Ask the Scholar
Document scope · 1 page
Scholar
Ask about this object, its catalog metadata, its source description, or the page inventory.
For page-specific OCR and visual context, open one of the page chats.
Scholar Source Context
Document identity
localId
4510964
label
Liquidity
core
doc
dtoType
document
citationUrl
pageCount
1
Source metadata
id
4510964
sourceUrl
contentType
document
title
Liquidity
citationUrl
collections
Arthur F. Burns Papers
Federal Reserve Board Subject Files
subjects
Credit
Banks and banking
Finance
Economics
thumbnailUrl
largeImageUrl
imageCount
1
hasImages
yes
source
import
hasTranscription
no
Source extras
naId
4510964
coverageEndDate
logicalDate
1970-02-28
month
2
year
1970
coverageStartDate
day
1
logicalDate
1969-12-01
month
12
year
1969
levelOfDescription
fileUnit
recordType
description
ocrSource
nara-archive
Single page context
seq
1
pageIndex
0
type
document
mediaId
b067586289011333
ocrText
The original documents are located in Box B77, folder "Liquidity" of the Arthur F. Burns
Papers 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. Arthur Burns 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United States of America his copyrights in all of his unpublished writings in National Archives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.
National /estminster Bank Limited
National Westminster House
326 High Holborn
London WC1
Telephone 01-242 3399
DERALO FORD LIBRARY
With the compliments of the Economic Adviser
Presented at The Eur ollar & Eurobond Internat al Seminar: London
10 and 11 December 1969
INTERNATIONAL LIQUIDITY
Russell J. Clark
FORD & GERALO LIBRARY
INTRODUCTION
In the pamphlet inviting attendance at these meetings,
the objective of the seminar was said to be to establish the
current and future prospects of the Eurodollar and Eurobond
markets and their implications for the industrialist as well
as for the banking community. No-one will question the
complexity of the subject before us, nor, I think, is there
any doubt about its importance. My task, as I understand 1t,
is not to discuss the mechanism of either the Eurodollar or
theEurobond markets but rather to set the scene by talking
about the international financial situation as it has developed
and some of the factors that will influence its future progress.
One of the significant aspects of the picture, and one directly
relevant to the Eurodollar market, is international liquidity.
The Euro-currency, and in the particular the Euro-dollar,
market is something that frequently arouses strong feelings.
There are those who regard it as the source of very great dangers.
We have, for example, recently been reminded by no less
an authority than the former Governor of the Bank of England
that this is a market in which there is no lender of last resort.
There are also those who see in the Euro-dollar market evidence
of the success of the U.S. in getting the world on to a dollar
standard, and this arouses opposition on political and emotional,
as well as on economic, grounds.
1.
2.
On the other hand, during the past month I have heard the
Euro-dollar market described by two eminent authorities in most
glowing terms. One, a representative of the City, spoke of
it as the salvation of our monetary system. The other, a
Continental banker, described it as the greatest private
enterprise institution in the world, more important than many
official institutions.
The size of the market 1s largely a matter for conjecture
for the very good reason that, because it operates outside
official jurisdiction, it is nobody's business either to make
or collect returns of transactions.
It is also a matter of
dispute as to whether or not there is an important element of
credit creation in this market. Milton Friedman, whose words
on monetary matters command widespread respect, has recently
accepted the size of the Euro-dollar market as around $30,000 million.
Since he finds that no more than $9000 million can be accounted
for as resulting from the U.S. balance-of-payments deficit
and a further $5000 million as having come from official reserves,
he attributes the remaining $15000 million - $16000 million
in the market to the creation of credit by the participating
financial institutions.
If this were so, with no lender of
last resort and the possibility of sudden surges of interest rates,
there would certainly be a serious danger of instability,
and even of disaster.
The probability is, however, that
FORD is LIBRARY GERALD
though there has been some credit creation, it has been on
nothing like the scale suggested by Professor Friedman.
Most
3.
Most of the dollars for which he cannot account may well have
come, over a long period, from non-official holdings in
commercial banks and elsewhere. Be that as it may, whatever
one's view of the disadvantages and dangers of this market,
this at least can be said - it has facilitated a greathdeal of
business that would otherwise have been frustrated for lack
of funds.
TEMPORARY PHENOMENON?
The question then arises as to whether this very large
and important market is to be regarded as a permanent, or only
a temporary, feature of the international monetary scene.
In part one's answer to this question depends on the view
one takes of the future of the U.S. dollar as both a reserve
and a vehicle currency.
Leaving that on one side, however,
perhaps one can be helped in finding the answer by recollecting
the main factors that have given rise to the Euro-currency market.
It came into existence essentially as a commercial response
to two things. First, restrictions imposed by national
governments on the convertibility of other currencies, and
hence on liquidity for international commercial transactions.
This meant that there was potential import and export business
round the world frustrated at the absence of suitable means
of payment.
GERALD FORD LIBRARY
4.
The second factor is that there were in the hands of
non-residents big currency balances, primarily dollars, arising
out of the deficit on the U.S. balance of payments, the holders
of which were seeking more profitable employment for their
funds than they could obtain by employing them in the U.S.
It was the bringing of these two things together by foreign
exchange dealers and brokers that resulted in the market
which has now grown to such large proportions.
BERALD FORD LIBRARY
It seems to follow that if either of these factors
disappeared the market would come to an end, or at least be
severely curtailed. Thus, if all currencies were made completely
convertible, the market in its present form would be unnecessary.
If, on the other hand, foreign exchange restrictions of the
severity that existed in the immediate post-war years were
to be introduced, the market would be impossible.
Should the U.S. balance of payments swing from its present
substantial deficit into surplus, dollar balances in the
hands of non-residents would obviously be considerably reduced.
Should the pattern of interest rates change markedly, it might
become more profitable to employ dollar balances within the U.S.
rather than use them externally.
Too much, however, should not be made of a possible shrinkage
in the size of the market arising out of a correction of the U.S.
deficit.
In the hey-day of sterling, long before the expression
"sterling balances" was invented, there were plenty of pounds
5.
in the hands of non-residents of the United Kingdom.
These
were due, not to a British balance-of-payments deficit -
we had a surplus - but to the fact that because people all
over the world were doing business with Britain, they had to
keep balances in sterling in London.
These
were
also
employed
for the finance of trade between third countries.
Surely the same will be true of the dollar.
The volume
of the overseas trade of the U.S. and the place that the dollar
has already acquired as a vehicle currency will ensure that
there are always a lot of dollars innon-American ownership.
Nevertheless, if the measures already taken and those
under discussion give us a reformed international monetary system,
and if policies adopted by individual countries result in
balance-of-payments equilibrium, there should be some easing
of controls. In that case there would be a change in the
Euro-currency market as we now know it which should, therefore,
be regarded as having a limited, though not necessarily a
very short, life.
GERALD FORD
6.
THE MONETARY SYSTEM IN WHICH THE MARKET DEVELOPED
Reference to monetary restrictions and balance-of-payments
deficits leads naturally to a consideration of the way in
which the monetary system has developed. If a monetary system
is to be judged by the extent to which it facilitates the
international movement of goods and services, the arrangements
made at Bretton Woods may be considered to have been remarkably
successful.
In the period since the War, the level of
world trade has increased year by year almost without interruption,
though not always at the same pace. Recently, however, some
doubts have arisen as to whether the Bretton Woods system would,
without modification, continue to meet the needs of the
international business community. At times there has seemed
to be the danger that trade and payments might be restricted
in order to preserve a system that was intended to result in
increased freedom of movement.
GERALD FORD LIBRARY
To understand why this should be necessary, look at the
Bretton Woods arrangements and the assumptions that underlay
them. An essential feature of the system is the fixing,
within narrow limits, of rates of exchange. To meet the
inevitable variations in the fortunes of the countries participating
in the Bretton Woods arrangements, rates were permitted to move
either side of their agreed parities by something like 1%.
Of equal importance was the establishment of the International
Monetary Fund itself, with reserves which, on conditions, it
could lend to member countries to tide them over temporary
deficits in their balances of payment.
7.
There were three assumptions underlying these very practical
arrangements for international monetary co-operation.
These
were that imbalances would normally be relatively small,
that countries, both deficit and surplus, would take prompt
domestic action to correct these imbalances, and that national
reserves, supplemented by modest assistance from the I.M.F.,
would be sufficient to provide bridging finance.
It was, of course, recognised that occasionally things
would not be normal. For one reason or another, the economy
of a country, and consequently the exchange rate for its
currency, might get seriously out of line with those of the
rest of the world.
This state of affairs was known as
fundamental disequilibrium, for which the appropriate remedy
was agreed to be the devaluation or revaluation of the currency
concerned.
In this connection it was assumed that, in
consultation with the I.M.F., countries would readily recognise
fundamental disequilibrium when it existed and would take the
appropriate, and early, action with regard to their currencies.
All these underlying assumptions have, to a greater or less
degree, proved false.
For one reason or another, countries
have not been willing to take prompt domestic action to correct
a deficit or a surplus on their balance of payments.
They have frequently been more concerned with maintaining
full employment and growth than with correcting their balance
of payments.
FORD i LIBRARY GERALD
8.
Then, with the growth of world trade, imbalances have,
perhaps naturally, tended to become larger and national reserves
have proved insufficient to finance them, especially in view
of the dilatoriness of countries, surplus and deficit, in
applying corrective measures.
Furthermore, again for a variety of reasons, there has
been an unwillingness to make adjustments in exchange rates.
Britain is, of course, one example of a country unwilling
to devalue its currency, even after it had become pretty
evident that the economy was in a state of fundamental
disequilibrium.
For a long time we defended the indefensible
and in the process incurred an unmanageable burden of short-term
debt and distorted the economy away from, rather than towards,
export markets.
We were not alone to blame for this, in that
the other major countries were only too willing to provide
the credits that permitted us to stave off a change in the
parity.
Had we had very much larger reserves, we could
have run these down and at least have avoided incurring
such substantial indebtedness.
GERALD LIBRARY GERALD FORD
Although the U.K. is the great example of a country
sticking to the agreed parity far longer than was desirable,
other countries have done the same.
The result has been
a series of international monetary crises, each more serious
than its predecessor.
Changes in parities have, more often
than not, been made in crisis conditions and, because of the delays
9.
in making them, have tended to be greater than was strictly
speaking necessary.
It is this failure of the Bretton Woods
adjustable-peg system to work satisfactorily that has given rise
to a call for greater flexibility in exchange rates.
EFFECTS OF THE EURO-CURRENCY MARKET IN THIS CONTEXT
It has now been conceded by most of the worlds international
monetary experts that the system needs to be reformed.
