Senator PROXMIRE. I think that is correct and I would agree it probably wouldn't go as high as 14 percent if we persist in a tight money policy, but I would say that the cutback won't be much below that 14 percent.

It may go down to 9 or 10 percent. But it is still a big increase. The main deficiency will be in housing. Here is where you will really get a cutback in the rest of the year.

Mr. WALKER. You think we will have a bigger cutback in housing than State and local government financing?

Senator PROXMIRE. Both. I think you are absolutely right to point at the great social loss in State and Government cutback. These are schools to be built and teachers to be hired and welfare institutions and houses to be built.

This is a tragic situation. But again, what is happening is the money is funneled into business expansion, a runaway boom unsustainable, something we all know we shouldn't have, and we are starving these social institutions that we know are so important.

That is why there is something wrong with our monetary policy, that we have to move it to try to make more funds available to State and local governments as well as to housing.

Mr. WALKER. I have that same great concern about State and local governments but I can't go along with the black and white picture that business is getting everything and State and local governments and housing get nothing. The figure belie that.

Senator PROXMIRE. I don't say they are getting everything and State and local housing is getting nothing. But evidence is clear that business gets more than ever before in terms of business investment in plant and equipment.

They might want a 20-percent increase. Maybe $15 billion. But they are getting an enormous amount. State and local government by your own testimony is in very serious straits and any analysis that I can see, any experience we had shows when you go to 72 percent prime rate, housing will be in serious trouble within a few months.

Mr. WALKER. I go on the basis of the figures we have. I represent that if and when we get this inflationary expectation wrung out of the econ omy, you will see very significant drops in interest rates in the short run. I don't think we ought to take our eye off of the fundamental culprit and that is inflation that has gone on much too long-for almost 4 years.

Senator PROXMIRE. I have two articles from the current issue of Newsweek which go into this in detail. The statistics I have here show the large banks between December 4 and March 12 have increased their business loans from $71 to $74.5 billion. An increase in annual rate of about 20 percent.

This is during a period of monetary stringency. I think this underlines what Newsweek pointed out when they say that many sceptics believe that big commercial banks have developed so many sophisticated techniques they can now subtly outflank whatever squeeze the Federal Reserve applies.

In truth the Nation's banks in recent weeks have proven marvelously resourceful. Banks have always been able to sell municipal bonds, et cetera, to raise cash for lending.

During the current squeeze, they liberally tap these resources but also came up with a variety of new money sources, including the

Eurodollar. Under these circumstances, while there is no question that eventually you will be able to retard the business boom and slow down inflation, but meanwhile it seems to me you are going to have other areas of the economy, farmer, small businessman, housing, and State and local government, that will suffer unduly.

Isn't there something we can do to change this situation so that more of the burden does fall in the area where we know that business engages in an unsustainable expansion?

On almost any sunny Sunday he and his wife can be found trudging through the pennant-draped model homes of any housing development. If he isn't doing that, he is roaming the streets with real-estate agents, ringing strange doorbells and shaking hands with smiling sellers. He is middle class-both in viewpoint and income and never in U.S. history have there been so many like him. He is the harassed U.S. house hunter, and if he ever finds what he wants and can afford, he can consider himself lucky.

"We feel we've been bushwhacked," moans a young Midwestern husband whose year-long house-hunting efforts have produced only frustration. Small wonder. Last week bankers pushed their prime interest rate to 7% per cent, the fourth increase in three and a half months and a move that certainly meant a continuation of tight money and the woes it produces-bigger down payments and even stiffer mortgage-interest rates. In some areas, down payments were hitting 30 per cent, with added 2 to 4 per cent service fees (sometimes called "points") amounting to $500 to $1,000 on a $25,000 mortgage. Mortgage-interest rates themselves hit a record national average of 7.39 per cent in February, bumping up against the legal usury ceilings in many states.

PRICES UP

Land prices jumped 7 per cent during the last half of 1968-an increase of more than 300 per cent since 1950. Plywood was selling for twice its price of a year ago, and increased lumber costs generally have boosted the price of a $25.000 home by $1,268 in fourteen months. Construction workers generally were receiving an average of more than $5 an hour, up 6 per cent in a year, and craftsmen such as carpenters were earning a whooping $7 in some areas. February housing starts showed an 8 per cent decline-modest enough in itself but taken by some as a sign of worse things to come by summer and early fall. Warned an official of the National Association of Home Builders: "I don't see any relief in the markets ahead."

It all bears a dismal message for the house hunter. Unless he is very rich, finding a place to live today is just about the toughest problem he can face. He must grapple with the worst national housing shortage in two decades— an unhappy phenomenon that includes not only single-family houses but apartments, co-ops and condominiums. The U.S. vacancy rate for all types of housing has, according to the Advance Mortgage Corp., dropped to a scant 2.4 per cent, with even lesser rates for such metropolitan areas as Philadelphia, Detroit, Cleveland and San Francisco. In New York City, hub of the tightest housing market in the nation, the rate is a nightmarish 1 per cent-and even lower for some types of new apartments.

