FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. I'm glad to have this opportunity to speak with you this morning and to be able to thank you for your work in finding new ways to serve America's economically distressed communities and bring low income families into the mainstream. I spend a lot of my time working to make the global capital market work effectively so that investment, capital, information and know-how flow freely to the places where they can be most effective in creating wealth and opportunity. And there is no more important capital market than the market here at home.

I. An Historic Challenge

Your work in these issues is of special importance right now, for three reasons.

First, it is a special moment for the American economy:

• unemployment and inflation are among their lowest in a generation;
• our rate of national savings, though still too low, has doubled in five years -- from 3.4 percent in 1992 to 7.2 percent;
• we are investing ever larger amounts in American companies and their workers;
• real wages and household incomes have at last started to catch up the ground that had been lost since the 1970s;
• and, lest we forget, the budget deficit is no more.

As a result of the deficit reductions we have seen in this decade, more than one trillion dollars in capital that would otherwise have been invested in the sterile asset of government paper has instead been invested in America's future: in our productive businesses, in our workers, in our cities and in our homes.

The second reason why your work is especially important today follows from the first. For, when the competition in international markets was less intense, when the economy was not growing as fast as it should have been -- in those days it was all too possible to leave untapped the human and economic resources of our inner cities. The same cannot be said today.

Now that American companies must work to preserve their new edge in global markets, now that issues of capacity and full employment has become more important -- unleashing the buried talent and productive capacity of these areas is not just a moral necessity but an economic one. Our country has to worry about emerging markets. But none are more important than the emerging markets within our own borders.

A third reason why your efforts are so important today relates to the much greater appreciation we now have today, in America and across the world, of the private sector as the greatest contributor to growth. As Robert Kennedy once said, "to ignore the potential contribution of private enterprise is to fight the war on poverty with a single platoon, while great armies are left to stand aside." Propositions become cliches because they capture truth; a hand-up really is better than a hand-out.

Since 1996 this nation has been following a fundamentally different approach to welfare policy than we have for a very long time. Over time we will see the results of this experiment. While this change is controversial, no-one can disagree with the idea that at a time when we are putting new stress on the importance of self-reliance among the poor it becomes even more critical to increase the scope for economic opportunity in the districts where these people live.

II. A Many-Sided Approach

A decade or two ago it would have been unlikely that a senior Treasury official would be addressing a group such as this one. But I hope to have already made clear why a concern about the future of our economy mandates a concern about the future of our inner cities and other disadvantaged communities. At Treasury we know that a more inclusive America will be a richer, more productive America. And we know that finance is a key tool for achieving that goal.

In a minute I will be describing three important pieces of our strategy. But it might be helpful to start with a little about the rationale for these initiatives.

There are some who wonder why the Treasury -- or any other part of government, for that matter -- should be seeking to intervene in this way. Surely, they ask, if there are viable investment and lending opportunities in these communities the market will find them by itself? Yet experience suggests that it will not.

The world over, private financial markets fail when it comes to very poor. You could say that mainstream banks do not seek out poor communities -- because that is not where the money is. Market psychology and other barriers tend artificially to restrict the flow of capital to certain neighborhoods or to minority groups, creating clear market failures. Yet if you deprive the people of these districts of the chance to lend or save and they are a good deal more likely to stay that way. The First Lady likes to say it takes a village to raise a child. Equally it takes capital to build a successful village.

Since the earliest days of this Administration we have been working -- domestically and internationally -- to democratize the access to capital. And our largest contribution to improving capital access in America has come through our greatly enhanced commitment to the Community Reinvestment Act .

A Revitalized CRA

America does much to help its banks. And it is right that they help America. That is why we have worked vigorously to promote an effective CRA and to promote fair lending in every part of this nation. We have stood firm against attempts to undermine the CRA -- it has become a real, but unsung, success story.

Since 1992, nonprofit community groups estimate that the private sector has pledged to make more than $270 billion in CRA loans -- which is fully 85% of the loan commitments made since CRA was passed in 1977. In 1996 alone, large commercial banks made nearly $18 billion in community development loans. All told, community development loans by national banks have more than quadrupled in the past four years.

