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supervision and regulatory functions of our nation's financial agencies

a most worthy objective.

Certainly some changes are needed. However, the proposed solutions of the FINE Discussion Principles raise a number of serious questions:

Do we want to dismantle our specialized housing industry?

Will diversified banking institutions improve the availability of housing credit at all points in the business cycle, or will they aggravate any present instability in the pattern of housing finance?

Will the termination of rate control ultimately improve the

return to small savers?

What does the end of Reg. Q imply for small borrowers?

Will the invitations to interstate branching and concentration of financial institutions lead to more competition and better services for hometown savers and borrowers?

Do the proposed incentives for low and moderate income housing promise realistic help for the problems of the housing sector?

Does the centralization of bank supervisory activities lead to

a more viable banking system?

In addressing these and other questions in the material which follows, it will

be seen that the U. S. League of Savings Associations has some fundamental

disagreements with the FINE Discussion Principles.

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DISCUSSION PRINCIPLES OVERLOOK INFLATION

One fundamental premise of the Discussion Principles suggests that

the problems encountered by financial institutions in the last decade have been due to restrictions on the powers of thrift institutions and Regulation Q ceilings on interest rates paid to depositors. This premise is a misreading of economic history, and it is hard to reconcile an attack on today s financial structure without reviewing the economic events of the last ten years.

The problems of financial institutions and housing finance have been caused not by their structure, but by unrelenting inflation and by the enormity of monetary and fiscal policy imbalances which contributed to inflation. These economic imbalances have created a hostile economic environment in which any financial institution would have a difficult time.

It is unrealistic to expect any financial system to function smoothly in, and emerge unscathed from, the economic and monetary conditions we have experienced in the United States in recent years.

A great deal of attention has been directed in recent years to the thrift institutions and particularly savings and loan associations. We have been the subject of intense probing by academic people across the country. There has been little made of the fact, however, that the problems faced by the savings and loan business are part of the same problem faced by all parts of the long-term credit market. Long-term money for corporate financing has

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frequently been not available in recent years, and when corporations have been able to sell long-term bonds they have had to pay very high rates. States and local governments have been unable to sell long-term bonds at anywhere approaching reasonable rates for a long time. This is not because money is not available from long-term lenders. The life insurance companies and the pension funds which are the primary sources of long-term credit for corporations have had a significant and steady build-up in their resources. The time and savings deposits in commercial banks, which is the primary source of credit for state and local governments on a tax exempt basis, have increased substantially in the past ten years. Instead it is inflation which has jeopardized our whole system of long-term cred it.

Long-term credit obviously dries up with double digit inflation. Interest must be very high to offset the effect of inflation and, of course, an inflationprone economy casts doubt upon the credit of any borrower 10, 15 or 30 years hence. Considering the nature of the mortgage instrument and the fact

that our institutions commit funds today

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at today's interest rates be repaid as far away as 25 or 30 years, it is remarkable that savings

to

associations have provided as much long-term credit for the housing field as we have. There are no "equity kickers", no "indexing", and no inflation hedges built into today's long-term residential real estate mortgage other business makes contracts at today's dollars so far ahead.

No

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The reason that the mortgage market has suffered less than other parts of the long-tern: credit market, of course, is the existence of the savings and loan business. Developed carefully by Acts of Congress, strengthened by insurance of deposits, the Federal Home Loan Bank Systein, and controls on savings interest rates, the savings and loan business and our present system of home finance has performed remarkably well in the past decade. It is hard to conceive of any new financial system which would function as adequately and remain viable under double digit inflation.

We believe the failure to identify inflation as the main source of the problem of financial institutions and housing finance over the past decade is a basic defect in the Discussion Principles.

If our financial system hasn't worked as well as it might have, let's put the blame where it rightfully belongs on the inflation which has disrupted the financial markets, prompted speculative borrowing and building to beat price rises, cut into the real purchasing power of American families, and contributed to a feeling of anxiety throughout our society. Inflation has weakened the attractiveness of mortgage loans as investments and has produced a roller-coaster pattern in interest rates, fast-changing cycles in savings inflows and outflows, and a "feast-and-famine" flow of credit to housing.

IMPORTANCE OF MONETARY POLICY

We have also said that underlying this problem of rampant inflation and general economic instability is the problem of volatile monetary and fiscal policy. In the area of fiscal policy, the Congress has already taken action with its new budget procedures. These procedures provide hope that we can obtain a more stable fiscal policy in the future.

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In the monetary policy area, little has been accomplished, although

the Federal Reserve has been persuaded to share with you some general targets

for monetary policy.

In our view, the wild fluctuations in monetary policy are responsible

for much of the housing problem that many seem to attribute to our diversified financial system. The existence of a specialized mortgage lending institution has not contributed to housing's instability, but has helped moderate the cycle. For this reason, we applaud the efforts of the Discussion Principles to initiate discussion of what should be done in the monetary policy area. If this Committee can find a viable solution which will generate a more stable monetary policy in the future, it will find that our diversified financial system will work extremely well once again as it did for many decades previous to the last one.

We suggest, therefore, that the FINE Discussion Principles focus on this area. Further, we hope that this Committee would not confuse this problem of volatile monetary and fiscal policy with the structural issue surrounding financial institutions.

THE RECORD OF SPECIALIZED LENDERS AND THE PROBLEMS OF HOMEBUILDERS

associations

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Let's not blame the specialized institutions the savings and loan which have become, increasingly, the major support of the mortgage market. According to the Federal Reserve Board figures, savings associations this year will have provided more than 88 percent of the funds invested by all depository institutions for home mortgages in 1975. When life insurance company figures are added, savings and loan associations will provide about 75 percent of the money used to finance American homes this