSISTANCE TO PREVENT
DEFAULT SUBSTANTIALLY OUTWEIGH THE BENEFITS,
FINALLY, WE BELIEVE THAT THE FEDERAL GOVERNMENT DOES
HAVE A RESPONSIBILITY TO THE NATION TO ENSURE THAT IF A
DEFAULT DOES OCCUR, PROPER STEPS ARE TAKEN TO LIMIT AND
CONTAIN ITS IMPACT. TOWARD THAT END, WE HAVE DEVELOPED
A PROGRAM WITHIN THE ADMINISTRATION. DEVELOPMENT OF THAT
PLAN SHOULD NOT BE MISUNDERSTOOD AS AN ANTICIPATION
OF DEFAULT; RATHER, IT IS A STANDBY MECHANISM WHICH PRUDENCE
SURELY DEMANDS. WHILE MY TESTIMONY WILL DEAL IN MORE DEPTH
WITH ITS DETAILS, LET ME SUMMARIZE THAT PROGRAM NOW:
GERALE FORD GRANT
-- TO INSURE ADEQUATE FINANCIAL RESOURCES
TO MAINTAIN ESSENTIAL SERVICES AND TO AVOID
POTENTIAL DISRUPTION AND CONFUSION CREATED
BY CONFLICTING LITIGATION, WE HAVE PRE-
PARED, AND WILL SHORTLY SUBMIT TO THE
CONGRESS, LEGISLATION AMENDING CHAPTER 9
OF THE FEDERAL BANKRUPTCY ACT TO FACILITATE
USE OF THAT Act's PROTECTION BY NEW YORK
CITY,
-- TO ASSURE THE CONTINUED FLOW OF CURRENT
ASSISTANCE PAYMENTS, WE HAVE IDENTIFIED
ALTERNATIVE METHODS OF OPERATING THOSE
GERALD R. LISEARY
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PROGRAMS IN THE EVENT LOCAL RESOURCES
TEMPORARILY BECOME UNAVAILABLE.
-- TO PROTECT THE BANKING SYSTEM AND THUS
ASSURE THE CONTINUED AVAILABILITY OF RESOURCES
THAT SYSTEM PROVIDES TO CONSUMERS, CORPORATIONS
AND GOVERNMENTS:
-- THE FEDERAL RESERVE SYSTEM WILL
PROVIDE LIQUIDITY THROUGH ITS
DISCOUNT FACILITIES IN THE EVENT
ANY INSTITUTION FACES UNEXPECTED
CASH WITHDRAWALS;
GERAL FORD
-- As A LAST RESORT, IN APPROPRIATE CASES,
THE FEDERAL DEPOSIT INSURANCE CORPORATION
WILL PROVIDE CAPITAL TO INSTITUTIONS WHERE
SUCH ACTION IS NECESSARY TO MAINTAIN
SOLVENCY,
LET ME REPEAT, WE DO NOT BELIEVE DEFAULT IS INEVITABLE
AND WE BELIEVE IT ESSENTIAL TO MAKE ALL REASONABLE EFFORTS
TO AVOID DEFAULT, MOREOVER, IF DEFAULT OCCURS, APART FROM
THE BANKRUPTCY AMENDMENT -- WHICH WE BELIEVE TO BE DESIRABLE
IN ANY EVENT -- WE DO NOT EXPECT TO NEED ANY PART OF THIS
PROGRAM. BUT IT IS OUR RESPONSIBILITY -- TO THE CONGRESS
AND TO THE NATION -- TO BE PREPARED FOR ANY EVENTUALITY.
CURRENT STATUS
LET US NOW CONSIDER THE CURRENT EFFORTS OF NEW YORK CITY
AND NEW YORK STATE TO PREVENT A DEFAULT.
FORD
GERALD
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ON SEPTEMBER 9, A SPECIAL SESSION OF THE
NEW YORK STATE LEGISLATURE ENACTED LEGISLATION CALLING FOR
-- CREATION OF A STATE DOMINATED EMERGENCY FINANCIAL
CONTROL BOARD TO ASSUME PLENARY CONTROL OVER THE
CITY'S FINANCES)
-- AUTHORITY TO ISSUE $750 MILLION IN SHORT TERM
STATE NOTES, THE PROCEEDS TO BE USED TO PURCHASE
MAC BONDS;
-- A MANDATE TO STATE AND CITY EMPLOYEE PENSION PLANS
TO PURCHASE $750 MILLION IN MAC BONDS (AND RELIEF
FOR THE STATE COMPTROLLER WITH RESPECT TO HIS
FIDUCIARY RESPONSIBILITIES REGARDING THESE PLANS);
-- AN INCREASE IN MAC's BORROWING AUTHORITY FROM $3
BILLION TO $5 BILLION;
-- AUTHORIZATION FOR THE CITY TO FILE A PETITION IN
BANKRUPTCY UNDER CHAPTER 9 OF THE FEDERAL BANKRUPTCY Ac
10 -
Two DAYS LATER, NEW YORK STATE SOLD $755 MILLION OF
SHORT TERM NOTES, INCLUDING $250 MILLION EARMARKED FOR THE
CITY, NAC IS BEGINNING TO RAISE FROM OTHER SOURCES THE
$800 MILLION NECESSARY TO COMPLETE THE $2.3 BILLION PACKAGE
REQUIRED TO FINANCE THE CITY THROUGH DECEMBER 1.
AT THE CITY LEVEL, MEANWHILE, MAYOR BEAME HAS APPOINTED
A TOP FINANCIAL EXECUTIVE TO SERVE AS THE CHIEF FINANCIAL
OFFICER OF NEW YORK CITY AND TO DEVELOP, BY MID-OCTOBER, AN
EXPENSE REDUCTION PLAN TO RETURN THE CITY TO A SOUND FISCAL
BASIS. THESE LAUDABLE EFFORTS REFLECT A RENEWED SENSE OF
DEDICATION TO ATTACK THE CAUSES OF THE PROBLEMS I DISCUSSED
WITH CONGRESSMAN ROSENTHAL'S SUBCOMMITTEE LAST JUNE.
