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REPORT OF THE COMMITTEE ON F E D E R A L C R E D IT P R O G R A M S to th e P r e s id e n t o f th e U n ited S ta tes Transmitted by the President to Agencies with Responsibilities for Federal Credit Programs February 11,1963 Report of the Committee on FEDERAL C R E D IT PROGRAM S to th e P res id en t o f th e U n ited S ta tes U.S. (JOVLKNMLNT PRINTING OFFICE VASUINGTON : 1963 T h e W h i t e H o ttse , Washington, February11, 1963. Memorandum to: The Secretary o f State. The Secretary of the Treasury. The Secretary of Defense. The Secretary of the Interior. The Secretary of Agriculture. The Secretary of Commerce. The Secretary of Health, Education, and Welfare. The Director of the Bureau o f the Budget. The Chairman of the Council of Economic Advisers. The Chairman of the Board of Governors of the Federal Reserve System. The President of the Export-Import Bank of Washington. The Governor of Farm Credit Administration. The Chairman of the Federal Home Loan Bank Board. The Administrator of the General Services Administration. The Administrator of the Housing and Home Finance Agency. The Chairman of the Interstate Commerce Commission. The Administrator of the Small Business Administration. The Administrator of the Veterans’ Administration. Subject: Implementation of the Report of Committee on Federal Credit Programs. I am transmitting herewith to the agency heads listed above copies o f the Report of the Committee on Federal Credit Programs. This Report not only provides a valuable appraisal of the past experience of Federal credit programs in helping to meet our national goals, but also contains recommendations which should be very helpful in provid ing a framework for the further evolution of these programs in accord with the changing requirements o f an expanding economy, fully con* sistent with the maintenance of strong and active private markets, and subject to effective review and control. I suggest that all departments and agencies administering loans, loan guarantee and insurance programs (including related grant pro grams) be guided by the principles outlined in the Report in admin istering their present programs and especially in proposing any new or expanded credit authority. I am asking the Director o f the Bureau oil) IV of the Budget to take the lead in assuring an effective and equitable application of those guidelines. As a further step to carry out the Committee’s recommendations, I am requesting the Chairman of the Council of Economic Advisers, as part of the Council’s role in advising me on economic policy, to organize, under his chairmanship, an advisory committee to review the special economic problems that may arise from time to time in each of the major areas involving important domestic credit aids. I am also asking the Secretary of the Treasury both to participate in the work of the advisory committee dealing with special economic problems and, as part of his general responsibility for administering debt management and for reviewing the borrowing operations of these agencies, to take special responsibility for assuring that any borrow ing arrangements undertaken by these agencies are consistent with overall monetary and debt management policies. N o v e m b e r 27, 1962. D e a r Mr. P r e s i d e n t : We submit herewith the Report of the Com mittee on Federal Credit Programs established in response to your memorandum to us of March 28,1962. In accordance with your directive, we have reviewed the legislation and administrative policies relating to Federal credit programs, and assessed their effectiveness in terms of our national goals. The Com mittee has attempted to extract from the record of the past quarter century or more those principles and procedures which have most clearly met the tests of experience in fulfilling the public policy ob jectives for which these programs have been intended. Our aim has been to develop a set of guidelines which could provide a framework for the further evolution of these programs to meet the changing requirements of an expanding American economy. The report is the end product of intensive discussions among senior officials of our four agencies. We have also benefited greatly from the full cooperation of the major Federal agencies administering credit programs. The starting point of our inquiry was the study of the Commission on Money and Credit, and the staff of that Com mission kindly made available to us research studies pertaining to this area originally prepared for their use. While calling freely upon the varied talents and experience of our own staffs, we did not ourselves undertake to sponsor extensive new research within the time available to us. The staff work was directed by Mr. J. E. Reeve of the Bureau of the Budget, who served the Committee ably as execu tive secretary. Committee representatives have met in 35 sessions, usually on a regular weekly basis. The early meetings were devoted largely to the task of identifying major problems and areas for investigation, culminating in a series of discussion papers and tentative positions. Following your suggestion, the Committee then sought the views of each of the major Government agencies in this area. During Sep tember, a series of five meetings was held with representatives of these agencies, using the tentative position papers developed by our staff and distributed to the agencies as a starting point for discussion. The Committee also met with a group of consultants, which included sev eral experts long acquainted with the special problems of Federal credit programs as well as leading professors from several universities. (V) VI In addition, we invited written comments from interested trade asso ciations, groups of financial institutions, and other private parties. After appraising all comments and views received, the Committee then prepared a tentative draft report. This draft was in turn cir culated to each of the agencies responsible for major credit programs, with a request for an expression of their further views and comments. The final report, therefore, reflects careful consideration by the Com mittee of the expressed views of Government credit agencies, as well as the comments volunteered by private individuals and organizations. This, o f course, should not be interpreted as implying agreement on the part of affected Federal credit agencies with every recommendation or with all parts of the supporting analysis in the report. The Committee did not interpret its mandate to include an exami nation of the desirability of particular goals of particular agencies, nor did it seek out specific new areas in which Federal credit programs might be used. We should make clear, however, our common belief that these programs—ranging from the provision of limited assistance to private credit agencies, through various forms of loan insurance or guarantees, to a number of facilities for direct lending by Federal Government agencies—have become a vital part of the credit structure which supports and promotes the energetic growth of our American private enterprise economy. This report is submitted in the convic tion that it can assist in the task of adapting these useful programs to the new needs and changing circumstances of the future. Faithfully yours, D D ouglas il l o n , Secretary o f the Treasury, Chairman. D a v id E. B e ll, Directory Bureau o f the Budget W alter W . H eller, Chairman, Council o f Economic Advisers. Wm. McC. M a r tin , Jr., Chairman, Board o f Governors o f the Federal Reserve System. T h e P r e s id e n t, The W hite House. (Enclosure) TABLE OF CONTENTS Page I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. Preface__________ ____ ______________ ______ ______ ____ _ Role of Federal credit programs____________________________ Criteria governing choicc among credit and noncredit aids......... . Participation of private lenders________ ____ _______________ Loan guarantees and insurance____________________________ Secondary market operations______________________________ Direct loans. _____________________________ ___________ Financing of credit programs______________________________ Budgetary treatment and control___________________________ Promotion of economic stability and growth__________________ Organization and coordination_____________________________ SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS- 1 4 9 14 17 21 24 29 33 36 40 44 APPENDICES A. Memorandum of the President establishing the Committee on Federal Credit Programs________________________________________ B. Recommendations of the Commission on Money and Credit regarding Federal credit programs, including seven general guides-------------C. New and broadened Federal credit programs in 87th Congress, 2d session_______ _______________ ____ _______ _____________ D. Historical trends in major Federal credit programs_______________ E. Outstanding direct loans and guaranteed and insured loans for active or newly authorized domestic Federal credit programs, June 30, 1961............................................................................................ (VII) 53 53 69 63 65 R E P O R T O F C O M M IT T E E O N F E D E R A L C R E D IT PR O G R AM S L PR EFA C E A . A ssignm ent In his memorandum o f M arch 28, 1962 (see app. A ) , the President established a Committee on Federal C red it Program s to review legis lation and adm inistrative practices relatin g to Federal credit pro grams, using as a point o f departure the relevant recommendations o f the Commission on Money and C red it (see app. B ) . Th e President pointed to the “need fo r a thorough review o f the im pact o f these pro grams on the economy, th e ir effectiveness fo r the special pm*poses fo r which they were established, and the policies and techniques employed in adm inistering them .” As more specifically defined by the President, the general task o f the Com m ittee was “to consider w hat changes, i f any, in Federal credit program s would contribute to achieving the nation’s economic goals.” In addition, the Committee was requested to consider p artic u la rly the follow ing five topics: (1 ) The circumstances under w hich Federal credit pro grams should be self-supporting and the c rite ria fo r and character and extent o f subsidy where subsidies are appropriate; (2 ) The c rite ria fo r determ ining w hether a p a rtic u la r pro gram should take the form o f direct Federal lending, loan insurance, loan guarantee, or other fo rm ; (3 ) The budgetary treatm ent o f Federal credit program s; (4 ) The appropriate degree o f coordination o f Federal credit program s w ith the general m onetary and fiscal policies o f the Federal Governm ent, and the use o f credit program s fo r countercyclical purposes: and (5 ) The role and effectiveness o f statutory and adm inistra tive interest rate ceilings in Federal credit program s. B. Scope and Trends of Federal Credit Programs F ed eral credit program s consist m ain ly o f direct loans and p a rtic i pations, secondary m arket operations, and insurance and guarantee o f p rivate loans. O ver the years, as these program s have increased in <i> 2 number and size, they have become significant means fo r accomplish in g many Government objectives. C red it program s are currently adm inistered by seven Cabinet departments (A g ricu ltu re; Commerce; Defense; H ealth , Education, and W e lfare ( H E W ) ; In te rio r; Treas u ry ; and S tate) and by m any other agencies (including, especially, the H ousing and Hom e Finance Agency ( H H F A ), Veterans’ A dm in istration ( V A ), Sm all Business A dm inistration (S B A ), E xp o rtIm p o rt B ank, and In terstate Commerce Commission ( IC C ) ) . In addition, the F arm C red it A dm inistration (F C A ) and the Federal Hom e Loan B ank Board (F H L B B ) provide support fo r quasi-public credit programs operating in whole or in p a rt w ith private funds. In every Congress, numerous proposals are made, and actions taken, to increase the variety and magnitude o f Federal credit programs. F o r example, at least 14 o f the public laws enacted in the 1962 session o f the Congress either authorized the establishment o f new credit program s or broadened existing program s. E ig h t other bills author izin g new or expanded credit programs were reported by committees o f one or both Houses o r proposed by the adm inistration but d id not become law . (S e ea p p .C .) The expanded range o f these program s has been accompanied by a gradual continuing increase in th e ir current level o f activities. In recent years, m ajor Federal credit program s, excluding Governmentsponsored quasi-public programs and direct and guaranteed loans o f the Com m odity C red it Corporation (C C C ), have involved annual new commitments o f $18 b illio n or more. O utstanding direct and guaranteed loans o f the same programs by the end o f the fiscal year 1961 had risen to $94 b illio n (o f which $71 b illio n were loans w holly o r p a rtia lly insured or guaranteed by Government agencies). H o w ever, the net im pact o f these activities on the Federal budget in any one year is only a sm all fractio n o f these amounts, because over threefourths o f the credit assistance usually represents guarantees or in surance o f p rivate loans o r loans by Government-sponsored enter prises, and because a larg e share o f the new disbursements on direct Federal loans and m ortgage purchases are offset b y repayments on outstanding loans and sales. (S e e a p p .D .) C. Scope of the Committee’s Review The broad range and the continuing expansion in Federal credit program s, together w ith the volume o f legislative proposals, empha size the need fo r development and application o f consistent standards and principles to govern the Federal role in this area. T o make its task manageable, and to concentrate on the subjects specifically men tioned by the President, the Committee gave p rim a ry attention to the principles and policies governing the m ajo r active o r proposed 3 domestic credit programs. In its review , therefore, the Com m ittee has excluded or placed only m inor emphasis on issues peculiar to fo r eign loans, to programs in which the credit aspects are incidental (e.g., farm price support loans, repayable Federal investments, and sales c re d it), and to inactive or liq u id ating credit program s. F o r sim ilar reasons, the Committee did not attem pt to evaluate the adm inistration o f specific individ u al credit program s. In its analysis^ however, the Committee found it useful to review five m ajo r groups o f active domestic credit program s (excluding C C C program s), each o f which serves s im ilar or related purposes. These program s are summarized below (and additional d etail on the level o f outstanding direct, guaranteed, and insured loans is shown in app. E ) : 1. Private housing, including— (a) Housing and Home Finance Agency—especially Federal Housing Administration (FHA) mortgage insurance, Federal National Mortgage Association (FNMA) mortgage purchases, and Community Facilities Ad ministration (CFA) direct loans for housing for the elderly. (&) Veterans* Administration—guaranteed and direct loans. (c) Department of Agriculture—Farmers Home Administration rural housing loans. (<Z) Federal Home Loan Bank Board—Federal home loan bank advances. 2. Community development and pubUc housing, including— (a) Housing and Home Finance Agency—especially Urban Renewal Ad ministration (URA) and Public Housing Administration (PHA) direct and guaranteed loans, CFA public facility loans and Office of the Administrator (OA) mass transportation loans. ( b) Department of Commerce—Area Redevelopment Administration (ARA) public facility loans. (c) Treasury Department—public works loans to the District of Columbia (DC). 3. Business and transportation, including— (a) Department of Commerce—especially ARA loans for industrial and commercial facilities. Maritime Administration ship mortgage insurance, and aircraft equipment loan guarantees. (&) Small Business Administration—especially loans to businesses and purchases of Small Business Investment Company (SBIC) obligations. (c) Interstate Commerce Commission—guarantees of railroad loans. (d) Department of Defense—guarantees of defense production loans. 4. Education and health, including— (a) Department of Health, Education, and Welfare—especially defense education loans. ( b) Housing and Home Finance Agency—especially CFA college housing loans and FHA nursing home mortgage insurance. 5. Resource development, including— (a) Department of Agriculture—especially Rural Electrification Admin istration (REA) loans and most Farmers Home Administration loans and loan insurance. (ft) Department of the Interior—especially Bureau of Reclamation loans. (*)Fmrm Credit Administration—loans by Federal intermediate credit banks, banks for cooperatives, and Federal land banks. 4 D . U s e o f t h e C o m m it t e e ’ s R e c o m m e n d a t io n s In preparing its recommendations, the Committee has emphasized p rim a rily the development o f principles to help guide the President and the executive agencies in proposing or review ing new legislation on credit programs and in adm inistering existing programs. A rea sonably effective and equitable application o f the specific guidelines would appear to require two different types o f approaches. (1 ) In cases where existing program s are not w holly consistent w ith the recommendations, m ajor changes m ay not be possible imme diately. O ver a period o f tim e, however, opportunities should arise fo r gradually sh iftin g the credit aspects o f these programs to meet the recommendations more fu lly . The Bureau o f the Budget, in the norm al process o f program review, should canvass w ith each credit agency the steps ( including proposals fo r changes in basic legislation) which it could reasonably be expected to take to adjust its programs in line w ith these recommendations. (2 ) Proposals fo r new programs and fo r substantive changes in existing programs represent a more prom ising area fo r immediate action. The objective here should be to make certain that the credit agencies consider the problems raised in this report when they draw up proposed legislation or suggest new programs, and do so before the specific legislative or other proposals are fo rm ally submitted fo r clearance w ith other interested agencies. As a possible device to accomplish this purpose, every futu re proposal involving a new credit program or a substantive change in existing programs should be accompanied (o r preferably preceded) by a memorandum which evalu ates the proposal in terms o f each o f the relevant recommendations in this report. IL T H E ROLE OF FED ER A L C R ED IT PROGRAMS Federal credit programs have become, in recent decades, an in creasingly im portant method fo r achieving some o f the basic eco nomic and social goals o f our society. W ith in a fram ew ork of p rim ary reliance on p rivate in itia tiv e and enterprise in financial m ar kets, they have contributed to a strong, com petitive economy, and helped m aintain a broad range o f economic opportunities fo r the in d ivid u al. They have successfully enabled sizable groups o f our citizens to share more fu lly in our economic progress. A nd, they are m aking significant contributions to the v ita l task o f community development and redevelopment. Throughout its work the Committee has recognized and accepted the role Federal credit program s have come to p lay in the pursuit o f fundam ental Government objectives. H ow ever, it has neither at 5 tempted to pass judgm ent on the wisdom o f the p articu lar goals set fo r p articu lar credit programs, nor has it trie d to find specific areas in which new programs m ight be appropriate. R ath er, it has con centrated attention on: (1 ) id e n tifyin g the kinds o f situations in which credit aids are lik e ly to be most u sefu l; (2 ) seeking out, from the rich experience o f recent decades, the adm inistrative and finan cial arrangements lik e ly to promote effective and economical use o f credit programs fo r m eeting the legitim ate goals set by the Congress; and (3 ) suggesting means fo r assuring consistency w ith other Gov ernment programs and policies. In shaping its conclusions, the Committee has recognized th a t the characteristic th a t distinguishes Federal credit program s from other Federal program s is not goals but techniques, and the test th a t has been applied is how effectively and economically the credit technique can be adapted to p artic u la r ends. A. Past Accomplishments The effectiveness o f Federal credit program s in achieving certain goals— m any o f which could not have been achieved nearly so w ell by other means— can be illustrated by examples draw n fro m each o f the five im portant domestic areas in w hich such program s are operating. (1 ) Private housing- Federal insurance o f am ortized mortgages, in itia te d in the depths o f the G reat Depression, has successfully broad ened home ownership1 im proved housing standards, and contributed to a healthy, com petitive mortgage m arkqt. T h e flow o f new savings into housing has also been fac ilita te d by Fed eral sponsorship o f a central reservoir o f credit fo r the savings and loan industry, and by a Governm ent secondary m arkqt fo r insured and guaranteed mortgages. Federal agencies have pioneered in broadening the flow o f housing credit to various groups in special circumstances— including moderateincome fam ilies, the elderly, and those in fa rm and ru ra l areas removed fro m fin an cial centers. (2 ) Community development and public hwmng.— Federal credit assistance— Jointly w ith other aids—is helping hundreds o f communi ties to obtain the funds necessary to acquire and redsYeJflpland* to provide decent housing fo r the underprivileged* and to plan (and in some cases to construct) sorely needed public fac ilitie s, w ith im portant benefits extending w ell beyond the groups im m ediately affected. (3 ) Business and transportation.— Thousands o f sm all businesses through Federal assistance have secured cred it essential to th e ir sur v iv a l and grow th, resulting in greater economic opportunity and a more com petitive m arket environm ent. F ed eral cred it assistance to other Businesses—in shipping, aviation, and railroads— has supported 6 the national interest in an efficient transportation system, able to meet our needs in w ar and peace. (4 ) Education and health.— Hundreds o f universities and colleges have been assisted in meeting the demands imposed upon them by soaring enrollments by long-term Federal loans fo r dormitories. In addition, thousands o f students have been encouraged by Federal credit to acquire scientific and other tra in in g useful both to themselves and to the national security. (5 ) Resource development.