participate closely in some of the earlier portions of this coordinating process.

Now it is not necessary for us, we feel, to operate that closely with the regulatory agencies, because they are doing it themselves.

In the whole area, Mr. Chairman, of what sort of economic policies we are going to follow in the United States-how heavily are we going to relay on tax policy or monetary policy-I believe that the cooperation of the Federal Reserve Board in the policymaking process has improved beyond anything that I have ever seen in my years in the Treasury. They consult with us. They meet with the President. You probably noticed they met with the President only last week. The Chairman of the Federal Reserve Board, the Secretary of the Treasury, the Chairman of the Council of Economic Advisers and the Director of the Bureau of the Budget met with the President last week on the whole gamut of economic and financial problems. The CHAIRMAN. Including mortgage credit?

Mr. BARR. Including mortgage credit, very specifically.
The CHAIRMAN. That is the thing I am trying to pinpoint.

Mr. BARR. Very specifically. But it boils down to this, Mr. Chairman. As Mr. Maisel said, we have to coordinate these policies very closely and the Federal Reserve is extremely interested in what we are doing on the tax front, because if they have to move, as we learned last year, with the degree of restraint that they exercised last year, the people that are hurt are going to be those dependent on the mortgage markets. Yet, we have devised nothing that will completely insulate those markets.

Mr. MAISEL. But if I may add further to that, I agree with everything the Secretary said. In addition, though, specifically in the mortgage field, there is a special intragovernment committee on housing and mortgage finance. It met at least every 2 months and much more frequently during some of the critical periods last year. It deals specifically with the housing and mortgage system. It attempts to measure the prospects and tries to see what can be done about them. I don't believe a committee of this type met to this same extent in the past nor did it have the same type of discussions. At least I went back in the records of the Board and didn't find any records of such meetings. If you now go back over this past 18 months you will find a great deal more coordination specifically in the area of mortgage and housing policy. The objective of the committee has been to make sure that we got as close to the national housing goals as we could through procedures available in the financial sphere.

Mr. SCHWARTZ. Anything I would say would be repetitious. We have participated, as Mr. Maisel said, in an increasing number of discussions and the discussions have been very favorable, and I think everybody understands the problem. But I am not sure that any of us have any real quick solutions.

Mr. BARR. Mr. Chairman, I would like to comment on the legislation that this committee and the Congress passed last year, which gave the Federal Reserve Board, the FDIC, and the Home Loan Bank Board added powers to set ceilings on time and savings rates. I don't think the Congress has ever passed such a spectacularly successful law, because roughly 60 days after the legislation was passed--it was

implemented almost immediately-this whole congestion in the money market started to unravel.

We had taken some action, too. We had suspended the investment. credit and taken the Government agencies out of the market. But that legislation was spectacularly successful because the agencies did get together; they implemented the legislation at once, and they implemented it, as the record shows, quite successfully.

The CHAIRMAN. That was about the time we passed the FNMA bill, too?

Mr. BARR. Yes. All of these things came together at the same time, and I must say on the record at least we look very good.

The CHAIRMAN. I hope we can keep it looking good for this year. Things were going fine and then recently rumors started to flow and now we hear some of the doubters tell us how bad it is going to be the latter part of 1967. I hope at least we will be forewarned. Forewarned is forearmed.

Mr. BARR. We are on notice, Mr. Chairman.

The CHAIRMAN. Now may I ask the three of you another question. I could ask you a great many, but we have a time limitation. There are suggestions pending before us for the expansion and change in some respects of the FNMA. The proposal has been made that it issue longterm obligations with features which would make such obligations competitive with long-term Government securities, with prime corporate securities. I wonder what you think of these.

Or, if you are familiar with the proposals with reference to change in FNMA's functions, you might discuss that, too.

Mr. BARR. Mr. Chairman, this is a bit of a technical issue. Mr. Maisel is more of a technical expert in this area than I. Both Mr. Schwartz and Mr. Maisel are. I would refer you to them, if I may.

The CHAIRMAN. All right.

Mr. MAISEL. I feel there are very important changes that could be made in FNMA, or at least some that look good on the surface. I think we ought to try to experiment with some of these ideas. One specific idea is that FNMA add trading operations in mortgages, as opposed to the present operations which are primarily those of furnishing extra funds.

