Economic Report of the President

of computer technology to the payments system, have created seriousdistortions in financial markets. As market interest rates rose aboveRegulation Q, ceilings, inflows of funds to depository institutionswere curtailed, and new nonregulated instruments (especially moneymarket mutual funds) were created. The allocation of savings to varioussectors of the capital market—particularly housing vis-a-vis othersectors—was altered, and small and less informed savers suffered declinesin the real rate of return on their savings. In addition, RegulationQ, generated a considerable amount of nonprice competition betweenfinancial institutions, such as an excessive number of branchoffices, with resulting adverse effects on efficiency. Interest rate ceilingson selected deposits were removed progressively beginning in1978.The Administration continues to support the removal of unnecessaryand excessive regulatory constraints on depository institutions.It is now widely asserted that the length and severity of the bankingcollapse of the 1930s was not the result of overly risky bank portfolios.Rather, many economists argue that these failures became widespread,initially, because of the reluctance of the Federal ReserveSystem to engage in aggressive open market operations to counterthe conversion of deposits to currency and, later, because of the FederalReserve's failure to assure adequate liquidity to banks experiencingruns on their deposits. As banks scrambled to liquidate theirassets to meet the demands of their depositors for currency, theirasset values fell, thus creating insolvencies. The provision of adequateliquidity by a lender of last resort has long been recognized asa primary responsibility of the Federal Reserve System.Partial deregulation of depository institutions is now proceedingunder provisions of the Depository Institutions Deregulation andMonetary Control Act of 1980 and the Garn-St Germain DepositoryInstitutions Act of 1982. Under the 1980 act, interest rate ceilings ontime and savings deposits are to be phased out over a period of 6years. The same law permits depository institutions to offer negotiableorder of withdrawal (NOW) accounts and preempted certainState usury ceilings. This act also created the Depository InstitutionsDeregulation Committee (DIDC) to administer the phaseout of interestrate ceilings at banks and thrifts.In March 1982, the DIDC adopted a deregulation schedule thatphases out interest rate ceilings, beginning with longer term time deposits.With the deregulation schedule in place, the focus of theDIDC turned to short-term deposit instruments. Prevailing high interestrates had caused a continued erosion of low-cost deposits atbanks and thrifts, as depositors sought market rates elsewhere, particularlythrough money market mutual funds. The DIDC addressed117