WILL THESE MEASURES WORK? CAN THE CITY DO ENOUGH
BETWEEN NOW AND DECEMBER TO RESTORE INVESTOR CONFIDENCE?
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SOME HAVE ANSWERED IN THE NEGATIVE, BUT I CANNOT AGREE. I
WOULD BE LESS THAN CANDID WITH THIS COMMITTEE IF I SUGGESTED
THE TASK WILL BE EASY. I WOULD BE LESS THAN CANDID IF I
FAILED TO SAY THAT MORE IN THE WAY OF IMMEDIATE ACTIONS --
IMMEDIATE EXPENSE REDUCTIONS -- IS REQUIRED NOW THAN WOULD
HAVE BEEN REQUIRED AT SOME EARLIER TIME. BUT IT WOULD BE
EQUALLY UNTRUTHFUL TO SUGGEST THAT THE JOB CANNOT BE DONE.
APPROPRIATE MECHANISMS ARE NOW IN PLACE, IT IS ESSENTIAL
THAT THEY BE USED PROMPTLY AND WELL.
IMPACT OF A DEFAULT
GERALD
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NECESSARY CONCEPTS
To SET THE FRAMEWORK FOR MY ANALYSIS OF THE IMPACT OF
DEFAULT IT IS IMPORTANT TO DEFINE SOME RELEVANT TERMS AND
CONCEPTS, I SENSE THAT THE DIALOGUE CONCERNING THE ISSUE
HAS BEEN HAMPERED BY CONFUSION OVER THE MEANING AND IMPORT
OF CERTAIN KEY WORDS, FIRST, THERE IS "INSOLVENCY" WHICH,
SIMPLY STATED, MEANS THAT A PERSON OR A CITY HAS CURRENT
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OBLIGATIONS WHICH EXCEED ITS AVAILABLE FUNDS. "DEFAULT" IS
A TECHNICAL LEGAL TERM DESCRIBING A DEBTOR'S REFUSAL OR
INABILITY TO PAY A CREDITOR WHO HAS DEMANDED PAYMENT.
"BANKRUPTCY" DESCRIBES A LEGAL PROCEEDING -- PROVIDED FOR
IN THE CONSTITUTION -- UNDER WHICH AN INSOLVENT PARTY IN
DEFAULT TURNS OVER TO A COURT THE JOB OF DECIDING HOW HIS
FINANCIAL RESOURCES WILL BE APPORTIONED AMONG CREDITORS,
IN LOOKING AT DEFAULT AND BANKRUPTCY, WE SHOULD ALSO
DRAW A DISTINCTION BETWEEN THE OPTIONS AVAILABLE IN THE EVENT
OF A CORPORATE DEFAULT AND THOSE AVAILABLE WITH RESPECT TO A
MUNICIPAL DEFAULT, IF A CORPORATION DEFAULTS AND IS SUB-
SEQUENTLY BROUGHT UNDER THE JURISDICTION OF A FEDERAL BANK-
RUPTCY COURT, ONE OPTION -- ALBEIT OFTEN NOT THE MOST DESIRABLE
ONE -- IS LIQUIDATION: THE SALE OF ASSETS TO SATISFY
GERALD FORD LIBRARY
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THE CLAIMS OF CREDITORS AND THE SUBSEQUENT DISAPPEARANCE
OF THE CORPORATION AS A CONTINUING ENTITY. BOTH COMMON
SENSE AND CONSTITUTIONAL PRINCIPLES PRECLUDE SUCH AN
OPTION WITH RESPECT TO MUNICIPAL DEFAULTS,
IN THIS RESPECT, A DEFAULT BY A STATE OR LOCAL
GOVERNMENT IS CLOSELY ANALOGOUS TO A DEFAULT BY AN INDIVIDUAL
PERSON. IN EITHER CASE, IF A BANKRUPTCY PROCEEDING ENSUES,
RESOURCES ESSENTIAL TO THE MAINTENANCE OF LIFE IN THE ONE
CASE AND ESSENTIAL SERVICES IN THE OTHER, ARE PROTECTED
FROM THE DEMANDS OF CREDITORS,
IT IS IMPORTANT TO RE-EMPHASIZE THIS POINT: IF
NEW YORK CITY DEFAULTED, IT WOULD CONTINUE TO EXIST AND TO
OPERATE. TAX PAYMENTS, FEDERAL AND STATE ASSISTANCE
PAYMENTS AND OTHER SOURCES OF REVENUE WOULD CONTINUE TO
FLOW, SCHOOLS AND HOSPITALS WOULD REMAIN OPEN; POLICE,
FIRE AND SANITATION SERVICES WOULD BE PROVIDED AND PAID
FORD LIBRARY is CERALD
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FOR, EVEN DEBT SERVICE ON THE LONG TERM BONDS WOULD APPEAR
TO BE WITHIN THE CITY'S MEANS IN THE EVENT OF DEFAULT.
IN SHORT, IT IS ESSENTIAL NOT TO CONFUSE THE LEGAL
AND IDIOMATIC MEANINGS OF THE TERM BANKRUPTCY, IN COMMON
FORD LIBRARY in GERVIL
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PARLANCE, WE MAY USE BANKRUPTCY TO DEFINE A CONDITION DEVOID
OF SUBSTANCE OR RESOURCES. By THAT DEFINITION, NEW York
HAS NOT BEEN, IS NOT NOW, AND WILL NOT BE BANKRUPT.
