WASHINGTON (MNI) - The following is the full text of prepared remarks by Cleveland Federal Reserve Bank President Sandra Pianalto Tuesday at a Ohio Housing Conference:

Introduction

I am very pleased to be here today to participate in this 11th annual Ohio Housing Conference, but I wish we were coming together under different circumstances. As everyone in this room knows all too well, we are just now beginning to emerge from the most severe economic crisis to hit this country since the Great Depression. And though we have seen some signs that the worst may be over, the housing industry is not out of the woods yet; nor is the broader economy.

I'm sure that everyone in this room has been challenged in some way by the events of the past few years. As a national policymaker, living through this crisis has been a humbling experience. It has been sobering to realize that financial market participants and regulators alike did not fully appreciate how complex and interconnected our financial markets had become. Nor did we fully appreciate how much risk was building up in the financial system. These are a few of the many lessons all of us have learned over the past couple of years.

At the Federal Reserve, we now have a better understanding of the conditions that led to the challenges we face, but understanding alone isn't enough. We have been responding vigorously on many fronts, and there is still more work to do. I know that all of you in this room have also been spending endless hours working to find solutions to the problems of delinquencies, foreclosures, and access to credit. Progress is being made, but it will take the work of many and a considerable amount of time for housing markets to fully recover.

Today I will talk about some of the Federal Reserve's efforts. I will first discuss the role of the Federal Reserve as a monetary policymaker and the actions we have been taking to put the economy on the road to recovery. I will then speak about the regulatory steps we are taking to ensure the safety of the financial sector and to protect consumers and borrowers. I will conclude by telling you about our activities here in Ohio and across our Federal Reserve District as a community development partner.

Please note that the views I express today are my own and do not necessarily reflect the views of my colleagues in the Federal Reserve System.

Monetary Policy

Let me begin, then, with our monetary policy response. The combination of this severe housing contraction and the steep national recession is not a coincidence. During the boom years leading up to this debacle, housing finance became intertwined with broader financial and economic developments. Rising property values supported more consumer spending, banking profits, and more lending of all kinds. When this growth cycle began to unwind, and spin in the other direction, mortgage-related losses eroded the capital of many financial institutions and cut deeply into the wealth of many homeowners. These problems led financial institutions to reduce lending to consumers and businesses, and induced consumers to curtail their spending. Weakness in the housing markets restrained the broader economy which, in turn, further weakened the housing markets.

As you know, the Federal Reserve has taken historic measures to address these problems. Monetary policy is the responsibility of the Federal Open Market Committee, or FOMC, which consists of the members of the Board of Governors in Washington and the 12 Reserve Bank presidents from across the nation. This decentralized structure ensures that the Committee takes into account Main Street as well as Wall Street. The FOMC has a dual mandate from Congressto maintain price stability and to promote maximum sustainable economic growth.

When economic activity weakens, the FOMC typically lowers its short-term policy target, known as the federal funds rate, and this time was no exception. As the outlook for the economy deteriorated, the FOMC repeatedly cut the federal funds rate target, and it now stands at essentially zero.

This recession has been far from a typical one, however. Many financial markets seized up, crippling the flow of credit to many parts of the economy, including such important Main Street activities as housing finance, auto loans and even student loans. Federal Reserve officials knew that we had to do more than rely on interest-rate actions alone. Beginning in the spring of 2008, we designed a number of new lending programs and facilities to get credit flowing once again to these important financial markets. Our objective was to help thaw a broad range of financial markets and steer the wider economy away from a cliff.

We have also taken unprecedented steps in how we conduct monetary policy. For instance, we have been purchasing mortgage-backed securities issued by the government-sponsored enterprises Freddie Mac, Fannie Mae, and Ginnie Mae. Our strategy has been to reduce the cost and increase the availability of credit for home purchases, which we expected would support housing and financial markets more generally. We are now well into this program, which will culminate in the purchase of $1.25 trillion in agency mortgage-backed securities by next spring. Today, mortgage rates stand more than a full percentage point lower than they were one year ago.

Fortunately, we have seen some recent progress in the housing sector. Housing prices and sales levels have begun to stabilize, and in the first half of the year, refinancing was up by more than 150 percent, which has lowered the debt burden of many homeowners. Of course, the Administration and Congress also had a strong hand in helping to stabilize real estate marketsmost notably with the first-time home-buyer tax credit. The combined efforts of these initiatives seem to be working. Three out of five home sales are now to first-time buyers, compared with one in five in a typical market. But this also illustrates for me that many move-up home purchasers are still sitting on the sidelines, so there is a long way to go before anyone can breathe a sigh of relief.

At this point, monetary policy can most effectively support the housing sector by fostering stronger growth in the broader economy, which would lead to more stable property values, increased consumer confidence, and lower unemployment. Economic conditions have certainly improved since the beginning of this year, but resource utilization levels still remain low, bank lending is restrained, and credit terms are tight. I expect our recovery to be a gradual and bumpy one.

Regulatory Issues

Of course, the work of the Federal Reserve affects the housing sector in ways other than through monetary policy. So let me now turn to the Federal Reserve's supervisory and regulatory roles. While much of the initial financial crisis originated in the mortgage markets, there is still much to correct there and in the broader financial markets.

Everyone with a role and a stake in the financial system needs to take a careful look at the various failures of market incentives and regulations that supported mortgages and securities that are now being described as toxic. In looking at what went wrong, we need to react in a thorough and thoughtful manner to limit similar problems in the future. We at the Federal Reserve have been examining our past actions to understand where opportunities are available for strengthening our supervisory approach. Where we can act under existing authorities, we are taking strong steps to make our financial system safe, sound, and fair.

We have broadened the scope of our supervision. For example, we have heard complaints that while a given bank might be complying with regulations, one of the same bank's holding company affiliates might not be. To address this issue, two months ago the Federal Reserve announced that we will conduct consumer compliance exams of nonbank subsidiaries of bank holding companies and foreign banking organizations, and we will investigate consumer complaints against them. Our goal is to ensure consistent practices within all subsidiaries of bank holding companies, not just banks.

In addition to these and other supervisory efforts, the Federal Reserve has adopted new regulations and revised existing ones to protect consumers. In July 2008, the Federal Reserve strengthened a key regulation designed to protect consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices. The rule also establishes advertising standards, requires certain mortgage disclosures to be given to consumers earlier in the transaction, and adds important protections for a newly defined category of "higher-priced mortgage loans." When developing new regulations, the Board of Governors is working carefully and creatively to craft regulations that people can better understandeven using consumer focus groups to give us feedback on the clarity of our proposals.

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