First there
is agreement that, in the sense that national reserves plus
borrowing facilities are insufficient, there is a shortage of
international liquidity. This by itself may not be important
for businessmen, since commercial transactions are not financed
from national reserves.
Finance for commercial transactions
is provided by commercial banks.
That, however, is not the
whole story.
As I have already indicated, with the expansion
in world trade, swings in national balances of payments have
widened and if national reserves, either owned or borrowed,
are insufficient to meet these, governments feel empowered
to apply restrictions of one kind or another.
This has
certainly been the case with the U.K., with the result that
many transactions can no longer be financed in sterling.
Thus,
at one remove, a shortage of liquidity in the national reserve
sense, certainly affects business.
The existence of the
Euro-currency market has undoubtedly eased the problem
GERALD FORD LIRRARY
10.
from the point of view of private enterprise.
This is what
the London banker meant when he said that the Euro-currency
market had been the salvation of the system.
By the same token, the existence of this market has made
it more difficult for governments to control domestic inflation.
This may be bad from a central bank or treasury point of view.
but meanwhile it is good for private enterprise, at least in
the short run.
Less desirable from every point of view is
the existence of a reservoir from which de-stabilising flows of
funds can move rapidly from weak to strong currencies.
Another effect attributed to this international market
in liquidity is some easing of the pressure on the U.S. balance
of payments, certainly as measured on an official settlements
basis.
To the extent that this is true, it has permitted
the U.S. to continue to run a deficit, which in their case
GERALD ReFORD
involves a transfer of real resources from relatively poorer
countries to the U.S.
The market has also been the means
by which American companies have been able, in spite of
restrictions on the export of capital from the U.S., to purchase
an ever-growing stake in Western Europe.
For obvious reasons
these effects do not command themselves to Europeans.
The Euro-currency market is also often condemned as being
the channel through which high interest rates in one country
are transmitted to another. While this may be true, it seems
to me evident that even if there were no Euro-currency market
11.
as we know it, the introduction of a tight monetary policy and
high interest rates in the most important financial centre in
the world would, by one means or another, make itself felt
in other countries.
Thus adverse criticism of the Euro-ddlar
market on this ground seems misplaced.
PRESENT CALM
The monetary system is at the moment enjoying a period of
quite unexpected calm.
This is a welcome change after the
financial crises of the past two years and more.
How long
the present lull will last no-one can tell, but it may help
in forming a judgment if one considers some of the factors
that have produced it.
Undoubtedly the most important element is the exchange
rate adjustments that have occurred, starting with the
devaluation of the pound in November 1967 and ending with the
revaluation of the D. Mark two months ago.
These adjustments
have resulted in all the major currencies looking far more
credible than they have done for a long time, and this
credibility has made speculation, particularly at current
GERALD FORD LIBRARY
rates of inteest, somewhat unattractive.
Secondly, in both the two main deficit countries, a measure
of monetary and fiscal discipline has been introduced.
In
neither is it working as quickly as the authorities would like
but in both there seems, for the moment at least, a political
determination to see the policy through.
Whether or not we
12.
Whether or not we shall like the results of hard-hitting deflationary
policies, particularly in the U.S., remains to be seen.
Thirdly, there has been concerted action via the I.M.F.
to increase international liquidity.
A decision was taken
at the I.M.F. Meetings in Washington at the end of September to
activate the scheme for S.D.R.s. Thus on 1 January next
the I.M.F. will make the first allocation of these,
the
total of the first issue being $3500 million, of which
Britain's allocation will be something in excess of £400 million.
This is significant in that it is the first sizeable addition
to our owned reserves for a very long time.
Other countries who are participating in the scheme,
and this means most, if not all, the 100 and more member
countries of the I.M.F., will also receive allocations of
S.D.R.s in accordance with the size of their quotas in the Fund.
Reserves will from now on consist of gold, foreign exchange,
reserve positions with the I.M.F. and S.D.R.s. After the
allocation of S.D.R.s, the total reserves for all member
countries will on current figures be held in the following
proportions: gold 49%, foreign exchange 39%, reserve positions
in the I.M.F. 7½, and S.D.R.s 41%.
The 4½ for S.D.R.s makes them appear rather unimportant,
yet 1 January will be an exciting day because something new in
the way of international monetary collaboration will have begun.
GERALD FORD LIBRARY
13.
International liquidity is to be deliberately created and the
increases are to be jointly managed through the I.M.F.
Whatever
the ultimate outcome, the decision taken last September has
certainly contributed to the measure of stability we now enjoy.
One can hardly refer to the present calm without some
reference to gold.
The behaviour of the free gold market
is important both as a symptom of the calm and also as a promoter
of continuing calm.
What will happen if the free market
price falls below $35, even for a short time, isbeing debated
by the experts.
Perhaps, for the purposes of national
reserves, gold may become a sort of metallic S.D.R.
THE FUTURE
In thinking about the future of the Euro-currency market
a number of factors require brief consideration.
Having
referred to S.D.R.s, one must raise the obvious question
as to the prospects for this experiment.
One may hope that
it will be successful and that its success will help to make
it possible for national governments to relax or even ultimately
remove, their exchange controls; but will the experiment succeed?
To me the omens seem good.
S.D.R.s have not been hastily
introduced as a stop-gap arrangement.
They are the product
of discussions between the I.M.F. and national governments
over a period of five years and more.
GERALD LIBRARY
14.
They have been endorsed by all the major trading countries
of the free world and their value in terms of gold is
guaranteed jointly by the members of the I.M.F.
Now we may
expect that they will be accepted by governments in settlement
of deficits and will be held by them in reserves on a par
with the other main constituents, gold and foreign exchange.
If this proves to be the case the resultant addition to
GERALD FORD LIBRARY
international liquidity should increase confidence.
A second element in the present situation that must have
a bearing on the future of the international monetary system
is the study being conducted by the I.M.F. on the possibility
of introducing greater flexibility into exchange rates.
The ability of exchange rates to move would have the effect
of making balance-of-payments deficits and surpluses to some
extent self-correcting.
Moreover, as there occurred a
persistent movement, downwards or upwards, in anexchange rate
it would be evidence to the entire world that some internal
adjustment was required in the economy of the country concerned;
and one might hope that governments might thereby be induced
to take earlier corrective measures.
If they did so,
such measures would need to be less punitive than if they were
left to the last possible moment, as has so often been the case
in the past.
With some flexibility in the exchange rate,
accompanied by appropriate domestic policies, we in Britain
might even get away from the abrupt stop-go policies that have
plagued us for so long.
15.
When thinking about the future of the Euro-currency market,
one must include the prospects for the U.S. balance of payments.
Even with an unprecedentedly severe monetary policy, this
problem is proving very difficult of solution, and few people
either inside or outside the U.S. seem to expect that the
coming year will see anything other than a still larger deficit.
One can only wish the Administration success in their endeavours
while hoping that they will not produce a recession of
exportable dimensions, nor allow balance-of-payments
considerations to draw them into isolationist economic and
financial policies.
Meanwhile, as I have already indicated, the tight monetary
policy in the U.S. is bound to result in high rates of interest
in the Euro-currency market.
It also seems likely that
when and if domestic policies in the U.S. are successful in
reducing their deficit, some curtailment of the market may
well result, with a consequent pressure on interest rates.
That is unless some other country begins to run a deficit and
its currency thereby becomes available to take the place of
dollars.
FORD & LIBRARY GERALD
16.
There is one other factor of which brief account should
be taken in this context.
I refer to the European Economic
Community and the efforts being made to carry integration
further by monetary means.
For many within the Community
the goal is not only the further unification of monetary and
fiscal policies, but also a single currency.
This is
undoubtedly a long way off but asa halfway house many would
welcome an agreement that would permanently fix exchange rates
between the currencies of the Six.
To the extent that the
Six are successful in achieving this aim, they will clearly
have introduced a considerable element of stability into the
world's monetary arrangements.
In the process they may
well have provided the world with a new reserve and vehicle
currency to operate alongside the dollar, especially if the U.K.
and sterling become a part of the European system.
GERALD FORD LIBRARY
17.
CONCLUSION
These then are some of the aspects of the international
monetary scene that affect the future of the Euro-currency
market, itself an important feature of that scene.
If the
S.D.R. scheme succeeds in being a useful improvement in
international liquidity, if greater flexibility is introduced
into exchange rates, and if balance-of-payments disequilibria
are brought under control, the need for national exchange controls
will be reduced.
With a relaxation of controls there would
be a correspondingly reduced need for the Euro-currency market.
I think the prospects for some relaxation, while not bright,
are considerably better than they were only a few months ago.
Should the hoped-for improvements not materialise, however,
and national controls be intensified, the Euro-currency market
would become much more restricted. There might also be
an attempt on the part of governments to secure some official
control of the market.
Thus changes of some kind seem a distinct possibility.
It would be surprising if the market simply went on getting bigger.
Though these and other changes may occur, it seems safe to
predict that for the foreseeable future the Euro-currency
market will continue to provide a useful addition to liquidity
and thus facilitate the international movement of goods and
services.
BERALD FORD LIBRARY
[1970?]
A small group of the staff met at 12 Noon, Monday, May 18,
in Mr. Holland's office preparatory to a meeting to be held in Chairman
Burns' office on May 19. Those present were:
Messrs. Holland
R. Solomon
F. Solomon
Molony
Partee
Axilrod
Gramley
Keir
Ettin
Grimwood, Secretary
There was a discussion of the nature of any liquidity crisis
that might arise, and the ways in which the crisis might affect broad
sectors of financial markets. There was general agreement that insti-
tutions holding money or near money -- commercial banks, savings and
loan associations, and mutual savings banks -- in the aggregate were
not in a weak position and that contingency plans to aid institutions
FORD i LIBRARY 07V839
of this type are adequate.
Insurance companies are making policy loans at a record
level, but cash flows apparently are adequate. Commitments out to
six months are holding up and do not give any indication of a sharp
pinch.
Some commercial paper issuers could find the market shrinking
to the extent that rollovers of outstanding paper might be difficult;
however, it is believed that most corporations have bank lines of credit
which would cushion the immediate effects. This would have effects on
bank loan expansion that would need to be taken account of by monetary
policy.
-2-
Two sectors of the market were identified as vulnerable --
stock brokerage houses and mutual funds. Both are closely tied in
with the stock market and are threatened with problems that are more
of confidence than of liquidity.
Stock Brokerage Houses. These institutions are vulnerable to
continued erosion of asset value. Currently there is no plan in place
eyel
to meet a liquidity crises in the industry. A bill introduced by
regist
Senator Muskie would provide protection to customers by insuring brokers'
liabilities to customers.
Contingent plans to funnel bank funds to brokerage firms
would face two problems: (1) lack of a suitable asset against which
to lend; and (2) a reluctance on the part of brokerage firms to acquire
a fixed-dollar liability when asset value was declining.