IF NEW YORK CITY DOES DEFAULT, HOWEVER, TO DEAL WITH ITS
CREDITORS IN AN ORDERLY WAY, A PROCEEDING UNDER THE FEDERAL
BANKRUPTCY LAWS IS THE MOST APPROPRIATE SOLUTION,
As I HAVE OFTEN SAID, NO OBSERVER WHO IS ASKED TO PREDICT
THE IMPACT OF A DEFAULT CAN DO so WITH ABSOLUTE CERTITUDE, A DEFAU
LIKE ANY MAJOR FINANCIAL REVERSAL -- HAS TWO ASPECTS: A
TANGIBLE, OBJECTIVE ASPECT ON THE ONE HAND AND A
PSYCHOLOGICAL ASPECT ON THE OTHER. IT WOULD BE INADEQUATE
TO LIMIT THE ANALYSIS TO ONLY ONE OF THESE ASPECTS, AND
CONFUSING THE TWO WOULD FURTHER CLOUD OUR EVALUATION OF THE
FORD & LIBRARY GERALD
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IMPACT OF DEFAULT, INDEED, I SENSE THAT SUCH CONFUSION
IS IN LARGE PART RESPONSIBLE FOR SOME OF THE MORE EXTREME
PREDICTIONS WHICH HAVE BEEN MADE IN RECENT WEEKS,
MOREOVER, AS I CAUTIONED IN MY LETTER OF LAST WEEK,
IT IS IMPORTANT TO BE SENSITIVE TO THE RISK THAT THE
EVALUATION PROCESS ITSELF MAY AGGRAVATE REACTION TO A
DEFAULT, LET US SUPPOSE, FOR EXAMPLE, THAT LEADERS OF MAJOR
FINANCIAL INSTITUTIONS CONTEND THAT THEIR INSTITUTIONS AND
THE MARKETS IN WHICH THEY FUNCTION WOULD BE DEVASTATED BY
A DEFAULT, OBJECTIVE FACTORS NOTWITHSTANDING, SUCH
CONTENTIONS WOULD MEASURABLY ENHANCE THE IMPACT OF
DEFAULT.
LET ME TURN TO A SECTOR-BY-SECTOR ANALYSIS,
GERALD A LIBRARY FORD
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ESSENTIAL SERVICES
IF NEW YORK CITY DEFAULTED ON AN OBLIGATION TO
REDEEM A MATURING NOTE ISSUE FOR CASH, A QUESTION OF
IMMEDIATE IMPORTANCE IS WHETHER THE CITY COULD CONTINUE
TO PROVIDE ESSENTIAL SERVICES: POLICE AND FIRE PROTECTION,
SANITATION, MASS TRANSIT, WATER AND SEWERAGE FACILITIES,
AND THE LIKE, WE EVALUATED THE OUTLAYS REQUIRED TO
PROVIDE THESE SERVICES AGAINST THE CITY'S LEVEL OF
RECEIPTS, WHILE, AS I HAVE INDICATED ON EARLIER OCCASIONS,
LEVELS OF OUTLAY FOR THESE SERVICES ARE EXTREME IN RELATION
TO THE OUTLAYS OF OTHER CITIES, NEW YORK CITY'S REVENUES
APPEAR SUFFICIENT TO PROVIDE AN ADEQUATE LEVEL OF SERVICES
IN THE EVENT OF DEFAULT,
GERAL rung LIBRARY
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FEDERAL ASSISTANCE PROGRAMS
ANOTHER POTENTIAL CONCERN RELATES TO CONTINUATION OF THE
VARIOUS FEDERAL ASSISTANCE PROGRAMS WHICH BENEFIT THE CITIZENS
OF NEW YORK, THE OFFICE OF MANAGEMENT AND BUDGET AND THE
DOMESTIC COUNCIL HAVE COMPLETED A SURVEY OF THE MOST IMPORTANT
OF THESE PROGRAMS WITH THE OBJECTIVE OF IDENTIFYING METHODS
FOR MAINTAINING SCHEDULED ASSISTANCE FLOWS IN THE EVENT LOCAL
MECHANISMS TEMPORARILY BECOME UNAVAILABLE, IT IS OUR BELIEF
THAT A DEFAULT WOULD NOT MATERIALLY INTERFERE WITH THE PRO-
VISION OF CURRENT ASSISTANCE,
AT THE SAME TIME, THE ADMINISTRATION IS CONDUCTING A
REVIEW OF THE ASSISTANCE PROGRAMS WITH THE OBJECTIVE OF
MAKING THEM MORE EFFICIENT AND LESS BURDENSOME AT THE
FORD LIBRARY is GERALD
LOCAL AS WELL AS THE FEDERAL LEVEL, I HAVE FREQUENTLY
CRITICIZED THE WELFARE PROGRAMS, THEY ARE TOO EXPENSIVE
AND OFTEN MISS THE TARGET INSOFAR AS HELP TO THE TRULY
DISADVANTAGED IS CONCERNED. THERE IS NO QUESTION THAT
THESE PROGRAMS IN THEIR CURRENT FORM HAVE ADDED TO
NEW YORK CITY'S FINANCIAL BURDEN.
THE PRESIDENT HAS ASKED VICE PRESIDENT ROCKEFELLER,
AS CHAIRMAN OF THE DOMESTIC COUNCIL, TO CONDUCT A THOROUGH
REVIEW OF ALL OUR ASSISTANCE PROGRAMS AND TO DEVELOP
PROPOSALS FOR REFORM. WHILE THAT REVIEW IS NOT YET COMPLETE,
MY VIEWS ARE WELL KNOWN, I HAVE LONG FAVORED A SIMPLE
PROGRAM OF INCOME MAINTENANCE AS THE LEAST BUREAUCRATIC
AND MOST EFFICIENT APPROACH TO OUR RESPONSIBILITIES IN
THIS AREA,
GERALD LIBRARY FORD
DEBT ADJUSTMENT
THE REQUIREMENT THAT THE CITY CONTINUE TO PROVIDE AND
FINANCE ESSENTIAL SERVICES UNDERSCORES THE IMPORTANCE OF
INSURING THAT THERE IS AN ORDERLY MECHANISM FOR ALLOCATING THE
CITY'S FINANCIAL RESOURCES AND EFFECTING A RESTRUCTURING OF
THE SHORT TERM DEBT. ABSENT SUCH A MECHANISM, THERE IS THE
RISK OF A MULTITUDE OF LAWSUITS, EACH SEEKING A LEGAL INJUNCTIC
AGAINST THE PAYMENT OF CITY FUNDS TO ONE CLASS OF CREDITOR OR
ANOTHER,
IT IS FOR THIS REASON THAT ME HAVE PREPARED, AND WILL
SUBMIT SHORTLY TO CONGRESS, LEGISLATION AMENDING CHAPTER 9 OF
THE FEDERAL BANKRUPTCY Act. THIS LEGISLATION IS DESIGNED TO
INSURE THAT THE CLAIMS OF ALL LEGITIMATE CREDITORS WOULD BE
DEALT WITH IN A SINGLE PROCEEDING. IT WOULD BE COMPLEMENTARY
TO THE LEGISLATION ENACTED BY THE NEW YORK STATE LEGISLATURE
AUTHORISING NEW YORK CITY, IN THE EVENT OF DEFAULT, TO SEEK
REORGANIZATION OF ITS DEBT UNDER THE PLENARY JURISDICTION
OF A FEDERAL COURT.
