believe it was you who said there ought to be a financial arrangement for housing.

(Mr. Friedman nods affirmatively.)

The CHAIRMAN. It is a very interesting point and a very important point, but I do not understand how there could be an allocation of funds or an allocation of a part of the capital that is available in the country for housing. Several of you have made statements regarding the action of the Federal Reserve Board. Over the years-I think some of you have heard me I have quarreled pretty strongly with the Federal Reserve Board because of their attitude toward housing. I have always felt that they did not have the right attitude. They do not assume it to be essential.

Well, I think it is essential and I think it ought to be given consideration because, as has been pointed out in several of your statements, when we have tight money, when credit is short, housing is critically affected. I think one of you used this expression, "hit first and hardest," and I certainly would be in favor of some kind of a policy, some kind of a program, that would recognize the need for housing.

But I wish you would discuss, even in my absence--I will read it in the record this question of what are the mechanics of making the monetary allowance or monetary allocation for housing. What can be done, and how can it be done?

I must leave now. I apologize. I thank Senator Bennett for taking over for me.

Senator BENNETT. Gentlemen, you can recognize that I come in cold, and it is going to be pretty hard to have a logical continuation of what Senator Sparkman has been talking about. I will do the best I can. He has left you with a problem and suggested that you talk among yourselves on this question of what can we do to influence the allocation of funds so that funds for mortgage lending will not be at the bottom of the list and so that in the future you will not go into the same kind of a problem that we had last year. And I would be grateful to any of you who would like to lead off on that suggestion. Mr. McDONALD. Mr. Chairman, my name is McDonald, of the National Farmers Union.

Senator BENNETT. Yes.

Mr. McDONALD. I do not have any specific comment on the word "allocation." I really do not think that would solve the problem. I think the problem of making funds available for housing lies in the Federal Reserve Board in fiscal policies up above the housing agencies.

Now, for example, in December 1965, the Federal Reserve Board increased the amount which banks could pay on certificates of deposit from 4 to 5.5 percent. This was an interest rate increase of 37.5 percent. We all know what happened. Lines formed at the savings and loan institutions and billions of dollars were taken out of savings and loan institutions and put into the bank because the people who had this money could get a little better interest rate on it.

Now, we look, as you know, Senator Bennett, with some disfavor on the policies of the Federal Reserve Board and we have suggested, as I said in my initial statement, that the Open Market Committee, which allows the Board to be dominated to a great extent by bankers, be eliminated.

So I really think we are not going to get at the root of the problem unless you do something about the Federal Reserve Board, together with initiating a fiscal policy and a cooperative policy between monetary policies and fiscal policies which has not been apparent, it seems to us, for several years.

For example, last year

Senator BENNETT. May I interrupt you? I have just been told that in 5 minutes there will be a record vote on the floor of the Senate. It means I have got to run, too, I will stay with you until the bell rings, but when the bell rings, that means I have got to go.

Mr. McDONALD. Senator, I want to give the others a chance. I just want to say last year the administration poured gasoline on the fire by continuing a 7-percent investment credit. If they had not had that, it would have slowed down, would not have had a 17-percent increase during the year for capital investment, which indirectly caused the inflation, tight money, scarcity. And then the participation certificates further increased the tight money situation so that the money was drained out of the country and landed up in New York in the New York Federal Reserve Bank to the extent of, I believe, $5 or $10 billion.

Senator BENNETT. Does anybody else want to comment?

Your name is?

Mr. CARSTENSON. Blue Carstenson, Farmers Union.

We want to thank you for at least trying to-one of the problems has been that the credit available for housing purposes has moved to other areas. And when we testified on the truth-in-lending bill, the consumer credit field has been one and it has gone there primarily because of this deceptive situation you can get higher interest rates because people really do not know what its effect is.

Senator BENNETT. Another problem has been that people just quit saving. The volume of savings went down and people went out in the market and spent this money instead of putting it into savings and loans institutions.

Mr. CARSTENSON. It also went into corporate structures where you had this is where the economy is overheated. Rather than put it in a bank they put it in a corporation.

Senator BENNETT. There is no doubt about it, there were transfers seeking the highest possible rate.