Mutual funds. There was no indication that mutual funds are
suffering net redemptions at this time, but it was recognized that
large-scale and prolonged redemptions might force liquidations on a
falling market. There is no plan in place to meet this possibility.
Plans to make conduit loans through banks would face the same
problems described above.
It was recognized that some marginal alleviation of liquidity
pressures could be provided by somewhat greater provision of reserves to
support a moderate expansion of bank credit and deposits, but that such
an action would have to be considered in the context of other objectives
of monetary policy.
FORD & LIBRARY GERALD
BOARD C - GOVERNORS OF THE FEDERAL RESERVE SYSTE
2/13/70
DATE
TO
Chairman Burns
FROM J. CHARLES PARTEE go
This report, prepared under the
supervision of Ed Ettin, Chief of our
Capital Markets Section, is in response
to your request for an analysis of the
liquidity situation relayed to me by
Bob Holland. A Wall Street Journal
roundup on the subject had appeared
about 2 weeks ago.
GERAL FORD LIBRANIA
Kolea
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date February 12, 1970.
To
Mr. J. Charles Partee
Subject: Current liquidity and debt
From Edward C. Ettin
burden in the U.S. economy.
As requested by you, the attached paper represents the
staff's evaluation of the current state of liquidity and debt
in the U.S. economy. While numerous tables summarize the available
statistical information, the analysis was severely restricted by
the lack of adequately disaggregated data. However, it is the
conclusion of the paper that generally there seems to be no risk
of widespread debt defaults or a liquidity crisis, although
some savings and loan associations and, possibly, some nonfinanci al
corporations are now in a very exposed position. This conclusion
rests on the twin assumptions of a less restrictive monetary
policy in 1970 and a recession no longer or deeper than those that
have already occurred in the postwar period.
Messdames Stockwell and Opper and Messrs. Fisher, Struble and
Stone joined me in preparing this paper.
Email CG
GERALD FORD LIBRARY
CURRENT LIQUIDITY AND DEBT BURDEN IN THE U.S. ECONOMY
A continuing concern of economists interested in the business
cycle and stabilization policies has been the potential risks of a
liquidity crisis both during periods of monetary restraint
and the initial phase of recessions. Specific concern centers on the
ability of both financial institutions and the nonfinancial sector to
meet their commitments, and the effect of any inability to do so on
both the economic structure and general confidence.
While no liquidity crisis has, in fact, developed in the U.S.
economy in the postwar years, concerns regarding liquidity and failures
by financial and nonfinancial institutions have become more pronounced
in both the "credit crunch" of 1966 and during the current period.
This paper, by reviewing selected major economic sectors, will discuss
the state of current liquidity and debt burden in the U.S. economy in
order to evaluate the risk of a liquidity crisis in 1970.
Three general qualifying factors, however, should be emphasized
at the outset. First, the micro-data needed to disaggregate totals
and averages do not generally exist, or at least are not available
to Board staff. Thus, aggregate trends and ratios must be used for
illumination, but they restrict the analyst to general, qualitative,
statements.
FORD DERALOR & GERALD LIBRARY
-2-
Second, the analysis presented in this paper assumes that
monetary policy will not be as restrictive in 1970 as in 1969. It
also assumes that if a recession develops, it will not be any more
severe than those that have occurred in the postwar period.
Third, there is a presumption that the Federal Reserve
System stands willing and able to be a true "lender of last resort" to
the entire financial system. Emergency credit procedures for the
savings and loan industry already exist, and contingency plans have
been considered for the savings banks and life insurance companies.
With the long standing procedures for emergency loans to both member
and nonmember commercial banks, it thus seems clear that those
financial institutions most likely to face a liquidity crisis will
be directly assisted by the Central Bank if and as assistance is
needed. This does not mean that very marginal financial institutions
will be immune from failure--although most of the depositors are
insured. It does suggest that spiraling failures among financial
institutions is not a likely event. It also suggests that the greatest
risk may be in nonfinancial sectors, where, unfortunately, the least
disaggregated data exist.
I.
FINANCIAL INSTITUTIONS
In this section, developments at commercial banks, mutual
savings banks, savings and loan associations, and life insurance companies
GERALD FORD LIBRARY
-3-
will be considered. By recent historical standards, each of these
institutional groups is operating with far less than normal liquidity
and flexibility, and--for some -pronounced further policy restraint
1/
could have serious repercussions. But, for this group of institutions,
the onset of a modest recession--accompanied by a relaxation of
monetary policy--would rather quickly improve their liquidity. Deposit
inflows would expand as market rates decline, loan demands would moderate,
loan repayments would probably accelerate as businesses converted some
working capital to cash, and life insurance companies would face a
smaller demand for policy loans.
Commercial Banks
Commercial bank liquidity declined considerably further
during the 1960's. This is clearly suggested by the two measures of
bank liquidity presented in Table 1. As may be observed, the ratio
of loans to deposits rose from about 53 per cent at the end of 1960
to nearly 68 per cent by the end of 1969. A similar uptrend, although
somewhat more moderate in slope, was displayed by the ratio of loans
to total bank liabilities. The smaller advance in this latter ratio
reflects the much greater use of non-deposit sources of funds that
banks have made in recent years.
1/ Most--if not all--financial institutions are probably insolvent in
an economic sense (i.e. the market value of their assets is less than
their liabilities). They are not insolvent in a regulatory sense because
governmental authority permits assets to be carried at cost. The
questions of solvency are ignored in this paper.
FORD is LIBRARY 076839
-4-
Table 1
SELECTED LIQUIDITY MEASURES
All Commercial Banks
*
Total loans as a per cent of:
Total Deposits
Total Liabilities
1929
73.0
67.0
1933
51.0
48.0
1946
19.0
19.0
1960
53.0
51.0
1966
65.0
61.0
1967
60.0
57.0
1968
61.0
57.0
1969
68.0
60.0
* - All ratios computed with year-end data except 1966 ratios which
are based on end-of-September data. This latter date was se-
lected to give some indication of conditions during the period of
financial strain in 1966. All ratios have been rounded to the
nearest decimal point.
The decline in bank liquidity during the 1960's extended a
downtrend that was begun soon after World War II. At the close of the
War total loans amounted to only 19 per cent of total deposits and to
a slightly smaller proportion of total liabilities. These early post-
War levels were exceptionally low by historical standards, and each
ratioshas risen almost steadily since the end of the War, except during
periods of recession when Federal Reserve monetary policy was easy and
loan demand was weak. However, despite the nearly continuous rise,
FORD is GERALD LIBRARY
-5-
both ratios remain below their 1929 values, and the banking system
appears to be in a somewhat more liquid condition than before the
financial collapse of 1929-1933.
To shift to a more recent period for comparison, according
to most traditional measures of liquidity, the banking system appears
to be in roughly the same liquidity position today as it was in during
the credit crunch period of 1966. As may be seen in Table 1, the
ratio of loans to deposits for all commercial banks was somewhat
higher at the end of last year than during the fall of 1966. Con-
versely, the ratio of loans to total liabilities for all commercial
banks was somewhat lower on the recent date than in 1966.
Essentially the same impression is conveyed by the data
presented in Table 2. The present liquidity position at large
weekly reporting banks appears somewhat lower if the ratio of liquid
assets to total liabilities is used as a measure and somewhat higher
if the ratio of loans to total liabilities is used. Both ratios
suggest that country bank liquidity is presently somewhat lower than
in 1966.
GERALD R. FORD LIBRAPA
-6-
Table 2
SELECTED LIQUIDITY MEASURES
Large Banks and All other Banks
2/
1966
1967
1968
1969
Large weekly reporting banks
Total loans/total liabilities
64.0
58.0
59.0
62.0
Total liquid assets 1/ /total
liabilities
20.0
20.0
19.0
16.0
All other commercial banks
Total loans/total liabilities
55.0
54.0
55.0
58.0
Total liquid assets-total
liabilities
28.0
27.0
26.0
22.0
1/ Total liquid assets include assets that serve as legal reserves for
Federal Reserve member bank, total U.S. Treasury securities, and
short-term municipal securities.
2/ Data for 1966 are as of the end of September. Data for all other
years are as of the end of the year.
It is a well recognized fact that a single liquidity measure,
or for that matter even a group of measures, cannot provide a precise
indication of the state of bank liquidity and changes therein. Between
1966 and 1969, for example, large banks in the United States discovered
several new sources of funds of which the Euro-dollar market and the
commercial paper market are the most important. Since these markets
have enabled banks to weather a rather substantial deposit decline during
GERALD LIBRARY
-7-
a period of considerable financial strain, it appears prudent to view
the new ability of banks to tap these markets for supplementary funds
as at least a partial offset to -- if not a partial cause of -- the
further erosion in conventional portfolio liquidity. To be sure, only
large banks have the capability of using these markets, but as the data
in Table 2 suggest, liquidity conditions at smaller commercial banks are
not quite as depleted as those at large banks.
The recent further decline in liquidity has not, of course,
fundamentally affected the ability of the banking system to meet a
serious currency drain, for this depends not on the composition of
bank assets but rather on the willingness of the Federal Reserve System
to act decisevely under such circumstances. Nonetheless, the depleted
state of bank liquidity would no doubt make the System's job more
difficult if a period of serious financial strain were to develop.
The reduced state of bank liquidity should also be of some
concern for another reason. With asset portfolios already heavily
weighted with loans, it seems unlikely that banks will be willing to
continue making loans with funds obtained from the sale of securities,
at least not at the same pace as in other recent months. Therefore,
unless the total volume of bank credit begins to expand again, it
appears that some bank borrowers may be hard pressed to find the credit
on which their own planning had been based. Indeed, the increased use
of high-cost non-deposit funds by banks suggests that when large deposit
inflows once again materalize, they would first be allocated to repaying
non-deposit borrowings, rather than to new loans.
FORD & LIBRARY GLRALD
-8-
Savings and Loan Associations
The quality and adequacy of liquidity at savings and loan
associations is particularly difficult to document. Data on the term
structure of liquid assets are virtually non-existent. Moreover, the
adequacy of liquidity must be measured not only against outstanding
deposit claims, but also against binding commitments to acquire
future investments--again, something that in practice cannot be
documented with precision.
In terms simply of "liquid assets 1/ held, the savings and
loan industry is probably in an adequate position even though its
current situation is low by historic standards. Relative to the
FHLBB's minimum requirements for liquid holdings-- which have been
reduced in three steps since mid-1968 in order to bolster the volume
of funds available for mortgage lending--the industry in aggregate
has held a fairly steady dollar volume of "excess" liquid assets
except for the 1966 lows, and currently is only marginally below the
highs of the 1960's (Table 3).