— A substantial m in o rity o f a ll A m eri can farm ers have been able, to obtain access to national financial m ar kets as a result o f credit facilities provided by federally sponsored lending agencies. These agencies were also used during the G reat Depression to refinance farm debts when the p rivate credit system was unable to function norm ally. D ire ct Federal loans, accompanied b y management assistance and other aids designed to increase farm ing efficiency, have also been made to low-income farm ers to enable them to obtain adequate production resources* Both farm ers and other ru ra l residents have been able to share more prom ptly in the benefits o f electric power and telephone services by virtu e o f long-term Federal loans to ru ral cooperatives. This varied credit assistance to farm ers has helped to make possible the great strides in agricultural produc tiv ity th a t have occurred in the last few decades. B . N eed fo r P ro g ram R eview T o cite these varied and significant accomplishments is not to en dorse, in every d etail, either the mode o f operation o f existing pro grams, o r th e ir indefinite extension. The needs fo r specific types o f credit assistance are certain to change over tim e, as the economy changes and as the a b ility o f the p rivate m arket to provide p articu lar types o f credit develops. The Committee also has been impressed by the diversity among the various Federal credit programs in the approach tow ard p articu lar problems, in the c riteria used to determine the kin d o f credit assistance employed, and in the terms and conditions under which Federal assistance is rendered. In p art, o f course, this diversity is a natural reflection o f specific objectives and p artic u la r circumstances. B u t, in p a rt, it also stems from the absence o f a common set o f principles and criteria in areas where common principles and approaches would be both feasible and useful— and from a fa ilu re o f one agency to p ro fit to the extent possible from the experience o f another. These facts strongly suggest the importance o f regular reviews o f existing credit programs to make certain th a t they conform to current and prospective requirements and to the best current practice. C red it program s, whatever th e ir mechanics, should not be considered a species 7 apart from other Government programs. Such program s are essen tia lly instruments o f public policy, and must be responsive to th a t policy. They d ivert real and financial resources fro m other uses; they often entail direct Federal costs and always some ris k ; and inevitably they compete w ith other program s fo r available funds and energies. In the end, like other Government program s, they must be judged in terms o f how effectively and economically the techniques used and the policies followed meet national objectives. O n the basis o f these regular reviews, the Com m ittee finds it reason able to expect th a t some program s should, over tim e, move from extending one type o f credit assistance to another, more in tune w ith the evolution o f private m arkets. U pon occasion, agencies m ight dis charge th e ir educational or innovative responsibilities so effectively th a t the special Federal support can be w ith d raw n en tirely, and its functions assumed by an efficient, com petitive, and self-relian t p rivate m arket th a t it helped to foster. C. B asic P rin cip le s In our society, there is a presumption th a t the allocation o f credit fo r essentially private purposes should be a function o f private m ar kets. A ccordingly, the Com m ittee believes th a t Federal credit pro grams should, in the m ain and whenever consistent w ith essential program goals, encourage and supplement, rath er than displace p ri vate credit. Th is is more than a m atter o f basic economic philosophy. I t also recognizes the fact th a t the p rivate m arket w ill continue to account fo r the great bulk o f a ll credit extensions. M ore can be gained in the end, therefore, i f Federal cred it program s, by w orking through the p rivate m arket, help to make it stronger and more com petitive, than i f they unnecessarily preem pt functions th a t private parties can p o ten tially perform effectively. M oreover, by m aking use o f the private m arket w ith its existing in stitu tio n al arrangements and skills to the extent consistent w ith essential program objectives, the problem o f adm inistering Governm ent program s can frequently be eased, and the essential Governm ent aid made more conveniently available to potential borrowers. (1 ) Removal of credit “gaps”— E ffo rts to im prove the private m arket mechanism are p artic u la rly appropriate when the purpose is to elim inate a “credit gap.” T h is type o f situation can arise, even in a generally w ell-functioning m arket, when p a rtic u la r types o f ac tiv ity , some groups o f borrowers, or specific geographic areas do not have access to credit ,on reasonably com petitive term s, even though they would be able to repay loans extended on such terms. Such m arket im perfections can sometimes be elim inated by changes in Gov ernment regulations, or by chartering add itio n al p rivate financial in 8 stitutions. B u t in other cases, Federal insurance. Government contri bution of in itia l capital to a new institution, or even self-supporting direct Federal loans m ight be the only feasible approach. W hatever the p articu lar technique, the ultim ate objective should be to reduce or elim inate the Government involvem ent i f and as private m arket im perfections disappear. (2 ) Provision of subsidies.— The situation is fundam entally d iffer ent when the essential purpose o f the Government program is not merely to elim inate or bridge com petitive im perfections, but to pro vide credit on terms and conditions th a t would not be forthcom ing even in a fu lly effective, com petitive, private m arket. Tn this case, some sort of subsidy assistance w ill be required, and so long as a valid need remains, there can be no reasonable expectation o f the Government w ithdraw ing from the m arket. However, in appraising both new and existing programs, efforts should be made to estimate and disclose the subsidy element in a consistent fashion, so th at bene fits can be in tellig ib ly assessed in terms o f casts. D . C o n tro l and C oordination Federal credit programs present special opportunities and problems, arising from methods o f financing and operation, th a t do not appear in most other Government programs. The Committee sees no reason why these special features should exempt credit programs from pro cedures fo r review and determ ination o f program levels comparable to those regularly required fo r other Federal programs. Moreover, fo r agencies borrow ing directly in the m arket, there is a special need to coordinate the tim in g and terms o f such borrow ing w ith the Treasury financing program . Coordination and direction w ill be facilitated by grouping p ar tic u la r credit agencies together w ith other Government programs by m ajor purpose. In this way, th e ir operations can be appropriately evaluated and directed w ith in the context, o f the overall objectives and operations o f Government fo r a p artic u la r substantive policy area. E ffective coordination between broad program areas, and w ith the central economic policies o f an adm inistration, is also im portant. The Com m ittee, therefore, is proposing, consistent w ith precedents already established in this adm inistration, in fo rm al consultative machinery to assist the President in coordinating credit programs w ith overall eco nomic policy. F in a lly , in the Com m ittee’s judgm ent, basic program legislation should allow fo r enough adm inistrative discretion in determ ining interest rates and other credit terms to p erm it prom pt adjustments to changing needs and circumstances. A n d, the agencies themselves can, in some instances, usefully devote increased attention to the develop 9 ment o f adequate and equitable adm inistrative standards fo r allocating th eir available funds to potential borrowers. E . P o te n tia l fo r the F u tu re Federal credit programs have achieved a lasting place in the fabric o f Government economic policies, and the Com m ittee firm ly believes there w ill be room fo r fu rth e r productive innovation in the years ahead. So long as the grow th can be appraised w ith in a fram ew ork o f reason able guidelines, w ith fu ll awareness o f costs and benefits and w ith recognition o f the continuing need fo r coordination, the potential fo r credit program s as an effective tool o f public policy w ill be substantial. I I I . C R IT E R IA G O V E R N IN G C H O IC E A M O N G C R E D IT A N D N O N C R E D IT A ID S C red it assistance represents one among several im portant methods employed by the Federal Governm ent to accomplish the social objec tives o f specific programs. Th is section discusses the Tmsie objectives which can be served by Federal credit aids, the types o f programs in which credit assistance is most lik e ly to be useful, and the specific kinds o f Federal credit aid which are most appropriate in various types o f situations. A . B asic O bjectives Federal credit program s can appropriately be used to help finance a p articu lar type o f economic a ctivity if such credit aid assists in - (1 ) Rem oving or reducing “credit gaps'’ arising from m arket im perfections th a t result in discrim ination against certain borrowers or in distortions in the flow’ o f funds to certain activities or geographic areas; (2 ) Influencing the s h ift o f additional resources into a specific kind o f economic a ctivity to promote social purposes which could not be achieved as effectively otherwise, even in a perfect p rivate m arket; a n d /o r (3 ) Increasing the to ta l use o f resources; i.e., using m an power and other resources otherwise unemployed. B . S u ita b ility o f C re d it P ro g ram s Even when Federal credit assistance can help to accomplish one or more o f these basic objectives, it is not necessarily the most suitable or effective method o f achieving the desired results. C red it assistance is clearly not the best way, fo r example, fo r the F ederal Governm ent to finance provision o f many goods or services y ield in g predom inantly social benefits; e.g., direct Governm ent expenditures are the accepted 675170— 68------- 3 10 methods o f providing fo r defense and law enforcement. N or, at the other extreme, is credit assistance the best method fo r providing pre dom inantly private goods and services, i.e., the benefits o f which accrue almost entirely to in d ivid u al identifiable purchasers; in such cases, Federal credit aids should be confined to measures designed to help remove im perfections in the private credit system and should be term inated when such imperfections are elim inated. Otherwise Federal credit aid may be appropriate— (1 ) W hen goods and services yielding m ajor benefits both public and private are, as in the urban renewal field, norm ally financed w ith borrowed funds; (2 ) W hen the credit assistance w ill facilitate needed con tinuing surveillance o f the borrow ers use o f the funds pro vided or the provision o f m anagerial assistance by the Governm ent; and /o r (3 ) W hen borrowers are undertaking relatively novel, but prom ising, ventures w ith which private lenders are not yet fa m ilia r. In a ll cases, however, there should be a reasonable expectation that the credit can and w ill be repaid; e.g., th at borrowers w ill receive substantial direct increases in real income through acquisition o f assets or skills financed w ith Government credit aid. On the other hand, Federal credit aids are inapproriate— (1 ) W hen viable loans are improbable even w ith subsidy interest rates— in such cases use o f direct grants or other forms o f Government assistance would norm ally be prefer able, since they would not undermine norm al creditor-debtor relationships; (2 ) W hen even a viable loan would create such exoessive debt service requirements against futu re income as to jeop- • ardize the needed fu rth e r expansion o f the program — in such cases (e.g., possibly where loans are proposed fo r local school districts or hospitals), a m atching g ran t program may be more suitable, in whole or in p a rt; a n d /o r (3 ) W hen financing is not the real problem , e.g., when the capital requirements are norm ally financed in tern ally fro m depreciation allowances or reserves— in such cases, tax reductions and other measures may be more effective incen tives tow ards achieving the desired objectives. F ro m tim e to tim e Federal credit aids are proposed to meet w hat are essentially equity capital needs; i.e., cases where there are both substantial risk o f loss as w ell as possibilities o f considerable profits. 11 In such situations, the Federal agency involved should make a careful exam ination to determine whether the need is fo r equity rath er than credit financing. I f equity financing is needed and im portant public purposes make some type o f Federal assistance essential, the ben eficiary, i f successful, should have an obligation to share some of the returns w ith the Federal agency p roviding the assistance. C. Types o f F e d e ra l C re d it A id Once the usefulness o f Federal credit assistance in achieving pro gram goals has been determined, several m ajor considerations are im portant in the choice among the various types o f credit aids. (1 ) W herever consistent w ith achievement o f the essential purposes o f the program , the Fed eral credit aids chosen should be designed to encourage and supplement private lending activities rath er than to substitute fo r them . Th is emphasis is essential not only to preserve and strengthen the a b ility o f the private m arket in our free enterprise system to allocate resources efficiently, but also to avoid placing un necessarily large and complex adm inistrative burdens on Federal agencies. (T h is subject is discussed in sec. IV .) (2 ) B oth the im m ediate im pact on budget expenditures and the long-run net cost are im p o rtan t factors in determ in in g the specific type o f credit aid which should be selected. Short-run budget expenditures can be m inim ized by relyin g, whenever feasible, on guarantees and insurance o f p rivate loans, rath er than direct loans or m ortgage purchases. In the long run, the cum ulative net cost entailed in subsidized interest rates an d /o r in high d efau lt levels not covered by adequate insurance charges should be compared w ith the cost o f the direct grants required to accomplish the same objec tives. (These issues are discussed in sec. V I I . ) (3 ) The need fo r and potential effectiveness o f Govern m ent controls over lending terms and borrow er e lig ib ility is often a m aterial factor in the choice among types o f Federal credit aid. D etailed controls can be read ily applied when direct loans are provided. Controls become more im portant as the amount o f subsidy increases, when close surveillance o f the use o f funds is necessary, a n d /o r when the borrow er’s bargaining position is so weak as to require protection. (4 ) The type o f Federal credit program selected and the policies follow ed in adm inistering it should be influenced by by whether the program is intended to be responsive to p o li cies on overall economic stab ility and grow th, or to operate independently o f them . (T h e am enability o f various types 12 o f credit programs to economic controls is discussed in S 6 C .X .) D . G uidelines on P rio ritie s I f the credit needs apparently arise from gaps in the private credit structure, a logical first step is to try to remove them by broadening the lending auth o rity o f existing private credit institutions, or even by authorizing new types o f p rivate institutions which do not require Federal financial aid. F o r example, statutory lim itations on m axi mum m aturities, percentages o f loan to value, and types o f assets eligible fo r investment by p rivate institutions sometimes can be liberalized w ithout conflicting w itli other public purposes or re q u irin g an unacceptable degree o f Government supervision. Measures o f this type are under consideration by the Committee on Financial In stitu tio ns. I f broadening the authority o f existing private lenders would be inappropriate or inadequate, diagnosis o f the specific requirements may indicate th at two or more types o f Federal credit assistance would be h elpfu l. In this event, the Committee recommend* th a t the follo w in g rough order o f p rio rity be used in determ ining the specific type o f Federal aid in itia lly employed. (1 ) Government gwmmtee* or insurance of private loan* should usually be the first alternative considered. T h is device uses the ex perience o f existing local lenders and th e ir knowledge o f the needs in th e ir own geographic areas to lim it the adm inistrative burdens other wise placed on Government lending agencies. I t can also be an im portant stimulus to com petition in p rivate markets. Guarantees and insurance are especially appropriate fo r use: (а) W hen there is a bona fide credit gap which private lenders in tim e can reasonably be expected to close w ithout continued Federal assistance, through development o f new lending and borrowing techniques, better understanding and norm al grow th; (б ) W hen the potential subsidy, i f any, is re latively small (e.g ., it can be absorbed fro m w aiver o f guarantee fees), o r can be expected to decline or disappear; a n d /o r (<?) W hen the social benefits are not clear enough to ju s tify more direct or extensive Federal aids. (T h e possible expansion o f this type o f credit assistance and the safe guards needed are discussed in sec. V .) (2 ) Government aid to newly sponsored types of private institution* m ay be justified when existing institutions are unable o r u n w illin g even 13 w ith reasonable Federal guarantees to provide a needed new type o f credit w hich has not yet demonstrated sufficient promise to attract private funds. The new institutions should be expected to become self-supporting, and therefore the Governm ent financial assistance should be recognized as tem porary and tran sitio nal. (T h is alternative is discussed in sec. IV .) (3 ) Establishment of a Government secondary Taarket may be de sirable to encourage effective p rivate p articip atio n in insured and guaranteed loans by p roviding greater m a rke tab ility fo r such loans. (Issues arising fro m the establishment and maintenance o f a secondary m arket are discussed in sec. V I.) (4 ) Direct loans are often most useful when the previous alterna tives cannot meet legitim ate needs fo r credit assistance. They are most lik e ly to be appropriate— (a) W hen there is a strong and clear case fo r Government assistance to achieve a basic program objective; (b) W hen the loan involves too large and concentrated a risk to a ttract p rivate lenders; (c ) W hen the credit assistance is needed by a Government en tity and the only alternative w ould be the guarantee o f a tax-exem pt obligation— an alternative which should not be accepted; (d) W hen substantial subsidies are necessary to make a viable loan; (e) W hen credit subsidies or noncredit aids make carefu l Governm ent screening o f borrowers and detailed supervision o f th e ir operations desirable; and ( / ) Possibly in a few cases when the cred it program should be insulated fro m fluctuations in the p rivate m arket. E . P e rio d ic P ro g ra m R eview Decisions on the m ix o f credit and noncredit aids available in any m ajo r area cannot be made once and fo r a ll. Needs m ay cliange, or p rivate financial institutions may g radu ally learn to make new types o f cred it available on com petitive term s. Hence, a t tim es a program m ay “graduate” from one type o f Federal cred it a id to another, or, conversely, the in itia l type o f aid m ay be found to provide inadequate incentives to accomplish program objectives, so th a t a more effective type o f assistance should be considered. Y e t, once a credit program is fu lly underw ay, there is danger th a t the continuing flow o f applications fo r assistance w ill be accepted as 14 sufficient evidence fo r continuing operations w ithout m ajor change. In such a situation, a specific credit program could continue indefi nitely follow ing its in itia lly prescribed pattern, w ith deviations, if any, chiefly in the direction o f expanding the scope and magnitude of the aids provided. W h ile this danger is not peculiar to Federal credit programs, the problem may be more lik e ly to arise in this area. M any o f the most im portant credit programs involve relatively m inor expenditure o f Federal funds, and, because o f lim ited resources ava il able fo r program review, m ay, at times, receive less thorough attention. S im ila rly other credit gaps may exist or develop in the p rivate credit system which impede the achievement o f im portant public pur poses. Program s which now make little or no use o f credit techniques may w ell be able to accomplish th eir goals more effectively through the introduction o f Federal credit aids. Accordingly, the Committee recommends th at the executive branch reg ularly appraise the actual experience in each m ajor Federal credit program in order to determine whether (1 ) a valid need remains fo r Government credit assistance, (2 ) other types o f credit or noncredit aid would be more appropriate to meet the changing needs of the pro gram , or (3 ) private lenders should be expected to meet a ll essential requirements. Such reviews could w ell be coordinated w ith the budg et process. A t the same tim e, the regular reviews o f other m ajor programs should include attention to any areas where Federal credit aids would be useful in rem oving gaps in the p rivate credit markets ham pering achievement o f public purposes. IV . P A R T IC IP A T IO N O F P R IV A T E L E N D E R S Despite the present variety and importance o f Federal credit pro grams and th e ir continuing expansion, the overwhelm ing m ajo rity of the credit needs o f the N atio n are and undoubtedly w ill continue to be supplied effectively by p rivate financial institutions. These include almost 14,000 commercial and m utual savings banks (w ith a to ta l o f over 25,000 offices), 6,300 savings and loan associations, over 1,400 life insurance companies, and a w ide array o f other lenders, ranging from the pension funds o f corporations and unions to sales finance com panies, factors, and credit unions. M an y Federal credit programs, including those w ith the prepon derant d o lla r volume, operate through these p rivate financial in stitu tions. T h is section o f the report discusses the basic principles and methods which, in the Com m ittee’s judgm ent, should be follow ed to assure the most effective use o f this broad range o f private institutions in achieving public program objectives. 