Lockhart Discusses Recent Events in Housing and Capital Markets
For immediate release: Sept. 6, 2007
ATLANTA — Dennis P. Lockhart, president and chief executive officer of the Federal Reserve Bank of Atlanta, discussed recent developments in mortgage and financial markets as well as principles he is using to guide his approach to policy in current economic and financial conditions.
In his remarks to the Atlanta Press Club, Lockhart described how problems in housing and mortgage finance have spread from the subprime market to capital markets. Lockhart noted that subprime mortgages became hard to value and, in turn, the secondary market for these securities shrank dramatically, making it even more difficult to value the securities by market price. He said, "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. What we’ve been going through is an intense adjustment in both price and practice, and this process may be continuing."
As a monetary policymaker, Lockhart said he believes "the essence of our current challenge is to balance three interconnected and potentially conflicting concerns: timely action in response to risks to the total economy, preservation of gains on the inflation front, and overall financial system stability."
Lockhart identified three principles he is using to guide his thinking during this time. "The first principle is let markets work. 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."
According to Lockhart, "There are certainly tensions to be resolved in applying these principles, and formulating measured responses to circumstances requires good judgment, particularly in transitional periods." He closed by stating that "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."
A transcript of Lockhart's remarks is available on the Atlanta Fed Web site.
The Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which encompasses Alabama, Florida, Georgia and parts of Louisiana, Mississippi and Tennessee. As part of the nation's central banking system, the Atlanta Fed participates in setting national monetary policy, supervises numerous commercial banks and provides a variety of financial services to depository institutions and the U.S. government.