However, as with all financial institutions, some of the
liquid assets held by savings and loans could only be sold at substantial
losses, even though they are carried on balance sheets at cost.
1/ S&L liquid assets are defined here as their holdings of cash and all
U.S. Government securities. This is not entirely satisfactory because
there is no indication available as to the maturity structure of their
Governments; furthermore, FHLBB minimum liquidity regulations allow
"liquid assets" to include holdings of US Government Agency issues of less
than 5 years, although in fact these are not included in the "US Government"
holdings and cannot be isolated out of the aggregate data.
GERALD FORD LIBRARY
-9-
Moreover, paralleling the FHLBB regulatory reductions, liquid holdings
relative to deposit liabilities are now at record lows (Table 4).
TABLE 3
LIQUID ASSET HOLDINGS
SAVINGS AND LOAN ASSOCIATIONS
($ billions, not seasonally adjusted)
2/
Cash + U.S. Governments
Excess Over Required
1966
1967
1968
1969
1966
1967
1968
1969
End of
Q I
11.1
11.6
12.9
12.7
3.3
3.5
4.0
4.0
Q II
10.7
12.0
12.9
12.0
2.8
3.6
3.9
3.9
Q III
10.1
12.1
12.1
10.9
2.3
3.6
3.7
2.9
3/
3/
Q IV
11.1
12.7
12.5
11.2
3.1
4.0
3.9
3.7
/ All U.S. Government securities excluding Agency issues.
2/ Required liquid assets consist of the minimum volume of cash and
Government securities that must be held based on deposit levels.
(The ratio was 7 per cent until 1968 and has been reduced in
three steps to the current 5.5 per cent.)
3/ High dollar level for the 1960's.
In an attempt to measure truly unencumbered funds, the "net" liquidity
measure of Table 4 has been developed which relates liquid holdings
less outstanding FHLBB advances. to total deposit liabilities. By this
measure which reflects the reductions in required minimum liquid holdings,
but primarily the record volume of funds advanced by the FHLBB during
FORD & 076830 LIBRARY
Table 4
SAVINGS AND LOAN ASSOCIATIONS
LIQUIDITY RATIOS
(Per Cent)
Legal 1/
Net 2/
High
High
For The
For The
End Of
1960's 3/
1966
1967
1968
1969
1960's 3/
1966
1967
1968
1969
Q I
12.0
9.9
10.0
10.2
9.5
9.4
4.5
5.3
6.6
5.3
Q II
11.9
9.5
10.0
10.0
8.9- 5/
5
8.9
3.0
6.2
6.0
/
3.9
4/
/
Q III
11.4
9.1
9.9
9.4
8.1
8.1
2.2
6.3
5.3
2.0
6/
Q IV
12.0
9.8
10.2
9.5
8.2-
8.2
3.2
6.4
5.2
6/
1.0
-10-
/
Ratio of cash and U.S. Governments to share capital.
/
[Cash and U.S. Governments - Borrowing] / Share Capital.
/
All highs occured in the 1960-62 period.
/
Required minimum decreased from 7% to 6.5%.
/
Required minimum decreased to 6.0%.
Required minimum decreased to 5.5%
GERALD
R
0804
LIBRARY
-11-
1969--the industry's net liquidity is at an all-time low. This is
an extremely harsh test, of course, because in the event of any
emergency the FHLB Board could waive repayment of at least some portion
of these outstanding loans.
In addition, however, California S&L's have been a special
problem case for some time; as indicated in Table 5, since 1964 they
have placed extraordinary reliance on borrowed funds--which by the
end of 1969 amounted to double their holdings of cash and US Governments.
These particular associations have characteristically been aggressively
growth-and profit-motivated--many are stock, as opposed to mutual
companies--and they had used borrowed funds not so much for liquidity
purposes as for profit-oriented leverage. This behavior was fairly
lucrative in the financial environment in which they had operated--with
higher-than-average mortgage yields as well as above average offering
rates. Since the adoption of rate ceilings in 1966, these institutions
have had particular difficulty in maintaining deposits since they had
counted heavily on out-of-State funds attracted at above average rates.
Their resultant lower deposit growth has, consequently, accelerated
their need to borrow from the FHLB; as opposed to pre-1966 borrowing,
which had been used for aggressive growth, more recent borrowing has
been required to supplement lost deposits.
FORD & GERALD LIBRARY
-12-
TABLE 5
CALIFORNIA INSURED S&L's
LIQUIDITY AND BORROWED FUNDS
(billions of dollars held at year end)
1/
Borrowed
Liquid
Excess
2/
End of
Funds
Assets
Liquid Assets
1960
.6
1.0
.4
1961
.9
1.3
.5
1962
1.0
1.6
.7
1963
1.4
1.8
.6
1964
1.9
1.9
.5
1965
2.2
1.9
.4
1966
2.9
1.9
.4
1967
1.9
2.1
.5
1968
2.3
2.1
.5
1969
3.7
1.8
.5
1/ Cash plus U.S. Governments of any maturity.
2/ Holdings of "liquid assets" (as defined above) in excess of the
minimum required by the FHLBB.
FORD de GERALD LIBRARY
-13-
The Federal Home Loan Bank System during 1969 provided an
unprecendented volume of funds to the entire savings and loan industry
in order to maintain mortgage activity. As indicated in Table 6, such
lending was equal to deposit growth at the S&L's in 1969. The FHLB
currently holds about $1 billion in liquid assets available for future
lending (Table 7). This amount is somewhat below recent "normal" levels,
but probably represents an adequate working balance--particularly in
light of the FHLBB's market borrowing scheduled for the first quarter,
the maximum $4 billion special borrowing privilege it now has with the
Treasury, and the emergency credit agreement arranged with the FRB. It
should be noted that the FHLBB's own obligations are very short term,
on average, and maintenance of anything like the recent pace of advances
to the S&L industry will require not only additional borrowing of new
money but also a considerable amount of refunding over the near future.
Despite the ability of the FHLB to maintain or increase the
aggregate volume of advances, the distribution of lending presents some
special problems. While 40 per cent of insured savings and loans had no
borrowed funds outstandings as of November 1969, fully 12 per cent--
holding nearly one-fourth of industry deposits--had advances outstanding
that amounted to more than 10 per cent of their deposits (Table 8)
FORD
GERALD
LIBRARY
Under existing FHLBB regulations, these is a 17.5 per cent maximum on
the allowable ratio to savings capital of advances for expansion purposes;
advances to meet withdrawals are currently limited by FHLBB regulation
to a maximum of 50 per cent
8
If
These associations are not exclusively located in California; there
are some in Illinois and in the Southeastern states that also have high
borrowed funds ratios.
-14-
Table 6
INSURED SAVINGS AND LOAN ASSOCIATIONS
SOURCES AND USES OF FUNDS
(Billions of Dollars)
1964
1965
1966
1967
1968
1969
Deposit accounts 1/
10.3
8.2
3.5
10.5
7.3
4.0
Borrowed funds
.6
.8
1.0
-2.8
1.0
4.1
Subtotal
10.9
9.0
4.5
7.7
8.3
8.1
Mortgage sales and
14.5
repayments 2/
16.0
17.0
13.8
14.2
14.5
14.1
Reduction in liquid
assets 3/
-.6
-.7
.1
-1.6
--
1.3
Other sources, net 4/
-.1
.4
-.9
1.3
.8
--
Gross mortgage acquisitions
26.2
25.7
17.5
21.6
23.6
23.4
1/
Includes interest credited.
2/
Includes funds from sales of loans and participations, loan repayments,
and miscellaneous credits. Excludes interest, taxes, etc.
3/ A drawdown of liquid assets (cash and government holdings) is shown as a
positive source of funds and an increase as a negative source.
4/
"Other" includes the net amount of loans in process, allocations to
reserves and surplus, accruals of dividends and other loans and invest-
ments.
Note: Components may not add to totals because of rounding.
Table 7
LIQUIDITY OF THE FHLB SYSTEM
(Billions of Dollars)
End Of
1966
1967-
1968
1969
Q I
.9
2.5
1.8
1.4
Q II
1.3
2.4
1.9
1.1
Q III
1.2
2.0
1.4
1.1
Q IV
1.8
1.6
1.5
1.2
1/ The highest level of FHLB liquidity in the 1960's.
FORD is LIBRARY GERALD
-15-
TABLE 8
RATIO OF FHLB ADVANCES TO SAVINGS CAPITAL
INSURED SAVINGS & LOAN ASSOCIATIONS
November, 1969
Ratio of FHLB
Per cent of
Advances to Savings Capital
Number of
Per cent of
Total
Percent of Total
(Per cent)
Associations
Total
Advances
Savings Capital
over 17.5
90
2.0
23.3
5.8
15.1-17.4
61
1.4
6.6
2.8
10.1-15.0
385
8.7
29.5
15.5
5.0 - 10.0
840
18.9
29.4
26.5
less than 4.9
1,286
29.0
11.2
27.8
no borrowing
1,778
40.0
0
21.6
Total
4,440
100.0
100.0
100.0
Source: FHLBB
of savings capital. It can be seen in Table 8 that associations
holding nearly 6 per cent of industry deposits had already exceeded
the 17.5 per cent-of-savings limitation; this is not only increased
significantly from a year earlier, but given the large volume of funds
advanced during December, it is very likely that current data would
show an even more serious situation. To be sure, some of the associa-
tions included in this upper category are "supervisory cases" not
necessarily borrowing heavily because of current financial conditions.
GERALD FORD LIBRARY
-16-
However, even allowing for this and assuming the FHLBB would relax
its maximum limitations, there is probably a practical limit on
the amount of borrowed funds that could be absorbed in the near
future by those individual S&L's that probably have the most need
for external funds--those currently in the over-10-per cent borrowing/
deposit category. Thus, while aggregated ratios indicate a fair
amount of borrowing leeway for the industry, there appears to be
far less flexibility when consideration is made of the already high
borrowing by those S&L's most likely to continue to need borrowed funds.
Moreover, the industry's commitment position is such that
in the absence of a significant improvement in deposit inflows,
savings and loans will soon have to draw down their liquid asset balances
further and/or continue their large volume of borrowings from the FHLB
System. Despite a steady reduction since mid-1969, the total amount
of commitments currently outstanding for future acquisition of mort-
gages looms quite large relative to recent cash flows (Table 9).
Unless takedowns of these commitments are scheduled further into the
future than the normal 3-month average, this factor represents a
potentially significant drain on the liquid resources of either the
S&L's or the FHLB System.