15 A . G e n e r a l R e c o m m e n d a t io n s (1 ) Government-financed credit program s should, in principle, sup plem ent or stim ulate private lending, rath er than substitute fo r it. They should not be established or continued unless they are clearly needed. Unless the urgency o f other goals makes private p articip a tion infeasible, the methods used should fa c ilita te p rivate financing, and thus encourage long-run achievement o f program objectives w ith a m inim um o f Government aid. (2 ) P riva te p articip atio n , however, should not be sought at the expense o f other program objectives i f the incentives required prove too costly fo r the benefits gained, or if , over a period o f years, it be comes apparent th a t p rivate lenders are u n likely to take more than a token role in the program . I f p rivate lenders have only a token p ar ticipatio n and there is no sign th a t they w ill u ltim ately enlarge th e ir effective role at reasonable m arket interest rates, and i f the credit as sistance serves an essential public purpose, direct Governm ent financ ing may be the most efficient and economical way to meet the specific credit needs. (3 ) Federal agencies should emphasize the developmental aspects o f th e ir credit program . Through helping to create experience in new lending techniques, they should endeavor to im prove the m obility o f credit and the a b ility o f borrowers to attrac t p rivate funds. Through these and other methods, Federal credit program s can help to reduce the gaps in the p rivate credit system so as to reduce the need fo r F ed eral aid. F o r example, the leadership o f Federal credit agencies in the private housing area has played a m ajor role in encouraging p rivate lenders to finance on favorable terms and a t a reasonable cost an in creased volume o f new housing construction, w hich in the past either could not be financed a t a ll o r could be financed only on much less favorable terms. Even in th is area, however, there is s till room fo r pioneering by Federal agencies. (4 ) In adm inistering a credit program , the responsible Federal agency should set general lending standards but, whenever appropriate incentives and safeguards become standard in stitu tio n al practices, it should s h ift to private lenders as much as possible o f the responsibility fo r m aking and servicing in d ivid u al loans. (5 ) W hen both public and p rivate funds are involved, it is espe c ially im p o rtan t th a t the term s and conditions p reva ilin g in com peti tiv e p riv a te m arkets should, as fa r as consistent w ith program objec tives, determ ine the basis on w hich the Governm ent funds are ad vanced, I f borrowers can obtain adequate funds a t reasonable in terest rates fro m p rivate lenders (w ith o r w ith o u t guarantees), they should nofcbe given special incentives in the form o f substantially low er costs to borrow fro m the Governm ent agencies. 16 B . G overnm ent In cen tives fo r P riv a te ly Owned In s titu tio n s In some cases, unnecessary substitution o f public fo r private credit can be m inim ized by providing financial incentives to establish Gov ernment-sponsored, p rivately owned and operated financial institu tions. T h is approach is most lik e ly to be feasible when a credit gap exists which can be filled p rivately w ith lim ited in itia l Government aid, and when some pioneering work is recognized to be essential, a n d /o r on an experim ental basis, has already been in itiated . The Federal home loan banks and the three groups o f institutions super vised by the F arm C redit A dm inistration provide im portant examples o f the use o f this approach. The small business investment companies chartered and supervised by S B A are the latest examples. C. Im m ed ia te P a rtic ip a tio n s in F e d e ra l Loans P riva te lenders participate w ithout continuing Federal insurance or guarantees in at least fo u r active direct lending programs. In the S B A loan program , the private lenders may take a share o f the to ta l loan. In college housing and public fa c ility loans made by the H H F A , private lenders, in some instances, acquire the shorter ma tu rities. In E x p o rt-Im p o rt B ank loan programs, private lenders nor m ally may take a p art o f the to tal loan, but in exceptional cases are perm itted to acquire the shorter m aturities. In a ll fou r cases, the p rivate participation is a m inor portion o f the total program . Significant advantages can arise from such im m ediate participations by private lenders. T o whatever degree they participate, private funds are being used. W hen the p rivate lender both makes and services the loan, he gains experience w ith the borrower and some times la ter purchases the Federal share. M oreover, by developing skills in this field, he may become w illin g to make such loans in the fu tu re independently o f the Federal agency (e.g., term loans to small business). How ever, this type o f jo in t financing involves several legislative and adm inistrative problems, p rim a rily how to obtain adequate p ri vate particip atio n w ithout excessive costs. T o m inim ize this problem , the Committee recommends th a t legislation avoid m andatory p refer ence fo r im m ediate participations and th a t adm inistrative policy should generally avoid th e ir use, unless (1 ) p rivate lenders are w ill ing and able to share risk in proportion to th e ir potential profits, and (2 ) no l)etter alternative fo r obtaining private financing is available. S im ila rly , the service charges paid to the private lender by the Fed eral agency in jo in t private-G overnm ent p articipation loans should not provide an incentive fo r m inim izing private participation. T h is is a danger, fo r instance, when a p rivate lender can obtain a service charge fo r a fu ll loan at a p ro fit to its e lf by agreeing to undertake 17 only a very sm all participation. M oreover, insofar as the Federal Government indirectly covers m ajor risks fo r p rivate lenders by ta k ing the longer m aturities on loans, the Federal agency should have authority to determ ine or approve interest rates on the private share o f the loan. D . G uarantee o r In suran ce o f P riv a te Loans Th e most widespread method of encouraging private participations has been fo r the Federal Government to assume a carefu lly specified contingent lia b ility by offering to guarantee o r insure private loans. Th is approach is most lik e ly to be effective i f the interest ceilings a l lowed on the guaranteed loans are high enough fo r the loans to be attractive to private lenders and i f the loans themselves are stand ardized; e.g., insured mortgages. M oreover, to assure m eaningful private p articipation the private lender should be expected to carry some portion o f the norm al lending risk. (These subjects are dis cussed more fu lly in the next section.) V . L O A N G U A R A N T E E S A N D IN S U R A N C E Fed erally insured and guaranteed p rivate loans currently represent the great bulk o f the d o llar volume o f Federal cred it program s. F H A insured and VA -guaranteed loans account fo r almost 90 percent o f outstanding insured and guaranteed loans, and fo r over 80 percent of the current level o f new commitments. A ccordingly, policies govern ing these programs are o f exceptional im portance. How ever, 12 other guarantee and insurance program s are active in varyin g degrees.1 N early a ll o f these 14 programs are associated w ith or in d irectly sup ported by direct loan or m ortgage purchase program s, the need fo r which is, in p art, determ ined by the policies follow ed under the guar antee o r insurance programs. Federal guarantee and insurance program s are most effective when credit needs arise from risks o r uncertainties w hich, in the opinion o f p rivate lenders, are too great or too unpredictable to encourage invest ment o f p rivate funds, but are not excessive when spread over many loans. In m any, but not a ll cases, the credit needed is fo r such a long term o r involves such a high proportion o f the to ta l investment th a t p rivate institutions cannot leg ally lend w ith o u t the protection o f F ed e ral insurance. Thus, to a very considerable extent, u n d erw ritin g by 1TbeRe Include Farmers Home Administration loan insurance and the CCC loan guaran tees In the Department of Agriculture; ship mortgage insurance and aircraft loan guarantees in the Department of Commerce; production loan guarantees in the Department of Defense; fishing vessel mortgage insurance in the Department of the Interior; international develop ment loan guarantees by the Agency for International Development (AID) in the Department of State; urban renewal and public housing loan guarantees in the HHFA; and various loan guarantee programs of thelferport-Iibport Bank, the I<5C, and the SBA. 675170— ----- 4 18 the Federal Government of such loans helps to fill a credit gap by in creasing the availability of private funds for these specific investment purposes. This section of the report discusses some of the key policy issues peculiar to insurance and guarantee programs. A . Coinsurance (1) la insuring or guaranteeing loans, the Federal Government has the option of offering protection which covers all <reditor risks or of requiring lenders to share the risk to some predetermined degree (coinsurance). Practices in existing guarantee and insurance pro grams vary. Up to now, the two largest groups of programs (F H A property improvement loan insurance and most of the mortgage insur ance and, to a lesser extent, V A loan guarantees) have required significant elements of coinsurance. Four smaller programs admin istered by other agencies (S B A deferred participations, Commerce aircraft loan guarantees, Defense production loan guarantees, and Export-import Bank loan insurance) customarily involve coinsurance. Several other small Federal programs, however, require no loss shar ing ; and this is also true for some of the newest F IIA programs. (2 ) The Committee recommends th a t some element of private lender risk (coinsurance) should be required, as a m atter of principle, in order to provide incentives fo r norm al vigilance by lenders in m aking and servicing insured and guaranteed loans. This is p ar tic u la rly im portant where the lender is so located geographically th a t he can supervise the borrower’s performance. I f complete coverage o f a ll creditor risks is deemed essential in itia lly to obtain private p articip atio n , or to m inim ize the required amount o f related Federal grants, the agency insuring or guaranteeing such loans has a special responsibility fo r continuing review o f the experience under the pro gram to determine whether a coinsurance requirem ent has become feasible or whether, in the absence o f effective p rivate participation, substitution o f direct loans w ould be preferable. (3 ) The Committee further recommends th a t where variations in degree o f coinsurance are feasible and fees are charged private lenders, agencies adm inistering loan insurance and guarantee programs should provide fo r a graduated scale o f fees, w ith the lowest rates available fo r lenders who assume the most risk. The object should be to encour age such lenders to assume as much o f the risk as they are w illin g and able to assume. B . G uarantees o f T ax -E x e m p t O b ligatio ns (1 ) Tw o o f the present loan guarantee program s—the indirect guarantees o f obligations issued by local authdrities fo r urban renewal and public housing— involve guarantees o f the obligations o f State and 19 local government instrum entalities. From tim e to tim e, guarantees o f other types of m unicipal obligations are proposed. This raises the question of whether the Federal Government should guarantee taxexempt obligations, especially since under the Public D ebt A ct o f 1941, it cannot issue direct obligations exempt from Federal income taxation. (2 ) State and local governments now receive substantial indirect benefits from the Federal income tax exemption on income from m unicipal obligations. As a result, these governments can usually sell th e ir obligations on a much low er yield basis than other issues of comparable quality. The tax exemption makes such obligations very attractive to institutions and individuals in relatively high income brackets. As a result, a sizable loss in Federal revenues occurs, which is greater than the saving in the cost o f State and local financing. (3 ) Guarantees o f tax-exem pt obligations tend to expand the volume o f such securities issued. The Committee, therefore, recom mends th a t no program in the futu re be authorized which involves guarantee of tax-exem pt obligations because (a ) the cost in tax rev enues to the Federal Government would generally exceed the benefits o f tax exemption received by borrowers, (b) such fed erally guaranteed tax-exem pt securities would be superior to direct Federal obligations themselves, and th e ir increasing volume w ould adversely affect Treasury financing, and (c) the a v a ila b ility o f increasing amounts of high-grade tax-exem pt issues would tend to a ttract funds fro m in vestors th a t should appropriately seek risk-bearing opportunities. (4 ) In addition to the substantial advantages from the tax exemp tion privileges available fo r State and local borrow ing, two additional types o f aid which do not involve guarantee o f tax-exem pt obligations could provide any additional necessary credit assistance : (а ) A n y local com munity w aiving its tax exem ption p riv i lege m ight be authorized to borrow fo r specific h igh p rio rity needs w ith the aid o f a Federal guarantee; and (б ) Local communities m ight be authorized to receive cap ital grants sufficient to perm it borrow ing the rem ainder in the m arket on reasonable terms. C . C eilin g s on In te re s t R ates on In s u re d and G u aran teed Loans Th e most im portant single determ inant o f p rivate p articip atio n in loan guarantee and insurance program s is the level o f interest rates p erm itted on the loans. F o u r agencies adm inistering im portant loan insurance and guarantee program s h are statutory ceilings on the interest rates w hich m ay be charged b y p riv ate lenders. T h e pro grams covered include a ll types o f F H A loan insurance, V A loan guarantees, Commerce ship m ortgage insurance, and Fanners Hom e 20 A dm inistration loan insurance. M ost o f the other programs are either covered by adm inistrative ceilings, handled on a case-by-case basis, or indirectly controlled by the statutory form ulas governing related direct loan programs. (1 ) A fte r review ing the arguments o f the Commission on Money and C red it fo r abolition o f such ceilings, the Committee recommend$ th at Federal agencies which insure p art or a ll o f the risk on private loans should have reasonably broad authority to set and adjust m axi mum rates fo r such loans, fo r the follow ing reasons: (а) Such authority is useful in helping to assure one o f the m ajor purposes o f the program , the a vailab ility o f funds at reasonable interest rates. (б ) Since Federal agencies bear most o f the risk, they should have authority to make sure th a t the interest charged by lenders does not include unnecessary compensation fo r such risks. (tf) Since the m arket fo r many types o f credit is im perfect and interest rates tend to respond slowly to changes in the a v a ila b ility o f funds, properly adm inistered ceilings can help to overcome in ertia. (d) B y affecting m arket expectations, changes in ceilings can sometimes accelerate desired adjustments in effective rates on the loans involved as w ell as changes in yields o f other related m arket obligations. (2 ) The Gommittee further recommends th a t legislation governing guaranteed and insured loan programs avoid fixed rates o f interest or fixed statutory ceilings. I f any statutory form ula is deemed neces sary at a ll, it should be flexible enough to perm it adm inistrative ad justments called fo r by variations in m arket rates o f interest. F o r example, the statutory V A ceiling should be abolished or, at a m in i mum, be amended to provide discretionary auth o rity comparable to the F H A authority. (3 ) S im ila rly , the Covmuttee recommends th a t, in establishing and m od ifyin g adm inistrative ceilings, the Federal agencies responsible should avoid ceilings which are outside the range o f reasonable m arket rates; fo r example, ceilings which are so low as to cause excessive dis counts. M any lenders are reluctant to acquire loans at sizable dis counts, and such discounts may result in lridden increases in costs fo r borrowers, or reduce the a v a ila b ility o f credit. (4 ) W h ile the maintenance o f interest ceilings m aterially below m arket levels o f interest m ay have a stabilizing effect at times when demands fo r funds are high, e.g., through reducing residential con struction, this device is neither an equitable nor a w holly effective 21 method o f achieving the desired result. In addition to the capricious tim in g and extent o f its im pact, it encourages pressure fo r direct loans and mortgage purchases, which may underm ine any desirable economic restraint and cause public funds to be used unnecessarily fo r program s which can and should obtain private financing. H o w ever, adjustments in ceilings and related secondary m arket policies should be adm inistered in such a way as to avoid disruptive effects on construction necessary to meet the requirements o f economic grow th. (5 ) W h ile it is probably not appropriate in a Federal credit pro gram to allow geographic differentials in basic interest rates, it may be desirable to provide authority fo r lenders to charge lim ited special fees fo r specific types o f loans or in specific types o f areas commen surate w ith any unusual lending costs associated w ith the class o f transaction. A part, fro m such cost-based fees, as long as interest ceilings are set high enough to cause insured and guaranteed loans to be at or near p ar in m ajor sections o f the country, norm al geographic differentials reflected in discounts may provide a necessary incentive to assure geographic m obility o f funds. How ever, it is essential th a t fu ll disclosure be made in advance to the borrow er o f the to ta l cost he may be required to absorb. V I. S E C O N D A R Y M A R K E T O P E R A T IO N S In evaluating the d esirability o f p artic ip a tin g in loan insurance and guarantee programs, p riv ate lenders consider not only the risk o f d efault and the rate o f return on the loans, but. also th e ir liq u id ity : i.e., how read ily the loans can be m arketed in case o f need. W h ile most commercial banks and savings and loan associations can meet emer gency needs fo r cash by tem porary advances from the Federal Reserve banks or the Federal home loan banks, both these and other lenders norm ally rely on the p rivate m arket when changes in investment policy make the sh iftin g o f assets necessaiy. A . R ole o f Secondary M a rk e ts In this situation, establishment of a Government secondary m arket may help to stim ulate the development o f an effective p rivate m arket in insured and guaranteed loans, thus enhancing the liq u id ity o f these loans and reducing existing credit gaps. Use o f the secondary m arket techniques is also sometimes proposed when it is believed th a t proper seasoning o f the financial assets acquired by the F ederal Government may in tim e make them salable to a p riv a te lender a t a reasonable price. 22 B . E x is tin g P rog ram s (1 ) A t present, the only form al Government secondary m arket is provided by the Federal N ational M ortgage Association in the H IIF A . This comprises two essentially different types o f operations: (а ) Through the “Secondary m arket operations trust fun d ,” the F N M A buys, sells, and lends on the security o f F H A -in su red and VA -guaranteed mortgages at prices rea sonably w ith in the range o f m arket prices, thus providing a degree o f liq u id ity fo r these mortgages and a stim ulant to new construction; and (б ) Through the “Special assistance functions,” the F N M A purchases, at prices usually somewhat above the pre v ailin g m arket, selected types of F H A -in su red and V A -g u a r anteed mortgages (1 ) under programs designated by the President or the Congress as requiring m arket support, and (2 ) under general programs when deemed necessary fo r eco nomic stabilization purposes. (2 ) F o u r other active loan guarantee programs (Farm ers Hom e A dm inistration insurance o f farm real estate loans, CCC crop-support loan guarantees, Defense production loan guarantees, and S B A deferred participations) have no form al secondary m arket, but the p rivate lenders in each program have the rig h t to tu rn over the guar anteed portions o f th e ir loans fo r cash at any tim e on demand (a fte r a 3-year w aiting period in the case o f the Farm ers Hom e A dm inis tra tio n ). Thus, in effect, under these fo u r program s, the lender's have a “b u ilt-in ” secondary m arket available on short notice where they can “ put” th e ir insured o r guaranteed loans whenever alternative investment opportunities appear more profitable. Since in every case the guaranteed portion o f the loan can be redeemed at the fu ll amount o f the unpaid balance, they have the equivalent o f a Govern m ent guarantee not only against d efault but also against m arket fluc tuations in interest rates. C. G uidelines A lthough the predecessors o f the present F N M A date back to 1938, experience w ith sizable Government secondary m arket operations is confined m ainly to the postwar period. Despite this lim ited experi ence, a few m ajor conclusions can be presented. (1 ) W h ile a Government secondary m arket can contribute to de veloping an effective private m arket, it cannot fu lly achieve this pur pose u n til a fa irly standardized loan contract is developed, a large volume o f loans is available fo r trad in g , and m ajor legal deterrents to interstate lending are reduced or removed. W h ile some progress has 23 been made in m eeting these conditions, much more is needed. The Conwrdttee recommends th a t Federal agencies, in cooperation w ith States, intensify th e ir efforts to promote the development o f u n i fo rm ity in State laws and regulations pertaining to m ortgage contracts (including originations, foreclosures, and title claim s). (2 ) Tem porary credit assistance through Governm ent support may be justified when a new program o f insured and guaranteed loans can not im m ediately attract p rivate p articipation except at an interest rate higher than th a t prevailing fo r roughly comparable credits in com petitive private markets. In this case, purchases a t low er rates by a secondary m arket organization, follow ed by a period o f seasoning may make it possible la te r to sell these loans at a low er and more com p etitive m arket yield, a n d /o r new loans o f the same types may not require fu rth e r support. F o r example, the special assistance once provided by F N M A fo r F H A -in su red m ilita ry housing mortgages is no longer necessary. (3 ) A Governm ent secondary m arket, however, m ay too readily become a perm anent program fo r supporting a submarket type o f credit. In this case, it is obviously a substitute fo r, rath er than a stim ulus to, an effective p rivate m arket. As a perm anent credit sup port, moreover, a secondary m arket is p a rtic u la rly unsatisfactory be cause o f the false impression it may give o f the salability on competi tiv e term s o f the financial assets placed w ith it. T o avoid the danger o f a one-way m arket, therefore, the