While it is difficult for individuals to overcome limited opportunities, the ability of entire communities to reinvent themselves has become increasingly important as evidence mounts suggesting how important social surroundings can be for individual success.

Foreclosed, vacant, and abandoned properties threaten neighborhoods nationwide, and community leaders are working to stabilize those neighborhoods. While the problem touches every community, it doesn't look the same in each because it's shaped by the circumstances that prevailed in those neighborhoods before the crisis hit. Neighborhood stabilization efforts are critical, now more than ever, as not all communities will be stabilized without intervention.

As the Federal Reserve builds on  its consumer protection efforts in order to mitigate foreclosures for current homeowners, we are also concerned about the impact current mortgage market problems are having on individual communities.  The challenges of rising foreclosures are significant at the state and local level and the nature of the problem varies by location.  Through its structure, the Federal Reserve System is attuned to local issues, which both informs its national policymaking and allows for responses tailored to local conditions. 

There is a striking parallel with the challenges for the re-emergence of the subprime mortgage market and the adoption of innovations in the community development investments market. To overcome the unease of the current financial markets and attract a new source of capital, new market entrants must make particular efforts to reduce the uncertainty associated with their investment opportunities. For the CDFI industry, the challenges that need to be addressed are improving information about these products, developing models of risk and pricing, and standardizing these contracts. Addressing these issues will be critical to jump-start sustainable private CDFI investments as well as to revive the subprime mortgage market.

The migration toward sustainable mainstream capital sources is important in light of budgetary challenges facing governmental and philanthropic funding sources. For CDFIs to expand the scope and volume of their financing activities, they need to develop new products and innovations that tap more predictable sources of funding. Accessing the broad depth of the capital markets as a self-sustaining funding source for community development would yield enhanced benefits, such as more-efficient delivery of capital, greater funding and underwriting discipline, and reduced finance costs.

Successful microbusinesses provide jobs as well as valuable products and services to their communities. Not least important, they can provide economic independence and self-reliance for the owner-entrepreneurs. The full benefits of this movement are difficult to calculate. Indeed, one important challenge for the future is to find ways to better measure the impact and cost effectiveness of microfinance programs. What is clear is that the microfinance movement has grown and adapted considerably during its short history in the United States. I hope that microfinance organizations will sustain their energetic spirit of innovation and experimentation as they strive to become more self-sufficient and adapt to our ever-changing economy. 

What about borrowers already in distress?  The Board and other federal supervisory agencies have taken actions to encourage the banks and thrift institutions we supervise to work with borrowers who may be having trouble meeting their mortgage obligations.  Often, loan workouts are in the interest of both parties.  With effective loan restructuring, borrowers facing temporary economic setbacks may be able to work through their problems while staying in their homes, and lenders may be able to avoid the costs of foreclosure and the losses usually associated with selling a repossessed home.

... [R]esearch studies suggest that minority-owned small businesses have a harder time getting access to credit than other businesses, even after controlling for a wide variety of factors related to creditworthiness.  Finding new ways to help connect capital with viable investment opportunities in these underserved markets is critical for an asset-based approach to community development to work.  

Skilled workers often find it more productive to continue to commute from home to office to exchange information, despite having the technical ability to work at home with the Internet and personal computers. Such information is often ambiguous, in the sense that it must be interpreted and often creatively advanced through business meetings face-to-face, often in a group setting, and often with rapidly changing groups of people located far and wide. As urban economist Ed Glaeser stated during his recent visit to Chicago, technical advances have only magnified the value of face-to-face communication. In today's information economy and in its advanced information industries, "who we converse with on the Internet are also those who we find we must meet with face-to-face."

The fact that I'm even talking about "local needs" and the importance of "public/private partnerships" is evidence of how much the community development field has changed over the last 40 years. In 1964, when President Lyndon B. Johnson famously declared that "for the first time in our history, it is possible to conquer poverty,"3 these concepts were not part of the community development lexicon. Neighborhood revitalization projects were much more likely to involve federal mandates and bulldozers than 'design charettes' or 'asset mapping.' The large-scale public housing projects of the 1940s and the urban renewal efforts of the 1960s had unintended consequences, isolating residents from educational and economic opportunities and creating neighborhoods with high levels of concentrated poverty, unemployment, and crime.

Clearly, our approach to community development has evolved considerably since Johnson's day. For one thing, I think we have all become much more humble about our ability to address the underlying causes of poverty. We now know that effective community development isn't about building affordable housing units alone—it requires a comprehensive approach that provides job training, supports entrepreneurs, offers opportunities to save and build assets, and connects families to important services like reliable transportation and child care.

Monetary policy is a blunt tool that cannot target industries, population groups, or regions. In contrast, as you know, CDFIs operate primarily at the microeconomic level, community by community. Using techniques such as financial counseling, local market research, and specialized lending, CDFIs work with partners in both the public and the private sectors to help unlock the economic potential of lower-income and underserved communities.

The movement toward quantifying the performance, risk, and community impact of CDFIs [community development financial institutions] is essential to the growth and sustainability of the field, in my view. By demonstrating both financial viability and social impact through hard data, CDFIs are better positioned to obtain the funding necessary to maintain their operations and to respond to emerging needs and opportunities.

The development of more and better data on economically distressed communities, together with sophisticated tools for analyzing those data, is essential for continued progress in community economic development.

With regard to the Federal Reserve's role in promoting the growth of rural communities, the Fed is charged with maintaining credit conditions that are conducive to our nation's progress. To be sure, our main tool, monetary policy, is a blunt instrument that cannot be targeted at individual industries or regions. However, the Federal Reserve can play a critical role in creating a credit climate that fosters rural progress in general, a climate in which the inherent advantages of individual communities can be realized.  We can best promote a progressive credit climate by maintaining an environment of low inflation.

Effective community development involves a comprehensive approach focused not only on providing housing, but also on creating programs that increase residents' capacities to make economic contributions to the community...I believe the progress that has been made by policymakers in the field of community development over the last thirty years has been remarkable.