half of the direct first - year effects of monetary policy on the real economy – which were estimated to be substantial – to disintermediation and other housing - related factors, despite the fact that regulation q provisions that still exist restrict banks'ability to pay interest on some deposits, but these remaining provisions have little effect on the ability of depository institutions to raise funds. in detrended data, the correlation between quarterly single - family housing starts and the growth of small time deposits at thrifts during the preceding quarter was 0. 53 for the 1960 - 1982 period ; since 1983, this correlation has fallen to - 0. 02. residential construction accounted for only 4 percent of nominal gross domestic product ( gdp ) at the time. as time went on, however, monetary policy mistakes and weaknesses in the structure of the mortgage market combined to create deeper economic problems. for reasons that have been much analyzed, in the late 1960s and the 1970s the federal reserve allowed inflation to rise, which led to corresponding increases in nominal interest rates. increases in shortterm nominal rates not matched by contractually set rates on existing mortgages exposed a fundamental weakness in the system of housing finance, namely, the maturity mismatch between long - term mortgage credit and the short - term deposits that commercial banks and thrifts used to finance mortgage lending. this mismatch led to a series of liquidity crises and, ultimately, to a rash of insolvencies among mortgage lenders. high inflation was also ultimately reflected in high nominal long - term rates on new mortgages, which had the effect of " front loading " the real payments made by holders of long - term, fixed - rate mortgages. this front - loading reduced affordability and further limited the extension of mortgage credit, thereby restraining construction activity. reflecting these factors, housing construction experienced a series of pronounced boom and bust cycles from the early 1960s through the mid - 1980s, which contributed in turn to substantial swings in overall economic growth. the emergence of capital markets as a source of housing finance the manifest problems associated with relying on short - term deposits to fund long - term mortgage lending set in train major changes in financial markets and financial instruments, which collectively served to link mortgage lending more closely to the broader capital markets. the shift from reliance on specialized portfolio lenders financed by deposits to a greater use of capital markets represented the second great sea change in mortgage finance, equaled in importance only by the events of the new deal. government actions had

stanley fischer : past, present, and future challenges for the euro area speech by mr stanley fischer, vice chair of the board of governors of the federal reserve system, at the ecb forum on central banking conference “ inflation and unemployment in europe ”, sintra, portugal, 21 may 2015. * * * it is an honor and a pleasure to participate in the ecb forum on central banking, and i thank you, president draghi, and other members of the ecb board, for inviting me to take part. 1 although the topic of the conference is inflation and unemployment, i will take another perspective by discussing some of the past, present, and future challenges that have and may in future confront the ecb and the euro area. my theme is taken from jean monnet, who in 1976 wrote : “ europe will be forged in crises, and will be the sum of the solutions adopted for those crises. ” 2 this quote is discussed in the interesting recent paper by luigi guiso, paola sapienza, and luigi zingales, whose view of monnet ’ s contention can be deduced from the title of their paper : “ monnet ’ s error? ” 3 there are similar quotes from others, among them jacques chirac in 2003 and the former chief economist of the ecb, ottmar issing, in 2010. 4 i first heard a statement to this effect from jean - claude trichet at the 2011 jackson hole conference. 5 an extended 2015 version of the monnet contention would take the form : “ the first step on the road to european union was the creation of the coal and steel community in 1951. at the start, we did not have a road map, but we had the goal of ensuring that the countries of europe would never again go to war, and to that end, we had to build an institutional structure that would make another european war impossible. from time to time we encountered obstacles in that process. these obstacles often led to crises, but the crises were overcome, and from each crisis, the prospects for a united, prosperous, and peaceful europe emerged stronger. and that is what will happen this time too. ” i am grateful to brian doyle, jane haltmaier, stacey tevlin and paul wood of the federal reserve board for their assistance. the views expressed are my own and not necessarily those of others at the board, on the federal open market committee, or in the federal reserve system. see jean monnet (