procedures by which this automaticity in coordinating the relationship may be improved and I shall offer it again and include also annual and quarterly monetary reports which are being received by the Joint Economic Committee from the Federal Reserve Board.

That can be formalized through an amendment to the Employment Act of 1946. I am the ranking member of the Joint Economic Committee and I have heard a great deal of testimony on the President's report and observing with the greatest interest and participation the economic scene.

I felt that I would like to lay these recommendations before this committee on which I served with such pride and pleasure while it was considering this very, very serious question.

I think what is bothering me, because I want this administration to be successful, is whether once you start these things in motion, which we have started, trying to make up for the fact that we tried to have guns and butter and you can't, and we tried to fight a war without controls, without special taxes or anything, which is the concomitant of war because the war was so unpopular, that now we would slam all the brakes on so hard you get a recession.

I deeply believe that this is worse than the trouble we are trying to surmount, at least in the eyes of the people. I think the people are right. Therefore, some of the measures need to be ameliorated. It is just as blunt as that.

I made a few recommendations. I am sure the committee can think of more. Beyond everything else, the committee must assert itself, in my judgment, to ameliorate the decisiveness with which these measures are being pressed, because I am deeply concerned, genuinely troubled, that unless they are ameliorated they will not be stoppable until natural forces stop them, and that is too high a price to pay, to wit, a recession, and perhaps even words.

Let's remember, gentlemen, that constantly overhanging the world is the sword of Damocles of monetary crisis. That is what touched off the 1932 depression and it could happen again.

In my judgment Britain is in very bad shape in terms of endeavoring to sustain a world currency like the pound. The French are in very grave difficulties. Our balance of payments is in very grave difficulty.

And the actions of the 10 taken over weekends is not correcting the basic inability of this system to carry the enormous superstruc ture of over $200 billion in world transactions with a base of about $44 billion in gold from all sources.

Now, this is something we must remember in evaluating in what danger we are because of trying to press the domestic fight on inflation too strong and too hard. I suggested a few things that can be done to ameliorate that and I am sure the committee will develop others but I urge you very strongly to move in that direction. Thank

you.

The CHAIRMAN. Thank you very much. A very interesting state

ment.

Any questions?

Senator PROXMIRE. I would like to say to Senator Javits that 1 certainly welcome your appearance here, Senator. I think that you are as ingenious and as thoughtful and constructive a Member as we

have in the U.S. Senate and this is your field. You have been such a marvelous asset to us on the Joint Economic Committee and you served on this committee for many years.

I think your proposals are most helpful. I would like to ask one question.

We passed last year the 1968 Housing Act which as you know provided for home ownership and for an opportunity for people with very low incomes to buy their homes.

Sections 235 and 236 provided particularly for interest rate subsidy down to effective 1 percent. One of the difficulties in this credit crunch is that anybody who earns less than $10,000 a year, according to the information I have, confirmed by Mr. Martin yesterday, can forget about buying a home unless he gets help of this kind.

Would you include as a helpful amelioration of the impact of high interest rates funding for this program to adequately provide at least some suitable increase close to our goals in low- and moderate-income housing?

Senator JAVITS. My answer is definitely yes with this caveat, and I am using a lawyer's word but understand what I mean: I don't remember the legislation well enough to know whether there is anything mandatory about the figure or whether it is an authorization so that you don't go down to the 1-percent figure unless it is really necessary in given cases. But assuming an area of administrative discretion. for negotiation and classes of borrower, et cetera, I would say definitely yes, and it would have great effect.

Senator PROXMIRE. Certainly that area is in there. It can go down to 1 percent, 3, 5, whatever.

Senator JAVITS. If not they can condition it in the appropriation. I served on the Appropriations

Senator PROXMIRE. Senator Sparkman wrote that bill.

Senator JAVITS. We are well aware of that technique. That would be the only precaution I would put in. This interest rate subsidy business is a very, very important technique for us. It may be the answer to the opposition to a capital budget in the Federal Establishment. Because it is the way in which you can utilize the credit machinery of the country and avoid major or budgetary impact. I deeply feel it should be implemented.