But you have the fundamental problem today that our demand for funds overall in the total economy is greater than the funds being created by the savings of the people. And as long as that exists, the competition for the inadequate savings will exist.

Did someone else want to comment before the bell rings?

Mr. FRIEDMAN. Senator Bennett, it was I who had something to say in my prepared remarks about direct Government loans in order to deal with problems of the mortgage market. Now, I have not figured out any details about how this would possibly operate, but what I was getting at was

Senator BENNETT. May I again interrupt? You are talking about direct Government mortgage lending?

Mr. FRIEDMAN. That is correct.

Senator BENNETT. Beyond the VA program?

Mr. FRIEDMAN. That is correct.

Senator BENNETT. Just to anybody who wants to come in and build a house and finds difficulty in securing a loan?

Mr. FRIEDMAN. Anyone who cannot get funds for financing a mortgage. And the reason we take this approach, or make this suggestion, is because of the nature of the existing money market. The money gets pulled away from the residential construction activity, and we think that steps have to be taken.

Now, we have not figured out the details. I do not consider myself enough of a technician in this field, but I made the proposal as something that should be studied as a means of overcoming some of the difficulties that presently exist.

Now, if I may, I would like to make one other point because Senator Sparkman did raise a question in his opening remarks about whether there should be the elimination of the ceiling on FHA and VA interest loans, and I would like to be perfectly clear that the AFL-CIO would very strongly resist such a proposal.

Senator BENNETT. Now, of course, we had a very interesting problem on the floor yesterday. There is a statutory ceiling on the amount the Government can pay as interest on its long-term debt, with the result that it has very little long-term debt. In other words, our average lengh of so-called long-term debt today is approaching 5 years, on which there is no ceiling. So when you put ceilings on, you have a tendency to dry up markets, to dry up the availability of funds. And we voted yesterday as to whether we should not take the ceiling off that the Government can pay as interest on debts longer than 5 years.

It lost. But one of these days it has got to happen or else the Government will be doing all of its borrowing in the very short-term market which is unfortunate from a debt management standpoint. If the Government were in the best possible situation, it would have a well-balanced portfolio of long-term and short-term debt. But by that 4.25 percent ceiling, its long-term debt is drying up.

And one of the devices that is used to get around this ceiling is the sale of participation certificates because they are not Treasury loans.

Well, I have got to run. Do you want me to come back? Do you want to continue the discussion, or do you feel that your statements were adequate?

Mr. FAY. Mr. Chairman, I should like to provide an answer to Senator Sparkman's question, but we can do this by a letter to the Senator rather than in the hearings.

Senator BENNETT. Right. Certainly you are all free to submit in writing any reaction you have had to the questions or the comments of each other. And we will be very happy to have that information.

It has been suggested that if you are going to discuss this matter further by letter, you might look again at page 304 of the report of May 22, which are the comments of Federal Reserve Board Governor Brimmer on the inadequacies of present mortgage facilities.

(The following material was received by the committee:)

Hon. JOHN J. SPARKMAN,

NATIONAL ASSOCIATION OF HOUSING
AND REDEVELOPMENT OFFICIALS,
Washington, D.C., August 15, 1967.

Chairman, Subcommittee on Housing and Urban Affairs,
Washington, D.C.

DEAR SENATOR SPARKMAN: When I testified before the subcommittee on June 28 in regard to the study of mortgage credit, you requested that I file for the record a statement expanding on NAHRO's recommendation to set national goals for housing as a part of national economic policy.

I am attaching a statement on housing goals, and respectfully request that it be made a part of the hearing record. We would, of course, be happy to discuss this further at any time.

Sincerely yours,

FREDERIC A. FAY,
President.