Committee recommends th a t estab lishm ent o f a secondary m arket be reserved fo r cases in which there is a real possibility o f encouraging sales to p rivate lenders, w ith purchases being discretionary and subject to firm supervision and control. In other words, the secondary m arket device should not become the dis guised equivalent o f a direct lending program . W hen perm anent credit assistance is desirable, direct loans, combinations o f loan guaran tees and capital grants, or interest subsidies are preferable, since these are more easily adjusted to provide the m inim um necessary Federal intrusion and support. (4 ) I t is very im portant th a t secondary m arket operations be con sonant w ith the objectives o f general m onetary policy. Housing and other in s tru c tio n , fo r example, are quite sensitive to changes in in terest rates and in the a v a ila b ility o f funds, and inappropriate policies on prices and on purchases or sales o f mortgages by a Government secondary m arket could strongly hinder the effectiveness o f stabiliza tion policy. Hence the Government secondary m arket should not, as a rule, be used on a scale sufficient to offset the im pact o f general m onetary policy on any m ajor sector o f the m arket— though under certain circumstances when the construction industry and the economy 24 as a whole are moving in different directions, some modification o f this principle m ay, at times, be w arranted. (5 ) In establishing and adm inistering loan guarantee and insurance program s, the Committee recommends against any guarantee of liq u id ity (o r “p u t” ) which gives the holder of an insured or guaranteed portion of a loan (o r deferred p articip atio n ) the rig h t to s h ift the loan back to the Government w ithout risk or cost whenever interest rates rise or alternative investment prospects improve. I f , as a transitional device, any liq u id ity provision is deemed necessary, the liq u id ity should be provided only fo r short periods and should entail a signifi cant actual or potential cost to the lender who enjoys the liq u id ity protection. V I I. D IR E C T L O A N S Despite the predominance in d o llar amounts o f loan guarantee and insurance programs, in a substantial number o f areas the Federal Government engages directly in lending operations, o r sponsors and in itia lly invests in p rivate lending institutions. D ire ct loans are p ar tic u la rly im portant in the international areas where, because o f the risks involved, it is often difficult to obtain p rivate p articip atio n on terms compatible w ith the foreign policy objectives o f the program . In addition, credit aids to agriculture, to local communities, to colleges (and college students), and to small business have been m ainly in the form o f direct loans. Because o f the relative freedom o f direct loan program s from the constraints o f p rivate financing, the terms on which direct loans are made available vary w idely. Some o f the variations in terms deliberately reflect differences in program objectives. Others can be explained largely in terms o f historical o rig in and legislative and adm inistrative in ertia. T h is section discusses m ain ly the scope and use o f subsidies in direct loan program s, the methods fo r measuring and disclosing subsidies, and the use o f ceilings and other controls on interest rates. A . G en eral Recom m endations on S e lf-S u p p o rtin g P rog ram s (1 ) W hen credit needs arise solely because o f im perfections in the p rivate credit system, direct loans or other Government credit aids designed to meet these needs should norm ally be self-supporting; i.e., a t a m inim um the returns should cover a ll costs reasonably im puted to the program . T h is rule should apply whenever (a) borrowers are able to pay a ll o f the costs fo r the specific type o f cred it th a t would be charged in an efficiently functioning, com petitive p riv ate m arket; and (5 ) the p rivate m arket does not generally supply such cred it o r sup plies it only at excessive costs (because o f u n fa m ilia rity w ith the 25 specific type o f lending, lack o f adap tab ility to em erging credit needs, or lack o f sufficient com petitive pressure). (2 ) I f the Government sponsors new types o f lending agencies to furnish the needed credit and these agencies obtain th e ir funds largely or entirely in the private markets a n d /o r are intended sooner or la te r to become w holly p rivate, such agencies should charge interest rates th a t are deemed adequate u ltim ately to cover a ll costs o f opera tions in the private m arket. (3 ) S im ila rly , other Federal credit program s intended p rim a rily to stim ulate private lending w ill be most effective in encouraging substi tution o f private fo r public credit i f the rates charged on the Federal loans are comparable to those th a t would p revail in effectively func tioning p rivate markets. Bates charged on direct loans which supple ment guaranteed or insured loans, fo r example, should be equal to the to tal charges (including guarantee fees or insurance premiums) payable by borrowers on the guaranteed o r insured p rivate loans. In s o fa r as feasible, borrowers should be expected to pay interest on the Governm ent’s share o f im m ediate participations in p rivate loans a t a rate which is adequate to cover norm al p rivate lenders* cost. B . Need fo r and M easurem ent o f Subsidies (1 ) The provision o f credit under Federal program s, even when the interest rate and other charges fu lly cover Government costs, tends to reallocate national resources. Indeed, such reallocation in socially desirable directions is the m ajor purpose o f these programs. In tellig en t choice among alternatives requires th a t the effects o f Federal credit on resource allocation be exp licitly recognized and decisions be made in the lig h t o f this recognition. To this end, it is h elp fu l to compare the interest rates under each Federal credit program w ith the interest rates which would be charged in a com petitive and efficient p rivate m arket, and also w ith the interest rates which would cover the Federal costs o f operating the program . (2 ) T h is does not mean th at the financial costs are the only costs, or th at financial benefits are the only gains. In fact, other public benefits may be veiy extensive; e.g., through prom otion o f fu lle r use o f resources, reduction of unemployment re lie f costs, and provision o f other indirect benefits. (3 ) Subsidies can be justified fo r credit program s, as elsewhere, when the reallocation o f resources accomplished by the subsidies re sults in net additional public benefits at least equal to the net cost o f the subsidies involved and when the additional public benefits are not obtainable through alternative approaches at low er costs. 675170—63------ 5 26 (4 ) T o fac ilita te evaluation o f the effects on use and allocation o f resources and on the costs o f Federal credit programs involving a subsidy, the Committee recommends that the subsidy element be ex p lic itly recognized. The first step should be to compare the interest rate paid by the borrower on direct Federal loans to the sum o f (a) the p revailin g m arket yield on Government securities o f comparable m aturities, (6 ) an allowance fo r adm inistrative costs, and ( c) an a l lowance fo r expected losses. S im ila rly the revenues, i f any, fro m premiums and other fees charged on insured and guaranteed loans should be compared w ith a reasonable allowance fo r adm inistrative expenses and expected losses in the guarantee or insurance program . (5 ) D eterm ination o f each o f these items necessarily involves some a rb itra ry estimates, but this approach appears to be feasible fo r most programs w ith in a reasonable range o f accuracy: (а ) W h ile the Treasury does not enter the m arket to bor row a specific amount fo r a specific period in order to make a loan o f an equal amount fo r the same period, it is compelled to have a com parably greater amount o f debt outstanding fo r such a period and the most appropriate measure o f the u lti mate alternative cost involved is the current m arket cost o f borrow ing fo r comparable m aturities. (б ) W h ile adm inistrative costs o f loan programs at times are interm ingled w ith other parts o f broader assistance pro grams, the difficulties o f allocation are rarely so great as to cause large errors in estim ating them. (c) W h ile the losses w ill be especially difficult to estimate in those credit areas in which the Government is pioneering, experience in earlier ventures or comparable program s can provide some guide. (6 ) T h is calculation provides a reasonable measure o f im puted Government costs, but even when the interest rate charged on a F ed eral credit program is sufficient (but no more than sufficient) to cover such costs, it can s till provide a significant advantage to the borrower, i f it is below the rate th a t a reasonably com petitive and efficient p rivate m arket m ight be expected to charge. The amount o f such additional advantage is difficult to measure, but it clearly exists. Because o f his more lim ited resources, even the com petitive and efficient p rivate lender has to build up reserves to cover not m erely the losses norm ally anticipated, but also the th reat o f abnorm ally hig h losses. T h is w ill be reflected in his charge fo r risk. The Gov ernm ent, on the other hand, can rely upon its taxin g power to take care o f such contingencies. M oreover, because o f its taxing power, 27 the Government enjoys a high credit ra tin g , which enables it to bor row at a substantially lower cost than any p rivate lender. (7 ) Thus, in a free enterprise economy relyin g p rim a rily on p ri vate financing institutions, borrowers given access to Government credit receive im portant advantages denied to most borrowers, even if the rates charged by the Government agencies are equal to Govern ment costs. Borrowers, when appropriate, can be given interest rates somewhat below the private m arket w ithout entailin g Governm ent costs, in addition to longer m aturities and other more lib eral terms than are available from private lenders. These extra advantages are properly included in any evaluation o f the resource allocation and equity effects of Government loans. C. D isclosure o f Subsidies (1 ) W h ile an interest rate below Government costs (o r the w aiver of guarantee fees) represents the usual type o f subsidy employed in Federal credit programs, exp licit grants are provided in addition in at least fo u r Federal programs including credit aids (urban renewal, low -rent public housing, local-service airlines, and m aritim e ship construction program s). F o r example, under the low -rent public housing program , the Federal Governm ent contracts to pay contribu tions up to the m axim um amount necessary to cover the debt service on loans financing the project. S im ila rly , the M aritim e A d m in istra tion pays a substantial p art o f the cost o f constructing A m erican-built ships, and insures private loans made to finance most o f the rem aining costs. (2 ) U nder present arrangements, interest-rate subsidies are less visible, and hence less subject to effective review ; they may also encour age unnecessary substitution o f public credit fo r private credit ava il able at slig h tly higher interest rates. O n the other hand, o u trig ht grants, w hile usually inappropriate fo r private borrowers, are often preferable when a public agency is the recipient. They can either be in the form o f in itia l capital grants, or can be paid later. In the la tte r case, they ctm be adjusted from tim e to tim e to meet the v a lid needs o f the borrowers. (3 ) W hatever the type o f subsidy, inform ed decisions are possible only i f there is provision fo r adequate disclosure o f the relative cost o f credit and other programs. T o this end, the Committee recom mends th at— (a) A ll proposals to create new credit program s or to broaden existing credit programs should be accompanied by an appraisal o f the relationship between the interest rate charged in the program , the rate which would be charged by 28 com petitive and efficient private lenders, and the rate neces sary to cover the Governm ent’s costs. (& ) The norm al reviews o f a ll existing Federal credit pro grams should include discussion o f these relationships. (4 ) The general principle o f takin g into account both budgetary and social costs applies to many other areas. The Committee would not propose to apply more rig id standards to Federal credit programs than to other programs o f a noncredit nature, since this m ight tend to induce substitution o f less desirable fo r more desirable types o f assistance. D . C eilin g s and O th e r C ontrols O ver In te re s t R ates on D ire c t Loans (1 ) In most direct lending programs adm inistered bv w holly owned agencies, the basic statutes place ceilings on the rates th at may be charged to borrowers. In several cases (e.g., the most im portant direct loan programs o f the S B A , V A , R E A , Farm ers Home A d m inistration, and H E W ) the maximum permissible interest rate is specified by law . In as many or more cases, the rates are governed by a statutory form ula (e.g., direct loans bv IJ R A , P H A , C F A , and A R A , as w ell as reclamation loans by In te rio r and D is trict o f Co lum bia public works loans from the T reasu ry). Most o f the active international loan programs, as w ell as some o f the Governmentsponsored, quasi-public credit programs, however, have adm inistra tive fle x ib ility w ithout either flat ceilings or form ulas being specified in the statutes. (2 ) These statutory lim itations, to a considerable extent, represent more or less exp licit judgments by the Congress regarding w hat a “fa ir” interest rate was at the tim e o f enactment. However, w ith a few exceptions, the rates governed both by specific ceilings and by form ulas have proved to be much more rig id and have varied more slowly and through a narrow er range than either m arket rates o f interest or current Treasury borrow ing costs. Occasionally, a fte r considerable delay, statutory ceilings have been amended, although not always by the fu ll amount o f the changes in m arket rates. F o r mulas based on coupon rates o f interest fo r the entire outstanding debt, and especially those based on long term debt, have been very sluggish both on the rise and on the decline, since they have been dominated by interest rates p revailin g in earlier periods when a large share o f the current debt was issued. O n the other hand, form ulas based upon current m arket yields, by definition, respond prom ptly to changes in m arket conditions. (3 ) S tatu to ry ceilings o r form ulas may often have perverse effects not intended. F o r example, when a decline in economic a ctivity 29 -causes m arket rates o f interest and Treasury borrow ing costs to fa ll, the statutory ceilings do not require— and many o f the statutory form ulas do not even perm it— any m ajor reduction in the rates which c red it agencies charge on new loans. B u t when boom conditions <iause m arket rates and Treasury borrow ing costs to rise, the ceilings and most o f the form ulas may prevent more than a token or gradual rise in interest charges. Thus, the biggest net subsidy is given on loans made in periods when both the need to g ran t special ad vantages to in d ivid u al borrowers and the case fo r stim ulating the economic system are least urgent. The converse is true in recession periods; i.e., the smallest net subsidies and, therefore, the least relative stim u lus to the economic system, are provided when the need is greatest and when assistance would be most tim ely. (4 ) A ccordingly, the Committee reconvmmds th a t in authorizing new direct loan programs or m ajor expansions o f present programs— {a) F u tu re legislation should avoid requirements fo r rig id or relatively inflexible ceilings (o r floors) on interest rates; and (6 ) I f fo r reasons o f public policy it appears appropriate to charge interest rates below rates fo r com parable loans in p rivate markets or below Governm ent costs, the lending agency should be perm itted to vary the rate charged new bor rowers from tim e to tim e a t least as much as m arket rates and current Treasury borrowing costs vary. V I I I . F IN A N C IN G O F C R E D IT P R O G R A M S The Government's role in financing F ederal credit program s varies g reatly, depending larg ely on the type o f program . The follo w in g paragraphs summarize the essential features o f the financing p attern fo r each o f the three m ajor groups o f Federal credit program s. (1 ) T h e largest segment, guaranteed and insured loans, involves relativ ely m inor use o f Government funds. In the case o f loan insur ance program s, a relatively sm all in itia l Governm ent investment usually is made, w ith la te r operating expenses and claims largely or w holly financed from prem ium and investm ent income. W hen F H A insured loans d efault, Governm ent-guaranteed debentures usually are issued to pay the claims and take possession o f the security, but the debentures are subsequently redeemed (and interest p a id ) from re serves b u ilt up from prem ium and investment income. In the case o f loan guarantee program s, no in itia l Governm ent investment is usually involved, but operating expenses and claims are larg ely financed from current appropriations. In addition, in both cases the Government assumes a contingent lia b ility , w hich curren tly totals over $60 b illio n . 30 (2 ) Federal capital investments have been made at various times in five groups o f currently active Government-sponsored enterprises en gaged in m ajor lending activities. The p rin cip al amounts o f these cap ital investments have been w holly repaid by tw o groups (the Fed eral land banks and the Federal home loan banks) and p artly repaid by two others (the Federal interm ediate credit banks and the banks fo r cooperatives). Both Federal and p rivate funds have been invested in the secondary m arket operations o f the F N M A , w ith no p rincipal repaym ent as yet on the Federal investment. The to ta l Federal cap ital investment in a ll o f these institutions, including accumulated net income, currently amounts to $0.5 b illio n . F N M A borrows rela tiv e ly small amounts fo r b rie f periods fro m the Treasury, but other wise a ll live groups o f agencies borrow d irectly in the p rivate m arket w ithout any exp licit Federal backing. C urrent loan disbursements are largely financed from repayments o f previous loans; in fiscal year 1961, fo r example, $7.3 b illio n o f new loans made compares w ith $7.1 b illio n in repayments. Outstanding loans on June 30, 1961, totaled $9.5 b illio n . (3 ) In contrast to the preceding programs, almost a ll funds used by w holly owned enterprises fo r direct loans and mortgage purchases are Government funds, which are largely obtained through borrowing from the Treasury. Outstanding loans of m ajor domestic programs (excluding C C C ) at the end o f the fiscal year 1961 totaled $12 b illio n , and there were also about $11 b illio n in foreign loans. As in the case o f Government-sponsored quasi-public enterprises, much o f the cur rent loan disbursements is financed from repayments on previous loans. The m ajor programs in 1961 had gross p rincipal disbursements o f $3.3 b illio n and repayments o f $1.7 b illio n (excluding C C C dis bursements o f $1.4 b illio n and repayments o f $1.6 b illio n ). A . C ongressional P rovisio n o f Funds (1 ) The volume o f Government funds invested in specific credit program s depends, in the first instance, on congressional decisions. The type and extent o f congressional control has not been the subject o f review by the Committee, w ith the follo w in g exception. Past experience w ith Federal insurance and guarantees in some m ajor Federal credit programs has indicated th a t p rivate p articip atio n can be effectively attracted only i f investors are confident th a t the Govern m ent w ill make good on its commitment w ithout undue delay when defaults occur. (2 ) The Committee recommends, therefore, fo r a ll program s authorized to guarantee or insure loans, th a t the Congress provide, in advance, reasonable amounts o f new obligational authority to meet any foreseeable contingencies arising fro m actual defaults. T h is 31 would not require accumulation of idle funds by the guaranteeing or insuring agency, but m erely advance provision o f authority to borrow or permanent appropriations fo r the exclusive purpose o f, and only up to the amount necessary fo r, carryin g out the guarantee o r insurance commitments. B . B o rro w in g F ro m the T re a s u ry (1 ) C red it agencies established as direct Federal program s and expected to rem ain w holly Government owned should norm ally obtain th e ir capital requirements by borrowing from the Treasury rath er than by borrowing, either w ith or w ithout a Fed eral guarantee, in the general m arket. (2 ) Th e chief present exception is the auth o rity of the Federal Housing A dm inistration to issue Governm ent-guaranteed debentures to pay off claims on defaulted loans, instead o f borrow ing from the Treasury to meet such obligations. The Committee recommends th a t the F H A continue to have the authority to issue guaranteed deben tures, but th at it also be authorized, at its option, to pay claims in cash. The auth o rity to issue debentures, which at times can be sold only a t a price less than par, provides a m inor but desirable element o f risk sharing (coinsurance) by private lenders. I t also provides a mechanism fo r financing the holding o f the properties acquired u n til th e ir sale is appropriate. C. B o rro w in g in th e P riv a te M a rk e t (1 ) Government-sponsored credit agencies which receive in itia l financial support, but become or are expected to become w holly p ri vately owned, should borrow in the private m arket on an unguaranteed basis rath er than borrow from the Treasury. W h ile the fac t of Gov ernment sponsorship im plies a measure o f Governm ent involvem ent, it is im portant th a t such agencies be required norm ally to meet the test o f the p rivate m arket. (2 ) In the early stages o f a Government-sponsored program , be fore its obligations have become accepted as seasoned securities, how ever, it m ay be necessary fo r Treasury to backstop its m arket bor row ing by purchasing its obligations on demand, n orm ally fo r short periods. Agencies such as the Federal home loan banks, which are the source o f liq u id ity fo r th e ir members, and the Secondary m arket operations o f the F N M A , should also continue to have recourse to Governm ent funds, but only to meet emergency or tem porary cash requirements. A n y such borrow ing fro m the Treasury, however, should rem ain subject to Treasury approval. (3 ) U n der the Government C orporation C ontrol A c t and related corporation charters, the Federal land banks, the Federal interm ediate 32 credit banks, and the banks fo r cooperatives are required to consult w ith the Secretary o f the