Another very important idea is that of FNMA issuing long-term participations in its secondary market portfolio.

A third idea that I have been interested in is to have either FNMA or FHA make mortgages a more salable item through using mortgage bonds. We are doing a fair amount of work on that idea now. We want to know what it would take to make such bonds sell. How many points would it cost for marketing? Is there a market for such bonds or not? Over the long run these are very important steps.

Mr. Schwartz said that from their point of view they were not certain that there would be much additional funds available for pension funds, small investors, or similar savers.

I have the opposite feeling. If in normal times the economy runs with a fairly balanced mix between monetary and fiscal policy, then these other markets are important. They should furnish more money for the mortgage market.

As I see last year's problem, it was that the investment money that had been attracted in previous years was all put in short-term deposits.

When the market tightened, that investment money flowed out. I would hope that by improving the type of instruments that FNMA offers, or through FHA insurance of bonds-we have also suggested long-term bonds for the FHLBB, and certificates for S & L's that long-term investment money could be locked up, so we won't have the same problem in the future.

In other words, as I see last year's problems, is wasn't that the normal flow into thrift institutions stopped as much as difficulties caused by a tremendous outflow of long-term money that had been attracted in the previous 2 or 3 years. Last year's money deficit in the mortgage market was as much through the loss of money that had previously been attracted as through failure to get a normal share of last year's savings flow.

I think that most of these proposals, if they work out, ought to help this situation.

The CHAIRMAN. May I ask you to expand on that suggestion, give us more details of your suggestion that FNMA should become more of a trader?

Mr. MAISEL. Well actually, one model we have looked at is based on the way the Government bond market works. As you know, FNMA both in its special assistance and secondary market operations tends to price somewhat off the market. As a result at one time there is a tremendous flow of mortgages into FNMA, and then at another time there is a flow out of FNMA. If the inflows of mortgages get too large for their available amount of money, they try to restrict them primarily by administrative regulations. They set up regulations saying that a mortgage can't be held for more than 2 months to be acceptable. or they limit the size of the mortgage that is turned in to $15,000, as they did last year.

The present FNMA operation is primarily an off-market operation, which when the flow becomes too great at the quoted price, is handled administratively.

What we have suggested is that they ought to, at least, try to let the market adjust some of these flows. The picture we have of a trading desk is similar to that of a Government bond dealer. One section of FNMA would be told, "All right, you have $50 million, you can't go beyond that. If this week you buy $5 million of mortgages, then you will have to change your price, so that next week you can cut down on the number of mortgages you buy. The following week you might have to change your price again in order to sell some from your inventory." The Government bond market is an excellent example of such pricing. The Government bond dealers change their price hour by hour or day by day in order to make sure that their inventories don't build up too high.

Another suggestion I have made has been that when FNMA is issuing commitments, as under the special assistance program or other programs, that they try an auction like that we have for Treasury bills. Let the different builders come in and bid for the mortgage commitments from FNMA. If this were done, FNMA would know what the real market price is.

The importance of an auction is that under the present administrative rules, if Alabama needs mortgage money more than New England, there is no real way for their making that known to FNMA.

But if you have an auction, the people who need the money most can offer to pay the most for it. As a result, the money would flow where it is needed most.

These are two technical ways we see that might improve these operations.

The CHAIRMAN. Any comment, Mr. Schwartz?

Mr. SCHWARTZ. Yes. I don't find myself as much in agreement with Mr. Maisel on this score as I have on some other issues. Perhaps I will be overstating my position, Mr. Chairman, but only in the interest of clarity, I hope you will understand.

I am not convinced entirely that rejiggling the market mechanisms or rejiggling the panoply of securities, with one possible exception, necessarily will be helpful. There are two difficulties. I would like to mention the German experience first.

In the German mortgage market, the German mortgage banks are are major factor, though they are not nearly as great a factor as the savings and loan associations in this country in supplying mortgage credit. They issue long-term securities. Their markup between what they issue their securities at and the price they charge on mortgages is sufficiently wide so that they can compete rather strongly in the capital market. Yet last year, in a very tight mortgage market, they suffered a reduction of 31 percent in the funds they could raise.