David Coulter, the CEO of BankAmerica Corporation, San Francisco reported recently on the success of community reinvestment programs that BofA has developed and applied, both nationally and in niche markets. Neighborhood Advantage, a system of low-and moderate income home loans has been particularly successful at helping to infuse capital into distressed communities. Since 1990, BofA has profitably lent more than $10 billion as part of the program to borrowers in communities across the western United States. And Bank of America is hardly alone. With the prompting provided by the CRA and the Home Mortgage Disclosure Act, mainstream banks across the country have developed -- and made money from -- similar schemes.

We have seen recently in New York, and other major American cities, that even small steps -- the mending of a window, the planting of a garden, the repainting of a graffitied wall -- can yield huge dividends in reduced crime rates and other benefits. The same applies, many times over, to the families that are finally able to put a down payment on a new home. In community after community, we are learning what increased home-ownership can do to foster a sense of pride and belonging in some of the poorest neighborhoods in the land.

As has been highlighted in the President's National Initiative on Race, race is a major problem. America continues to face deep racial problems. But we can take profound satisfaction in the great improvements in access to capital for minorities that has been achieved through enhanced scrutiny and transparency under the Home Mortgage Disclosure Act.

Data for 1996, produced as a result of that Act, showed that since 1993, conventional home mortgage lending to African Americans has increased by 67.2 percent, lending to Hispanics has risen 48.5 percent, and lending in low and moderate income areas is up 37.9 percent. All this, in a period in which the entire market grew only 18 percent.

It is possible to glean in all of these figures a new paradigm in community regeneration strategies -- one that is less government-driven, more collaborative and creative. Truly it might be said that a quiet revolution has been underway in the approach taken to these areas. Public sector and nonprofit organizations are working shoulder to shoulder with mainstream banks and other financial institutions to bring affordable credit and private sector investment to distressed districts and transform their prospects.

The CDFI Fund

Yet, inevitably there are thing that banks will have trouble doing. This is especially true of those early investments in new markets, or forgotten communities where the social returns can be particularly large relative to the private ones.

Throughout our history the government has been a force for innovation in pushing back the frontiers of American financial markets. As Eugene Ludwig, the Comptroller of the Currency, recently pointed out, if the credit terms of 1776 still applied in today's Washington, only a handful of people would qualify for a bank loan. Even 125 years ago, it was more or less unheard of for national banks to offer home mortgage loans. The pioneering efforts of the FHA led to the home mortgage industry we know today. More recently, we at Treasury have continued that tradition of innovation in issuing the first inflation-indexed bonds.

In his 1992 Presidential campaign Bill Clinton championed another new idea -- the notion of a network of financial service institutions to expand access to credit and financial services in lower income urban, rural and Native American communities. And with the Community Development Financial Institutions Fund the President's vision is becoming a reality. Investments are flowing to communities and making a difference in the lives of low income families.

A successful CDFI is perhaps best compared to a niche venture capital firm that deploys its superior knowledge of an emerging market niche to invest and manage risk better than other investors. CDFIs are often "early birds" or "market scouts" who see the market potential of overlooked customer segments. But there is a clear market test involved. Like other frontier investors, CDFIs cannot survive unless they find paying customers. They must make loans and investments that are repaid. And, in the end, they must aim to be supplanted. By definition, CDFIs' customers are not yet fully served by the market. But the end goal is always to change the psychology of the marketplace to catalyze more investment by the private sector.

Thus far, the Fund has made two rounds of awards under the BEA and CDFI programs. In the CDFI Program, 80 CDFIs, including national intermediaries, have been awarded over $75 million in grants, loans, equity investments and technical assistance. The CDFI awards will be leveraged 3-4 times in the short term alone.

In the BEA Program, the Fund has made 92 awards worth $30 million to insured depository institutions who have increased their investments in CDFIs or increased their direct lending and other services to low income communities. These institutions have provided over $130 million in assistance to CDFIs and $143 million in direct assistance to distressed communities. The third round of awards will be made this year, and the Fund is also launching a training and technical assistance round to help further build capacity in the field.