:
GERA
MOLIBRARY
LIBRARY
SPECIFICALLY, OUR PROPOSAL WOULD MODIFY EXISTING LAW
BY ELIMINATING THE EXISTING REQUIREMENT THAT A CITY MUST
FILE A REORGANIZATION PLAN AND WRITTEN ASSENTS TO THE
PLAN FROM 51% OF THE CREDITORS BEFORE OBTAINING THE PRO-
TECTION OF A FEDERAL BANKRUPTCY COURT, UNDER THE REVISED
PROCEDURE, FEDERAL PROTECTION WOULD BE PROVIDED UPON THE
FILING ONLY OF A SIMPLE PETITION BY THE CITY, As IS THE
CASE WITH RESPECT TO OTHER TYPES OF REORGANIZATIONS UNDER OUR
BANKRUPTCY LAWS, THE REORGANIZATION PLAN AND THE CREDITORS
ASSENT THERETO WOULD BE DEVELOPED IN THE COURSE OF THE
PROCEEDING, IN THE INTERIM, HOWEVER, THE CITY WOULD BE
PROTECTED FROM CONFLICTING CLAIMS AND INJUNCTIONS REGARDING
ITS RESOURCES, AND COULD CONTINUE TO CONDUCT ITS AFFAIRS IN
AN ORDERLY MANNER,
I WOULD POINT OUT THAT THIS PROPOSAL IS SUBSTANTIALLY
CONSISTENT WITH THE RECOMMENDATIONS OF THE NATIONAL
COMMISSION ON THE REFORM OF THE PANKRUPTCY LAWS, EMBODIED
IN S. 235
GERALD FORD LIBRARY
FINANCIAL MARKETS
IN ASSESSING THE IMPACT OF A DEFAULT ON THE FINANCIAL
MARKETS, WE ARE DEALING IN THE REALM OF JUDGMENTS: AS I HAVE
SAID ABSOLUTE CERTAINTY IS SIMPLY NOT POSSIBLE, OUR ANALYSIS
IS BASED ON A DETAILED REVIEW OF ALL THE FACTUAL CIRCUMSTANCES
DISCUSSIONS WITH A WIDE RANGE -OF MARKET PROFESSIONALS IN THE
PRIVATE SECTOR, AND MY OWN CONCLUSIONS, BASED ON MORE THAN
TWENTY YEARS OF EXPERIENCE IN THE INVESTMENT BANKING BUSINESS.
THE IMPACT OF A DEFAULT ON MARKETS OTHER THAN THE MUNICIPA
MARKET IS, IN THE FINAL ANALYSIS, CLOSELY RELATED TO THE
IMPACT ON THE OVERALL ECONOMY, As I SHALL DISCUSS MORE
FULLY IN A FEW MOMENTS, IT IS OUR JUDGMENT THAT A DEFAULT
WOULD NOT DAMAGE THE PROSPECTS FOR THE NATION'S ECONOMIC
RECOVERY, THE PUBLIC UNDERSTANDS THAT NEW YORK CITY'S PROBLEMS
ARE UNIQUE IN MOST IMPORTANT RESPECTS, MOREOVER, OVER THE PAST
SIX MONTHS AND IN THE MONTHS TO COME, THE PUBLIC HAS HAD, AND
FORD VIBRARY
WILL HAVE, AMPLE OPPORTUNITY TO DECIDE WHETHER A DEFAULT BY
NEW YORK CITY IS MERELY REPRESENTATIVE OF A MORE FUNDAMENTAL
FLAW IN OUR ECONOMY. ONLY IF SUCH A CONCLUSION WERE REACHED -
AND THERE IS NO OBJECTIVE REASON WHY IT SHOULD BE -- COULD
WE EXPECT A SERIOUS AND LASTING ADVERSE IMPACT ON OUR
MARKETS,
MUNICIPAL BOND MARKET
OUR CONCLUSIONS WITH RESPECT TO THE MUNICIPAL BOND
MARKET ARE AT ONCE MORE PRECISE AND MORE COMPLEX. OVER AT
LEAST THE PAST YEAR, THE MUNICIPAL MARKET HAS BEEN
UNSETTLED DUE TO A VARIETY OF COMPLEX FACTORS,
FIRST, THE ENORMOUS VOLUME OF TAX-EXEMPT SECURITIES
COMING TO MARKET -- MORE THAN $51 BILLION OF BOND AND NOTES IN
1974 AND MORE THAN $40 BILLION IN THE FIRST EIGHT MONTHS OF
BERALD FORD LIBRARY
- 23 -
THIS YEAR ALONE -- HAS NOT BEEN MATCHED BY A CORRESPONDIN
INCREASE IN DEMAND FOR SUCH SECURITIES. SECOND, INFLATION
AND NOW ITS INEVITABLE HANDMAIDEN -- THE ANTICIPATION OF Fi
INFLATION -- CAUSED BY MASSIVE FEDERAL DEMANDS ON THE MARKE
HAS DAMPENED INVESTOR INTEREST IN COMMITTING FUNDS FOR THE
LONG TERM. FINALLY, A SERIES OF EVENTS -- THE REPEAL OF
THE PORT AUTHORITY COVENANT BY THE LEGISLATURES OF NEW YORK
AND NEW JERSEY; THE DEFAULT BY UDC, OCCASIONED BY THE
NEW YORK STATE LEGISLATURE'S INITIAL REFUSAL TO CARRY OUT ITS
"MORAL OBLIGATION;" AND THE PROBLEMS OF NEW YORK CITY
ITSELF -- HAVE ALL SHARPENED INVESTOR AWARENESS OF RISK AND