Treasury before borrow ing from the public. The Federal home loan banks and the F N M A are required to obtain the approval o f the Secretary o f the Treasury on the tim in g and terms o f any borrowing from the public. The Committee recommends th at approval by the Secretary o f the Treasury be required o f these aspects o f the borrowing o f any new Government or Governmentsponsored enterprises borrowing in the m arket in th e ir own name, and th a t such a requirem ent fo r a ll existing agencies be included in any revisions o f the Government Corporation C ontrol A c t or o f p articu lar corporation charters. The purpose is to m inim ize any conflict w ith m onetary and debt management policy which may arise from issues o f th e ir securities. D . R evo lvin g Funds M ost Government credit program s, whether direct loans or guaran tees and insurance, are financed through “public enterprise revolving funds” ; e.g., funds which finance a cycle o f operations in which ex penditures generate receipts coming p rim a rily from the public and available fo r continuing use. T h is type o f funding provides a desir able fle x ib ility in lending operations and helps to disclose systemati cally the relationship between revenues and expenses as w ell as any subsidy provided by the Government. The Committee recommends th a t the revolving fund method o f financing be extended to a ll credit program s where it is feasible to do so. E . Sales o f Assets (1 ) A s a general rule the terms of Government credit provided fo r buyers o f physical assets from the Governm ent; e.g., surplus prop erty, should be such as to make the loan suitable fo r u ltim ate resale to p rivate lenders. In exceptional cases, however, submarket interest rates, deferm ent o f am ortization requirements, or other unusually favorable terms may be justified i f necessary either to promote the essential objectives q f the program or to accomplish a sale expected to y ield greater aggregate proceeds, allow ing fo r both price and credit terms. (2 ) Sales o f existing loans and other assets acquired from lending operations are an appropriate source o f funds fo r new loans. Such sales, however, should norm ally be made only at such times and prices w ill be consistent w ith prograxa objectives ajcwJ overall fiscal policies, and conduoive^ to economic stab ility and grow th. (3 ) Sales o f direct loans to private institutions are appropriate when such sales w ill encourage the eventual substitution o f p rivate fo r Gov ernment credit in the p rim ary lending operation. Loans which have 33 subsidy interest rates and other features not attractive to private lenders offer no realistic prospect o f achieving such a result. H ow ever, sales o f such loans m ay be justified to complete liquidation o f an in active program or to help meet budgetary emergencies. (4 ) I f necessary to foster development o f a private m arket, the Federal agency selling its own direct loans m ay appropriately guar antee or insure the loans (except ta x -exempt securities). Such insur ance or guarantees, however, should be confined to guarantees against d efau lt, should involve some coinsurance, and should avoid guarantees o f liq u id ity (o r “puts” ). (5 ) In exceptional cases involving the handicaps o f unknown names and credit and where coinsurance is im practicable, it m ay be feasible, possibly as an in terim procedure, to issue collateral tru st certificates backed by a pool o f Government loans. In general these certificates should not have liq u id ity guarantees; such guarantees, however, are least objectionable if they can only be exercised a fte r a stipulated tim e period, and i f the issuing agency has call privileges and can re negotiate interest rates. (6 ) The policies followed by the F N M A in selling insured and guar anteed loans, as w ell as the liquidation policies o f the V A loan guaran tee and the F H A m ortgage insurance program s, should be established on a m utually consistent basis. I t is especially im portant th a t the prices at which comparable insured and guaranteed mortgages are offered fo r sale be substantially the same and th a t the tim in g o f changes in sales policies be m utually agreed upon. T h e im pact on the level o f interest rates and construction a c tiv ity should be among the m ajor factors considered in decisions on the term s under which insured and guaranteed mortgages are sold. W hen consistent w ith these and other economic objectives, sales below p ar should be perm itted. The Committee recommends th a t the Congress remove any legislative lim itations on sales prices or term s w hich m ig h t impede desirable fle x ib ility . IX . B U D G E T A R Y T R E A T M E N T A N D C O N T R O L A lm ost a ll Federal credit program s are included in some form in the Budget of the Urated States. There is substantial variatio n , how ever, in the kinds o f data presented and in the extent o f budgetary control over specific program s. A . P resen tatio n o f C re d it P ro g ra m s in th e B u dg et The data on Federal credit program s presented in the budget serve three related but distinct purposest (1 ) program review , (2 ) analysis o f Treasury fmancingneeds, and (3 ) analysis o f economic significance. 34 In recognition of this fact, the budget presentation o f most Federal credit programs, in conjunction w ith the supporting statements made available to Congress, currently go w ell beyond the tabulation o f net financial flows, although the comprehensiveness o f presentation varies among the different types o f credit programs. (1 ) D ata on income and expenses, new loan commitments, presertt and prospective repayments, and loss experience are essential fo r p u r poses o f program review by the Congress and the Executive. In direct loan and mortgage purchase programs, gross outlays and repayments should be presented, as w ell as net expenditures. The gross figures disclose the extent to which credit is being new ly provided by the loan program , w hile the net expenditures indicate the flow o f new Govern ment funds into the program . (2 ) F o r purposes o f analyzing Treasury financing requirements, direct loan and mortgage purchase programs should be included on a net basis, as they are in the consolidated cash statement. (3 ) F o r purposes o f analyzing the economic im pact o f the Budget, the differences in character between credit program expenditures, d i rect Government expenditures fo r goods and services, and transfer payments should be recognized. Because expenditures fo r loans and mortgage purchases are not themselves expenditures fo r goods and services, they are not classified in the Federal sector o f the national income and product account, but the activity stim ulated by Federal credit programs appears in other sectors. A ccordingly, it is im portant to provide the type o f inform ation on credit program s th a t w ill enable in tellig en t evaluation o f th e ir indirect im pact on other sectors o f the national economic accounts. (4 ) T h is effect can vary considerably from tim e to tim e, depending upon the type o f loan, opportunities fo r profitable investment of the proceeds o f the loan, borrower attitudes tow ard liq u id ity , and the general level o f business activity. S im ila rly , it makes a great d iffer ence whether the loan finances the production o f new assets or the p u r chase o f existing assets; and whether it substitutes fo r private loans or refinances old debts, rather than adding to the to tal volume o f credit. W hen extension o f Government credit (eith er through loans or guar antees o f p rivate c re d it), finances production o f new assets which otherwise would not have been produced, the economic stim ulus is apparent. B u t even loans which in itia lly finance acquisition o f exist ing assets m ay enable a series o f asset transfers th a t u ltim ately adds to the aggregate demand fo r goods and services. (5 ) A serious gap in the presentation o f relevant inform ation on Federal credit programs in the annual B udget is the relatively m inor amount o f data on certain m ixed-ownership Government corpora 35 tions. Because o f the exemption from statutory requirements on budgetary disclosure, inform ation about the banks fo r cooperatives and the Federal interm ediate credit banks is largely confined to statements o f financial condition of these institutions at the end o f the previous fiscal year, together w ith in fo rm atio n on present and prospective new Federal investments or retirem ents o f existing invest ments in these institutions. M ore nearly adequate data are provided on the Secondary m arket operations o f the F N M A . On the other hand, the data on the 11 Federal home loan banks, now w holly p ri vately owned, are even more lim ite d ; and no data a t a ll are provided on the 12 w holly farm er-owned Federal land banks. The Committee recommends, at a m inim um , th a t the banks fo r cooperatives and the Federal interm ediate credit banks be made subject to the statutes on budget disclosure and th at the Budget contain adequate data on th e ir present and futu re budget programs. B . B u d g e ta ry C o n tro l O ver G overnm ent C re d it P ro g ram s (1 ) F o r both economic and fiscal reasons, the aggregate volume o f Government credit aid and its distribution among various programs should be subject to effective executive control. A g ain , a gap exists in such control insofar as mixed-ownership Governm ent corporations are concerned. The Committee recommends th a t those corporations which have the authority to obtain or u tiliz e Governm ent funds (e.g., the banks fo r cooperatives and the Federal interm ediate credit banks) o r the auth o rity to issue guaranteed obligations should be subject to effective annual review . T h is review would be facilitated by b rin g in g these organizations under the budget review requirements o f the Governm ent C orporation C ontrol A ct. (2 ) The volume o f applications q u alify in g fo r Governm ent loans or guarantees under statutory o r adm inistrative standards is often not a proper measure o f the v alid level o f F ederal credit assistance. N o r is the fac t th a t most loans w ill u ltim ately be repaid, w ith interest, a sufficient reason fo r blanket approval o f a ll elig ib le applications. R ath er, since credit programs add to the demands on resources, the ac tiv ity in each program should be judged not only in term s o f the claim placed on the Federal budget, but also in term s o f the relative bene fits obtained from the use o f resources diverted fro m other uses by fed erally backed p rivate credit o r by direct Federal loans. (3 ) Since Government credit often involves significant net u ltim ate costs and always entails some risk, (usually greater than fo r p rivate c re d it), sound fiscal policy requires th a t these risks and potential costs be subject to effective control. M oreover, as long as executive and congressional budgetary policy is made on the basis o f budget totals 36 which include loans, lim itations on loan commitments are necessary from tim e to tim e to make room fo r expenditures o f higher p rio rity . (4 ) W h ile other methods o f control may be available, budget con trols are often the most, effective device— especially fo r direct loan and mortgage purchase programs. Such controls must be applied to com mitments, rather than to the expenditures which more or less auto m atically follow once a commitment has been made. (5 ) A t times, some Federal agencies have been reluctant to apply more restrictive standards in reviewing credit applications than those specifically required by the enabling legislation, p referrin g to fill a ll loan applications that meet the m inim um requirements o f the law on a first-come, first-served basis. W hen funds run out, either more funds must be obtained from the Congress, or backlogs o f unfilled applications are b u ilt up. (6 ) O ther agencies have found it possible, consistent w ith th e ir legislative mandates, to develop adm inistrative c riteria fo r reviewing applications. Thus, when funds are inadequate to take care o f a ll eligible applications, the lim ited commitments can be rationed on a more equitable and effective basis than first-come, first-served. Such c riteria have included geographic allocation o f available auth o rity, lim itations on m axim um amounts fo r in d ivid u al projects or borrow ers, requirements fo r reasonable amounts o f p rivate participation (ac companied by technical assistance in obtaining such p a rtic ip a tio n ), and p rio rities fo r types o f borrowers w ith p articu larly urgent needs. (7 ) The Committee recommends th a t Federal agencies adm inister ing credit programs give increased attention to developing adequate and equitable standards (including legislation, i f necessary) fo r use when the demand fo r credit exceeds the present and prospective levels o f available funds. (8 ) D ire ct or indirect controls over the level o f new commitments fo r loan guarantees and insurance can be as im portant from the economic standpoint as controls over direct loan commitments, and o ften more im portant. W hen such guarantees can be effectively lim ited by the level o f advance funding provided fo r losses, such budget lim itatio n s m ay be a useful device. M ore often, however, controls through changes in terms or other approaches are lik e ly to be p refer able. These are discussed in the next section. X . P R O M O T IO N O F E C O N O M IC S T A B IL IT Y A N D G R O W T H As Federal credit program s have grown in size and diversity, th e ir im pact on aggregate economic a c tiv ity and th e ir capacity to affect prices have become more im portant. As a result, any exam ination o f Federal cred it programs must p u t great emphasis on whether these 37 program s are being used to the fu ll extent possible in carrying out the mandate o f the Em ploym ent A ct o f 1946 to promote “maximum employment, production, and purchasing power.” A . S ta b iliz a tio n o f the Econom y vs. In d iv id u a l Sectors (1 ) The mandate o f the Em ploym ent A ct im plies th a t Government policy should seek to m inim ize deviations from a rising trend o f poten tia l output th at reflects the growth in the labor force and productive capacity. In general, Federal credit program s, however, are not designed p rim a rily to counteract cyclical fluctuations in the economy; rather they have th e ir origin in a desire to assist a p articu lar sector o f the economy, such as housing or agriculture. (2 ) In periods when resources are idle in a ll m ajor sectors o f the economy, the use o f Federal credit programs to stim ulate the economy is clearly consistent w ith th e ir function to assist p articu lar sectors. Policies designed to increase aggregate income w ill stim ulate spend ing throughout the economy. Conversely, policies th a t add to spend* ing or income in p articu lar sectors w ill stim ulate higher spending and income elsewhere. (3 ) Inconsistency between the program and stabilization objectives is more lik e ly at times o f relatively fu ll employment, when production is pressing against available resources, w ith consequent inflationary pressures. In such a situation adoption o f restrictive policies in Federal credit programs may restrain certain sectors o f the economy more than others. This may be, but is not necessarily, undesirable. W h ile im m obility o f resources could cause idle resources in sectors bearing the m ain brunt o f restraint, simultaneous w ith shortages in other sectors, there is almost always some m o b ility o f resources at th e m argin. Decisions on the use o f Federal credit program s as tools o f restrain t, therefore, should be taken in the lig h t o f the effects on p articu lar sectors and in accordance w ith the scale o f social p riorities p revailin g at the tim e. B . S ta b iliz a tio n vs. S ocial O bjectives T h e use o f Federal credit program s as tools fo r general economic stabilization and grow th need not conflict w ith achievement o f the longer-run social objectives o f the specific programs. F o r example, annual additions to the stock o f housing or other cap ital goods induced by Federal credit programs are lik e ly to be sm all compared to the total stock. The tim in g o f these additions is not always crucial in attain in g the social objectives o f the program . Indeed, insofar as Federal cred it program s help to achieve overall economic stabiliza tion and grow th, every sector o f the economy is lik e ly to gain. In the long rim , a healthy, vigorous economy is the m ain prerequisite fo r the economic health o f individual sectors. 38 C . R ole o f F e d e ra l C re d it P rog ram s vs. O th er P olicies (1 ) Federal credit programs are but p art o f a gam ut o f economic policies— including budgetary, tax, m onetary, and debt management policies— available to carry out the stabilization objectives of the E m ploym ent A ct. The choice o f an appropriate m ix o f policies depends upon the economic im pact o f various policies, the freedom and flexi b ility w ith which they can be employed, tim e lags between execution Mild actual im pact, and fin ally the other economic and social goals be ing pursued; e.g., economic grow th and balance o f payments equilibrium . (2 ) T h e usefulness o f Federal credit programs as tools of economic stabilization policy is less than sometimes assumed. F o r many credit program s, the tim e lag between a change in terms or ava ila b ility o f credit and the resulting im pact on economic activity is long. A nd changes in the level or terms o f many credit programs may be difficult to accomplish w ithout ham pering sound adm inistration o f these pro gram s or o f the broader program s o f which they may be only an incidental p art. (3 ) M oreover, w hile Government credit programs have varying economic impacts, they norm ally have less im pact per d o llar o f credit extended than expenditure or tax policy. Federal insurance and guarantees o f private credit and Government-sponsored credit in s ti tutions, to some extent, d ivert private credit from one use to another. T h ey have th e ir most expansionary effect when they activate idle cash balances, when the loans otherwise would not have been made by existing p rivate lenders, and when they are used to finance types of expenditures th a t are especially sensitive to credit ava ila b ility and terms. (4 ) In quantitative terms, the potential net stimulus from Federal credit programs, w hile significant, is only a fraction o f the stimulus from either m onetary or fiscal policy. F o r example, the net increase o f $1.2 b illio n in outstanding direct Federal loans (excluding loans in foreign currencies) in fiscal 1961 was relatively m inor, compared either to the expansion in commercial bank credit stim ulated by m onetary policy or to the to tal increase in Federal expenditures and tran sfer payments. The gross effect o f the continued re-use o f these resources is much greater, however, as indicated in appendix D . (5 ) Changes in the outstanding volume o f guaranteed and insured p rivate loans are usually much greater than in direct Federal loans; e.g., $4.6 b illio n compared to $1.2 b illio n in 1961. Hence, a b ility to influence the terms on which such p rivate cred it is extended may give the Governm ent a useful tool fo r affecting the volum e o f private lending. 39 (6 ) G iven the lim itations inherent in Federal credit programs as tools o f economic stabilization and grow th, it would be a mistake to regard such programs as adding a large new dimension to stabiliza tion policy. Nevertheless, advantage should be taken o f the poten tia lity o f such programs as stabilization tools, since the arsenal of such tools th a t can be readily and quickly brought into play is fa r from adequate. D . G uidelines (1 ) T h e steps necessary to use Federal credit programs effectively fo r stabilization objectives vary fo r d ifferent types o f programs. They involve m ainly changes in policies on interest rates, downpay ments, m aturities, maximum loan amounts, and in the to ta l credit commitments by specific programs. T o p erm it prom pt and effective action when the economic situation requires, it is essential to have flexible auth o rity available. The Committee recommends, therefore, th a t wherever present authority proves to be inadequate to perm it effective use o f credit programs in prom oting economic stabilization, legislation be enacted to provide the needed additional auth o rity, in cluding appropriate safeguards to lim it its use. One o f the respon sibilities o f the coordinating committee and its subcommittees suggested in Section X I should be to id e n tify any such needs fo r additional authority. (2 ) A t a m inim um , when neither basic conflict w ith recognized pro gram objectives nor gross inefficiencies are entailed, the terms o f Gov ernment credit programs should be varied in lin e w ith variations in terms in private credit markers, thus m aking such program s responsive to general monetary j>oliey. This policy would prevent significant changes in the relative subsidy im p lic it in m any o f these program s and prevent undesirable cyclical shifts between Governm ent and p rivate credit. (3 ) In some o f the larg er and more flexible credit program s, having a significant influence on economic a ctivity and on p rivate credit terms, a dynamic stabilization policy o f leading rath er than fo llo w in g private credit policy is at times appropriate. Em phasis should be on stim u la tin g (o r restricting ) those expenditures especially responsive to credit terms. M any Federal credit program s involve relatively long term loans, and variations in the term s on which such loans are ava il able should prove p artic u la rly effective. (4 ) In the area most im portant in d o llar terms— Federal insurance And guarantees o f housing credit— it appears both possible and desir able, when undue economic fluctuations occur, to change the term s and conditions under w hich Governm ent aid is available; e.g., by varying m axim um loan amounts and m aturities and m inim um downpayments. 