subject to consent orders. to be sure, a number of efforts are under way to establish additional mortgage servicing standards. the consumer financial protection bureau ( cfpb ) has recently declared its intent to propose servicing rules that would apply to all mortgage loans. the fhfa strategic plan includes an initiative already in motion to create a single set of servicing protocols for both fannie and freddie loans. these new standards are being developed in consultation with federal financial regulators who are also exploring establishing uniform servicing standards for the institutions they supervise. however, while we hope that the prospect of uniform national servicing standards will lead to more consistent, efficient, and fair servicing practices, it is also generating uncertainty about the future costs of servicing mortgages and may be a factor in decisions by servicers to delay or abandon investments in servicing capacity. also affecting decisions about investing in servicing are new approaches to servicer compensation under consideration by the fhfa. servicers currently receive the same compensation for loans that are up to date as they do for loans that are past due. servicing fees significantly exceed the cost of the administrative tasks associated with loans that pay on time, but there is an expectation that servicers will stockpile some of this “ excess profit ” to cover the cost of servicing delinquent loans. the problems associated with loan modifications and foreclosures clearly demonstrate that servicers failed to invest enough in their infrastructure to be able to handle the current level of delinquent loans. furthermore, this arrangement provides no incentive for servicers to take on loans that have a higher risk of going past due and incurring higher servicing costs. with origination and servicing closely linked, this incentive results in less credit offered to borrowers who have weaker credit profiles. moreover, servicers subject to regulatory capital requirements are likely to be affected by new international capital standards that change the capital treatment of the asset known as “ mortgage servicing rights ” that is created from servicing compensation. these new standards are expected to cap the amount of mortgage servicing rights that institutions can bis central bankers ’ speeches include in regulatory capital, which could lead institutions to seek to limit or reduce the amount of mortgage servicing rights they own. this circumstance, in turn, could reduce the liquidity in the market for mortgage servicing rights and potentially drive their valuations down. thus, the final design of servicer compensation along with servicing requirements will factor into the capital allocated to the mortgage business generally and to the relative tightness of credit standards. additional regulatory uncertainty arises from the dodd

the two elements taken together – the stylised fact and what we know about the deep economic structure – pose a puzzle. i will then offer the key to solving the puzzle. take the simplest measure of economic performance, the mean and the standard deviation of annual cpi inflation and of a conventional measure of detrended output for the euro area, the united states and several other countries over the period following the start of economic and monetary union ( emu ). plot these statistics in the same chart and treat this simple picture as a representation of the facts. [ figure 1 does this in the form of a scatter - plot. 1 in for the euro area, inflation has been computed on the basis of the hicp. for all economies, the detrended measure of output is the hodrick - prescott - filtered logarithm of real gdp. with the exception of the euro area, the united states and the united kingdom – for which data are from their respective national statistical order to make the comparison meaningful, take detrended output, which in the short - tomedium term reflects output movements over and above the low - frequency variation that is beyond the control of monetary policy. if you compare means and standard deviations across countries, several interesting aspects emerge from the chart. figure 1. inflation and de - trended output : means and volatilities since january 1999 source : ecb calculations first, and almost en passant, you are led to confirm a fundamental economic principle which is a cornerstone of our monetary framework : higher inflation is not automatically associated with a superior economic performance. comparing means – of inflation and detrended output – across countries you can find simply no connection between average inflation and average macroeconomic performance, even at business cycle frequencies. as a simple corollary, higher inflation merely imposes additional costs on the economy, costs which it is my precise duty to spare euro area businesses and consumers. 2 but it is by comparing volatilities in the right - hand panel that you would be most surprised. in terms of volatility, the euro area exhibits a remarkable comparative performance for what concerns both inflation and detrended output. emu has kept inflation in the vicinity of levels consistent with our objective, without this having caused abnormal swings in business conditions. when seen from an international perspective, real activity in the euro area – in its deviation from trend – has been remarkably in line with that seen in other countries, but with a crucial difference : euro