Like any other new institution, the CDFI Fund has had its share of growing pains. I am happy to say that the Fund was recently given an unqualified audit for its activities since inception. That audit confirmed, however, that there were material weaknesses in the Fund's financial oversight in previous years -- weaknesses that the Fund has already taken steps to correct. I am convinced that the CDFI Fund is now well positioned to build on the vital progress it has already achieved in some of the poorest communities in the land.

A few individual case studies tell the story better than any statistics:

• Nancy Stratton, of Port Hadlock, Washington, used a loan in 1996 from the Cascadia Revolving Fund, a Seattle-based CDFI, to open her in-home day care center. Cascadia has received a $600,000 grant from the CDFI Fund to broaden its service to low-income people like Nancy throughout Washington and Oregon.
• or there is the single mother of three in Charlotte, North Carolina who recently moved to escape an abusive spouse and found it impossible to service the debts caused by her children's past medical expenses on her modest salary as a teacher's aide. The School Workers Federal Credit Union was able to arrange a debt consolidation loan and help her manage her debts -- to the point where she has now been able to make a $1500 down payment on a house. Thanks to the $150,000 grant from the CDFI Fund it received last year, this Credit Union is now poised to help many others work their way out of debt.

This year, to build on these and countless other successes, we will be seeking to pass legislation in the Congress to extend the Fund's authorization and increase its appropriation, from $80 million in FY 98 to $125 million in FY 99. We will be pursuing both of these simultaneously.

The Fund's enabling legislation authorized appropriations for the Fund through FY 98, and we will be seeking permanent extension of that authorization. In addition, we will be seeking changes to permit the Fund to launch a new program to support state-run Capital Access Programs that match loan loss reserves set aside by financial institutions to enable them to make more difficult small business loans. We believe that this is an important new initiative that will be a real benefit to financial institutions, small businesses, and states.

We will shortly be submitting this legislation to the Congress. Later this week, the VA/HUD appropriations subcommittee in the House will hold hearings, and next week, the Senate subcommittee will hold hearings. Hearings in the authorizing committees will follow.

Let me be clear: both the extension of the Fund's authorities and the $125 million appropriation are top Treasury priorities. The CDFI Fund is a sound investment for America's communities, and we urge Congress to give it full support. No good business idea or budding entrepreneur should fail simply because they could not get a loan.

Targeted tax incentives

Capital access is very important. But there also have to be the right kind of incentives to obtain and use capital. That is why a third important piece of our strategy to revive the power of the market for low-income families and communities has been the use of targeted tax incentives. Briefly, since 1992 we have proposed and enacted:

• a new "brownfields" tax incentive to help spur the private sector to clean up and put back into productive use environmentally contaminated properties in distressed communities;.
• two rounds of Empowerment Zones and new incentives to invest in our Nation's Capital;
• special wage credits for hiring those who have the hardest time in the labor force particularly families coming off welfare;
• and we made the low income housing tax credit permanent, helping to create 80-90,000 units of affordable housing every year.

Since the President made this credit permanent in 1993, states have put in place improved allocation systems and demand for the credits has soared. As a result the credit's efficiency has improved by 38%, and demand outstrips supply by 3 to 1. In the Presidents' FY 99 budget we have proposed expanding the low income housing tax credit by 40 percent, which will mean another 180,000 units of affordable housing over the next five years.

III. Concluding Remarks -- the Challenge Ahead

All of these initiatives -- an expanding and innovating CDFI Fund, a more focused CRA, and our carefully targeted tax incentives -- are the vital microeconomic counterpart to the sound macroeconomic policies we have pursued these past five years. Both are aimed at the same core goal: bringing more economic opportunities and higher living standards to every American.

Our commitment to sound policies, both at the macro and a micro level has already paid important dividends in some of America's most disadvantaged communities. But we must do more. And we must work together to do it. Our efforts can help jump start growth in your communities, but only if we have partners like you. Your organizations make the critical difference in community after community across the country. I applaud your hard work, and your success. Thank you very much.