CREATED AN ELEMENT OF DOUBT ABOUT THE WILLINGNESS OF PUBLIC
BODIES TO CARRY OUT THEIR FINANCIAL OBLIGATIONS,
To A SIGNIFICANT EXTENT, THESE DOUBTS HAVE ALREADY LED
TO SOME ADJUSTMENTS IN THE MARKET. IN THE EVENT OF DEFAULT,
GERALD FORD VIBRARY
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WE WOULD EXPECT ONLY A TEMPORARY PERIOD OF MODERATE ADJUSTMET
AND OVER A SLIGHTLY LONGER TIME FRAME, WE CAN SEE SOME
POTENTIALLY FAVORABLE SIGNS, WE UNDERSTAND THAT NUMEROUS
INTERMEDIARIES AND INVESTORS ARE CURRENTLY WITHHOLDING FUNDS
FROM THE MUNICIPAL MARKET BECAUSE OF THE CURRENT UNCERTAINTIE
WHEN THE NEW YORK CITY SITUATION IS RESOLVED -- ONE WAY OR
ANOTHER -- WE CAN EXPECT A SUBSTANTIAL RETURN OF FUNDS TO
THE MARKET, IMPROVING LIQUIDITY AND LOWERING BORROWING COSTS,
BUT THE IMPLICATIONS ARE BROADER THAN SHORT RANGE
FUND FLOWS OR PRICE ADJUSTMENTS, SINCE AT LEAST THE BEGINNING
OF THIS DECADE, THERE HAS BEEN A MARKED INCREASE IN THE TENDEN
OF INVESTORS TO RESTRICT THEMSELVES TO HIGHER-GRADE INSTRUMENT
A SHIFT IN QUALITY PREFERENCES TO USE THE TECHNICAL TERM,
INFLATION AND ITS BY-PRODUCTS IS THE PRIMARY CAUSE, BUT THERE
IS LITTLE QUESTION THAT MAJOR FINANCIAL REVERSALS -- THE
PENN CENTRAL DEBACLE, FOR EXAMPLE -- HAVE SERVED AS IMPORTANT
CATALYSTS,
FORD
GERALD
CLEARLY, NEW YORK CITY'S SITUATION HAS CAUSED THIS
TREND TO ACCELERATE. - ISSUERS WHOSE OBLIGATIONS ARE
VIEWED AS LESS THAN PRIME ARE PAYING HIGH RATES OF INTEREST
RELATIVE TO THE GENERAL STRUCTURE OF INTEREST RATES,
CONVERSELY, WELL-RUN ISSUERS ARE BENEFITING IN THE FORM OF
LOWER RATES.
IN SHORT, AS WE MOVE FROM A PERIOD OF UNCERTAINTY,
UNDERLYING CREDIT CHARACTERISTICS -- FINANCIAL SOUNDNESS --
WILL BE THE DOMINANT FACTOR IN THE PRICING OF ALL MUNICIPAL
DEBT, THE RESULT WILL BE A BETTER AND MORE EFFICIENT
MUNICIPAL BOND MARKET.
AT THE SAME TIME, WE CANNOT IGNORE THE WAY IN WHICH
THE MUNICIPAL MARKET HAS PERFORMED EVEN UNDER THESE
SERIOUSLY UNSETTLED CONDITIONS, DURING AUGUST ALONE,
FOUR STATES AND 255 MUNICIPALITIES RAISED NEARLY $2.6 BILLION
IN LONG TERM DEBT. AND CONTRARY TO WIDELY HELD OPINION,
SUCH FUNDS WERE RAISED AT A COST NOT GROSSLY DISPROPORTIONATE
GERALD FORD
TRADITIONALLY, THERE HAS BEEN A 30% SPREAD BETWEEN
TAX-EXEMPT AND TAXABLE ISSUES OF COMPARABLE QUALITY. WHEN
WE HEAR COMPLAINTS ABOUT THE RECORD RATES MUNICIPALITIES ARE
PAYING FOR FUNDS, WE MUST KEEP IN MIND THAT CONDITIONS IN
THE CORPORATE MARKET ARE NO BETTER, THIS MONTH, THE
SPREAD BETWEEN LONG TERM PRIME MUNICIPALS AND COMPARABLE
UTILITY ISSUES WAS SQUARELY ON THE 30% FIGURE,
THIS IS NOT TO SUGGEST THAT THE MUNICIPAL MARKET HAS NOT
BEEN IMPACTED BY THE UNCERTAINTY SURROUNDING NEW YORK CITY'S
CONDITION. BUT IT DOES PLACE THE REACTION OF THE MARKET
IN A MORE ACCURATE PERSPECTIVE THAN SOME OF THE RHETORIC OF
RECENT MONTHS.
FINALLY, THE DISRUPTIONS WHICH HAVE OCCURRED IN THE
MARKET PLACE CAN PROVIDE AN IMPETUS FOR SOME VERY IMPORTANT
REFORMS, ONE REASON OUR CAPITAL MARKETS ARE THE FINEST IN THE
WORLD IS THAT, UNDER OUR LAWS AND PROCEDURES, INVESTORS
ARE PROVIDED WITH DETAILED AND ACCURATE INFORMATION
GERALD LIBBARY P FORD
27
CONCERNING POTENTIAL INVESTMENTS. To THE EXTENT INVESTORS
BEGIN TO RECEIVE SUCH INFORMATION FROM TAX-EXEMPT ISSUERS,
THE MARKET WILL CLEARLY BENEFIT.