As a matter of fact, I testified this morning to its utilization in respect of hospital modernization over on the House side which is so vital. I definitely feel it too could be a very materially helpful factor, especially as there is no real shortage in terms of labor or materials. I mean you are dealing really with a completely manmade ceiling, to wit, the credit ceiling which you are bumping your head against. So I agree with you and I hope very much that will be done.

The CHAIRMAN. I disclaim the honor that my friend has bestowed on me that I wrote that act. This whole committee wrote that act and it was a united committee action all the way through.

But there is a very specific formula in the act so that the interest subsidy is definitely tied to the ability of the family to pay.

Senator JAVITS. I think that is the way it ought to be.

The CHIARMAN. Anything else? Thank you very much. We appreciate it.

Our next witness is Dr. Preston Martin.

The CHAIRMAN. Mr. Martin, we are happy to have you with us. We have your prepared statement. As you know, it will be printed in full in the record, just as it is given to us. You may present it as you see fit.

STATEMENT OF PRESTON MARTIN, CHAIRMAN, FEDERAL HOME LOAN BANK BOARD, ACCOMPANIED BY CLARK FAUVER, DIRECTOR, OFFICE OF FEDERAL HOME LOAN BANK OPERATIONS

Mr. MARTIN. Thank you very much, Mr. Chairman. I appreicate the opportunity to appear before this committee.

I have with me the Director of the Office of Federal Home Loan Bank Operations, Mr. Clark Fauver, who is sitting on my left.

I would like to summarize my statement and allude to two exhibits which have been prepared on the subject before this committee.

Let me begin by saying that the Federal Home Loan Bank Board fully recognizes the vital need for curbing the inflationary pressure and inflationary psychology now rampant in our economy.

Nevertheless, as Chairman of a Government agency given the responsibility for promoting sound and economic and continuing home financing, I feel it is appropriate to voice my concern as to certain impacts of monetary policies on mortgage markets.

Here, sir, I refer not only to the direct impact of high interest rates caused by restrictive credit policy in a period of high and rising demand, but also to the indirect impact through the effect of such rates on the overall availability of mortgage funds.

By direct impact, I refer here to the increasing difficulty of a marginal borrower to qualify for his loan where the usual ratios of income-family income or individual income-are applied and compared to housing costs, including interest costs.

As the committee can see from the green line on the initial exhibit, a 75-basis-point increase in conventional mortgage rates has occurred over the past 12 months. This increase raises the monthly payment nearly 50 cents per month per $1,000 on a 25-year mortgage. This is about $10 a month on a $20,000 loan and it does, in fact, disqualify certain borrowers whose incomes do not increase at the time these monthly payments increase.

The curtailed availability of mortgage funds tends to have a greater impact than the high interest rates as such, and the availability impact. works out in a number of ways.

One route is that the diversified lender shifts his commitment of funds from mortgages to other forms of investment; diversified lenders are institutions such as commercial banks and life insurance companies.

Another route is disintermediation, in which the saver, corporate or individual, diverts his investments and new funds directly into marketable securities, as Secretary Walker has indicated.

Now, back to the first chart again, sir. We show yields on 3-month Treasury bills, marketable securities with which we are all familiar, on the lower line on that chart. The second line is yields on AAA new corporates. There is a conventional mortgage yield depicted by the top line.

As it can be seen there, developments since late 1968 have narrowed the spreads between conventional mortgages, new AAA corporates, and

the 91-day Treasury bill, although there is an increase in the conventional mortgage rate which has occurred in the last 2 or 3 months. Now since a substantial portion of the funds diverted from financial intermediaries by the yields on money market instruments flow through the specialized intermediaries, particularly the savings and loan associations, the supply of mortgage funds is reduced on almost a dollar-for-dollar basis. This is because savings and loan associations, as is well known, invest essentially all their funds in mortgage markets. Thus far, in this current period of restrictive monetary policy, I would agree with Secretary Walker that housing starts and home mortgage lending have held up reasonably well. The second chart illustrates this in terms of loans made by savings and loan associations. The data are monthly, adjusted for seasonal variation.

Money loans made from the end of the recovery period in August and September 1967 through our February figures for 1969-the variation has not been marked-have generally been somewhere between $134 and $2 billion on a seasonally adjusted basis.

