mr. greenspan presents the views of the federal reserve board on some broad issues associated with financial modernization testimony of the chairman of the board of the us federal reserve system, mr. alan greenspan, before the subcommittee on financial institutions and consumer credit of the committee on banking and financial services of the us house of representatives on 13 / 2 / 97. madam chairwoman, members of the subcommittee on financial institutions and consumer credit, it is a pleasure to appear here today to present the views of the federal reserve board on some broad issues associated with financial modernization. the unremitting pressures of technology and the market are drastically changing the financial landscape and eroding traditional positions of competitors, inducing new competitive strategies and participants, forcing new regulatory responses, and building pressures on the congress to shape developments in the public interest. madam chairwoman, i know that you have been an active sponsor and supporter of legislation to modernize the financial system. the board also has been a strong proponent both of expanded financial activities for banking organizations and enhanced opportunities for nonbank financial institutions to enter banking. we continue to support financial modernization because we believe it would provide improved financial services for our citizens. moreover, both our experience and analysis suggest that the additional risks of new financial products are modest and manageable. indeed, technology already has resulted in a blurring of product and service - defining lines so dramatic as to make many financial products virtually indistinguishable from each other and the old rules inapplicable. in the process, we have already seen the public benefits, benefits that removal of old barriers could only enhance. but, as we proceed down the path of reform, reforms both desired for their benefits to the public and required by global markets and new technologies, the board urges that any modifications be tested against certain standards. in particular, the board believes that the changes we adopt should be consistent with ( 1 ) continuing the safety and soundness of the banking system ; ( 2 ) limiting systemic risks ; ( 3 ) contributing to macroeconomic stability ; and ( 4 ) limiting the spread of both the moral hazard and the subsidy implicit in the safety net. thus, if my comments today sound cautious, i want the subcommittee to understand that my observations do not reflect opposition to further freeing of constraints on financial competition. to the contrary. we strongly urge an extensive increase in the activities permitted to banking organizations and other financial institutions, provided these activities are financed at nonsubsidized market rates and do not pose unacceptable

any estimates of the neutral level of short - term interest rates. in this regard, there is an important asymmetry to consider. if the neutral rate turns out to be significantly higher than we currently estimate, it is less likely that we will have to deploy our unconventional tools again. in contrast, if the neutral rate is as low as we estimate or even lower, we will be glad to have our unconventional tools in our toolkit. the bottom line is that we must recognize that our unconventional tools might have to be used again. if we are indeed living in a low - neutral - rate world, a significantly less severe economic downturn than the great recession might be sufficient to drive short - term interest rates back to their effective lower bound. conclusion let me conclude with a brief summary. as a result of the great recession, the federal reserve has confronted two key challenges over the past several years : one, the fomc had to provide additional policy accommodation after short - term interest rates reached their effective lower bound ; and two, subsequently, as we made progress toward the achievement of our mandate, we had to start scaling back that accommodation in the presence of a vastly expanded federal reserve balance sheet. today i highlighted two points about the fomc ’ s experience with those challenges. first, the monetary policy tools that the federal reserve deployed in the immediate aftermath of the crisis — explicit forward rate guidance, large - scale asset purchases, and the payment of interest on excess reserves — have helped us overcome these challenges. second, in light of evidence suggesting that the neutral level of short - term interest rates is significantly lower than it was in previous decades, the likelihood that future monetary policymakers will have to confront those two challenges again is uncomfortably high. for this reason, we must keep our unconventional policy tools ready to be deployed again should shortterm interest rates return to their effective lower bound. 5 / 7 bis central bankers'speeches 1 before the great recession, the fomc occasionally provided forward rate guidance, but that guidance was typically confined to a relatively short horizon. 2 in addition to depressing term premiums, large - scale asset purchases by the federal reserve can lower longer - term yields if those purchases are perceived by the public as a signal that short - term interest rates are likely to remain lower for longer than previously anticipated. 3 see, for instance, eric t. swanson and john c. williams ( 2014 ), “ measuring the effect of the zero lower bound on medium - and