financial crises really so different? ” international finance discussion papers 1037 ( washington : board of governors of the federal reserve system, november ). bis central bankers ’ speeches the heavy load of housing - related debt that many households are still carrying may be affecting consumer spending even more powerfully than would be suggested by the drop in house values alone. for example, recent academic research has found that highly indebted households cut their spending on goods and services more severely in response to a drop in home values than do less - indebted households hit with the same reduction in home values. 3 this result suggests that consumer spending may not act powerfully to revive the economy until americans ’ financial situations have improved. alternatively understood, this research finding suggests that monetary policy alone may be insufficient to promote a more robust and sustainable improvement in household net worth. besides the substantial direct losses in the wealth of households through losses in home equity, other housing - related issues have likely been holding back the economic recovery. the collapse of house prices coincided with a sharp increase in mortgage defaults and foreclosures, leaving financial institutions with large holdings of residential real estate, or reo. as these properties were put up for sale on the market, they contributed to the alreadybloated supply of vacant homes available for sale and put further downward pressure on house prices. in los angeles, for example, more than one out of every four homes sold in 2011 were reo properties. and the inventory of mortgages that are more than 90 days delinquent or somewhere in the foreclosure process amounts to more than five times the current stock of reo, illustrating the large “ shadow inventory ” of properties that might be put up for sale sometime in the future. concerns about future defaults and foreclosures have caused lenders to tighten their lending standards considerably – raising down - payment requirements, requiring extensive documentation, and charging substantial fees to all but those with the highest credit scores. this marked change in mortgage credit standards has restricted access to mortgage credit for many potential borrowers, limiting both home purchases and refinancing. in addition, it doesn ’ t take extensive forays into many neighborhoods here to see that the foreclosure process imposes less quantifiable but heavy costs on homeowners and communities. monetary policy and other federal reserve actions how should the federal reserve respond to a recession with these contours? the fed ’ s accommodative monetary policy response has been

hospitable. yields for high - yield corporate bonds have fallen from between 8 and 9 percent prior to the recession to near 7 percent, contributing to the robust pace of issuance of these securities over the past few years. partly as a result of these actions, business spending for investment in equipment and software has been relatively robust in the past several years. in addition, real spending on consumer durables such as motor vehicles has begun to pick up. moreover, foreign trade has been an important factor contributing to demand for u. s. products. here in los angeles, net container flows through the ports of los angeles and long beach rose 16 percent in 2010 and continued to rise last year, though at a slower pace. in contrast to the upturns in business equipment investment, consumer durable purchases, and foreign trade, other sectors of the economy have not fared as well. despite historically low mortgage rates, purchases of new and existing homes have not risen much above their lows seen several years ago. one reason for the absence of a significant pickup in home purchases has been the substantial tightening of underwriting standards for mortgages. in addition, households ’ concerns about their future prospects for employment and income have likely deterred many potential homebuyers from committing to mortgage payments that might be difficult to make if they lose their jobs. housing has played a central role in magnifying the recession and delaying the recovery. in los angeles, there is huge demand for information on foreclosure recovery from organizations that serve families going through the process of losing their homes. residents here want financial institutions and recipients of grants from the neighborhood stabilization program to understand the most effective ways to use funds from that program to acquire, rehabilitate, and repurpose real estate owned by financial institutions and vacant properties. we have seen much interest by financial institutions, nonprofit housing providers and advocates, local government, and academics in understanding new approaches to reo disposition and financing mechanisms. turning to the business sector, credit conditions for many small firms have not improved in this recovery. in 2010, the federal reserve bank of san francisco organized a statewide small business task force that meets twice per year to assess barriers and opportunities for credit - worthy small businesses in california. last year, it held a conference to help identify ways that the community development financial institutions ( cdfi ) fund can work with community banks to serve the needs of small businesses that may not qualify for bank loans and to identify additional bank sources of capital for small