40 Changes in terms are preferable to rig id interest ceilings as a method fo r influencing the flow of p rivate credit into housing. M oreover, revisions in terms of these insurance and guarantee programs should be accompanied by policies on purchases and sales o f insured and guaranteed mortgages through the Secondary m arket operations of the F N M A consistent w ith over-all objectives o f stabilization policy. The F H L B B policy on advances should also have adequate scope to discourage undesirable fluctuations in m ortgage lending by savings and loan associations. The Committee recommends th at the legis lative standards governing both the F N M A Secondary m arket pro gram and the operations o f the Federal home loan banks be revised to provide clear and unambiguous authority to perm it use of these in sti tutions in prom oting economic stabilization when clearly appropriate. (5 ) W hen over-all economic policy calls fo r variations in fiscal policy, direct lending programs should o rd in arily be among those subject to changes in budgetary controls whenever such changes are lik e ly to operate fast enough to contribute to economic stabilization. X I . O R G A N IZ A T IO N A N D C O O R D IN A T IO N In the preceding sections, the Committee has presented its analysis o f the m ajor criteria which should influence the choice among the various types o f credit and non-credit aids, and the guidelines to be follow ed in establishing, financing, and adm inistering credit pro grams. The actions recommended are designed to carry out the President’s request fo r the Committee “to consider w hat changes, i f any, in Federal credit programs would contribute to achieving the N atio n ’s economic goals.” In this section, the Committee discusses the general approach which, in its judgm ent, is most lik e ly , over a period o f tim e, to assure more effective organization o f Federal credit program s and especially to coordinate more efficiently th e ir activities w ith each other and w ith other Government programs. A . O rg an izatio n by M a jo r Purposes (1 ) L ik e other Government programs, credit programs should be grouped organizationally by m ajor purposes served (e.g., farm in g, housing, business), rath er than by processes or techniques used (e.g., loans, grants, research, construction). Such grouping perm its b etter evaluation, balancing and coordination o f the various means o f achiev ing each m ajor purpose, as w ell as clearer focusing o f responsibility. (2 ) A s fa r as possible, new credit program s should be assigned to existing agencies whenever they serve the same general purposes 41 already served by such agencies. However, in some cases; e.g., the credit portions o f the area redevelopment program , i f the agency responsible fo r the new program in itia lly lacks sufficient personnel w ith the necessary financial skills and procedural expertise and the prospective level o f operations does not ju s tify the creation o f a whole new structure o f lending operations, the agency w ith over-all responsi b ility fo r the function should be authorized to use, as its agent, another agency w ith the necessary credit skills. The special problems involved in such delegation, should be recognized, and p articu lar effort devoted to assuring sympathetic and effective adm inistration by the delegate agency. (3 ) Some im portant existing credit program s (e.g., veterans hous in g loans) are grouped w ith other program s serving the same clientele, even though other clientele groups m ay have basically sim ilar credit needs. Since such groupings are not fu lly consistent w ith organiza tion by m ajor purpose, interagency coordination becomes especially im portant whenever two or more program s in separate agencies are serving essentially the same m ajo r purpose. (4 ) In each o f the five m ajo r domestic program areas reviewed by the Com m ittee, one o r more cred it program s are carried on by agencies •outside the departm ent or agency having the p rim a ry Governm entw ide responsibility fo r leadership in the area o f the common m ajo r purpose. The agencies w ith p rim a ry responsibilities in each area and the most im p o rtan t related credit program s in other agencies include: (a ) Private homing. P rim a ry agency: H H F A B elated credit program s: V A -guaranteed and direct loan program s. A g ricu ltu re— ru ra l nonfarm housing loan program . Federal home loan banks— advances to home financing institutions. (b ) Community development and public homing. P rim a ry agency: H H F A B elated credit pro g ram : Commerce— public fa c ility loans fo r area redevelopment. (c ) Business and transportation,, P rim a ry agency: D epartm ent o f Commerce (in clu d in g p re vi ous C A B guaranteed loan program ) B elated credit program s: SB A — loans and other aids to sm all business. IC C — guarantees o f ra ilro a d loans. 42 (d ) Education and health. P rim ary agency: D epartm ent o f H ea lth , Education, and W elfare Related credit program s: H H F A — college housing loans. H H F A — nursing home mortgage insurance. S B A — loans fo r p rivately owned health facilities. (e) Resource development. P rim ary agencies: Departm ents o f A g ricultu re and In te rio r Related credit program s: F C A — loans by Government-sponsored enterprises aid ing farm ers. (F u rth e r detail on credit programs in each o f these areas as o f June 30,1961 is shown in app. E ) . (5 ) The Committee recommends th a t in a ll m ajor cases in w hich credit programs are adm inistered by agencies separate from those p rim a rily responsible fo r Governm ent-wide leadership in achieving the m ajor purposes served, special efforts should be made to assure continuous and effective coordination. T h e in itia tiv e and respon s ib ility fo r such action rests w ith each o f the credit agencies them selves. Periodic reviews should be made, a t the discretion o f the President, to determ ine whether, in practice, m ajor common problems are being anticipated and satisfactorily resolved. I f existing arrange ments prove unsatisfactory and the achievement o f im portant public purposes is seriously hampered, consideration should be given to more basic approaches. In some cases tran sfer o f the credit program to the agency w ith the p rim ary reponsibility fo r leadership in the area served by the program m ay be an appropriate solution. B. Basic Program Formulation and Objectives L ik e other Federal program s, those w hich involve the issuance o r guarantee o f credit affect the allocation o f resources fo r the purpose o f achieving certain social objectives. A p a rt fro m the specifically credit features o f such programs, the basic form ulation o f program levels and goals (both w ith respect to new legislative proposals and to on going program s) should be carried out in the same fram ew ork ap p ly in g to a ll other program s; i.e., through submission o f such proposals fo r review by the President through the B ureau o f the B udget and other interested agencies to the extent appropriate. N o special mecha nism is needed here which does not already exist. C. Coordination of Economic Policy Aspects (1 ) The organizational structure and methods used to coordinate economic policy necessarily depend upon the President’s decisions as 43 to how he wishes to adm inister his executive responsibilities. In this A dm inistration, coordination o f economic policy in the field o f housing credit is already being accomplished, in p art, by an in fo rm al in ter agency group chaired by a member o f the Council of Economic Advisers. In addition to the Chairm an, this committee consists o f rep resentatives from each o f the agencies w ith m ajor housing credit pro grams, as w ell as from the Treasury, the Bureau o f the Budget, and the W h ite House. N o comparable group exists in the other m ajor areas in which domestic credit programs are im portant, but the N ational A dvisory Council on In tern a tio n a l F in an cial and M onetary Problems (N A C ) to some degree fills a sim ilar role fo r international credit programs. (2 ) Sim ple expansion of the housing credit committee to embrace a ll other domestic credit programs would lead to an unw ieldy and in effective committee. However, it would be j>ossible fo r representatives o f the C E A , Treasury and the Bureau o f the Budget— who are con cerned p rim a rily w ith over-all coordination, rath er than adm inister ing specific credit programs— to form a nucleus w ith W h ite House staff fo r a broader continuing committee on domestic Federal credit programs. Representatives o f in d ivid u al credit agencies would p ar ticipate in the discussions o f problems in th e ir area o f interest. Such areas m ig h t be defined to correspond w ith the five areas in to which this Committee has found it useful to group domestic credit program s. In effect, there would be a single coordinating committee w ith lim ited membership, and five subcommittees, each o f w hich w ould include the members o f the coordinating committee. (3 ) W h ile the responsibilities o f such a committee should not be rig id ly lim ited , it should deal m ainly w ith those aspects o f Federal credit programs in which coordination is necessary to achieve a con* sistent over-all economic policy, p artic u la rly stabilization policy. In the course o f its operations, meetings could be called at the in itia tiv e o f the committee its e lf or o f in d ivid u al credit agencies. In p articu lar, credit agencies considering m ajor program changes involving sig nifi cant economic impacts should be expected to b rin g th e ir tentative plans to the committee as a method o f securing the advice and assistance o f other interested agencies and o f avoiding the danger o f conflict w ith o ver-all economic policies. A t the same tim e, the com mittee could be used to help explore revisions in credit program s necessary to foster economic stab ility and grow th. W h ile most o f the meetings probably should be called only when there are significant problems requiring dis cussion, a m inim um number o f meetings o f each group should be planned each year. 44 (4 ) The committee's role would be exclusively advisory. W hen a complete consensus was not reached, norm al methods should be fo l lowed to obtain decisions from the President. (5 ) The Committee recommends the establishment o f an advisory committee to review the special economic problems th at arise from tim e to tim e in each o f the m ajor program areas where domestic credit aids are o f m ajor significance. Consistent w ith the policy already estab lished in this A dm inistration, the President m ay wish to designate the Council o f Economic Advisers, as p art o f its role in advising him on economic policy, to organize and chair such a committee and to arrange fo r the regular p articipation o f other agencies w ith over-all executive responsibilities, as w ell as participation from tim e to tim e o f those credit agencies w ith activities in the area under discussion on specific occasions. X I I . S U M M A R Y O F C O N C L U S IO N S A N D R E C O M M E N D A T IO N S T h is fin al section summarizes the Com m ittee’s m ajor conclusions and lists the specific recommendations contained in Sections I I I through X I . C rite ria G overning Choice Am ong C re d it and N o n e re d it A id s (S ectio n I I I ) A . The basic objectives o f Federal credit programs are (1 ) to remove or reduce credit gaps arising from im perfections in p rivate m arkets; (2 ) to influence the allocation o f economic resources in order to promote social purposes which otherwise could not be achieved as efficiently; and (3 ) to increase the total use of resources which otherwise would not be fu lly employed. B . C red it aids are most lik e ly to be suitable (1 ) i f the goods and services financed yield m ajor benefits both public and private and are norm ally financed from borrowed funds; (2 ) i f credit aids w ill fa c ili tate needed surveillance o f borrower use o f Government assistance; or {3 ) i f the ventures financed are relatively novel and u n fa m ilia r to private lenders. In a ll cases, there should be a reasonable expectation th a t the credit can and w ill be re p a id ; e.g., th a t borrowers w ill receive substantial direct increases in income through acquisition o f assets or skills financed w ith Government credit aid. C red it aids are inap propriate (1 ) i f viable loans are im probable, even w ith subsidy rates; (2 ) i f excessive debt service requirements are involved; o r (3 ) i f p u r chasers can finance th e ir needs w ith o u t Federal cred it. C. W hen Federal credit assistance is appropriate, the type o f aid selected should to the extent consistent w ith the purpose o f the program 45 be designed to encourage and supplement p rivate lending, to m inim ize costs, to provide the control needed to protect the Government’s in terest, and to be responsive, where appropriate, to over-all economic stab ility and grow th requirements. D. Recommendation: I f broadening the auth o rity o f existing p ri vate lenders would be inappropriate or inadequate to achieve the objec tives sought, but two or more types o f Federal credit assistance would be h elp fu l, the usual order of p rio rity should b e: (1 ) guarantees o r in surance o f p rivate loans, (2 ) Government aid to new types o f p rivate institutions, (3 ) a Government secondary m arket, and (4 ) direct loans. E . Recommendations: The Executive Branch should regularly ap praise the m ajor Federal credit program s to determ ine (1 ) whether a valid need remains fo r the type o f assistance provided, (2 ) whether other types o f aids would be more appropriate, or (3 ) whether private lenders should be expected to meet a ll essential requirements. Such reviews could w ell be- coordinated w ith the budget process. The regular reviews of other m ajor programs also should include attention to any areas where Federal credit aids would be useful in rem oving gaps in the private credit markets ham pering achievement o f public purposes. P a rtic ip a tio n o f P riv a te Lenders (Sec. IV ) A . Recommendations: Government credit programs should, in p rinciple, supplement or stim ulate private lending, rath er than sub stitute fo r it. P riva te p articipation, however, should not be sought i f the incentives required prove too costly fo r the benefits gained or if private lenders are u nlikely in tim e to take more than a token role in the program . Federal agencies should emphasize the devel opm ental aspects o f th e ir credit programs by helping to create ex perience in new7 lending techniques, thus im proving the m obility o f credit and the a b ility o f borrowers to attrac t p rivate funds. W hen ever appropriate incentives and safeguards become standard prac tices, Federal agencies should s h ift to p rivate lenders as much as possible o f the responsibility fo r m aking and servicing in d ivid u al loans. W hen both public and p rivate funds are involved, it is espe c ially im portant th a t the terms and conditions p revailin g in com petitive p rivate m arkets should, as fa r as consistent w ith program objectives, determ ine the basis on w hich Governm ent funds are advanced. B . In some cases, substitution o f public fo r p rivate credit can be m inim ized by p roviding incentives fo r Government-sponsored, p riv ate financial institutions. T h is is most lik e ly to be possible when a credit gap exists which can be fille d p riv ately w ith lim ite d in itia l 46 Government aid and when some pioneering w ork is recognized to be essential an d /o r has already been in itiated on an experim ental basis. C. Im m ediate participations by private lenders in Government loans help private lenders to gain experience w ith borrowers and, by developing skills in this type o f credit, to make such loans in the futu re independently o f the Federal agency. However, this type of jo in t financing involves the problem of obtaining adequate private participation w ithout excessive costs. Recorrmiendations: Legisla tion should avoid mandatory preference fo r im m ediate participations, and adm inistrative policy should generally be to avoid th e ir use unless p rivate lenders are w illin g and able to share risks in proportion to th e ir potential profits. The service charges paid to the p rivate lender by the Federal agency should not provide an incentive to m inim ize p rivate participation. W hen the Federal agency assumes m ajor risks by taking the longer m aturities on loans, it should have authority to determine or approve interest rates on the private share o f the loan. Loan G uarantees and In su ran ce (Sec. V ) A . Recommendations: A s a m atter o f principle, some element o f p rivate lender risk (coinsurance) should be required in guaranteed or insured loans in order to provide an incentive fo r norm al vigilance l>v lenders in m aking and servicing such loans. W here variations in the degree o f coinsurance are feasible and fees are charged p rivate lenders, agencies adm inistering loan insurance and guarantee pro grams should provide fo r a graduated scale o f rates w ith the lowest rates available fo r lenders who assume the most risk. B . Recommendation: No program should be authorized in the futu re which involves Federal guarantees o f securities the income from which is exempt from Federal taxation. Since State and local governments already have a significant advantage in th e ir borrowing because o f the tax exemption privilege, any necessary additional cred it assistance can be provided, when appropriate, (1 ) through Federal guarantees o f obligations on which the Federal income tax exem ption is waived, or (2 ) through capital grants sufficient to perm it l>orrowing the rem ainder in the m arket on reasonable terms. C. Recmnrnendatiom: Federal agencies, which insure o r guarantee p art or a ll o f the risk on p rivate loans, should have auth o rity to set maxim um interest rates fo r such loans. H ow ever, such legislation should neither establish fixed rates o f interest or fixed ceilings, nor impose statutory form ulas so inflexible as to prevent adm inistrative adjustments required by variations in m arket rates o f interest. In establishing and m odifying adm inistrative ceilings, the Federal agen cies should avoid placing them outside the range o f reasonable m arket rates. H ow ever, adjustments in ceilings and related secondary m arket policies should be adm inistered in such a way as to avoid 47 disruptive effects on construction necessary to meet the requirements o f economic growth. I t may be desirable to provide authority to charge special fees fo r specific types o f loans or in specific types of areas commensurate w ith any unusual lending costs. In such cases fu ll disclosure should be made to the borrower o f the total costs he may be required to absorb. Secondary M a rk e t O perations (Sec. V I) A . jRecommendation; In order to achieve a more effective p rivate mortgage m arket on a nationwide basis, Federal agencies, in coopera tion w ith States, should intensify th e ir efforts to promote the develop ment o f u n ifo rm ity in State laws and regulations governing mortgage contracts (including originations, foreclosures, and title claim s). B . Recommendation : To avoid the creation o f a permanent p ro gram fo r support o f submarket types o f credit by this device, the establishment of a Government secondary m arket should be reserved fo r cases in which there is a real possibility o f encouraging sales to private lenders and in which purchases are discretionary and subject to firm supervision and control. In other words, the secondary m ar ket should not become the disguised equivalent o f a direct lending program . W hen permanent credit assistance is desirable, direct loans, combinations o f loan guarantees and capital grants or interest subsidies are preferable, since these are more easily adjusted to provide the m inim um necessary Federal intrusion and support. C. I t is very im portant th a t secondary m arket operations be conso nant w ith the objectives o f general m onetary policy. Housing and other construction, fo r example, are quite sensitive to changes in in terest rates and in the a va ila b ility o f funds, and inappropriate policies on prices and on purchases or sales o f mortgages by a Government secondary m arket can strongly hinder the effectiveness o f stabilization policy. Hence, the Government secondary m arket should not o rd i n a rily be used on a scale sufficient to offset the im pact o f general mone ta ry policy on any m ajor sector o f the m arket— though under certain circumstances when the construction industry and the economy as a whole are m oving in different directions, some m odification o f this p rinciple m ay, at times, be w arranted. D . Recommendations: Loan guarantee and insurance program s should not provide any guarantee o f liq u id ity (o r “p u t” ) which gives the p rivate holder o f a loan the rig h t to s h ift it back to the Govern ment w ithout risk or cost whenever interest rates rise or altern ative investment opportunities become more attractive. I f any liq u id ity provision o f this sort is deemed necessary, the liq u id ity should be pro vided only fo r short periods and should en tail a significant actual or potential cost to the lender m aking use o f it. 48 D ire c t Loans (Sec. V I I ) A . Recommendatiom: W hen credit needs arise solely because o f im perfections in the private credit system, direct loans (o r other Government credit program s) should norm ally be self-supporting; i.e., cover a ll costs reasonably im puted to the program . Federal credit programs intended p rim a rily to stim ulate private lending w ill be most effective in encouraging substitution o f private fo r public credit i f the interest rates charged are comparable to those th a t would prevail in effectively functioning private markets. This com parability p rin ciple should apply to (1 ) loans by Government-sponsored agencies u ltim ately expected to become w holly p rivate, (2 ) direct loans th at supplement guaranteed or insured loans, and (3 ) insofar as feasible, im m ediate participations by Government agencies in p rivate loans. B . W hen Federal credit programs are used to influence the alloca tion o f resources, intellig en t choice among alternatives requires com parison, rough as it may have to be, o f net additional public benefits and net costs to the Government, i f any. Recommendation: As a first step, the interest charge fo r direct loans should be compared to the sum o f (1 ) the prevailin g m arket yield on Government securities of comparable m aturities, (2 ) an allowance fo r adm inistrative casts, and (3 ) an allowance fo r expected losses. The evaluation o f the re source allocation and equity effects o f Government loans should also properly include consideration o f (1 ) the additional advantage to users o f Federal credit aids arising from the fact th a t imputed costs to the Government are usually significantly below the interest rates charged in a reasonably com petitive p rivate m arket as w ell as (2 ) the im portant benefits to the general public. C . Recommendation: T o assure adequate disclosure o f the relative cost o f credit and other programs (1 ) a ll proposals to create new credit program s o r to broaden existing credit program s should be accom panied by an appraisal o f the relationship between the interest rates charged in the program , the rates which would be charged by com peti tive and efficient private lenders, and the rate necessary to cover the Governm ent’s costs; and (2 ) the norm al reviews o f existing Federal credit program s should include discussion o f these relationships. D . Recommendations: (1 ) T o provide fo r adequate fle x ib ility in interest rates, legislation authorizing new credit program s o r m ajor expansions o f present programs should avoid rig id o r relatively in flexible ceilings (o r floors) on interest rates fo r direct loan programs. (2 ) I f , fo r reasons o f public policy, it is appropriate to charge in te r est rates below rates fo r comparable loans in private m arkets, or below Governm ent costs, the lending agency