I would suggest to the committee that, in my view, housing starts have held up and mortgage lending has held up reasonably well, in part because of the long leadtime of money rates to mortgage origi

nations.

During the 1965-66 period of restraint-as I believe has been alluded to previously today-net home mortgage lending dropped by somewhere around 50 percent on a seasonally adjusted basis. This is somewhat evident by the exhibit before you, which indicates a decline in loans made by savings and loan associations from close to $2 billion per month to below $1 billion per month. In 1969's first 2 months, net mortgage lending has continued at about the level of the immediately previous quarters.

This relatively favorable mortgage volume which has persisted, however, should not lull us into complacency concerning the period ahead-the balance of 1969 and calendar 1970; there are several reasons for this.

First, while home mortgage lending by diversified lenders has been reasonably well maintained so far, historical experience indicates that a reduction in lending by this type of institution comes only after restrictive monetary policy and-I might say parenthetically-rising demand in all financial markets, has been in effect for some time.

Most observers would agree-and the previous exhibit gives some support to this-that it was late in 1968 before the pressure in the money and capital markets found its way out into actual rate quotations. I would call attention to the sharp rise in yields on marketable securities in late 1968. These increased yields make deposit-type institutions the over-the-counter institutions, particularly savings and loan associations-increasingly subject to the possibility of disintermediation.

Second, as the exhibit before you indicates, the demand for housing and home mortgage financing has been increasing recently. The chart shows a series entitled "forward loan commitments of savings and loan associations" the red line thereon. This is a series collected by the Federal Home Loan Bank Board, and, as the committee can see, it rose from a level in mid 1968 of just below three billion in outstanding commitments by savings and

Senator BENNETT. Should that be 1967?

Mr. MARTIN. I beg your pardon; 1967-the increase, with the usual fluctuation of any series of this sort, from a mid-1967 level of about three billion to a mid-1968 level of nearly three and a half bilion dollars. Since then commitment have increased sharply further and our most recent inputs to this series indicate a level significantly in excess of four billion dollars.

This indicates to me that the demand for housing and home mortgage finance will increase in the future. The actual recordings of loans should increase in the future from today's level, which is shown in the lower line.

Now we have been looking on this particular chart as a reflection of the mortgage market. To these data and to this potential upswing in demand there simply should be added loan demands resulting from demolition of existing structures and loan demands from the need to rebuild and upgrade housing in the vast inner city areas and in the gray areas of our country.

The strength of the market demand for housing is indicated in some respect by the rental vacancy rate. The vacancy rate in rental units in the country was 4.9 percent in the fourth quarter of 1968; a relatively low level. I do not have those data on the chart. The homeowner vacancy rate was estimated at 1.1 percent in the fourth quarter, the lowest since 1960. The rental vacancy rate was the lowest since early 1957.

The inventory of newly completed unsold homes has also fallen to a relatively low level in recent months.

In these circumstances it is imperative, I feel, that we do not permit the admittedly necessary restrictive monetary policy to impinge on housing and on mortgage markets to the extent it did in 1966. The effects of monetary restraint should be widely distributed so that housing and mortgage markets receive their fair share of available financial sources.

In this period, while monetary tools are vigorously used, it is vitally important to the national interest that the Federal Home Loan Bank Board should support mortgage markets to the fullest extent possible from an undue and unreasonable impact from tight money.

The Board supports continuing the general dividend interest rate ceiling structure adopted by the Board and by the bank regulatory agencies pursuant to the rate control legislation of 1966 as amended; this is the same position taken by Secretary Walker here before you this morning.

Rate control, undesirable as it may be over the long run, has done much under the present money and credit conditions to prevent the shrinking savings market shares of mortgage lending institutions that were so detrimental to the mortgage market and to housing in 1966. Another area of immediate concern is that of assuring the ready availability of Federal Home Loan Bank System credit to member institutions, not only to meet the withdrawal of savings, but to supplement the inflow of funds from savers for mortgage lending. The assurance of reasonable future availability of such credit is particularly vital to the forward planning, committment and investment process which characterizes mortgage lending by associations and, indeed, which permeates housing activity.

Again, the data on forward loan commitments by savings and loan associations bears out this need. Ready availability at the advances