NEW YORK STATE AND ITS AGENCIES
WE HAVE TAKEN A PARTICULARLY CAREFUL LOOK AT THE CREDITS
WITHIN ilEW YORK STATE TO DETERMINE WHETHER ANY CREDIT WOULD
BE ABLE TO WITHSTAND AN INCREASED LEVEL OF SCRUTINY, WE NOW
BELIEVE THERE IS LITTLE RISK THAT A DEFAULT BY NEW YORK CITY
WOULD DIRECTLY PRECIPITATE A DEFAULT BY NEW YORK STATE.
THERE IS A BASIS FOR MORE CONCERN REGARDING SOME OF
THE AGENCIES OF THE STATE, PARTICULARLY THE NEW YORK STATE
HOUSING FINANCE AGENCY. IN DIFFERENT TIMES, THE ABILITY
OF SUCH AGENCIES TO MEET THEIR OBLIGATIONS WAS TAKEN AS A
MATTER OF FAITH. BUT THE INCREASED LEVELS OF SCRUTINY HAVE,
WE ARE TOLD, PRODUCED INVESTOR MISGIVINGS CONCERNING CERTAIN
ASPECTS OF THE PROGRAMS SPONSORED BY THESE AGENCIES. OUR
OWN ANALYSIS OF THE PROGRAMS INDICATES THAT THEIR SHORT-
GERALD FORD
COMINGS CAN BE CORRECTED BY PROMPT ACTION BY THE STATE.
AND THE EXPENSE OF MAKING THE NECESSARY CORRECTIONS, WHILE
MEANINGFUL, IS SMALL IN RELATION TO THE FINANCIAL BURDEN
ON THE STATE IF IT WERE REQUIRED TO AVERT DEFAULT BY
CARRYING OUT ITS MORAL OBLIGATION PLEDGE,
IN OTHER WORDS, IT IS IMPORTANT THAT ACTION BE TAKEN,
AND TAKEN QUICKLY. HOPEFULLY, THE TOO LITTLE, TOO LATE
SYNDROME WHICH FOR MONTHS CHARACTERIZED THE RESPONSE OF
OFFICIALS TO NEW YORK CITY'S PROBLEMS WILL NOT APPLY TO
THE FUNDAMENTALLY DIFFERENT SITUATION CONFRONTING THE
STATE AGENCIES,
GERALO R FORD LIBRARY
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LET ME BE CLEAR, NEW YORK CITY'S DIFFICULTIES DID
NOT CAUSE THESE PROBLEMS FOR THE AGENCIES OF New YORK STATE.
AND A RESOLUTION OF NEW YORK CITY'S PROBLEMS WILL NOT MAKE
THEM GO AWAY. FOR THE STATE, AND INDEED ALL ISSUERS OF
TAX-EXEMPTS, INCREASED SCRUTINY OF CREDIT IS NOW A FACT OF
LIFE IN THE MUNICIPAL MARKET, AND FISCAL SOUNDNESS IS NOW A
CONDITION OF ENTRY,
IMPACT ON THE BANKING SYSTEM
As THE COMMITTEE IS AWARE, THE TREASURY DEPARTMENT, IN
CONJUNCTION WITH THE COMPTROLLER OF THE CURRENCY, THE FEDERAL
RESERVE BOARD AND THE FDIC, HAS TAKEN A CLOSE LOOK AT THE
HOLDINGS OF NEW YORK CITY SECURITIES IN OUR BANKING SYSTEM.
WHILE SIGNIFICANT AMOUNTS OF NEW YORK CITY'S DEBT IS HELD BY
COMMERCIAL BANKS, WE DO NOT BELIEVE A DEFAULT WOULD HAVE A
MATERIAL IMPACT ON THE BANKING SYSTEM.
FORD & LIBRARY 9ERALD
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BUT AS IS THE CASE IN OTHER AREAS, WE HAVE FELT AN
OBLIGATION TO DEVELOP MECHANISMS TO MINIMIZE ALL RISKS,
HOWEVER, SMALL. ACCORDINGLY, WITH RESPECT TO ANY BANK
WHICH MAY BE IMPACTED, VARIOUS MECHANISMS ARE NOW
AVAILABLE TO INSURE THAT NONE WILL FAIL AS A RESULT OF A
DECLINE IN THE VALUE OF THEIR HOLDINGS OF NEW YORK CITY
OBLIGATIONS. BANK CUSTOMERS HAVE NO NEED TO FEAR FOR
THEIR FUNDS.
1. WHERE POSSIBLE, BANK DIRECTORS WILL BE REQUIRED
TO CONTRIBUTE ADDITIONAL CAPITAL,
2. CERTAIN BANKS MAY BE SOLD TO, OR MERGED WITH,
OTHER BANKS OR BANK HOLDING COMPANIES.
3. As A LAST RESORT, IN APPROPRIATE CASES, THE FDIC
MAY PROVIDE CAPITAL IN THE FORM OF CONVERTIBLE
GERALD R. FORD License
- 31 -
SUBORDINATED DEBT, AT THE SAME TIME IMPOSING
APPROPRIATE SANCTIONS ON THE BANK OFFICIALS DIRECTLY
AND INDIRECTLY RESPONSIBLE FOR THE BANK'S EXPOSURE.
OVERALL ECONOMIC IMPACT
As I SUGGESTED EARLIER, WE CANNOT CONCLUDE THAT A
DEFAULT BY NEW YORK CITY WOULD RESULT IN A BROAD-BASED DECLINE
IN CONSUMER OR INVESTOR CONFIDENCE OR IN THE ADOPTION OF
UNNECESSARILY RESTRICTIVE LENDING POLICIES BY FINANCIAL
INSTITUTIONS, THE AMERICAN PEOPLE KNOW THE REASONS NEW YORK
CITY IS HAVING FINANCIAL DIFFICULTIES AND THEY KNOW THAT
THERE IS LITTLE, IF ANY, DIRECT RELATIONSHIP BETWEEN THESE
DIFFICULTIES AND THE CONDITION OF THE NATIONAL ECONOMY.