NEW YORK MARKET

The result is a wild seller's market where supply and demand are totally out of equilibrium. Prices skyrocket but demand follows right along, and there appears to be no limit to what the traffic will bear. Nowhere is this truer than in the New York metropolitan area. In suburban Larchmont, N.Y., an executive accepted an offer of $65,000 on a 25-year-old Tudor house for which he paid $49,500 less than two years ago. Elapsed time between listing (at $67,500) and bid: 48 hours. In nearby Harrison, N. Y., a real-estate agent pointed to a $110,000 house the other day and said: "You'd be surprised how many people come in with cash to swing a deal that big." Manhattan, of course, is where all the pressures come to bear to an extent approaching the ridiculous. A house-hunting bride asked an agent last week if she knew of any three-bedroom apartments that could be purchased for under $60,000. "Well, I'll try, dear," the agent said. "But I'm afraid you'll probably never hear from me."

It is proportionately the same in other major metropolitan areas. Rising construction costs have driven the price of new homes up as much as $4,000 to $6,000 during the last 24 months-and there is no lack of customers. The realestate sections of major Sunday newspapers show what has been happening. Plain, four-bedroom houses, in good neighborhoods but with few frills, are routinely going for $40,000, $50,000 and $60,000. Anything remotely special about a house a pool, proximity to natural water-can drive the price to $100,000 and far beyond. In Manhattan, tacky brownstones with little to recommend them save a nice East Side address, routinely go for well over $100,000. As for rentals, New York just concluded a bitter row with landlords who agreed to limit increases to 15 per cent over two years.

THE PINCH

Clearly, the going is rough for home seekers who can't afford the fat pricesand that appears to be the majority. Many are in the predicament of Catherine and John Trumbull of Royal Oak, Mich. They have outgrown their two-bedroom bungalow, bought five years ago for $14.000, and want, as Cathy Trumbull puts it, a "four-bedroom colonial, a nice size living room, a formal dining room, a small library and fireplaces." On the plus side: their house would bring about $20,000 now, and Trumbull's salary as a chemist for Chevrolet has increased from $8,500 to $11,500. But they find that the dream home they want now sells not for $29,000, as they thought, but for $35.000 or perhaps even $41,000. By dropping out of GM's stock-savings plan and using the $6,000 or $7.000 they would clear from the sale of their present home, Trumbull figures he could swing something near his wife's dream by assuming a $25,000 mortgage and payments of $200 a month. But it would be a squeaker, especially with growing children who, as Trumbull acknowledges, can "eat you out of house and home." It has been tight all along on payments of $120. Says Trumbull: "We don't go

out very often. We haven't been to a movie in two years. We've really been sacrificing." In any case, time is running out. Cathy Trumbull has given birth to her third child, and some sort of decision must be made soon. Trumbull puts it bluntly: "We feel the walls closing in."

Similar pressures are felt by families earning more money. A Los Angeles lawyer, Irwin (Chip) Chasalow, 36, earns well over $30,000. His wife, Judy, 33, is expecting their third child. The family would like to move from their $37,500, three-bedroom home into something with more room costing $60,000. But even if they get the $47,500 they are asking for their present home, it will be rough going, perhaps impossible. First there will be the $15,000 down payment. On top of that comes $900 in mortgage "points," $50 for a salesman's special fee. $300 in tax-escrow fees, a $900 early-payoff penalty fee, a title-insurance policy fee of $125 and additional expenses of about $300. All of it means that to spend the first night in their new home, the Chasalows will have to scrape up, in cash, a whopping $17,575. Says Chasalow: "I don't have the cash." The family spends every Sunday afternoon looking for something better that they can afford, but Chasalow is pessimistic. "All I can see," he says, "is more grief."

Most house hunters can look forward to the same. They find themselves in the uncomfortable position of being hurt not only by inflation but by the cures offered by Washington. The income-tax surcharge, designed to cool the economy and slow inflation, also has the effect of making it more difficult for many taxpayers to put together a down payment.

MAN IN THE MIDDLE

Moreover, the average house hunter is left largely to fend for himself. For the genuinely poor there is at least the promise of a new Federal program under the Housing Act of 1968-although even that is becoming bogged down in indecision and uncertainty. The rich, of course, already have the luxury of choice. But for the man in the middle there is only the occasional bone-such as the one President Nixon threw last week to cut lumber prices, which account for more than a third of construction costs. He told the Pentagon to keep lumber purchases to a minimum, ordered the Agriculture and Interior departments to soften the market with timber from government lands. Even the tool that in the past helped make Everyman a homeowner-the FHA-insured mortgage--has become almost snooty. In December 1967, an income of from $10,600 to $12,700 was needed to qualify for an FHA guaranteed loan on a $25,000 home. Now it takes an income of $11,150 to $13,400. And as always, there is nothing that says a bank must go along even if the requirements are met.

But the biggest problem remains the housing shortage. It persists in the face of production that has increased generally during the last year, despite recent weak signs. Currently in the U.S. there are 65 million dwelling units. But that will have to be doubled in the next 25 years. Says Joshua Muss, a Chicago builder: "Nationwide our capacity to sell exceds our ability to produce. The only solution I see is the Pill.”