should be perm itted to vary the rate charged new borrowers a t least as much as m arket rates and current Treasury borrow ing costs vary. 49 F i n a n c i n g o f C r e d it P r o g r a m s ( S e c . V I I I ) A . Recommendation: F o r a ll loan guarantee or insurance pro grams, the Congress should provide, in advance, reasonable amounts o f new obligational authority to meet any foreseeable contingencies arising from actual defaults. B . W h o lly Government-owned agencies should norm ally obtain th e ir capital requirements by borrowing from the Treasury. Recom mendation: The F IT A should continue to have authority to pay off in guaranteed debentures, but it should also be authorized, at its op tion, to pay claims in cash. C. Government-sponsored agencies, which are expected to become w holly privately-ow ned, should borrow in the p rivate m arket on a nonguaranteed basis. However, in the early stages o f a Governmentsponsored program , it may be necessary fo r Treasury to backstop its m arket borrowing. Agencies such as the Federal home loan banks, which are the source o f liq u id ity fo r th eir members, (and the Second ary m arket operations o f the F N M A ) should also continue to have emergency or tem porary recourse to Government funds, subject to Treasury approval. Recommendation: Treasury approval should be required on the tim in g and terms o f the borrow ing in the m arket o f all Government or Government-sponsored, enterprises. D . Recommendation: Revolving fund financing should be extended to a ll credit programs, where feasible. E . The credit aspects of sales o f Government physical assets and loans should be reviewed fo r consistency w ith overall policy on F ed e ral credit programs. C redit terms offered buyers o f physical assets should generally be such as to make the loans suitable u ltim ately fo r resale to p rivate lenders. D irect loans should norm ally be sold to p rivate institutions on terms th a t w ill encourage eventual substitution o f p rivate fo r Governm ent credit in the p rim a iy lending operation. I f necessary to help develop a p rivate m arket, the Federal agency selling its direct loans (except tax-exem pt loans) may appropriately guarantee them against default. F . The policies followed by F N M A in selling insured and guaran teed loans and the liquidation policies o f the V A loan guarantee and F H A m ortgage insurance program s should be consistent, especially in prices and in tim in g o f changes in sales policies. Im pacts on in te r est rates and construction activity should be among the m ajor factors considered in decisions on the term s under which insured and guaran teed mortgages are sold. W hen consistent w ith these and other eco nomic objectives, sales below p ar should be perm itted. Recommen dation: Legislative lim itatio n s on sales prices o r term s which m ight impede desirable fle x ib ility should be removed. B u d g e ta ry T re a tm e n t and C o n tro l (Sec. I X ) A. Recommendations: (1 ) B udget presentations o f Government credit program s should include sufficient significant d eta il about each 50 m ajor program to provide the ingredients necessary fo r program review by the Congress and the Executive, analysis o f Treasury financing requirements, and analysis o f the economic im pact o f the programs. (2 ) T o remove a serious gap in the presentation o f rele vant inform ation, the banks fo r cooperatives and the Federal in ter mediate credit banks should be subject to the statutes on budget dis closure, and the Budget should contain adequate data on th e ir pro grams. M oreover, since these agencies are s till using substantial amounts o f Government funds, they should be subject to effective annual review. B. The volume o f applications th a t q u alify fo r Government loans or guarantees under the statutory or adm inistrative standards pro vided is often not a proper measure o f the valid level o f Federal credit assistance. R ather, since credit program s add to the demands on resources, the activity in each program should be judged not only in terms o f the claim placed on the Federal budget, but also in term s o f the relative benefits obtained from the use o f resources diverted fro m other uses by Federally-backed p rivate credit or by direct Fed eral loans fo r the purposes o f each program . Recommendation: F ed eral credit agencies should give increased attention to developingadequate and equitable standards (including legislation, i f necessary) fo r use when the demand fo r credit exceeds the prospective available funds. Promotion of Economic Stability and Growth (Sec. X ) A . In general, Federal credit programs are not designed p rim a rily fo r the purpose o f counteracting cyclical fluctuations in the economy; rath er, th e ir purposes are directed to m eeting more specific needs in p artic u la r sectors. W hen resources are idle, however, the expansion: o f these programs can help to stim ulate higher spending and income throughout the economy. Conversely, at times o f generally fu ll em ploym ent, when production is pressing against capacity, it m ay be necessary to restrain p artic u la r sectors o f the economy. However,, decisions on the use o f these program s as tools o f restrain t should be made in the lig h t o f the effects on p artic u la r sectors, and in accordance w ith the scale o f social p rio rities p revailin g at the tim e. B . T h e use o f Federal credit programs as tools fo r general economic stabilization and grow th need not conflict w ith achievement o f the longer-run social objectives o f specific programs. Indeed, in so far as Federal credit programs help achieve overall stabilization and grow th, every sector is lik e ly to gain. In the long run, a healthy, vigorous economy is the m *in prerequisite fo r the health o f in d iv id u al sectors. 51 C. The usefulness o f Federal credit programs as tools of economic stabilization policy is subject to serious lim itations. F o r many credit program s, the tim e lag between a change in terms or a va ila b ility o f credit and the resulting im pact on economic activity is long, and the im pact per d o llar is norm ally less than fo r expenditure or tax policy. Changes in the outstanding volume o f guaranteed and insured private loans are usually much greater than in direct Federal loans. Hence, a b ility to influence the terms on which such p rivate credit is extended may give the Federal Government a useful tool fo r affecting the volume o f p rivate lending. D . Recommendations: W herever present authority proves to be inadequate to perm it effective use o f credit program s in prom oting economic stabilization, legislation should be enacted to provide the needed additional authority, including appropriate safeguards. W hen changes would neither conflict w ith recognized program ob jectives nor introduce inefficiencies, Governm ent credit terms should be varied in lin e w ith variations in private markets. E . In the area most im portant in d o llar terms— Federal insurance and guarantees o f housing credit— changes in the terms and con ditions on which Government aid is available should be accompanied by a positive stabilization policy in F N M A purchases and sales o f mortgages. S im ila rly F H L B B policy on advances should have ade quate scope to discourage undesirable fluctuations in m ortgage lend ing by savings and loan associations. Recommendations: Legislative standards governing the F N M A secondary m arket and operations o f the Federal home loan banks should be revised to provide unam bigu ous auth o rity to perm it use o f these institutions in prom oting stab ili zation, when clearly appropriate. O rg a n izatio n and C o ordin atio n (Sec. X I ) A. L ik e other Government program s, credit program s should be grouped organizationally by m ajor purposes served, rather than by techniques used. Such grouping perm its better evaluation, balancing and coordination o f the various means o f achieving each m ajor p u r pose, as w ell as clearer focusing o f responsibility. As fa r as possible, new programs should be assigned to existing agencies w hen they serve the same purposes already served by such agencies. Recommenda tions: W hen credit programs are adm inistered by agencies separate from those p rim a rily responsible fo r Governm ent-wide leadership in achieving the m ajor purposes served, special efforts should be made to assure continuous, effective coordination. I f achievement o f im po rtan t public purposes is seriously hampered by inter-agency prob lems, more basic approaches should l)e considered, including in some 52 cases the possible transfer to the agency p rim a rily responsible fo r leadership in the area served. B. The basic form ulation o f program levels and goals fo r Federal credit programs should be carried out in the same fram ework app ly ing to a ll other programs. C. The organizational structure and method used fo r coordinating economic policy necessarily depend upon the President’s decisions on how he wishes to adm inister his executive responsibilities. Recom mendations: Consistent w ith the precedent established by this A d m inistration, an advisory committee should be established to review the special problems th a t arise from tim e to tim e in the various areas served by m ajor Federal credit programs. The President may wish to designate the Council o f Economic Advisers, as p art o f its role in advising him on economic policies, to organize such an interagency committee, consisting in the first instance o f the prin cip al agencies concerned w ith overall questions o f Federal credit policies. The areas subject to the committee’s review m ight w ell correspond to the five m ajor areas previously identified in this report. The committee should meet w ith representatives o f the in d ividual credit agencies involved in each p articu lar area, as problems peculiar to th at area arise. Its duties should be exclusively advisory. I t would assist in the coordi nation o f Federal credit program s, w ith a view tow ard achieving a consistent overall economic policy. A P P E N D IX A T h e W h ite House, Washington, March 28, 1962. Memorandum to: The Secretary of the Treasury. The Director of the Bureau of the Budget. The Chairman of the Council of Economic Advisers. The Chairman of the Board of Governors of the Federal Reserve System. Subject.: The Establishment of a Committee on Federal Credit Programs. Pursuant to my Economic Report to the Congress, I am requesting the persons to whom this memorandum is addressed to form a Committee on Federal Credit Programs to review legislation and administrative practice relating to these programs. I am asking the Secretary of the Treasury to serve as Chairman of this Committee. The Committee should seek the views and advice of appropriate government agencies and may also cronsuit with interested private parties and independent exi>erts. The recommendations of the Commission on Money and Credit on this sub* ject provide a point of departure for the Committee, but its deliberations need not be limited to the issues raised by the Commission. The Commission’s re port calls attention to the wide range and substantial magnitude of Federal direct lending programs and programs for insuring and guaranteeing private loans. There is need for a thorough review of the imi>act of these programs on the economy, their effectiveness for the special purposes for which they were established, and the i>olicies and techniques employed in administering them. The general task of the Committee should be to consider what changes, if any. in Federal credit programs would contribute to achieving the Nation’s economic goals. Among the topics for consideration by the Committee should be the following: (a) The circumstances under which Federal credit programs should be selfsupporting and the criteria for and character and extent of subsidy where subsidies are appropriate. (&) The criteria for determining whether a particular program should take the form of direct Federal lending, loan insurance, loan guarantee, or other form. (e) The budgetary treatment of Federal credit programs. (<f) The appropriate degree of coordination of Federal credit programs with the general monetary and fiscal policies of the Federal Government, and the use of credit programs for countercyclical purposes. (e) The role and eifectiveness of statutory and administrative interest rate ceilings in Federal credit programs. In order to be of use in drawing up the Administration's legislative program for the 1963 session of the Congress, the Committee's report and recommenda tions should be submitted to me by November 1,1962. I am enclosing for your information copies of the memoranda establishing separate committees on Financial Institutions and on Corporate Pension Funds and Other Private Retirement and Welfare Programs. (S) (58) John F. K ennedy . A P P E N D IX B RECOMMENDATIONS OF THE COMMISSION ON MONET AND CREDIT REGARDING FEDERAL CREDIT PROGRAMS, INCLUDING SEVEN GENERAL GUIDES Selfsupporting credit programs “Federal credit programs designed to improve the allocative functioning of private credit markets and to stimulate greater enterprise and competition therein should be self-supporting. In general, loan insurance j>rogranis are preferable to programs that establish federally sponsored lending agencies. (First guide)” (P. 188) “The Commission recommends the continuation of the Federal Housing Ad ministration loan insurance programs to facilitate the flow of private funds into residential construction. The recommendation is limited to the FHA program because the VA program is scheduled to lapse in the near future. Two separate agencies to underwrite residential loans entail unnecessary duplication. Even if Congress should desire to continue the veterans’ special preference, this could be done through FHA machinery, for example, by having the VA pay the FHA insurance premium for veterans/’ (p. 191) “In order to ensure the continued availability of insured loans in all areas of the country, the Commission recommends that the voluntary home mortgage credit program and the certified agency program of the Federal Housing Admin istration be encouraged . . . . If, however, important needs are not met, an FHA direct lending program similar to the terminating VA program may be necessary. A direct loan should be made, however, only if evidence indicates that efforts to obtain an insured loan through other programs have failed. And the same credit standards and terms should be used for direct loans as those applicable under the FHA insured loan programs/' (p. 102) “The Commission recommends that a limited self-supporting Federal insurance program be developed and administered by an established farm credit agency for mortgage loans featuring low down payments, long maturities, and not neces sarily complete amortization. Such insurance should be available only under stringent conditions, perhaps such as (1) the farm unit should be large enough to take advantage of existing technology and provide a satisfactory level of family income under reasonably good management, and (2) adequate farm plans should be developed by the borrower.” (pp. ISM-195) “The Commission recommends also a Federal loan insurance program for intermediate-term credit of 3 to 10 years to help fanners finance the acquisition of the capital assets, other than real estate, required for an efficient farm unit.” (p. 186) “It is extremely difficult to evaluate the empirical data on the adequacy of small business financing. . . . The evidence is also inconclusive on whether a sig nificant gap still exists in credit facilities for new and small business firms which have a realistic prospect of successful operation since the establishment (55) 56 of the SBIC program. As yet the life of the SBICs has been 100 short to show how far they will contribute to small business financing. However, the pro gram appears to be promising. “If, however, later evidence suggests that the SBIC program is not adequate for its task, consideration might be given to the development of a loan insurance program available to all lenders, including possible SBIC's. Such a program should l>e designed with enough risk shifted to the insurance program so that private lenders would adopt more liberal lending practices.” (pp. 196-107) Subsidized credit programs “Federal credit programs designed to alter the allocation of resources to achieve a public purpose which even a perfectly functioning private market system would not attain require a subsidy in the form of below-market interest rates or credit terms. The choice among types of credit programs should be made on the basis of which will be effective at the least cost and which will interfere least with the private financial system. Where it can be effective, a loan guarantee type of program should take preference over the direct lending type of program. (Second guide) *’ (p. 197) “Illustrations of subsidized credit assistance are many. A few are cited below. The Commission has made no recommendations, however, as to the appropriateness of the objectives of these programs.” (p. 198) “While the appropriateness of the cash subsidy or its amount is not a matter for its consideration, the Commission does believe that the amount of the cash subsidy should be made an explicit charge in the budget.** (In discussion on the 2 percent interest rate on KEA loans, p. 201.) Credit programs and economic stabilization “Since direct lending programs to achieve a particular allocation of resources resemble Government expenditure programs, the amount of credit extended should be determined as a part of the budgetary process. However, merely because direct lending programs are credit rather than expenditure programs, the amount of credit extended should not be singled out as being either uuiquely appropriate for countercyclical variations or uniquely insulated from such variation. (Third guide)** (p. 201) “Credit programs established to increase the effectiveness of the private credit system should be designed to be sensitive to general monetary policy. Some programs, especially loan insurance programs, should at times be used to sup plement and reinforce general monetary policy by variations in lending terms. (Fourth guide)" (p. 203) “The Commission recommends that the FHA and VA underwriting programs tie used to aid in implementing the countercyclical and price-stabilizing policies of the Government by variations in the terms of the underwritten loans and by allowing contractual interest rates to rise and fall with conditions in the mort gage market,** (p. 294) “The Commission recommends that the Federal Home Loan Bank System oi>erate its programs in close harmony with the general stabilization policies of the government. . . . •\Amore flexible interest rate policy on advances is suggested as one approach. There appears to be a fairly constant relationship between the interest rates charged by the banks on advances and their cost of borrowing in the market. A chauge in policy to relate the interest rates charged to mortgage rates prevailing 57 or expected to prevail in each bank district might more effectively curb over commitments by some members and hence future bank advances. The Com mission urges experimentation in rate controls.” (pp. 204-205) “Where the funds for direct lending programs come partly from the Treasury and partly from private financial institutions participating in direct loans on a guaranteed basis, the interest rates on the private participations should be varied in response to the needs of the general monetary policy. If the financing of direct lending programs requires the issue of securities in national capital markets. Treasury issues, rather than fully guaranteed issues of Government coriH>rations, should be employed. (Fifth guide) ” <p. 206) Interest rate ceilings “Statutory or rigidly administered interest rate ceilings should not be em ployed in Pederal credit programs which rely on the private financial system for loan funds. (Sixth guide)'’ (p. 207) “The Commission believes that the harmful effects of the ceiling rates on underwritten mortgages outweigh their automatic contribution to economic stabilization and recommends that they be abolished.” (p. 208) “The various interest rate ceilings or limitations that affect agricultural credit should also be removed.” (p. 209) Secondary market programs “Federal agencies to create and maintain secondary markets for financial in struments, such as mortgages, should buy and sell the instruments at market prices and should not attempt to control their prices. (Seventh guide)” (p. 209) “Pending the development of more effective private secondary mortgage in stitutions, the Commission recommends that the secondary market operations of FNMA be continued and made more effective. The special assistance and market support programs of FNMA which are inconsistent with the dealer func tion should be operated in an entirely distinct and separate manner from the secondary market operations, preferably by a separate agency/' (p. 211) Coordination of domestic lending agencies “The same general framework of coordination,1 with adaptations to suit par ticular situations, should apply also to the government lending agencies, for example to the Farm Credit and Home Loan Bank systems, the Housing and Home Finance Agency, the Small Business Administration, the Export-Import Bank and others. Given the adoption of the Commission’s previous recommen dations, no major additional changes in organization seem needed for coordina tion purposes. It is likely, however, that closer working relationships at operate ing levels will need to be developed to give a fuller effect to the wider monetary, credit, and fiscal policies of the government. The coverage of the President's reports under the Employment Act should include attention to the actions and policies of the credit agencies. Budget controls apply to most of them in varying degrees. And they should be included in the scope of discussions in the advisory board. A further statutory mechanism of coordination, applicable to the agen cies established as government corporations, may be found in the terms of the Government Corporation Control Act . . 1 Chiefly revival of the Advisory Board on Economic Growth and Stability (p. 277). 