Senator PROXMIRE. The representatives of the savings and loan, or the expert regulators, the Home Loan Bank Board, they favor this brokerage fee?

Secretary REGAN. The S. & L.'s actually wanted this brokerage service and the Federal Home Loan Bank Board staff had no objection.

Senator PROXMIRE. They did support it?

Secretary REGAN. They did support it.

Senator PROXMIRE. Well, I wonder if they still would. I doubt it, from what I've heard. But anyway, let me ask one other question because I think this is really the fundamental problem we have here. The thrifts are very important to all of us, of course, and we want to do all we can to preserve them. I think they are very important institutions, certainly in all of our States. At the same time, the reason for the thrifts is to support housing, and I wonder if this legislation that is before us today wouldn't, in effect, just walk away from that special function that thrifts have performed very well over the last many years and create a situation in which home buyers and homebuilders just wouldn't have a financial institution which would provide the kind of service that thrifts have in the past at the price they have in the past with the expertise they have in the past.

SACRIFICE TAX ADVANTAGES

Secretary REGAN. Well, at the risk of being repetitious, Senator, I am convinced that they would not immediately turn away from the housing industry and get into those other powers. Look at what they would do if they were to do that. First of all, they would sacrifice many of their tax advantages. You know the tax situation of thrifts as well as I do, so I won't bother to review that but the more they get into other asset powers, the less tax advantage they would have.

Second, most of the people within the thrift industry-management and the like are primarily concerned with the housing industry. I don't think they are going to turn their backs on the industry immediately and walk away from it. At the same time, we are encouraging commercial banks to come back into the housing market which they have abandoned over the past few years. I think the combination will give as much money to the housing industry as it could possibly want, when the price of money gets to where the housing industry can use it.

Frankly what's wrong with the housing industry at this point is price, the price of money. It is too high to make profits in building houses, but as soon as we can get interest rates down, then I think the housing industry—

Senator PROXMIRE. Well, of course, you're absolutely right. The fundamental problem is the interest rates right now. But I am just afraid when that problem is gone, that we will have lost much of the great advantage to housing that savings and loans provided. I was disturbed-you are an extraordinarily articulate and intelligent man, I think one of the ablest people in the administration without any question, but you said immediately turn away-you wouldn't expect them to immediately turn away and immediately abandon the expertise they have in housing. The implication was

that they would turn away eventually but not immediately. That is not a very happy future for a housing industry.

Secretary REGAN. I will withdraw the adverb. I would put it this way-I don't think they will turn their backs on the industry. I think that the major activities of the thrift industry will still be in the housing area. Look what we're doing for them, allowing them to go into real estate. A great many of the savings and loan association people have told me that if they could take a piece of the action, this would encourage them to go into it even more. I think that since we are giving them that power in S. 1720 it will encourage them to stay in the industry. So I don't think you need to fear that, Senator.

Senator PROXMIRE. Well, I hope you're right.

Thank you, Mr. Chairman.

The CHAIRMAN. Mr. Secretary, I would just interject at this point, in response to Senator Proxmire's question, this is the Banking, Housing and Urban Affairs Committee, and so we do have great concern for housing. But what I see taking place, Mr. Chairman, and I share some of your fears of making these changes, but unless we do, I see no S. & L. industry left, literally. And I think the alternative is we have got to try some other means or there isn't going to be housing money available because the thrifts are not going to be in the business anymore.

On the other hand, I think what the Secretary said is true, that housing demand is so tremendous, there is no lack of people who want to buy houses. It is their inability to qualify for loans in order to purchase those houses. If the interest rates come down, I don't think we will be able to build houses rapidly enough. I think the industry will be there to respond if they are still healthy. If we can keep them healthy in the meantime, they are going to respond to that demand. I think we have got to proceed with some of these restructuring changes to make them competitive for the future and get those interest rates down, and then that demand for housing is going to be overwhelming, in my opinion.

Senator Schmitt?

Senator SCHMITT. Thank you, Mr. Chairman.