GERALD FORD LIBRASA
-17-
Table 9
SAVINGS AND LOAN ASSOCIATIONS
RATIO OF OUTSTANDING MORTGAGE COMMITMENTS
TO RECENT CASH FLOW 1/
QI
Q II
Q III
Q IV
2/
1966
.92
1.03
1.13
1.09
1967
.89
.93
.91
.99
1968
1.09
1.13
1.14
1.12
1969
1.19
1.20
1.23
1.26
Memo:
Outstanding mortgage commitments
(average outstanding over the
quarter) (Billions of dollars).
1966
5.4
4.8
3.8
3.3
1967
3.5
4.3
5.3
5.8
1968
5.9
6.0
6.1
6.5
1969
6.9
7.1
6.5
6.0
1/ Ratios computed from seasonally adjusted quarterly data.
Average outstanding mortgage commitments divided by total
cash flow during the same quarter. This measure is dis-
torted to the extent that there is a difference between
cash flow expected at the time the commitments are scheduled
for disbursement and the current quarter cash flow used for these
ratios.
The second quarter of 1966 marked the first time that this
ratio exceeded 1.0 in the 1960's (the period for which these data
have been maintained).
FORD & 039470 LIBRARY
R.
GERALD
FORD
-18-
LIGUARY
Mutual savings banks
The kind of detailed analysis just presented for the savings
and loan industry is not possible for the mutual savings banks because
of limited data availability. However, mutúal savings banks tend to
operate on a far more self-sufficient basis than do savings and loan
associations. Very few savings banks have exercised their option to
join the FHLB System, and very limited use is made of borrowed funds,
even though nearly all have arranged lines of credit with commercial
banks. New York and Massachusetts institutions, in addition, have
access to state-established liquid sources.
As has been the case with commercial banks, liquidity ratios
at savings banks have declined throughout the postwar period essentially
without interruption (Table 10). In large part, of course, this trend
reflects a basic adjustment in portfolio management from war inflated
finance, accelerated by the rising level of market yields in the
1960's. The liquidity measurements in Table 10 do not reflect all of
the portfolio liquidity of the savings banks. In the last few years,
the savings banks have acquired some Agency securities and since 1967
have acquired almost $4 billion of corporate bonds. While, of course,
not all of the latter can be readily sold without loss, these securities
do augment the general marketability of their portfolios.
1/ The Mutual Savings Central Fund, operating for Massachusetts savings
banks as both an insuring agency and a lender of last resort, has a small
fund available for loans to savings banks which has not been used since
the late 1930's. In New York, the Saving Bank Trust Company operates as
a central bank for savings banks in the state and typically has a moderate
volume of repurchase arrangements on loans held by these institutions.
-19-
18
TABLE 10
1/
LIQUID ASSETS
HELD BY ALL MUTUAL SAVINGS BANKS
December
Liquid assets
$ billions
as % of deposits
1945
11.3
73.4
1950
11.8
58.8
1955
9.4
33.5
1960
7.1
19.6
1963
6.8
15.2
1964
6.8
13.9
1965
6.5
12.4
1966
5.7
10.4
1967
5.3
8.9
1968
4.8
7.5
1969
4.2
6.3
1/ Cash plus U.S. Government securities.
Data are available, since 1966, for all securities maturing
in less than one year held by the New York State mutual savings banks,
in
a group accounting for 60 per cent of the industry's deposits. As
indicated in Table 11, this ratio, while declining, has been relatively
more stable than the total holdings of cash and government securities
held by all savings banks.
With their recent relative stability in short-term liquid
asset holdings, their more marketable portfolio, and access to borrowing
at commercial banks and state-established liquid sources, savings banks
as a group do not appear to be overly exposed at this time.
FORD i LIBRARY 038470
-20-
TABLE 11
NEW YORK STATE MUTUAL SAVINGS BANKS¹/
Cash plus Securities 3/ Maturing Within 1 Year
2/
as Per cent of Total Assets
End of
1966
1967
1968
1969
Q I
3.5
3.9
3.6
3.4
Q II
3.3
3.6
3.5
3.1
Q III
3.5
3.2
3.4
2.8
Q IV
3.7
3.5
3.1
3.0
/
These banks account for about 60 per cent of industry deposits.
2/
Cash and due from banks.
3/
Includes any securities--Governments, corporates, etc. -maturing
within one year.
Life insurance companies.
The life insurance industry's holdings of liquid assets are
not particularly relevant. The unique and generally predictable nature
of their cash flows suggests that analysis of the liquidity position
of life insurance companies is appropriately directed to their com-
mitments to acquire investments relative to reasonable estimates of
the funds available for such acquisitions. Thus, the industry's
disruption during the 1966 "credit crunch" was a result primarily of
unexpectedly large policy loan claims diverting loanable funds at a
time when life insurance companies were relatively "fully committed".
GERALD FORD LIBRARY
-21-
As indicated in Table 12, in late 1965 and early 1966
the industry had allowed very little flexibility for unexpected
shortfalls in its projected fund flows. Since that time, however,
the industry has been quite careful in maintaining a margin between
projected claims on its cash flow and its best estimates of the
TABLE 12
LIFE INSURANCE COMPANIES
SIX-MONTH PROJECTIONS
COMMITMENT DISBURSEMENTS AS PER CENT OF EXPECTED AVAILABLE FUNDS
I
II
III
IV
1965
76
82
82
89
1966
89
89
89
84
1967
75
74
74
79
1968
79
75
72
75
1969
71
75
76
78p/
1/
This represents what the reporting companies expected in takedowns
of commitments as a per cent of funds available for investment.
The sample represents about two-thirds of life insurance industry
assets.
p/ preliminary
funds that would be available for lending. Since 1966, life insurance
companies have been able to meet unprecedented policy loan demands and
cope with other shortfalls in their loanable funds without resorting to
extraordinary cash sources, primarily because of this conscious leeway
maintained in their commitment scheduling.
GLRALD FORD LIBRARY
-22-
In 1969, the industry had experienced a marked retardation
in its loanable funds, as shown in Table 13. It can be seen that
despite the large drain from policy loans, sales of securities have
not been as large in any one year as they were in 1966. However,
cumulatively they have sold a very large volume of securities in
recent years to provide funds for new lending, and there is evidence
that these sales have entailed considerable loss. It is probable
that there now remains an increasingly limited degree of marketability
of securities still in portfolio.
The latest evidence suggests that, although the volume of
policy loans remain high, it appears to have stablized. With the
flexibility now built into the temporal pattern of their commitment
schedules, and with the likelihood of no further unexpected shortfall
in their loanable funds, life companies will probably not have to
resort to their own portfolios to any great extent to meet their
commitments.
II.
NONFINANCIAL SECTOR
In this section, the household and nonfinancial sectors,
and financing of non-residential properties, will be discussed. As
in the financial sectors, the impact of restrictive monetary policies
is readily apparent.
GERALD FORD LIBRARY
-23-
Table 13
SOURCES OF FUNDS INVESTED BY LIFE INSURANCE COMPANIES
(Billions of Dollars)
1964
1965
1966
1967
1968
1969p/
Ledger assets 2/
7.0
8.0
7.8
8.4
8.5
8.0
Return flows 3/
7.7
8.4
7.3
7.4
7.8
7.9
Security sales 4/
1.8
2.4
3.4
2.0
2.2
2.0
Policy loans
-.7
-.7
-1.7
-1.2
-1.4
-2.7
Other 5/
.9
.1
.1
.2
.2
.5
TOTAL
16.7
18.2
16.9
16.8
17.3
15.7
1/
Estimated for the entire industry, with the components derived from
a sample representing 80 per cent of industry assets.
2/
Net increase in ledger assets reflects primarily receipts from insurance
premiums and net investment income (including net gain or loss from from
securities sold).
3/
Return flows from existing mortgage and securities holdings.
4/
Consists only of sales out of long-term portfolio; reflects primarily
sales of non-Government securities.
5/ "Other" includes miscellaneous sources of funds and adjustments to
liquid assets (cash, commercial paper, and short-term Governments).
p/
Preliminary.
GERALD FORD LIBRARY
-24-
Mortgage Debt on Multifamily and Commercial Properties.
A slowdown in general economic growth could impinge on some
$128 billion in mortgage debt outstanding against multifamily and
commercial properties, on which average default rates are probably
unusually low at the present time. This debt covers a broad range
of types of structures (such as apartment houses, office buildings,
industrial facilities, and churches), and is distributed among a
wide variety of types of borrowers (individuals, partnerships, and
corporations, including nonprofit institutions).
Virtually no information exists about the incidence of this
debt, whether in the aggregate or in detail. There are also few
statistics bearing on the ability of the various types of borrowers
to meet scheduled debt payments. In the absence of reliable data
which would illuminate these aspects of the issue directly, some
broad observations of an indirect nature must suffice.
During 1969, mortgage debt secured by multifamily and
commercial properties expanded at rates of 9 and 11 per cent, respectively
(Table 14). These rates of growth were essentially unchanged from
the annual averages prevailing since the mid-1960's for mortgages on
multifamily properties, and over the entire postwar period for mortgages
on commercial properties. By the end of last year, about a third of the
total outstanding amount of both types of indebtedness had apparently
been added in the preceding 5 years, and hence was relatively unseasoned
and prone to default.
GERALD R. FORD LIBRARY
-25-
Table 14 14
Mortgage Dept on Multifamily
And Commercial Properties
(Dollar Amounts in Billions)
Multifamily
Commercial
End of
Amount
Annual Percentage
Amount
Annual Percentage
Year
Outstanding
Rate of Growth
Outstanding
Rate of Growth
1945
$ 5.7
--
$ 6.4
--
1950
10.1
12
11.4
12
1955
14.3
7
18.3
10
1960
20.3
7
32.4
12
1965
37.2
13
54.4
11
1966
40.3
8
60.1
10
1967
43.9
9
64.8
11
1968
47.3
8
71.4
10
1969p/
51.7
9
76.5
11
p/ Preliminary.
Source: Federal Reserve estimates. "Commercial" includes commercial, industrial,
institutional, and other types of private nonfarm nonresidential properties.
As a rule, multifamily and commercial properties securing mort-
gage debt are rather small in size, despite the dramatic exceptions of sky-
scrapers and shopping centers. Their modest scale can expose them to
sharp change in occupancy rates whenever a few occupants moverin or out.
As a result, gross operating revenues available to meet operating ex-
penses and principal and interest payments are inherently volatile.
Even so, it is common trade practice to set aside reserves against only
GERALD FORD LIBRARY
-26-
those debt service payments due in the period immediately ahead.
While there is no statistical evidence bearing on the
point, mortgaged multifamily properties may, on balance, be somewhat
more subject to volatile earnings than mortgaged commercial properties.
Nearly all owners of apartment houses depend solely on the course of
market rents and occupancy to generate revenues to meet their current
and capital expenses. While the short term of apartment leases makes
for flexibility in adjusting scheduled rents to market conditions
(including hopefully changes in operating expenses), it also makes
earnings available for debt service more vulnerable to any curtailment
in demand for apartment space.