NEW YORK CITY IS FACING A POSSIBLE DEFAULT BECAUSE FOR
YEARS IT HAS SPENT FAR MORE THAN IT TAKES IN. NEW YORK CITY
IS FACING A POSSIBLE DEFAULT BECAUSE, UNTIL RECENTLY,
R FORD LIBRARY
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IT HAS NOT SHOWN ITSELF WILLING TO IMPLEMENT THE NECESSARY
REFORM MEASURES REQUIRED TO RESTORE CONFIDENCE AND REGAIN
ACCESS TO THE CAPITAL MARKETS, No CHANGE IN THE NATIONAL
ECONOMIC PICTURE WILL MEASURABLY IMPROVE CONDITIONS IN NEW YORK,
AND BY THE SAME TOKEN, NO CHANGE IN NEW YORK'S CONDITION WILL
MATERIALLY INFLUENCE THE ECONOMY AS A WHOLE.
FEDERAL FINANCIAL ASSISTANCE
THE ONLY EVENT WHICH COULD MODIFY THIS CONCLUSION WOULD
BE THE PROVISION OF FEDERAL FINANCIAL ASSISTANCE TO AVERT A
DEFAULT. INDEED, SUCH ASSISTANCE -- BE IT IN THE FORM OF A
GUARANTEE OR A LOAN, INSURANCE OR A GRANT -- WOULD, IN MY VIEW,
ONLY THREATEN THE PROCESS OF RECOVERY,
As THE CHIEF FINANCIAL OFFICER OF THIS GREAT COUNTRY
I HAVE A RESPONSIBILITY TO ALL THE PEOPLE, NOT SIMPLY
TO PARTICULAR GROUPS OR SECTORS AT PARTICULAR TIMES,
Mr JOB, IN ESSENCE, IS TO PROTECT AND RESTORE THE ERODING
BERALD FORD LIBRARY
FISCAL AND FINANCIAL INTEGRITY OF THE UNITED STATES FOR
THE BENEFIT OF EVERY CITIZEN, To STATE MY VIEWS ON
SPECIAL FINANCIAL ASSISTANCE FOR NEW YORK CITY MOST
DIRECTLY: I WOULD BE IGNORING THIS FUNDAMENTAL
RESPONSIBILITY IF I WERE TO SUPPORT SUCH ASSISTANCE
FOR YEARS, GOVERNMENT AT ALL LEVELS HAS BEEN
PROMISED MORE THAN IT CAN DELIVER, THIS IS THE CAUSE OF
NEW YORK CITY'S PROBLEM AND IT IS THE CAUSE OF OUR SEVERE
PROBLEMS AT THE FEDERAL LEVEL AS WELL, MORE AND LARGER
DEFICITS AND THE INCREASED LEVEL OF FEDERAL BORROWING
REQUIRED TO FINANCE THESE DEFICITS HAVE COMBINED TO
THREATEN OUR ECONOMIC SYSTEM WITH FUNDAMENTAL CHANGE:
NO LONGER CAN WE BE CONFIDENT THAT OUR PRIVATE SECTOR
WILL HAVE ACCESS TO THE CAPITAL REQUIRED IF IT IS TO MEET
THE NEEDS OF ALL OUR CITIZENS, YET SOME WOULD HAVE US
ACCELERATE THESE CHANGES TO DEAL WITH THE CONSEQUENCES
OF FISCAL IRRESPONSIBILITY AT THE LOCAL LEVEL.
FORD is LIBRARY GERALD
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ANY FORM OF FINANCIAL ASSISTANCE WOULD DIRECTLY
INCREASE THE BURDEN THE FEDERAL GOVERNMENT IMPOSES ON
THE CAPITAL MARKETS. WHO WOULD SUFFER? ALL BORROWERS,
INCLUDING EVERY OTHER STATE AND LOCAL GOVERNMENT, WOULD
PAY HIGHER INTEREST RATES. AND CERTAIN SECTORS -- HOUSING,
SMALL AND MEDIUM-SIZED COMPANIES, FOR EXAMPLE -- COULD
DISCOVER THAT FUNDS WERE NOT AVAILABLE AT ANY PRICE.
MOREOVER, WE DO NOT ESCAPE THESE PROBLEMS BY MAKING
THE ASSISTANCE SLIGHTLY LESS DIRECT; BY PROVIDING A GUARANTEE
OR INSURANCE FOR MUNICIPAL DEBT. INDEED, SUCH A PROGRAM WOULD
CREATE A SECURITY SUPERIOR TO THOSE OF THE FEDERAL GOVERNMENT
ITSELF: BACKED BY- THE FULL FAITH AND CREDIT OF THE UNITED
STATES AND EXEMPT FROM FEDERAL TAXES. THE IMPACT ON ANY
MUNICIPAL ISSUER WHICH DID NOT HAVE A GUARANTEE WOULD BE
DIRECT AND SEVERE: THE GUARANTEED BONDS WOULD SKIM THE
CREAM OF THE MARKET AND ALL OTHER ISSUERS WOULD PAY SUBSTANTIALLY
HIGHER RATES,
FORD & LIBRARY GERALD
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AND WHAT WOULD SUCH A PROGRAM DO TO FISCAL POLICIES
AT THE LOCAL LEVEL? TODAY, THE DESIRE TO MAINTAIN
ACCESS TO CREDIT AT THE LOWEST POSSIBLE RATE IS THE
MOST IMPORTANT INCENTIVE FOR FISCAL RESTRAINT. A FEDERAL
GUARANTEE PROGRAM WOULD PROVIDE ALL PARTICIPANTS WITH THE
CREDIT OF THE UNITED STATES: THIS CRITICAL RESTRAINT
ON SPENDING WOULD BE LOST ENTIRELY.