Developers are working overtime to meet the demand. To the dismay of some planners, they have stacked people and building materials together indiscriminately and produced "slurbs"-a favorite term of former Housing Secretary Rober Weaver. But some builders and businessmen are more farsighted. In an effort to cut costs, some have turned to modular-construction techniques and assembly-line methods. Yet costs have not been reduced by as much as some had hoped. Techbuilt Homes, Inc., of Cambridge, Mass., pioneered “pre-engineered" houses, but prices for its homes in New England areas can hit $75,000. Currently the company is considering a new approach-cheap town houses for suburbia. Says Techbuilt president Franklin W. Hobbs, 44: "These are the types of homes that will help us get ready for the zoning changes that will have to come about because of the scarcity of land."

CHRYSLER'S ANSWER

Others are applying sheer economic muscle to the task. Chysler Corp. has hired famed architect Minoru Yamasaki to oversee development of 1,700 acres of company land near Troy, Mich. The expected result: a self-contained community, with commercial, retail and research facilities, and some 4,000 housing units.

In North Carolina, Grover Cleveland Robbins brings a touch of evangelism to the job. His Carolinas Carribean Corp. is planning a 2,500-unit development on 3,120 acres near Charlotte. To skeptics who noted that Robbins was not building on the prestigious side of town, Robbins snapped: "We'll create it." He spent

$3.5 million for the land alone. But the eventual price could hit $8 million to $10 million-with all the planned golf courses, swimming pools, clubhouses-and open areas for "just waking and meditating." Says Robbins: "There's a big sickness in the suburbs. And it's boredom.”

Still, the critics moan that progress is only patchwork. The over-all problem, says American Builder magazine, is not the lack of money or the lack of credit or high prices or inflation. What's wrong, it says, is that nobody gives a damn about housing. It simply doesn't rank as a top national priority, as do the space program and the war in Vietnam. The magazine recommends a radical fourteenpoint relief program-including a national land-use policy, removal of zoning powers from suburbs to permit more building, elimination of all local building codes and abolition of all local property taxes in favor of a "site-value" tax to discourage feverish land speculation. It also recommends organization of big multibuilder companies to spread construction risks and take on bigger projects. Whether any of it becomes a reality remains anybody's guess. Meanwhile, the U.S. house hunter can expect only rough going, and lots of hectic Sunday afternoons.

[From Newsweek, Mar. 31, 1969]

THE MORE IT COSTS, THE MORE YOU WANT

In real life, immutable economic laws of supply and demand sometimes cease to function. This seemed to be the case last week when the nation's banks boosted the "prime rate"-the interest they charge on loans to their best customersfrom 7 per cent to a postwar high of 71⁄2 per cent. Every fundamental rule of economics holds that the higher the price of a commodity-and interest is the price one pays for credit-the smaller will be the demand. Yet boosts in bank lending rates over the past 24 months have failed to restrict business demand for borrowing (chart). And bankers this time even conceded that they were raising rates mainly to cover the cost of their own mounting interest payments on deposits. The new rate, they said, might not do much to discourage business borrowing. Confirming this view, spokesmen for several major companies promptly said that the new rates would have "no effect on us whatsoever."

What's going on here?

The answer, in one word, is inflation. Price rises reached a rate of 4 per cent annually by the end of last year and have shown no signs of abating in 1969. Indeed, last week's ration of economic news was blatantly inflationary. New orders for durable goods in February soared by $1 billion to a new record of $30.7 billion. And personal income, after slowing momentarily in January, leaped by $5.3 billion to an adjusted annual rate of $721.4 billion, another record.

A JOKE

Against this background, businessmen simply do not yet believe that the Nixon Administration's inflation-fighting efforts to control the Federal budget or the Federal Reserve Board's efforts to limit credit are going to curtail future price boosts. Thus, companies are willing to pay practically any price to borrow money and buy new equipment, plants and raw materials. They figure that these will cost much more in the future anyway. And they will be able to pay for them later in inflation-debased dollars when their loans fall due. Thus the cost of money has become, in the words of New York economist Pierre Rinfret, "a joke."

Rinfret, economist Eliot Janeway and a handful of others have gone so far as to suggest that corporations could keep on borrowing until the price of money hits 15 per cent or more. Underlying this lurid prospect are a variety of suppositions. One is that government fiscal policy, which may now deliver no better than a balanced Federal budget in the year ending June 30 and a modest $3.4 billion surplus in the following year, is not going to be restrictive enough to help dampen burgeoning business and consumer spending. Perhaps even more important, many skeptics believe that big commercial banks have developed so many sophisticated techniques that they can now substantially outflank whatever squeeze the Fed does apply.

In truth, the nation's banks in recent weeks have proved marvelously resourceful. Banks have always been able to sell municipal bonds and U.S. government securities from their portfolios to raise cash for lending. And during the current squeeze, they have liberally tapped their reservoirs. But they have also come up with a variety of new money sources.

Several big banks, including Morgan Guaranty, the nation's fifth largest, have begun raising money by selling "participations" in their loan portfolios to smaller