Under current conditions of unusually low vacancy rates
however, the problem of reduced demand for apartment space has not
been pressing during a period when consumer incomes, in general, have
been rising. In fact, vacancy rates in rental-type residential units
have recently been running at the lowest average level in more than
a decade.
GERALD R. FORD LIBRARY
-27-
TABLE 15
VACANCY RATES IN RENTAL
HOUSING
(in per cent)
Average by Type of Structure
5-or-more
Quarter
All types
units only
1957
II
4.9
n.a.
1958
II
6.0
n.a.
1960
II
7.3
8.3ᵃ
1961
I
8.0
n.a.
1968
III
5.4
6.4
1969
III
5.0
6.6
a) Census of Housing, April.
Source: Census Bureau, current housing vacancy reports, series beginning
in 1956.
Commercial properties, in contrast, include a large number of
structures occupied by their owners, who can draw on income from
sources other than property operation in order to pay current and capital
outlays on the real estate. Leases of space in rented structures often
span a number of years, and can thus assure greater stability in
occupancy and gross income during the term of the lease. On the other
hand, such leases may make it more difficult to pass on quickly (in
higher rents) any increases in expenses of operating the structure.
But use of escalation-type clauses in longer-term leases, under which
FORD & GERALD LIBRARY
-28-
rents are tied to designated operating expenses, has become a
widespread practice in the 1960's, reducing the volalitity of the
cash flow available for mortgage payments.
Data on new mortgage commitments of $100,000 and over, approved
by certain life insurance companies on multifamily and commercial
properties, indicate that the average debt-coverage ratio on rental
structures has drifted down since 1965. Rather than a weakening in
borrower ability to pay, the downtrend has reflected primarily the
rationing of commitments among stronger borrowers eligible for larger
loans that typically carry debt-coverage ratios that are lower than
those associated with smaller-sized loans. By the third quarter of
1969 (the latest available data), an average margin of 27 per cent
still remained between the level of expected annual property earnings
and the amount of scheduled annual payments for debt service.
TABLE 16
New Commitments of $100,000 and over on Multifamily and
Nonresidential Mortgages Made by 15 Life Insurance Companies
Average amount of
loan commitment
Average debt
Third quarter
(millions of dollars)
coverage ratio
1965
0.9
1.45
1966
0.9
1.34
1967
1.0
1.32
1968
1.2
1.29
1969
1.7
1.27
Source: Confidential LIAA series for companies with slightly more than
half of the nonfarm mortgages held by all U.S. life insurance companies.
The average debt coverage ratio applies only to fully amortized level-
payment loans for which an estimate of prospective net stabilized earnings
(earnings after vacancy allowance+operating expenses but before income
taxes, depreciation and debt service) is available.
GERALD FORD LIBRARY
-29-
The burden of mortgage indebtedness against multifamily and
commercial properties has been accentuated in recent years by a growing,
but still probably quite limited, volume of mortgage agreements incor-
porating so-called "equity kickers." These agreements typically call
for interest, in addition to the contract interest rate, to be paid
contingent on future increases in property earnings. The most common
practice appears to require some increase in contingent interest pay-
ments over and above a specific level of gross earnings. For multi-
family properties on which operating expenses often absorb considerably
more than half of gross earnings, even at full occupancy, "equity
kickers" may pose more of a threat than in the case of rental com-
mercial properties with typically lower operating expense ratios. In
either case, it seems probable that in event of borrower difficulty in
meeting these contingent payments, lenders would likely modify the
agreement rather than foreclose the mortgage. Such modification
agreements are not uncommon in the trade even on mortgages bearing no
equity kickers.
A moderate slowdown in the rate of economic growth would
come at a time when delinquency rates on multifamily and commercial
mortgages appear to be historically low, judging from information from
a limited number of life insurance companies. The higher average for
multifamily properties, indicated in Table 17, primarily reflects greater-
than-average difficulties with FHA-insured mortgages. Such loans may
FORD is LIBRARY GERALD
-30-
relate, in a significant number of cases, to apartment houses in
slum areas or to properties in which occupancy is limited to dis-
advantaged families.
TABLE 17
Mortgage Delinquency Rates by Type of Structure,
Reporting Life Insurance Companies
(in per cent)
Type of Structure
1-4
Third quarter
Family
Multifamily
Nonresidential
1965
1.11
2.00
.68
1966
.95
2.28
.47
1967
1.01
.94
.76
1968
.72
.99
.64
1969
.75
.92
.36
Source: LIAA confidential reports for companies holding from 75 to 80
per cent of the total assets of all U.S. life insurance companies.
Data not available prior to 1965. A delinquent loan is a city (nonfarm)
mortgage with two or more monthly interest payments past due.
But with demand for space in both apartment houses and
nonresidential structures apparently strong and with costs of buying
and operating owner-occupied homes continuing to increase, a moderate
slackening in general economic growth, of limited duration, would not
appear to pose any undue threat, on the average, to either type of
property. Experience with vacancy rates in rental housing in the 1957-58
and 1960-61 recession periods tend to support this generalization.
FORD
GERALD
LIBRARY
-31-
One remaining unknown in the picture, however, is how large
a volume of newly-completed space is likely to come onto the market
over the near term. A record number of new dwellings in apartment
houses was started last year. Trade reports emphasize that substantial
new office-building construction is coming to completion in a number
of major cities. These newly-completed units will, of course, provide
an important test of local markets, for both new and existing properties.
Nonfinancial Corporations
In the years since 1964, nonfinancial corporations have relied
much more heavily on funds raised in credit markets than they did in the
late 1950's and early sixties. As may be seen from Table 18, net new
borrowing-- in the form of bonds, mortgages, commercial paper, and
loans from banks and other lenders--have financed 29 per cent of cor-
porate outlays in each year since 1967, compared with only 17 per cent in
1964. In the past five years, the nonfinancial corporate sector has on
balance incurred about $140 billion of additional interest-bearing debt
and another $70 billion through increases in other liabilities--
primarily trade debt; undistributed profits and net new stock issues,
on the other hand, have together totaled only about one-half the increase
in total liabilities over this period.
The increased reliance on borrowed funds has of course changed
the structuredof corporate balance sheets. Table 19 shows a percentage
distribution of total resources of manufacturing corporations (the only
part of the nonfiancial corporate sector for which full balance sheet
FORD & GERALD LIBRARY
-32-
Table 18
Percentage Distribution of Corporate Sources of Funds
Flow-of-Funds, Nonfinancial Corporations
1950-
Source
1963
1964
1965
1966
1967
1968
1969
Average
Internal sources
63.8
70.3
60.8
60.8
65.0
57.2
53.0
2/
Net stock issues
3.2
1.9
1.2
2.4
-.7
2.2
Net borrowing
18.7
17.1
22.0
24.1
28.7
28.8
29.1
Bonds & mortgages
13.4
10.6
10.0
14.3
20.4
16.9
14.3
Bank loans n.e.c.
4.7
5.3
11.4
8.3
6.8
8.7
7.2
Other loans
0.6
1.3
0.6
1.4
1.5
3.3
7.7
loans
1.3
1.4
1.5
3.3
7.7
3/
Other liabilities
14.3
10.6
17.1
13.9
3.9
14.8
15.6
1/
Undistributed profits (after allowance for inventory valuation adjustment and
inclusion of foreign branch profits), plus capital consumption allowances.
2/
Less than 0.5 per cent.
3/
Accrued income tax liabilities, trade debt, and miscellaneous liabilities.
FORD i LIBRARY 076839
R.
GERALD
OROA
Table 19
LIBRATA
Liabilities and Equity of Manufacturing Corporations
Percentage Distribution, End of Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1/
Short-term bank
loans 2/
3.9
3.6
3.6
3.5
3.6
4.1
4.9
4.9
5.0
5.8
Trade debt & Federal
tax liabilities
12.3
12.7
12.9
13.3
13.5
13.2
13.2
12.0
12.3
11.6
Other short-term
liabilities
4.6
4.8
4.9
5.1
5.1
6.1
6.4
6.5
6.7
7.1
-33-
Total Curr. Liabilities
20.8
21.2
21.5
21.9
22.3
23.4
24.4
23.3
23.9
24.5
Long-term debt
12.2
12.5
12.6
12.6
12.6
13.1
14.0
15.5
16.3
16.7
Other non-curr. liabilities
1.4
1.6
1.8
2.0
2.2
2.7
2.8
3.0
3.6
3.7
Total long-term liabilities
13.6
14.1
14.4
14.6
14.8
15.8
16.8
18.5
19.9
20
Total Liabilities
34.5
35.2
35.8
36.4
37.0
39.2
41.1
41.8
43.8
44.9
Equity
65.5
64.8
64.2
63.6
63.0
60.8
58.9
58.2
56.2
55.1
1/ End of third quarter (latest available).
2/ Includes current instalments of long-term bank and nonbank debt.
Source: Quarterly Financial Report, U.S. Manufacturing Corporations.
-34-
data are available for recent years). As may be seen from the table,
the relative importance of equity in manufacturing capital accounts
declined gradually during the early sixties and more rapidly after
1964, though the growth in the dollar volume of manufacturer's equity
compared more favorably with the expansion in their total liabilities
than was the case for all nonfiancial corporations.
At some point, a sharply reduced margin of equity for
corporations as a group means that the number of individual companies
dangerously over-burdened with debt has become disturbingly large.
Whether the decline in the equity share from 63 per cent of total
manufacturing resources at the end of 1964 to 55 per cent in late
1969 means that such a point has been reached is impossible to say,
though a mitigating factor may be that the corresponding rise in the
liabilities proportion has been largely in long-rather than short-
term debt. On the other hand, flow-of-funds estimates for all non-
financial corporations (Table 20) show an increased importance of
shorter-term borrowing; moreover, 1969--a year when many borrowers
attempted to avoid being locked in to high interest rates--was marked
by substantial reliance on sources of relatively short-term credit
(e.g. banks and the commercial paper market) to finance fixed investment,
which will only gradually generate the return flows to retire the debts.
The staff expects a considerable share of this short-term debt to be
funded in capital markets in 1970.
FORD LIBRARY is GERALD
Table 20
Percentage Distribution of Corporate Liabilities
Flow-of-Funds, Nonfinancial Corporations
1955
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
Credit market instr.
50.2
54.2
57.1
56.8
56.6
56.8
56.7
57.1
59.2
59.7
60.3
Bonds & Mtges.
36.7
39.2
41.8
41.7
41.3
41.1
39.6
39.4
41.0
40.7
39.9
Bank loans, n.e.c.