Mr. Secretary, it's good to be with you today and listen to you with a great deal of interest, and I hope that I'm getting educated at the same time. I've always found, as Senator Garn knows, that the Banking Committee may be the most educational committee that I sit upon, probably because I know the least about the subject. But I am concerned, Mr. Secretary, that as we attempt to level the playing field through deregulation, which I fully support, that we are building mountains on that playing field by other actions that are outside the jurisdiction of this committee for the most part.

For example, if the all savers certificate does represent not only an allocation of credit but also the use of the Tax Code to establish certain interest rates, and in another area which I have expressed my concern before this committee just recently, loan guarantees, we further allocate credit-one measure just was approved by the Congress by not vetoing it just the other day, and that is the TOSCO loan guarantee for $1.125 billion. I'm sorry I couldn't find a

way to force the Senate to vote on that. I couldn't. Nevertheless, it is a major allocation of credit and it is one of many.

CAPPING LOAN GUARANTEES

I understand that the question of loan guarantees, that the administration hopes to cap loan guarantees. Could you expand on that a little bit, to see if this one mountain may not grow any higher than it has in the past?

Secretary REGAN. Well, like you, Senator, we in the administration are concerned about the use of Government guarantees. We think that Government guarantees need to be cut back and cut back sharply, because they put certain agencies in competition, not only with Treasury but with private borrowing, for the amount of credit that is available. We think that if there is a justifiable economic reason, these agencies should be able to go ahead on their own without a Government guarantee to get the money. If there isn't any justifiable reason for the funds, then what's the sense of putting a Government guarantee behind the security. We are working with the Office of Management and Budget to see which of these guarantees we can cap, eliminate, or cut back sharply. And I think that, within a matter of weeks, you will be seeing the results of our efforts.

Senator SCHMITT. Could we expect to see the synfuels loan guarantees reevaluated in that operation?

sir.

Secretary REGAN. We are taking a very careful look at that, yes,

Senator SCHMITT. Do you recall the level of credit allocations for loan guarantees that occurred in fiscal 1981?

Secretary REGAN. It is about $48 billion net new guarantees. It's going to be about the same in 1982, unless we cap it.

Senator SCHMITT. Do you recall the level of credit allocation that has occurred through low-interest loans in fiscal 1981?

Secretary REGAN. We can get you that number for the record. [The following information was received from the Treasury Department:]

Direct loans made at below market interest rates equaled over $64 billion in fiscal 1981 and the subsidy involved was over $16 billion.

Senator SCHMITT. But it is in the $50 billion range?

Secretary REGAN. Yes, it is. There is quite a subsidy in there. Senator SCHMITT. And again, without congressional action, that presumably would continue in fiscal 1982.

Secretary REGAN. Yes, but that's another area that Treasury and OMB are working on to cut back as much as possible. It is a very sensitive area, politically, as you know.

Senator SCHMITT. There's no question. But it does, does it not impact the issues that we're talking about today, and that is, what are the capabilities of the thrift institutions to provide capital for other purposes?

Secretary REGAN. Oh, yes. Because there is only a certain pool of funds within the United States that is available for capital allocation. I recall some figures, Senator, that might be of interest to you. It used to be that the Federal Government took 16 to 20 percent of all the credit in the United States. Currently, the Feder

al Government is taking 36 percent, and if you throw in State and local governments, it is well over 40 percent, probably closer to 45 percent of every credit dollar now is going to the Federal Government or to a Federal agency. We think that is much too high and not sustainable.

Senator SCHMITT. Doesn't credit allocation of this kind have the same effect in terms of pressure on interest rates that financing the deficit has?

Secretary REGAN. Well, I'm not sure that it's the same pressure, but at least there is pressure there. There is no doubt about it that the more credit that the Federal Government takes, the less there is available to others which means the money rates stay high.

Senator SCHMITT. What's the difference between a loan guarantee of $1 billion in terms of pressure on interest rates and the Federal Government financing a $1 billion deficit.

Secretary REGAN. It would be approximately the same, the only question would be the difference in interest rates between the Federal-guaranteed loan and the actual Federal borrowing.