BUT, SOME WILL ASK, WHY NOT HAVE THE FEDERAL GOVERNMENT
IMPOSE THESE RESTRAINTS AS A CONDITION FOR THE GUARANTEE?
THAT POSSIBILITY CONCERNS ME MORE PERHAPS THAN ANYTHING
ELSE, WE WOULD HAVE TO CREATE A NEW BUREAUCRACY, SIMPLY
TO CONCOCT AND ENFORCE THE GUIDELINES AS TO LOCAL PRIORITIES
WE HERE IN WASHINGTON WOULD BE IMPOSING ON THE GOVERNMENTS
OF THE NATION. WE WOULD BE CONFRONTED WITH THE SORRY SPECTACLE
OF DULY-ELECTED LOCAL OFFICIALS LINING UP OUTSIDE MY DOOR,
ATTEMPTING TO PERSUADE ME THAT THEY WERE CARRYING OUT THEIR
FORD LIBRARY is 9ERALD
RESPONSIBILITIES IN A SATISFACTORY FASHION. WE WOULD, IN
SHORT, BE CONTRAVENING CONSTITUTIONALLY - IMPOSED PRINCIPLES
- 36 -
OF FEDERALISM; PRINCIPLES WHICH LIE AT THE HEART OF THE
STRUCTURE OF GOVERNMENT IN THIS NATION,
THOUSANDS, PERHAPS TENS OF THOUSANDS, OF GOVERNMENTS
WOULD RESIST THIS INTRUSION INTO LOCAL AFFAIRS. AND
THEY WOULD BE ABSOLUTELY RIGHT, BUT IN THE FINAL ANALYSIS,
THEIR CHOICE WOULD BE A HOBSON'S CHOICE: SUBMIT TO FEDERAL
CONTROL OR PAY THE PRICE OF INDEPENDENCE IN THE BOND MARKETS,
ARE WE REALLY PREPARED TO INFLICT THIS CHOICE ON THE NATION?
FINALLY, THERE ARE THOSE WHO SAY THAT NEW YORK CITY
IS A SPECIAL CASE; THAT HELPING NEW YORK WILL NOT OBLIGATE
US TO HELP OTHER CITIES IN THE FUTURE, BUT WE ARE ALREADY
OBLIGATED, WE ARE OBLIGATED TO LOCAL OFFICIALS THROUGHOUT
THE COUNTRY WHO HAVE RISKED THEIR CAREERS BY INSISTING ON
deficits of
FISCAL RESTRAINT. WOULD FINANCING THE MOST PROFLIGATE OF
New York City
OUR CITIES BE CONSISTENT WITH OUR OBLIGATION TO THEM?
AND CAN WE REALLY DRAW THE LINE AT NEW YORK CITY?
GERALD FORD
I DOUBT IT. ASSISTANCE TO ONE CITY WOULD CREATE AN INTOLERABLE
PRECEDENT FOR THE FUTURE,
- 37 -
BEFORE CONCLUDING, I MUST RETURN ONCE AGAIN TO AN IMPORTANT
POINT. As STRONG AS OUR ECONOMY AND OUR FINANCIAL SYSTEM MAY
BE, IT REMAINS SOMEWHAT VULNERABLE TO ATTACKS FROM VITHIN.
To THOSE WHO CONTINUE TO INSIST THAT A DEFAULT BY NEW YORK CITY
WOULD DEVASTATE THIS GREAT NATION, I SIMPLY ASK: PROVIDE SOME
OBJECTIVE BASIS FOR YOUR FEARS AND, IF YOU CANNOT, PLEASE
REMAIN SILENT. WE IN THE ADMINISTRATION HAVE DONE ALL WE CAN
TO EVALUATE THE RISKS A DEFAULT PRESENTS AND, WHERE POSSIBLE,
TO PROVIDE MECHANISMS TO MINIMIZE THOSE RISKS. BUT IF I MAY
BORROW A THOUGHT FROM JUSTICE HOLMES, THE MOST
ELABORATE FIRE PROTECTION SYSTEM IN THE WORLD MAY NOT
PROTECT THEATERGOERS FROM THE MAN WHO CRIES "FIRE."
MR. CHAIRMAN, FISCAL RESTRAINT IS NOT AN EASY TASK
FOR ANY ECONOMIC UNIT IN OUR SOCIETY --- A PERSON, A
CORPORATION, A PARTNERSHIP, A CITY, I DO NOT WANT TO DEVIATE
FROM THE SUBJECT AT HAND, BUT I MUST POINT OUT THAT EVEN WE AS
A NATION ARE NOT IMMUNE. ONLY OUR PRINTING PRESS ALLOWS US A
GERALD FORD LIBRARY
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GREATER OPPORTUNITY FOR POSTPONEMENT, WHILE WE DAILY RISK
MORTGAGING AWAY THE FINANCIAL HEALTH AND PROSPERITY OF TUTURE
GENERATIONS.
BUT OUR ECONOMY -- HOWEVER WEAKENED BY EXCESSES AT THE
FEDERAL LEVEL -- REMAINS ABLE TO WITHSTAND EVEN THE MOST SEVERE
SHOCKS. I DO NOT WISH A DEFAULT UPON NEW YORK CITY, I DO NOT
BELIEVE IT HAS TO DEFAULT AND I EXPECT IT TO TAKE THE MEASURES
NECESSARY TO AVOID SUCH AN EVENT, BUT IF IT DOES DEFAULT,
THE ECONOMY OF THIS NATION AND ITS FINANCIAL SYSTEM WILL
SURVIVE, WITH ENOUGH STRENGTH NOT ONLY TO REPAIR THE DAMAGE,
BUT ALSO TO START OUR GREATEST CITY ALONG THE ROAD TO
RECOVERY,
FORD & LIBRARY GERALD