12.4
13.4
13.5
13.4
13.7
13.9
15.4
15.8
16.2
16.5
16.5
Other loans
1.1
1.6
1.8
1.7
1.6
1.7
1.8
1.9
2.1
2.5
3.9
Other liabilities
49.8
45.8
42.9
43.2
43.4
43.2
43.3
42.9
40.8
40.3
39.8
-35-
Federal tax liabilities
10.0
5.0
5.4
5.2
5.4
5.4
5.4
5.0
3.7
4.1
4.0
Trade debt
24.5
23.8
24.5
24.2
24.0
23.7
23.8
23.5
22.4
21.4
21.1
Other
15.2
17.0
13.0
13.8
14.0
14.2
14.1
14.4
14.7
14.8
14.6
1/ Based on end-of-year outstandings.
GERALD
?
FORD
LIBRARY
-36-
Many corporations are also reported to be planning issues of
equity securities this year, to moderate the problem of refinancing short-
term debt, to redress the structure of their balance sheets, and to
lessen the drain of interest payments on their profits. The latter
drain has apparently become quite substantial. While data on gross
interest payments are not presently available, even the ratio of net
interest payments (estimated amount of interest paid less interest
received) to profits before such net payments and before taxes has
risen dramatically since 1965 (Table 21). Similar ratios based on gross
interest payments would undoubtedly show an even faster rise to a
significantly higher level. For some companies--particularly certain
conglomerates--interest payments in 1969 exceeded current profits,
as the assets acquired with borrowed funds failed to generate the
expected income.
The ability of corporations to carry their debt burden is
adversely affected by the erosion in their liquidity positions. Cor
porate liquidity ratios reached new lows in 1969--as they did in every
recent year except 1968 (Table 22). It is impossible to say what level
of relative liquidity is dangerously low; throughout the whole post-war
period, liquidity ratios have levelled off from time to time but there
has been no floor they did not eventually pierce--without disaster.
Reflecting the more aggressive money management of corporate
treasurers, innovations in available liquid financial assets, and rising
yields, the composition of corporate liquid assets has changed dramatically
FORD & LIBRARY GERALD
-37-
Table 21
1/
Net Interest Paid by Nonfiancial Corporations
As per cent of:
Nonfin. Corp.
Nonfin. corp. profits.
Year.
Amount
GNP
bef. int. & taxes
(Bill.$)
1955
1.6
0.7
2.0
1956
1.7
0.7
3.9
1957
2.2
0.9
5.2
1958
2.7
1.1
7.4
1959
2.7
1.0
5.9
1960
3.0
1.1
7.0
1961
3.5
1.3
8.0
1962
4.1
1.4
8.4
1963
4.5
1.4
8.4
1964
5.1
1.5
8.4
1965
6.0
1.6
8.4
1966
7.3
1.8
9.3
1967
9.1
2.1
12.1
1968
10.9
2.3
12.6
1969P
12.0
2.4
13.4
1/ Net interest = interest paid less interest received.
Source: Department of Commerce
FORD is LIBRARY GERALD
-38-
Table 22
Corporate Liquidity Ratios
(per cent)
End of year
Liquid Assets (F.O.F.)
Dep. & US Govts.
Dep., Govts. & Misc.
Nonfin. Corp. GNP
Total Curr. Liab. Total Curr. Liab.
(Securities & Exchange Comm.)
1955
27.1
48.0
51.5
1956
23.6
41.3
45.8
1957
22.5
40.2
45.2
1958
24.2
41.1
46.6
1959
23.8
38.6
44.6
1960
21.8
35.8
42.4
1961
22.6
35.6
42.3
(new series)
1961
38.4
46.7
1962
21.9
37.0
45.6
1963
22.2
35.4
44.8
1964
20.9
32.6
42.3
1965
19.6
29.1
38.9
1966
18.4
25.4
35.3
1967
18.0
24.1
34.5
1968
18.4
23.4
34.4
1/
1969
17.9
19.6
30.6 /
1/ Ratios for end of third quarter, not seasonally adjusted. Ratios usually
rise in fourth quarter. Third quarter 1968: 22.8 and 33.7 resp.
FORD is LIBRARY 938470
-39-
in the last 10 years (Table 23). Holdings of money and Treasury
issues now account for a smaller share of the total and--reflecting
Regulation Q ceilings--the sharp increase in corporate holdings of
bank CD's, which began in the early 1960's, was reversed in 1969.
Increased holdings of the short-term notes of other corporations, together
with holdings of short-term tax-exempt obligations, are now estimated
to account for a sizable proportion of corporate liquidity, although
these estimates are necessarily a little shaky. However, since no
secondary market for commercial paper exists and municipal notes can
/
often be liquidated only at substantial losses, about one-third of
corporate liquid assets are probably not very liquid for emergency
purposes--an increase over the one-tenth of such asses held in this
form in the early 1960's.
Commercial paper dealers will sometimes take back this paper before
maturity as a favor. Discount tax-exempt obligations of less than 6
months maturity must fetch a price to compensate the buyer for the
lack of capital gains treatment for the difference between purchase
price and par.
FORD & GERALD LIBRARY
Table 23
1/
Percentage Distribution of Corporate Liquid Assets
Flow-of-Funds, Nonfinancial Corporations
1955
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
Demand dep. & curr.
54.5
54.0
53.7
49.4
45.0
41.2
38.1
38.1
35.9
33.5
34.8
U.S. Government securities
39.7
32.8
30.5
29.5
28.4
25.7
23.0
20.8
17.3
16.7
14.7
Time deposits
1.7
4.7
7.3
12.5
17.2
21.3
25.9
24.5
29.3
28.5
18.5
State & local government sec.
2.0
4.0
3.8
3.2
3.2
3.5
4.1
5.3
4.7
4.6
6.9
-40-
Open market paper
2.0
4.5
4.8
5.3
6.2
8.3
8.8
11.2
12.8
16.7
25.1
1/ Based on holdings at end of year.
GERALD
R.
LIBRARY FORD
-41-
Consumer debt.
Liquidity and debt burden have not proven to be a serious
general problem to the household sector in the postwar period,
despite the large increase in consumer debt. Both mortgage and
consumer instalment debt have increased rapidly since the end of
World War II; non-instalment debt has also increased but less rapidly
(Table 24).
The largest share of consumer debt reflects mortgages against
owner occupied homes. While homeownership involves fixed costs,
there is flexibility in the timing of maintenance and repair expendi-
tures, and some measure of leeway in timing even for mortgage pay-
ments and taxes. Moreover, mortgage debt has the offset of asset
ownership, which may be substantial, especially following a period
of rising house prices.
Figures from the Michigan Survey of Consumer Finances
indicate that in 1967 (the latest available data), 97 per cent of
all homeowners had equities of $1,000 or more, and 76 per cent had
equities of $5,000 or more. With rising house prices and the more
restrictive terms of recent mortgages, homeowner equities are
probably larger today. The protection afforded lenders by these
margins could, of course, decline during a recession. Moreover, in
evaluating the protection offered the mortgagor by this margin,
allowance should be made for real estate commissions in the event of
sale, and the present difficulty of a subsequent purchasor's obtaining
GERALD FORD LIBRARY
-42-
Table 24
Mortgage and Consumer Debt
(Billions of Dollars)
End Of
Mortgage
Consumer
Consumer
Year
Debt *
Instalment Debt
Non-Instalment Debt
1945
18.6
2.5
3.2
1950
45.2
14.7
6.8
1955
88.2
28.9
9.9
1960
141.3
43.0
13.2
1965
212.9
71.3
19.0
1966
223.6
77.5
77.5
20.0
20.0
1967
236.1
80.9
80.9
21.2
21.2
1968
251.2
89.9
89.9
23.3
23.3
1969
266.8
98.1
24.1
24.1
* One-to-four family houses, including those held for rental. No
similar mortgage series for owner-occupied houses is available.
FORD if GERALD LIBRARY
-43-
financing if the existing mortgage cannot be assumed.
Liquidation values implied by equity measures, while
important, are not especially indicative of debt burden and sensitivity
to restrictive public policies and recessions. Unfortunately, however,
no satisfactory series on the ratio of scheduled debt service payments
on residential mortgages to the income of the mortgagor exist.
/
Some empirical indication of ability to carry home mortgages can be
determined from delinquency and foreclosure rates, although the
available information in this area is statistically suspect. Table 25
presents the best available series on delinquencies and foreclosures;
it is based on a very small sample and is overly weighted by VA and
FHA mortgages. These data suggest that there has been some general
increase in the last 15 years in the rate of delinquencies on home
mortgages, and noticable sensitivity of delinquencies to recessions.
On the other hand mortgage loans in foreclosure, data for which are
only available in the 1960's, have shown a general down-trend.
On balance, given the fixed nature of mortgage debt service
payments contrasted with the secular trend of rising money incomes,
the ratios of income to debt service on "seasoned" home mortgages
are probably considerably higher than at the time the loans were made--
1/ The Commerce Deparment does keep an unpublished estimate on
aggregate scheduled debt service on 1-to 4-family properties. Both the
Commerce and Board staffs, however, do not think the estimated data are
accurate enough to be analytically useful. Among other problems, the
data probably include mortgage liabilities of partnerships and syndicates.
For what it is worth, the ratio of these scheduled payments to aggregate
disposable income has been stable at about 6 per cent since the mid-1960's,
up from 5 per cent in 1960.
GERALD FORD LIBRARY
Table 25
Delinquency and in Foreclosure Rates on Home Mortgages
(Per Cent of Loans)
Delinquent 30 Days
Delinquent 31-90 Days
In Process of Being Foreclosed
QI
QII
IIIÒ
QIV
QI
QII
IIIÒ
QIV
QI
QII
QIII
QIV
1953
n.a.
n.a.
n.a.
2.00
n.a.
n.a.
n.a.
0.53
n.a.
n.a.
n.a.
n.a.
1954
1.76
1.74
1.76
1.89
0.56
0.54
0.56
0.55
n.a.
n.a.
n.a.
n.a.
1955
1.63
1.55
1.65
1.71
0.49
0.43
0.45
0.47
n.a.
n.a.
n.a.
n.a.
1956
1.71
1.66
1.71
1.77
0.52
0.47
0.51
0.50
n.a.
n.a.
n.a.
n.a.
1957
1.60
1.59
1.56
1.63
0.49
0.42
0.48
0.52
n.a.
n.a.
n.a.
n.a.
1958
1.67
1.63
1.64
1.71
0.59
0.56
0.59
0.62
n.a.
n.a.
n.a.
n.a.
1959
1.61
1.47
1.64
1.74
0.63
0.51
0.59
0.57
n.a.
n.a.
n.a.
n.a.