Senator SCHMITT. Now on the other side of that, of this problem of other things outside the jurisdiction of this committee that we do to build mountains on the playing field, the all savers certificates is an allocation of credit. It again may have been necessary for a short period of time, but wouldn't we be far better off in terms of leveling the playing field, if we just built in incentives for savings and investment across the board, rather than trying to exercise our wisdom on what is the best way to allocate credit?

Secretary REGAN. I would agree with you, Senator, I would much rather let the marketplace do it and do it through the Tax Code for everybody. That is why I was in favor of the new IRA/Keogh provisions of the Tax Code. That way you allow people a tax break for savings for their old age, for retirement, and at the same time let them choose the instrument rather than let the Government say which instrument would be better than another.

Senator SCHMITT. So if we really want to level the playing field, we should be looking at least in three directions, one is, as in S. 1720, to try to equalize the rules by which the game is played between various types of institutions. Second, to build in strong incentives across the board for savings and investment, whatever instrument may be chosen, depending upon the individual's needs and desires. And third, to try to get the Government out of the marketplace, out of borrowing from that pool of capital or causing to be borrowed from the pool of capital that the various institutions have to use for whatever places the marketplace otherwise would dictate.

Secretary REGAN. I'm not sure S. 1720 should carry all of those provisions.

Senator SCHMITT. No, I'm not saying that it can, but we can't think of S. 1720 in a vacuum. We could write a beautiful deregulation bill, say, comparable to the Telecommunciations Act, which is making the law transparent to changes in technology and changes in the marketplace. But if we don't also recognize that that could pale into insignificance, because we allocate credit through the Tax Code or we allocate credit through loan guarantees, then we have

failed. And we might as well not have gone through the effort to create the bill.

Secretary REGAN. That is correct, Senator. I think the setting for S. 1720 has to be within that type of philosophy.

Senator SCHMITT. Thank you, Mr. Secretary. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Dixon, we appreciate your patience and no one could understand it better than I. For those in this group who don't realize why I can understand it so well, Senator Dixon and Senator Dodd are the only two new Democrats in the whole class of 1980. Senator Paul Laxalt and I were the only two new Republicans in 1974. Therefore, he and I understand better than anybody else what it is to sit on the last row. The only difference, I was on the other corner. So I do sympathize with your position and appreciate your patience.

I would like to turn to you for questions now.

Senator DIXON. Thank you, Mr. Chairman.

Mr. Secretary, I join others on the committee who are pleased by your decision of the half percent increase on the passbook accounts. I don't know that I was able to ascertain from questions previously asked as to whether there is any chance that you will reassess your position on deregulating interest rates on IRA and Keogh accounts, which Senator Proxmire addressed to some extent in his questions. Secretary REGAN. I would not see any reason to revisit that issue at this time. I think we have done the right thing on the IRA and Keogh accounts. I think we should stick with our position on that.

MASSIVE MERGERS AND TAKEOVERS

Senator DIXON. Mr. Secretary, I come from a State with many hundreds of commercial banks and savings and loan association. Many are saying that S. 1703 and S. 1720 will lead to massive mergers into and takeovers by large bank holding companies. If you don't think this will happen, can you tell me why it won't? Secretary REGAN. Well, at the present time, S. 1720 only authorizes interstate and interindustry mergers for troubled institutions. It does not authorize a healthy institution's takeover on an interstate or an interindustry basis. In my opening remarks, I encouraged greater intrastate and intraindustry type of branch banking, so that institutions could get ready if interstate banking is permitted in the future.

I might elaborate a little bit on that, Senator. I've heard the same type of argument before, you're going to ruin the little man or the smaller institution. We heard the same thing on Wall Street when we said we were going to go from partnerships to corporations, that we would wipe out the small partnership. It never happened.

It was said that if we went to competitive rates, in Wall Street that a few large brokerage firms would end up with all of the available resources, there would be no room for the small brokerage firm. It hasn't happened.

The point of fact is, there are more members today on the New York Exchange than when we deregulated commissions. I heard the same thing about the airline industry, that if you deregulated the airline industry, you would wipe out the smaller ones.