Now, the other point I think I would like to make is that if what you are saying is you have to have an instrument in a tight money market that is as competitive as corporate bonds can be, with a great variety of features, I don't think that the mortgage agencies, whether private or public, can stand the gaff, or if they have to pass the price along that the borrower can stand the gaff, that is involved in meeting the kind of competition corporate bonds can exert.

I will agree over normal periods perhaps broadening the panoply of instruments would attract an unspecified amount of additional money into the mortgage market. I am not prepared to say that this would alleviate the type of situation which concerns us most, namely one in which credit is really very tight.

Mr. BARR. Mr. Chairman, without being an expert in this particular area, let me add a comment about one group of credit agencies that the Federal Government sponsored-the Federal land banks, the Federal Intermediate Credit Banks, and the Bank for Cooperatives. Last year they got the Congress to remove the 6 percent ceiling they had on their borrowings, and they fought in the money markets and paid the rates they had to pay. As a result, last year the best indication that we had was that there was no real shortage of credit in the agricultural sector of this economy. The farmers got the money they needed. They had to pay a lot for it, but at least it was there at a price.

The thing that concerned me most last last year about the housing market was that the money was not there at any price. Somehow, for structural reasons, the money was not there at any price; you just couldn't get it.

I am not precisely sure of the answer, but I can give you an example. The Federal Government, starting back in 1917, created these three special farm banks to fill a gap that might develop. Last year they functioned, and functioned beautifully. They had to get a ceiling removed to get in and compete, but they did an outstanding job last

year of providing credit to the farming sector of this country. The farmers were not shut off from the credit markets.

I would be inclined on the basis of that to be a little more in favor of Mr. Maisel's position and say, let them get in there a little closer to the markets and see what they can get done. At least some money will be there at some price.

The CHAIRMAN. I think that sounds like a very good suggestion to

me.

Let me ask this, I believe all of you, and in fact everybody who has written papers on this has discussed the proposition of higher interest rates. I do not believe, though, that anyone has suggested that we change the law in that respect. You are not recommending that we set the interest rates on FHA and VA mortgages at more than 6 percent, are you?

Mr. BARR. The Treasury is not, Mr. Chairman.

I would defer comment on this rather thorny issue and remind you that last year, at least in the farming sector of the economy, they didn't have any hesitation. They broke through the 6-percent rate and competed, and they did get the money.

I am not prepared to make a statement in this area. As I say, I don't claim to be a technical expert and perhaps one of the other gentlemen can speak to it. I am not avoiding the issue; I just don't know enough about it.

The CHAIRMAN. May I suggest the home buyers who were able to buy homes, most of them broke through that ceiling, too, in the form of discounts?

Mr. BARR. That is correct and one thing that disturbs me is that I noticed there seemed to be a more rapid increase in the rate on FHA and VA mortgages than on the conventional mortgages.

In other words, I can see some statistical evidence to indicate that that ceiling, instead of protecting the home buyer, was actually penalizing him.

Mr. MAISEL. Mr. Chairman, I would say this, I would hope a 6-percent ceiling would be adequate, but the real question is how much demand the Federal Government is going to put on the credit markets. If the Federal Government runs a very large deficit in the last half of the next fiscal year, and that deficit has to be financed, then there just isn't going to be as much money for the mortgage market. The 6percent ceiling might be too low.

I personally believe that we ought to be able to live with an interest rate that is well below the 6-percent ceiling. I also think that the concept of a ceiling is proper, but the ceiling ought to be more flexible.

In other words, an optimum ceiling probably is one where you have a two or three point discount. Such a small discount is very useful in order to help money flow around the country. Small discounts also save money for home buyers. But when you get to a seven or eight point discount, then everybody is likely to lose, because there are lenders who feel they don't want to go into a market at that discount.

It is important that we retain the ceiling concept, but it should be flexible so that the agencies involved can set the ceiling so as to avoid the very large discounts we have had recently.

The CHAIRMAN. May I say that I believe it is fair to say that the testimony by the various housing officials this morning was to that same effect, that the one, two, three discount points did lend a certain amount