Financial Update (Third Quarter 2007)

Atlanta Fed President Discusses Recent Events in Housing, Capital Markets

Dennis LockhartProblems in housing and mortgage finance have spread from subprime borrowers to capital markets, Dennis P. Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, noted in a September speech. As subprime mortgages have become hard to value, the secondary market for these securities has shrunk dramatically, making it even more difficult to value the securities by market price. In the speech, Lockhart discussed recent developments in mortgage and financial markets as well as principles he uses to guide his approach to policymaking.

A period of "intense adjustment"
"I believe we've been experiencing the unpleasant process of the financial world changing its ways after a prolonged period of relatively cheap credit, and, in consequence, high leverage," he said in his remarks to the Atlanta Press Club. "What we've been going through is an intense adjustment in both price and practice, and this process may be continuing."

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Lockhart identified his three current guiding principles. "The first principle is let markets work," he said. "The second principle is the central bank has a responsibility to promote orderly conditions in financial markets, stepping in only as necessary to avoid severe system disruption. The third principle is to make sure the second principle doesn't undermine our long-term mission."

Applying principles for long-term benefit
Applying these principles requires resolving tensions, Lockhart believes, and formulating responses to circumstances requires sound judgment, particularly in transitional periods. "As we move forward, my voice in Fed deliberations will be aimed at balancing response to immediate problems with concern for the best outcome for the long run," he said.

September 21, 2007