August 10, 1973
Our Bank directors report a sharp stiffening in recent lending practices. They are now making new loans rarely and only to good customers. Business conditions in the First District are reported as good, if not booming, but the seasonally adjusted unemployment rate in June remained at 6.2 percent.
Bank directors report that they have cut back sharply on new loan commitments. Our Bank directors say that they have ended all construction loans and that they are limiting other loans only to good customers.
A New Hampshire bank director says that he is only making new loans rarely and is making none for construction, new customers, expansion, or acquisitions. This director attributes monetary tightness to a loss of demand deposits, in part due to firms cutting down demand deposits and in part due to competition from "NOW" accounts which are allowed in his state. The new Fed ruling limiting four-year time deposits to 5 percent of time money prevents his bank from competing for funds. This banker reports that his tight loan policy is generally true throughout New Hampshire and that many savings banks are also very tight and mortgage rates are firming.
A large Boston bank director reports no trouble in getting additional funds, but that rates are too high to make profitable loans. He feels that the bank gains more goodwill by explaining to a potential borrower that the bank has no funds than to charge 12 to 13 percent for a loan. Instead, they are encouraging borrowers who can do so to go elsewhere, and they are not looking for new customers. They are currently combing their loan portfolio to get some loans out of the portfolio. They are also no longer building up their residential mortgage portfolio.
Business conditions are reported as pretty good in New England, although not booming. Machine tools and heavy capital equipment production are doing especially well. Unemployment still remains high in a number of areas. In Massachusetts, the seasonally adjusted unemployment rate in June was 6.9 percent, down from 7.3 percent a year ago, and in the Boston SMSA the unemployment rate remained at its year-ago level of 5.9 percent. With the exception of New Hampshire, all of the New England states have unemployment rates above the national average.
Professors Eckstein and Samuelson had very different orientations in their policy remarks. To Eckstein, the crucial issue for the monetary authorities is "whether or not to let disintermediation ruin housing". Traveling around the country talking to banks, thrift institutions, and life insurance companies, Eckstein found the supply of mortgage funds has dried up. Mortgage loans are available only at a few large banks to some established customers. Insurance companies were fully committed and now are having trouble with policy loans. California savings and loan associations face a situation like 1966. He feels monetary policy is misguided by focusing on monetary aggregate figures which suffer from technical problems. He cited various theories to explain the pattern of money growth in the first and second quarters, saying none had much to do with real economic growth. Interest rates are the only indicator one can go by at the present time, he argued, since no one understands the recent behavior of the monetary aggregates.
Samuelson felt it is still unresolved whether the economy has entered a growth recession. He suggested that the second-quarter real growth figures look too low and the third-quarter figures will look too high due to seasonal correction problems. He agreed that we are in a partial credit crunch and that mortgage money cannot be obtained in many areas. He feels, however, that a growth recession, even if it comes, would be "stagflation". Monetary policy could not choke off the commodity price explosion without choking off a lot more. Monetary tightness will not produce automatic, quick inflation abatement. In order to reduce the growth in the aggregates, he would allow interest rates to continue to rise so that the move toward ease could come faster later if it became necessary to ease. Citing the 1966 experience, he believes that policy can be successfully reversed. Eckstein also felt policy could be reversed if it backed off soon.