1960
1.56
1.63
1.73
2.01
0.65
0.60
0.68
0.79
n.a.
n.a.
n.a.
n.a.
1961
1.82
1.82
2.09
2.27
0.91
0.84
0.93
0.83
n.a.
n.a.
n.a.
0.29
1962
1.92
1.99
2.14
2.26
0.77
0.68
0.73
0.79
0.34
0.32
0.30
0.30
1963
2.14
2.29
2.27
2.37
0.89
0.80
0.90
0.98
0.34
0.36
0.33
0.34
1964
2.12
2.08
2.20
2.35
0.90
0.75
0.84
0.86
0.41
0.39
0.38
0.38
-44-
1965
2.06
2.18
2.30
2.40
0.88
0.82
0.90
0.89
0.37
0.38
0.38
0.40
1966
2.13
2.16
2.25
2.54
0.89
0.79
0.84
0.86
0.38
0.38
0.36
0.36
1967
2.17
2.14
2.36
2.66
0.87
0.71
0.79
0.81
0.38
0.34
0.31
0.32
1968
2.11
2.23
2.23
2.43
0.73
0.66
0.70
0.74
0.32
0.28
0.26
0.26
1969
2.04
2.06
2.18
n.a.
0.73
0.62
0.73
n.a.
0.26
0.25
0.25
n.a.
Note: Mortgage Bankers Association of America data from reports on 1-to-4 family FHA insured, VA guaranteed,
and conventional mortgages held by more than 400 respondents, including mortgage bankers (chiefly)
commercial banks, savings banks, and savings and loan associations,
GERALD
FORD
LIBRARY
-45-
even adjusted for the long-run rise in costs of other goods and
services which would tend to have increased the difference between
money income and the actual net income available for debt service.
Assuming no severe recession in 1970, the staff does not see any
reason to expect a pronounced rise in residential mortgage delinquencies
and foreclosures.
In the case of consumer instalment debt, the postwar period
has not experienced widespread delinquencies and defaults or a
collapse of consumer credit, even during periods when unemployment
exceeded 7 per cent. Delinquency figures for instalment credit at
commercial banks collected by the American Bankers Association have
not shown a secular uptrend since World War II, but do show that
the proportion of delinquent loans has risen during past periods of
business slowdown, and that a rise has been taking place recently
(Table 26). While loss rates are not available, most of these
delinquent loans are ultimately paid, so anticipated losses are
low. No comparable overall delinquency series exists for finance
/ Unlike delinquencies, personal bankruptcies have risen throughout
most of the post-war period with a strong secular trend. However, this
pattern of growth was reversed in late 1967, and present filings con-
tinue to run well below 1967 levels. It is not clear the extent to
which the postwar growth in these bankruptcies was due to increases
in the number of people in financial difficulty, and the extent it
was due to greater public awareness of bankruptcy precedures.
FORD & GERALD LIBRARY
-46-
Table 26
Delinquency Experience at Commercial Banks
Consumer Instalment Credit
(Per Cent of Loans Delinquent 30-89 Days)
(Not Seasonally Adjusted)
Year
Feb.
April
June
Aug.
Oct.
Dec.
1948
1.64
1.59
1.43
1.45
1.50
1.55
1949
2.10
1.90
1.73
1.65
1.80
1.88
1950
1.91
1.66
1.34
1.47
1.46
1.62
1951
1.55
1.40
1.32
1.41
1.30
1.59
1952
1.44
1.36
1.52
1.58
1.44
1.65
1953
1.54
1.40
1.45
1.58
1.58
1.78
1954
1.88
1.53
1.52
1.51
1.49
1.49
1955
1.50
1.29
1.23
1.23
1.21
1.42
1956
1.31
1.28
1.23
1.27
1.20
1.46
1957
1.39
1.25
1.26
1.22
1.24
1.49
1958
1.53
1.41
1.41
1.45
1.24
1.43
1959
1.40
1.17
1.13
1.21
1.35
1.51
1960
1.46
1.32
1.32
1.36
1.44
1.66
1961
1.69
1.49
1.38
1.39
1.34
1.55
1962
1.51
1.27
1.25
1.26
1.26
1.54
1963
1.48
1.28
1.32
1.34
1.29
1.67
1964
1.51
1.22
1.26
1.35
1.34
1.56
1965
1.57
1.28
1.30
1.45
1.46
1.51
1966
1.59
1.37
1.34
1.44
1.42
1.62
1967
1.68
1.45
1.30
1.33
1.37
1.59
1968
1.35
1.20
1.20
1.30
1.22
1.56
1969
1.41
1.27
1.28
1.43
1.40
1.76
Source:
Bi-Monthly American Bankers Association data, sum of component loan
categories weighted by amounts outstanding.
FORD & 076839 LIBRARY
-47-
companies, but reports from individual companies indicate a generally
similar situation.
similar situation.
A factor reducing the impact of increasing debt levels is
the corresponding increase in prices and incomes. The ratio of
debt repayments on instalment credit to income has shown little
change since 1965, halting an upward trend over the earlier part of
the postwar era (Table 27). Furthermore this relationship does not
appear likely to worsen during the coming year, assuming that repay-
ments continue to grow at the same rate as in 1969, and disposable
income according to the Division's projections. These assumptions
indicate quarterly repayments ratios for 1970 of 14.7 to 14.8, com-
pared to last year's rates of 14.8 to 15.2.
Aggregate measures such as these can be misleading in that
the distribution of debt by consumer income differs. Instalment debt
is most heavily used in the middle income brackets, but some lower
income families do have heavy cómmitments according to the University
of Michigan Survey Research Center data comparing repayments with
previous year's income (Table 28). In recent years there has been
some shift in the more heavily indebted group towards higher income
classes.
R.
GERALD
FORD
LIBRARY
-48-
Table 27
Ratios of Consumer Credit To
Disposable Personal Income
(In per cent)
Outstanding consumer credit
Instalment credit
Year
Total
Instal.
Noninstal.
Extended
Repaid
1945
3.3
1.4
1.9
3.6
3.4
1950
9.2
6.4
2.8
10.4
8.9
1955
12.6
9.5
3.1
14.2
12.2
1960
15.2
11.7
3.4
14.2
13.2
1965
17.7
14.0
3.7
16.6
14.8
1966
18.1
14.4
3.7
16.1
14.9
1967
17.9
14.2
3.6
15.5
14.9
1968
17.9
14.3
3.6
16.4
14.9
1st quarter
17.6
14.0
3.6
16.1
14.9
2nd quarter
17.6
14.0
3.6
16.3
14.9
3rd quarter
18.0
14.4
3.6
16.8
15.1
4th quarter
18.3
14.6
3.7
16.6
14.9
1969 p/
18.4
14.8
3.6
16.3
16.3
15.0
15.0
1st quarter
18.3
14.7
3.7
16.5
15.1
2nd quarter
18.4
14.8
3.7
16.8
15.2
3rd quarter
18.4
14.8
3.6
16.2
15.0
4th quarter p/18.6
15.0
3.6
15.8
14.8
3.6
1500
Note: Ratios of consumer credit to Department of Commerce estimates
of disposable income, both series seasonally adjusted.
/
Preliminary
R.
GERAL
CADA
-49-
Table 28
Ratio of Annual Instalment Debt Payment Rate to
Previous Years Disposable Income
1969 Survey of Consumer Finances, University of Michigan
(Percentage Distribution of Families)
No debt
Less than 10%
10-19%
20% or more
Total
All families
49
21
19
11
100
Annual family income:
Less than $3,000
77
7
7
8
100
$3,00-4,999
62
17
7
14
100
$5,000-7,499
39
18
26
17
100
$7,500-9,999
35
24
29
12
100
$10,000-14,999
32
30
29
9
100
$15,000 or more
52
31
11
6
100
Note: Percentages may not add due to rounding.
Liquid assets of families have also been increasing somewhat,
but most of the increase has come in the highest asset group. (Table 29).
The distribution of debt by size of liquid asset holding, shown in
Table 30, suggests that families with the largest liquid assets are the
least likely to have instalment debt; conversely, 53 per cent of
families with debt show no liquid assets at all.
R.
GERALD
FORD
LIBRARY
-50-
Table 29
Liquid Asset Holdings* in 1963, 1965, 1968 and 1969
(Percentage distribution of families)
Amount of Liquid Assets
1963
1965
1968
1969
None
22
20
19
19
$1 - 199
15
17
15
14
$200 - 499
14
11
12
12
$500 - 1,999
21
21
24
22
$2,000 - 4,999
14
14
13
15
$5,000 - 9,999
8
9
8
8
$10,000 or more
6
8
9
10
TOTAL
100
100
100
100
Median (all families)
$490
$570
$660
$730
* Liquid assets include savings accounts, certificates of deposit,
checking accounts and bonds.
GERALD R. FORD
LIBERTY
-51-
Table 30
RELATION OF LIQUID ASSET HOLDINGS TO INSTALMENT DEBT
(Percentage distribution of families)
Liquid Assets
All
$500-
$2,000
Total Installment Debt
families
None
$1-499
1,999
and over
None
49
47
27
41
69
$1-499
15
30
17
14
8
$500-1,999
23
15
35
28
14
$2,000 and over
13
8
21
17
9
Total
100
100
100
100
100
Median debt
for those who owe
$1,020
$430
$1,140
$1,280
1,080
1969 Survey of Consumer Finances, University of Michigan, SRC
The likely effect of an economic slowdown on consumer debt
really relates to the extent to which a recession would depress incomes
and employment--and the distribution of the impact and the extent to
which those most affected would have significant debt burdens. Under
the assumption of only a modest recession in 1970 there is no evidence
to suggest a substantial increase in consumer credit delinquencies or
defaults can be expected.
FORD & LIBRARY 938870
-52-
III. CONCLUSION
While liquidity throughout the U.S. economy has been eroded
by the restrictive monetary policies of 1969, available data do not
suggest that a liquidity crisis and accelerated debt defaults are
near--assuming that in 1970 financial restraint does not continue to
the same degree as in 1969, and that any recession is no longer or
deeper than those of the postwar years.
Two exceptions do stand out as possible areas of concern.
First, some savings and loan associations--particularly those in
California--appear extremely vulnerable to further deposit attrition.
With Federal Reserve emergency lending procedures as a supplement to
FHLBB resources and the Treasury tap, no broad increase in failures
can be expected- given the assumption above. But some S&L failures
cannot be ruled out, and the attendant publicity can hardly be helpful
to the S&L industry.
Second, it is possible that some business corporations may
face difficulties in funding short-term debt and meeting other com-
mitments. The staff, however, is unable to be any more precise than
this because of the unavailability of disaggregated current data in
sufficient detail to evaluate the distribution of business liquidity
and debt.
FORD is 938870 LIBRARY