A PROPOSAL-ESTABLISHING HOUSING GOALS FOR THE UNITED STATES AS A COMPONENT OF NATIONAL ECONOMIC POLICY

INTRODUCTION

Since the initiation of federally-assisted housing programs in the 1930's, there has always been a close association-expressed in the declaration of purposes of the housing acts-between economic goals such as full employment, economic stability and economic growth and housing and community development programs. Prime objectives of the housing legislation in the 1930's were: (1) general economic stability and full employment; (2) a high level of residential construction; and (3) special housing aid for low-income families. These goals are still strong objectives of the basic housing and community development legislation as shown in the declaration of purpose of the Housing Act of 1949, as amended. However, despite the relationship of economic and housing and community development goals in the housing acts, their relationship in practice has been far from uniform. There have been wide fluctuations in housing production, reflecting the great sensitivity of housing to changes in the economic cycle. In particular, the efforts to meet the housing needs of low and moderate-income housing have suffered. The ad-hoc relationship between economic cycles and housing production was well demonstrated during 1966 when interest rates soared and housing starts declined by 20 percent. This was at a time of critical unemployment and a severe housing shortage for low and moderate-income families. The next few months are still a critical period for economic adjustment and the impact on housing production cannot yet be accurately predicted.

Now is the time for a concerted effort to mesh housing production with longterm housing goals and then with general fiscal and economic policy. This is necessary not only to avoid cut-backs in housing production, generally, but to avoid a still further hardship on low- and moderate-income families.

ACTIONS BY THE CONGRESS AND THE ADMINISTRATION

The responsibility for setting housing goals and making them an integral part of national economic policy is a joint responsibility of the Congress and the Administration.

The Congress has responsibility to set housing goals for the nation, both in terms of general housing production to meet the needs of household formation and population growth, and housing production to meet the special needs of families who cannot afford the cost of private housing production.

The administrative agencies directly responsible for setting housing and economic policy should be requested by the Congress to pointly prepare a recommendation each year which outlines the impact of economic policies on housing goals and makes recommendations for a level of general housing production, and a level of housing production for low and moderate-income families. This recommendation should be included in the Economic Report of the President to the Congress (prepared by the President's Council of Economic Advisors) and in a special report by the Secretary of the Department of Housing and Urban Development indicating to the Congress his recommendations for achieving the

level of housing production (including a special recommendation for housing production goals for low-income families) necessary to meet the goals set by the Congress.

Specific actions toward the establishment of housing as a component of national economic policy:

1. The declaration by the Congress (as an amendment to the National Housing Act) of a level for annual housing production for the next 20 years. (A generally recommended level is 2.5 million units per year, with 500,000 of these units to be made available for low and moderate-income families. Such a level is generally assumed to be necessary to meet population expansion needs plus the replacement of approximately 11 million units in the present inventory which are either dilapidated or deteriorating.)

2. The inclusion in the annual Economic Report of the President to the Congress of a report on how the goals for housing production set by the Congress were achieved during the preceding fiscal year, and the relationship of this record to other areas of the economy; plus the recommendation as to the level of housing production, including production to meet the special needs of low and moderate-income families, which can be achieved in the next fiscal year to carry out the housing goals of the Congress, in conjunction with the general economic policy of the nation.

3. A request for a Special Report to the Congress by the Secretary of Housing and Urban Development (at the same time as the Economic Report of the President) which will contain his recommendations on how the housing goals of the Congress will be implemented in the budget for the Department for the next fiscal year.

Senator BENNETT. And with that, we will recess, to meet at 2:30 this afternoon. I assume those who were due to testify have been notified. Thank you very much.

(Whereupon, at 11:20 a.m., the hearing was recessed to reconvene at 2:30 p.m. the same day.)

AFTERNOON SESSION

The subcommittee reconvened at 2:30 p.m., in room 5302, New Senate Office Building, Senator Walter F. Mondale presiding. Present: Senator Mondale and Mr. Coan.

Senator MONDALE. Would the participants please be seated around the witness table? We appreciate your participation in these hearings and recognize that you have a great deal to testify to of value to the committee, and we are asking you to keep your summaries to approximately 5 minutes, but do not intend that you be limited by that time if you feel your treatment of the subject requires you to go somewhat longer.

This is the sixth and last panel on mortgage credit to be heard by the subcommittee on housing. This afternoon we have an outstanding panel representing four of the top industries involved in building and financing homes for the American people, also two leading finance experts in the field of mortgage credit.

Each of the participants has submitted excellent papers which have been printed in the compendium published by the subcommittee. We have asked you to come before us today to review your recommendations for action by the Congress or the administration to correct the deficiencies in the existing mortgage market.

We hope that your brief remarks will comment also on observations you may care to make on recommendations by the panelists.

We have heard a great deal during the hearings about the necessity for the establishment of housing goals by the administration and the