elizabeth a duke : cra – a framework for the future speech by ms elizabeth a duke, member of the board of governors of the us federal reserve system, at the revisiting the cra policy discussion, washington dc, 24 february 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * good afternoon. i am pleased to be here to discuss the future of the community reinvestment act ( cra ). as many of you probably know, i joined the federal reserve board last year after having spent many years as a community banker. my experience gives me both a practical and theoretical interest in today's discussion of cra's future. when the federal reserve bank of boston celebrated the 30th anniversary of cra's enactment, it did so by hosting a forum in october 2007 that focused not just on the law's contributions to making financial services more readily available in low - and moderateincome communities, but also on the challenges of applying the law in a financial landscape that is vastly different from the one that existed in 1977. it was at that gathering of researchers, regulators, bankers, nonprofit practitioners, and community advocates familiar with the cra that congressman barney frank challenged the federal reserve bank of boston to collect the best thinking about how the cra might be improved for the future. the bank took this challenge to heart and, together with the federal reserve bank of san francisco, invited an impressive group of experts to contribute to the creation of a publication serving as the center of discussion at today's forum, revisiting the cra : perspectives on the future of the community reinvestment act. this volume presents a variety of perspectives from many who have been closely involved in the development and implementation of cra policy over the years. as one might imagine, there is no shortage of good ideas contained in these pages including suggestions for statutory as well as regulatory changes. while many divergent views are expressed in this publication, its most striking feature is an expression of a shared understanding that access to financial services for all, including low - or moderateincome communities and individuals continues to be an important goal for policymakers. in my remarks today, i will highlight what i consider to be the most compelling reasons for making changes to the cra at this time, discuss many of the themes and issues raised in this publication, and suggest a framework for how, as policymakers

and expanding businesses may require time to put the necessary capital equipment in place to increase productivity. and of course, some firms will go out of business and some people will be unemployed for a period of time. but from a macroeconomic point of view, adjustment can take place with less social and economic cost overall when inflation expectations are well anchored, the economy is operating close to its potential, and a floating exchange rate is helping to absorb external shocks. international adjustments that ’ s a quick look at how the canadian economy is adjusting to global forces. our flexible exchange rate is helping to bring about movements in the real exchange rate, which is what matters in terms of the adjustment process. but this is not the case in all countries. where the nominal exchange rate is fixed, the only way to bring about adjustments in the real exchange rate is through large movements in relative wages and prices. this is theoretically possible if wages and prices are highly flexible, both upwards and downwards. but in practice, wages and prices aren ’ t that flexible. and so when exchange rates are fixed, adjustment can still take place, but it comes at a high cost - through shrinking output and rising unemployment in countries with current account deficits, and eventually through very high inflation in countries with current account surpluses. while this adjustment is costly, it does work, provided countries that are fixing their currencies through foreign exchange intervention are not offsetting the monetary consequences of this by “ sterilizing ” the intervention. this is an important point. when intervention is sterilized, this temporarily prevents the movements in wages and prices needed to bring about the necessary economic adjustment. in these cases, economic adjustment is postponed - in both surplus and deficit countries. but the adjustment and its costs are only delayed, they are not avoided. indeed, the costs typically end up being larger than they would otherwise be, precisely because they have been delayed. the only way to truly minimize the costs of adjustment is to allow nominal exchange rates to move around. for decades, canada has benefited from having a flexible exchange rate that can help bring about economic adjustments. by the end of the 1990s, most industrialized economies and a number of emerging - market economies had also realized the benefits of having a floating currency. but other economies, particularly but not exclusively here in asia, have opted for a fixed exchange rate regime. and unfortunately, some have rejected the adjustment mechanisms that should go along with such a regime. by sterilizing their interventions, they are accum