the Federal subsidy will be so irresistable to local officials that it will lead to a drying up of the tax-exempt bond market, to Federal control over municipal finance, and to federally imposed restrictions on the volume or purpose of municipal borowing.

The Federal Financing Bank itself would have no authority to subsidize municipal obligations, and it would be authorized to purchase only those municipal obligations which are issued under those few programs which are directly subsidized by other Federal agencies. To the extent that a decision is made to finance those particular programs through the Federal Financing Bank there could be significant savings to government at all levels. Such financing would not involve the Federal Government in any municipal borrowing or project it was not already involved in.

If the Congress should determine at some future date that direct Federal subsidies or guarantees should be made available for all of the bonds or notes of all 50 States, or just for municipalities, or just for the weaker borrowers, or just for general obligations rather than revenue bonds, or just for certain essential public facilities, then, in that legislation, decisions must be made with respect to the degree of Federal control, the degree of subsidy, and the method of financing. The Federal Financing Bank Act does not prejudge any of those issues.

Finally, Mr. Chairman, you have requested the views of the Treasury Department on S. 3215, the Municipal Capital Market Expansion Act.

That bill would provide for a 33% percent Federal interest rate subsidy for the apparent purpose of encouraging States and local public bodies to issue taxable obligations.

Yet the bill does not contain a provision making such obligations taxable, and the effect of the bill would be to provide direct subsidies on tax-exempt bonds.

There are also some technical problems with the bill, but we are not prepared at this point to make recommendations as to the bill's substantive provisions and we recommend against action on the bill at this time.

Somewhat similar bills were introduced in both the Senate and the House recently. Some of the bills provide for a 50-percent subsidy on taxable municipal bonds, and others provide for a subsidy of 25 to 40 percent to be determined by the Secretary of the Treasury. We believe that these proposals deserve consideration, but we must face the fact that they raise complex and difficult issues of the role of the Federal Government in relation to State and local authorities.

They must be studied in the light of revenue sharing and other proposed legislation and with due recognition of the importance of financial independence for State and local governments.

We recommend against this bill at this time, as I indicated, Mr. Chairman. The issues raised by S. 3215, however, are not raised by the Environmental Financing Act and the Federal Financing Bank Act, which are designed merely to facilitate the financing of programs already authorized by the Congress and to permit greater order and efficiency in the management of the Government's finances.

I strongly urge your approval of those two bills.

Mr. Chairman, that concludes my prepared statement. I would be happy to try to answer any questions regarding this legislation.

Senator PACKWOOD. Mr. Secretary, I have some questions from a number of Members. If you can answer them orally, fine. If not, if you can give us answers in writing, I think that will satisfy them." Would you review the method used now by the Treasury to coordinate Federal borrowing?

Mr. VOLCKER. This depends on the particular kind of borrowing, Mr. Chairman.

In a considerable number of cases, there is a standard provision of law which says an agency must come to us before it enters into the securities market for approval of the terms and conditions of its financing.

In other cases, our role formally is simply limited to a requirement of consultation.

Now, as you can imagine, with this variety of legal prescriptions, the practice varies to some degree agency by agency. In general, I think it is fair to say our relationships have been close with most agencies, certainly most important borrowers.

We informally or formally consult with them. We perform a kind of function that is often cited as a traffic cop function where we will work with the various agencies so they do not unduly congest one portion of the market or another at a particular time.

The point is that there is now so many of these agencies and so many borrowings, the provisions of law differ enough so that the room for conflict and difficulty increases.

As you can imagine, Mr. Chairman, each agency thinks its program is the most important. It doesn't want to give way to any other program.

But that other program, of course, thinks that it is equally or more important. So, we do get into a certain amount of conflict and contention at times.

Senator PACKWOOD. In essence, you have, in some cases, just a perfunctory administrative authority over some of the agencies and, in other cases, you have discretionary authority as to the method or whether they will be able to sell their bonds?

Mr. VOLCKER. That is right.

In all cases, the Treasury function is not to influence the program objectives. We are trying to promote efficient and coordinated financing in everyone's interest.

But we don't conceive of our job, indeed it is not our job, to say, this is a good program or a bad program. That is the Congress' job in setting up the program.

Senator PACKWOOD. Could you provide, for the record, the different administrative regulations under which you are participating in these different financing programs, so we might have it in one place? Mr. VOLCKER. I could, indeed.

(The information follows:)

The following table shows the nature of and the specific statutory bases for Treasury control over major Federal and federally assisted borrowings in the private market. As indicated in the table, the degree of Treasury control varies considerably by agency and by type of borrowing activity. Under present arrangements those agencies consulting with the Treasury, either by law or practice, generally advise the Treasury well in advance of their proposed borrowings. There are now no uniform statutory or administrative requirements for

the submission of detailed financing plans by Federal agencies as would be provided for by section 7(c) of the Federal Financing Bank Act.