58 “Accordingly, the Commission recommends that the Government Corpora tion Control Act of 1946 be amended so as to direct the Secretary of the Treasury, in the exercise of his clearance power over the issuance and sale of the securities of government-owned corporations, to take into account explicitly the full range of objectives of the Employment Act as amended, and not merely debt manage ment considerations; and that cases of disagreement be taken to the President.” (pp. 279-281) A P P E N D IX C NEW AND BROADENED FEDERAL CREDIT PROGRAMS IN 87TH CONGRESS, 2D SESSION1 L Private housing A. Enacted (1) Loans in connection with disposal of Los Alamos—Public Law 87-719. Authorizes Atomic Energy Commission to accept from purchasers, notes secured by first mortgages in order to facilitate sale of federally owned property. Also authorizes advances for rehabilitation, moderni zation, etc. (2) Loans and loan insurance in Senior Citizens Housing Act of 1962— Public Law 87-723. Increases authorization for existing loans to nonprofit corporations, cooperative or public agencies from $125 million to $225 million and limits program to new structures. Authorizes $50 million for direct loans to rural elderly and removes present provisions that (a) appli cants for direct loans must already own the land on which housing is to be constructed, and (ft) proceeds cannot be used to purchase existing houses. Authorizes (a) $50 million revolving fund for 50-year direct loans, and (ft) loan insurance to provide rural rental housing for elderly. B. Bills reported by Committee (1) Extend Veterans' Administration housing credit program to peacetime veterans in proposed Veterans Readjustment Assistance Act—B. 3j9. Would have extended VA housing loans and loan guarantees to vet erans of post-1955 service. Reported in Senate. (2) Extend maturity of VA loans and loan guarantees—S. 3024. Would have extended maximum maturity of VA housing loans and loan guarantees from 30 to 35 years. Passed Senate. IL Community development and public housing A. Enacted (1) Broadened eligibility of NASA communities for public facility loans— Public Law 87-634. Authorizes Community Facilities Administration to make public fa cility loans to communities with population between 50,000 and 150,000 near research or development Installations of the National Aeronautics and Space Administration. (2) Revised Joan criteria and terms in Public Works Acceleration Act— Public Law 87-658. Removes population ceiling per municipality (50,000 or 150,000 In redevelopment areas) for CFA loans to finance public facilities or hiam 1 Excludes (•) simple extensions in expiring laws, and (6) bills which wen not reported by anj Congressional committee, whether or not hearings were held. (59) 60 transportation in areas eligible under the act. Deletes requirement that public works planning advances be repayable if the project is initiated under a grant under this act. (3) Eligibility of Indian tribes for public facility loam—Public Law ST808. Makes Indian tribes eligible for CFA public facility loans. B. Proposed by Administration and reported by Committee (1) Loans in proposed Urban Mass Transportation Act of 1962—H.R. 11158, S. 3615. Would have authorized Housing and Ilome Finance Administrator to use present $30 million authorization to make 40-year loans for both publicly and privately owned (in Senate-reported version) mass trans portation, with limited interest payment deferment in certain cases. (House-reported version was substantially the same as Administra tion proposal.) Reported in House and Senate. HI. Business and transportation A. Enacted (1) Trade adjustment assistance in Trade Expansion Act of 1962—Public Law 87-794 and in Public Law 87-550. Authorizes Department of Commerce to make guarantees, deferred participations* and loans to import-injured firms for acquisition, con struction, expansion, etc. of facilities and in exceptional cases, for work ing capital. Commerce is required to make use of existing agencies as appropriate. SBA is given the same authorization as Commerce. (2) Revisions in aircraft loan guarantees—Public Law 87-820. Extends program for five years, increases maximum loan permissible to any one borrower from $5 million to $10 million, and transfers ad ministration from Civil Aeronautics Board to Department of Commerce. B. Proposed by Administration and/or reported by Committee—None. IV. Education and health A. Enacted—None. B. Proposed by administration and/m■reported by Committee. (1) Loans in proposed College Academic Facilities and Student Assistance Act—H.R. 8900, S. 1241. Conference Rej>ort would have authorized (a) $600 million over 5-year period for loans to public and private nonprofit colleges for construction of academic facilities, and (6) $149 million over 5-year period for first* year loans (20 percent of which may be “nonreimbursable") to college students, and any necessary additional appropriations over &-year period for later installments. (Administration originally proposed (a) $1,500 million for facility loans and (ft) scholarships instead of student loans.) Facility loans were approved by both House and Senate although at different authorization levels; House rejected Conference Report. (2) Student loans in proposed Health Professions Educational Assistance Act—H.R. 4999, S. 1072. Would have authorized $72.3 million for loans to medical, dental and osteopathic students, with forgiveness of repayment of up to 50 percent of principal and interest for student practicing in area of shortage, in armed services, or in public or nonprofit agency. (Administration orig inally proposed scholarships instead of loans.) Reported in House. 61 (3) Amendments to loan provisions in National Defense Education Act— II.R. 13204, S. 3760. Would have (a) raised student loan authorizations for fiscal 1963 and 1964 from $90 million per year to $125 million, and (ft) raised ceiling on Federal contributions to loan funds per institution from $250,000 to $500,000 in any one year. (Administration proposal would have removed authorization ceilings on student loans.) Passed Senate, reported in House. (4) Broadened loan cancellation provisions of National Defense Education Act— S. 3326. Would have expanded 50 percent loan repayment forgiveness pro vision to include students who go on to teach in private non-profit elementary or secondary schools or institutions of higher learning. (Administration proposal would have limited extension of forgiveness to those teaching in institutions of higher learning.) Passed Senate. (5) Mortgage insurance and loans for group medical and dental facilities— H.R. 13081. Would have authorized Surgeon General to provide $100 million for mortgage insurance and loans over 5-year period for construction and equipping of group practice facilities, with preference to facilities in smaller communities and to nonprofit organizations. Proposed by administration late in session. Xo congressional action. V. Resource development A. Enacted (1) Broadened loan authority in Food and Agriculture Act of 1962—Public Law 87-703. Adds recreational uses and facilities as eligible purposes for which Farmers Home Administration may make or insure real estate loans. Extends programs to cover fish farmers. Authorizes loans to State and local public agencies for purposes of land conservation and land utilization. (2) Increased loan insurance authority of Farmers Home Administration— Public Law 87-798. Increases from $150 million to $200 million the annual amount of real estate loans which may be insured by Farmers Home Administra tion. (3) Broadened REA lending authority—Public Law 87-862. Allows Rural Electrification Administration to finance communica tion facilities which are not primarily intended for voices; e.g., closed* circuit television, teletypewriters, telephotograph, and other data trans mission. B. Proposed by administration and/or reputed by Committee.—None. VI. International A. Enacted (1) Loans to International Monetary Fund—Public Law 87-490. Authorizes $2 billion stand-by authority for the Secretary of the Treasury to make loans to IMF to strengthen international monetary system. (2) Loans to refugees in Migration and Refugee Assistance Act of 1962— Public Law 87-510. 62 Authorizes the President or his designee to make loans or advances for assistance of refugees from W estern Hemisphere countries. Pur poses include providing health and educational services, training for employment, transportation and resettlement, and establishment and maintenance of projects for employment or refresher professional training. (3 ) Expanded loans to Latin America and increased and "broadened invest ment guarantee program in Foreign Assistance A ct o f 1962— Public Law 87-665. Authorizes (o ) loans o f $2.4 billion over 4-year period to Latin America under Alliance for Progress, (&) increase in maximum guar antees outstanding under Latin America housing program from $10 million to $60 million, (c ) insurance against loss o f loan investment fo r housing projects with “appropriate participation” by private lenders in the risk, and (dl) increase in m aximum guarantees outstanding under “ all risk” program (including $180 million. (4 ) ( c ) above) from $90 million to Loan to United 'Nations— Public Law 87-731. Authorizes maximum of $100 million fo r loans to U .N . and reduction in future annual U.S. payments to the U.N. by amount of the cor responding annual installment o f principal and interest due the United States. B. Proposed 1>y administration and/or reported by Committee.— None. APPENDIX D HISTORICAL TRENDS IN MAJOR FEDERAL CREDIT PROGRAMS T able D-l.— Annual new commitments 1of major Federal credit -programs,3 1950-61 [A m ounts in m illions] Fiscal year D irect loans and mortgage purchases * 1950____________ ____ ______ ___ 1951.______ ____________________ 1952____________________________ 1953............ ............................. ...... 1954_______________________ ____ 1955___________________________ 1956............ ..................................... 1957_________________ ______ ___ 1958____________________ _______ 1959____________ _______________ 1960____________ _______ _______ 1961.................................................. $3, 543 2, 906 2,847 2, 884 2, 005 1, 669 1,989 4, 295 4, 536 5, 072 4, 325 4, 955 Guaranteod and insured loans * $8, 424 7, 826 9, 077 7, 893 8, 791 12, 913 13, 418 11,326 10, 979 12, 096 14, 118 13, 060 T otal $11,967 10, 732 11, 924 10, 777 10, 796 14, 582 15, 407 15, 621 15, 515 17, 168 18, 443 18, 015 1 Com m itm en ts are defined as approvals b y Federal agencies o f direct loans or o f insurance or guarantees o f private loans. T h e y are show n on a gross basis, Including com m itm ents w hich d o not later result in actual credit extension. * Based on special analyses published in the 1952-63 budgets adjusted to exclude C om m odity Credit Corporation (in 1061-61) and Federal interm ediate credit banks (in 1951-55). * D oes n ot in clu d e loans and m ortgage purchases b y G overnm ent-sponsored quasi-public enterprises, or b y various m inor w h olly ow n ed enterprises. « Includes both guaranteed and unguaranteed portions o f loans. («8) 64 T able D -2 . —Net expenditures 1 of major Federal credit programs,21950-61 [Amounts in millions] Fiscal year Disbursements 1950________ __________________ 1951__________ ______ __________ 1952___________________________ 1953___________________________ 1954___________________________ 1955___________________________ 1956___________________________ 1957____ __ __________________ 1958___________________________ 1959___________________________ 1960___________________________ i 1961 ____ _____________________ ! Net expenditures Receipts $1, 106 1, 344 1, 250 1, 930 2, 655 ; 1, 419 1, 432 2. 201 2, 046 1, 690 2, 942 1, 670 S2, 071 2, 383 2, 587 3,002 2, 444 1, 910 1, 729 2, 594 3, 507 4, 368 4, 075 3, 304 i $965 1, 039 1, 337 1,072 -2 1 1 491 297 393 1, 461 2, 678 1, 133 1, 634 i 1 Represents net excess of (Hsburscjnents over repayments, including foreign currency loans and repay ments going directly into miscellaneous receipts. 1 Based on special analyses published in the 1052-453 budgets adjusted to exclude Commodity Credit Corporation (in 1951-61) and Federal intermediate credit bants (in 1651-55). Also excludes loans and mortgage purchases by Government-sponsored quasi-public enterprises and by various minor wholly owned enterprises. T a b le D- 3.—Outstanding direct loans and guaranteed and insured loans of major Federal credit programs,l 1950 -61 [Amounts in millions] 1950. 1951 _ 1952. 1953. 1954. 1955. 19561957_ 1958_ 1959_ 1960 _ 1061 _ ill End of fiscal year $12, 611 13,318 13, 689 14, 781 14, 380 14, 937 15, 383 15, 869 17, 282 20, 207 21, 388 23,015 Guaranteed and insured loans 3 $15, 793 19, 974 24, 326 34, 732 38, 452 41, 405 50, 511 55, 579 58, 087 63, 107 67, 107 71, 243 1 Based oil special analyses published in the 1952-63 budgets adjusted to exclude Commodity Credit Corporation (in 1951-61) and Federal intermediate credit banks (in 1951-55). 2 Does not include loans and mortgage purchases by Government-sponsored quasi-public enterprises, or by various minor wholly owned enterprises. 3 Includes both guaranteed and unguaranteed portions of loans. APPENDIX E Outstanding direct loans and guaranteed and insured loans fo r active or newly authorized domestic Federal credit programs June 30, 1961 , 1 [A m o u n ts in m illions] ! D irect loans and mortgage purchases Area, agency, and program W h o lly ow ned enterprises G overn m en tsponsored agencies Guaranteed and insured loans * Private housing Housing and Home Finance Agency: Federal Housing Administration: Direct and insured mortgage loans (except nursing homes) _ Insured property improvement loans______ _______ ___ Federal National Mortgage Asso ciation: Special assistance functions___ Management and liquidating functions,___ ___________ Secondary market operations Community Facilities Administra tion: Housing for elderly loans__ Veterans' Administration: Dircct and guaranteed loans_________________ Department of Agriculture: Farmers Home Administration Kural housing loans __ _____.- ___ ____ Federal Home Loan Bank Board: Fed eral home loan banks: Advances to member associations___________ .« _ Total, private housing_________ $401 $34, 107 47 1, 610 1, 829 1, o8 < $2, 522 None 3 29, 864 1,617 229 1,869 5, 710 4, 391 65, 581 Community development and public housing Housing and Home Finance Agency: Community Facilities Administration: Public facility loans. ______ ___ Public works planning advances___ Office of the Administrator: Mass transit loans * __ _______ __ _ Urban Renewal Administration: Direct and guaranteed loans_____________ Public Housing Administration: Direct and guaranteed loans-------------------- See footnotes at end of table. (65) 55 17 None 4 79 713 97 3, 739 66 Outstanding direct loans and guaranteed and injured loam for active or newly authorized domestic Federal credit programs, June 80,1961 1— Continued [Amounts in millions] Direct loans and mortgage pureliases Area, agency, and program Community development and public housing—Continued Department of Commerce: Area Redevelop ment Administration: Public facility loans* Treasury Department: Public works and other loans to District of Columbia_____ Total, community development and public housing______ __________ Wholly owned enterprises Governmentsponsored agencies Guaranteed and insured loans1 i I None 5 $34 282 $4, 452 Business and transportation Department of Commerce: Area Redevelopment Administration: Loans for industrial or commercial facilities________________________ Maritime Administration: Direct and insured loans____________________ Civil Aeronautics Board: * Guaranteed loans to air carriers________________________ Small Business Administration: Loans and participations__________ ____ _____ Interstate Commerce Commission: Guaran teed loans to railroads__ _______ _____ Department of Defense: Direct and guaran teed defense production loans___________ Total, business and transportation__ | None 5 154 355 25 482 51 126 8 228 644 785 Education and health Department of Health, Education, and Wel fare: Office of Education: Defense educa tion loans________ _ _______ __ ___ Housing and Home Finance Agency: Community Facilities Administration: College housing loans__ _____ Federal Housing Administration In sured nursing home mortgage loans. _ Total, education and health__ _____ See footnote* at end of table. 131 958 ......... - - i 1,089 _________i 9 o 67 Outstanding direct loans and guaranteed and insured loans for active or newly authorized domestic Federal credit programs,June SO, 19611— Continued [Amounts in millions] D irect loans and m ortgage purchases Area, agency, and program W h o lly o w n ed enterprises G overnm entsponsored agencies Guaranteed and insured loans * Resource development Department of Agriculture: Rural Electrification Administration: Electrification and telephone loans, _ Farmers Home Administration: Direct and insured loans (except housing)__ Department of the Interior: Bureau of Reclamation: Reclamation loans___ _______________ - _______ Bureau of Indian Affairs: Loans to Indians_________________________ Bureau of Commercial Fisheries: Direct and insured loans_________________ Farm Credit Administration: Banks for cooperatives: Loans to coop eratives_________________________ Federal intermediate credit banks: Loans to production credit associa tions, etc_______________________ Federal land banks: Farm mortgage loans___________________________ Total, resource development_*__ __ Total, by type of assistance. ____ $3, 367 $182 858 35 10 7 (0 595 1, 831 2,728 4, 277 5, 154 182 12,002 9, 545 71,009 i Excludes: (a) all international programs (e.g., Export-Import Bank, Agency for International Develop ment); (6) all liquidating activities not part of active credit programs (e.g., HHFA liquidating fund, defense production loans and advances, General Services Administration asset liquidation and surplus property sales credit); (c) CCG price support aad storage facility loans and loan guarantees; (4) loans acquired by Federal Deposit Insurance Corporation and Federal Savings and Loan Insurance Corpora tion to protect insured institutions; (e) purchases of acceptances, discounts, and advances to member banks by Federal Reserve banks; (/) repayable Federal investments; and (g) very small programs (e.g., Soil Conservation Service loans and Pablic Health Service hospital construction loans). *Includes both guaranteed and unguaranteed portions of loans. *Authorised in Housing Act of I960 (Public Law 86-373), approved Sept. 23,1950. «Authorized in Housing Act of 1961 (Public Law 87-70), approved June 30,1961* 1Authorized in Area Redevelopment Act (Public Law 87-27), approved May 1,1961. *Program transferred to Department of Commerce in 1962, by Public Law 87-820. TLess than $900,000 U.S. GOVERNM ENTPRINTINGOPFlCCit«*3 Advance r e le a s e Wednesday. Apr. 4/ 2/62 4 Mark WASHINGTON, D .C ., Apr. P ion eer Banks 45th A nniversary 4 — I t ' s the 45th b ir th d a y o f an American i n s t i t u t i o n — The F e d e ra l Land Bank System — which i s an o u tsta n d in g example o f how c i t i z e n s can s o lv e t h e i r own problem s w ith a minimum o f governm ental h e lp . T h is was p o in te d ou t by Don H. B u sh n e ll, Deputy G overnor and D ir e c t o r o f the Land Bank S e r v ic e o f th e Farm C r e d it A d m in is tra tio n , i n h is remarks t o th e F ed era l Farm C r e d it Board i n i t s m eeting h e re to d a y . He p a id t r i b u t e t o th ese fa rm e r- owned banks th a t have s e t many p re ce d e n ts i n fin a n c e and c r e d i t . "The h i s t o r y o f th e F ed era l Land Bank S y s t e m a c c o r d i n g to B u sh n ell, "shows what a group o f c i t i z e n s can do to h e lp th em selv es, g iv e n a s t a r t by a w e l lc o n c e iv e d Government lo a n o f c a p i t a l . " The F e d e ra l Government i n 1917 advanced money to c a p i t a l i z e th e 12 lan d banks, b u t o f equal im p orta n ce, a c c o r d in g to B u sh n ell, "p r o v id e d the m achinery f o r fa rm erb orrow ers t o pay t h is b ack , as they d id many y e a rs a g o ." As p io n e e r s , th e la n d banks have s e t f o r t h what has become known as "th e Farm C r e d it P a t t e r n ," many fe a t u r e s o f w hich have been in c o r p o r a te d in such o th e r G overnm ent-sponsored i n s t i t u t i o n s as th e F ed era l Home Loan Banks, F ed era l N a tion a l M ortgage A s s o c ia t io n , F ed era l D e p o sit Insuran ce C o r p o ra tio n , and the Small B usiness Investm en t Companies, as w e ll as in some younger s i s t e r Farm C r e d it System i n s t i t u t io n s — th e F ed era l in te rm e d ia te c r e d i t banks w ith t h e i r a f f i l i a t e d p ro d u ctio n c r e d i t a s s o c i a t i o n s , and th e banks f o r c o o p e r a t iv e s , which a ls o a re su p e rv ise d by th e Farm C r e d it A d m in is tra tio n . The la n d banks, f o r example p io n e e re d the p r a c t i c e o f tappin g th e N a tio n 's w h o le s a le money m arkets when, i n 1917 th ey s o l d t h e i r f i r s t sm all is s u e o f Land FARM CREDIT ADMINISTRATION Washington , D.C. T e l . -Hoag - DUdlev 8-3120 25 (m ore) Today, th e Land Bank System has about $ 2.5 b i l l i o n i n bonds ou tsta n d Bank b o n d s . in g i n th e hands o f the in v e s t in g p u b l i c . "Due t o th e re p u ta tio n th e banks have b u i l t up as sound l e n d e r s ," B u sh n ell s ta te d , "t h e y are a b le t o o b ta in t h e ir lo a n funds a t r a t e s o n ly s l i g h t l y h ig h er than th o s e o f T reasury is s u e s , even though th e bonds are n ot guaranteed b y th e F ed era l G overnm ent." The b u i l t - i n "p a y -b a ck -U n cle Sam's c a p i t a l" mechanism o f th e Land Bank System, B u sh n ell s a id , o p e ra te s in th e fo llo w in g manner: When a farmer g e ts a lan d bank lo a n , f i v e p e rc e n t o f th e p ro ce e d s goes t o buy s to ck in h is l o c a l a s s o c ia t io n o f la n d bank b o rro w e rs. lan d bank. The a s s o c i a t i o n , i n tu rn , buys a l i k e amount o f s to c k in th e By t h i s means, th e fa rw e r-b o r ro u e rs have not o n ly r e p a id Uncle Sam, b u t to d a y th e y have $168 m i l l i o n i n c a p i t a l s to c k and $325 m i l li o n i n r e s e r v e s to stre n g th e n th e f i n a n c i a l base o f th e banks so th e y can stand th e shock o f such p e r io d s as th e 1930’ s , i f n e c e s s a r y . Even th e c o s t o f s u p e r v is io n o f th e Land Bank System by the Farm C red it A d m in is tra tio n , th e Goverment agency which in the p u b lic i n t e r e s t su p e rv is e s th e System n a t i o n a l l y , i s n ot p a id f o r b y ta x p a y e r s . In s te a d , t h i s c o s t i s borne b y th e farm ers who use th e System. B u sh n ell p o in te d out th a t th e lan d banks were th e f i r s t t o make g e n e ra l use th rou gh ou t th e co u n try o f th e lo n g -te r m , a m ortized lo a n , a fe a tu r e th a t r e v o lu t io n e d farm r e a l e s t a t e le n d in g . H ost la n d bank lo a n s , he s a id , a re made w ith repayment p e r io d s o f 20 t o 35 y e a rs and a t r a t e s w hich, because o f econom i c a l o p e r a t io n s on a n a t io n a l s c a l e , u s u a lly can be h e ld t o about one p e rce n t above th e w h o le sa le r a t e s th e banks pay on t h e i r b on ds. Farmers now have 3 8 0 ,0 0 0 such lo a n s o u tsta n d in g from th e banks f o r some $ 2 .8 b i l l i o n . "P erhaps o f g r e a t e s t s i g n i f i c a n c e , " a cco r d in g t o B u sh n ell, "th e lan d bank system has dem onstrated how Government can h elp i t s c i t i z e n s t o h e lp th em selv es. In t h i s in s t a n c e , an e a r l y Goverment investm ent o f o n ly $9 m i l l i o n unleashed th e i d e a s , e n e r g ie s and a s p ir a t io n s o f a la r g e segment o f our c i t i z e n r y , th e good r e s u l t s o f w hich a re s t i l l b e in g h a r v e s t e d ." - 30 -