EXECUTIVE CONTROL OVER MAJOR FEDERAL AND FEDERALLY ASSISTED BORROWINGS IN THE PRIVATE MARKET

EXECUTIVE CONTROL OVER MAJOR FEDERAL AND FEDERALLY ASSISTED BORROWINGS IN THE PRIVATE MARKET

Type of borrowing

C. Guaranteed securities sold (asset sales) by
Farmers Home Administration, HEW,
HUD (except GNMA), VA, Export-Im-
port Bank, and SBA.

D. Other securities guaranteed by Govern-
ment agencies: GNMA mortgage backed
bonds, new community debentures,
public housing notes and bonds, urban
renewal notes, merchant marine bonds,
asset sales by GNMA, and other agencies
not included in C above.

E. Other obligations guaranteed by Government agencies but generally originated and held by private lending institutions rather than sold in securities market. These are largely guarantees by the Federal Housing Administration, VA, HEW, Eximbank, and SBA.

1 The Secretary of Commerce and the Secretary of the Treasury have agreed to consult on a continuing basis concerning the timing, terms, and other financial arrangements of offerings of guaranteed merchant marine bonds.

Source: Office of Debt Analysis, Office of the Secretary of the Treasury (revised May 3, 1972).

Senator PACKWOOD. If the Federal Financing Bank were to be approved, what percentage of agency offerings do you think would be handled by that bank?

Mr. VOLCKER. Mr. Chairman, over a period of time it would be handling all or at least the bulk of those offerings which are now made in the central securities markets, as opposed to those securities which by their nature benefit from participation of dispersed lenders. Let me make a distinction in practical terms. The FHA mortgage program, which is a big program, is conducted through individual banks and agents dispersed all over the country.

It is integral to that program that it be administered in that way. That program would continue unaffected by the Federal Financing Bank, and it is a big program. It is $10 billion to $15 billion a year. You take, on the other hand, the sale of mortgages by the Farmers Home Administration, done in the form of a packaged sale of mortgages in the central securities markets at a high rate. That is a type of security par excellence that we would pick up.

There are about $2 billion of those a year. There are a number of public housing authority bonds sold in the central securities markets.

I would guess that in an initial phase we would probably pick up $15 billion of securities over a 2-year period, say, which is only a fraction of the total but it is the portion that goes into the central securities markets. This amount tends to be increasing and tends to be increasing fairly rapidly.

You could make a projection expanding from there on out, I think, Mr. Chairman.

Senator PACKWOOD. Under section 7(a) (2), the Secretary of the Treasury does not have authority to place any limitation on the total amount of obligations guaranteed by any Federal agency.

Isn't it possible, however, that obligations of a particular agency

78-443 O 72-2

might be given a low priority so that they would be denied access to the market at the time that money is needed by the agency?

Mr. VOLCKER. No. I don't-You were referring to which section? Senator PACKWOOD. 7(a) (2).

Mr. VOLCKER. The intent of that section is to provide, unlike the existing situation that I described earlier, standard authority for being traffic cop in a sense over all the agencies, to put them all on a parallel footing. But in the wording of that section, we have tried quite carefully to make clear that this is a financial function and not a program function.

It specifically indicates, for instance, in the section in paragraph (d), Mr. Chairman, the second sentence there, we are prohibited from placing any limitation on the total amount of obligations guaranteed by any Federal agency or in any specific guarantee program or to withhold approval of the issuance sale or guarantee of obligations by any Federal agency on the basis of any consideration other than those relating to financing, and those considerations are listed earlier in the section.

So, there is an attempt here to focus on economical and efficient financing, period. That is the entire focus of this paragraph.

Senator PACKWOOD. Then let's make sure we have it in the record so that we understand clearly.

You are not saying to a particular agency: "We are sorry, the financing market is such this month, this year, we do not think we can market your bonds." But if by chance you have a glut on the market today, or this week, you would have the authority to hold them over for a week and try to market them under more favorable conditions?

Mr. VOLCKER. That would be a typical case.

We would have no right to say to an agency we think you are spending too much money for rural electrification or farm mortgages or urban mortgages or water pollution, whatever it is. That is their business.

They come to us and tell us how much they have to borrow. We would have the right to say, "Look, I understand you want to borrow all this money in the market this week or this month, but so do other agencies, and you are going to have to borrow on short term this month and hold over those other borrowings until next month.”

This would all be substantially eased in any event by the Federal Financing Bank itself.

This section to which you refer provides general authority to determine whether or not the security goes through the Federal Financing Bank. We would anticipate, of course, that the securities would go through the Federal Financing Bank in most instances.

This will be a more efficient borrowing unit and will be able to handle these competing needs more effectively than if they are going through the market individually.

Senator PACKWOOD. Mr. Secretary, would you favor putting any kind of limitation in the bill as to how long you could hold up the sale of bonds for a certain agency?

Mr. VOLCKER. No, sir; I would not.
Senator PACKWOOD. You would not?