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For release on delivery
(approximately 12;00 Noon, Pacific Standard Time)
Tuesday, March 21, 1967
(3:00 PM, EST)

Remarks by
Andrew F. Brimmer
Board of Governors of the
Federal Reserve System
Biltmore Hotel
Los Angeles, California
Tuesday, March 21, 1967

Monetary Policy, Interest Rate Ceilings
and the Future of Residential Financing

Monetary management and residential financing, after enduring a year
of mutual agony, have again been cast in central roles on the stage of national
economic policy. Monetary policy, having borfte the brunt of the campaign to
moderate inflationary pressures in 1966, has been following a course in
recent months designed to ensure that the availability of credit is adequate
to see the economy through a period of inventory adjustment and on to a
path of balanced expansion, with reasonable price stability and x^ithout serious
aggravation of the U.S. balance of payments position. As projected in the
President's Economic Report in January, residential construction is expected
to be a major source of economic growth during the second half of 1967. An
increase in the volume of funds flowing to financial institutions -- and their
availability to potential mortgage borrowers at rates of interest below
those prevailing in late 1966 -- is a necessary component of this basic strategy.
Thus, the overall task for economic policy in the months ahead is both
difficult and critical. Precisely for this reason, it is important that there
be no misunderstanding of the role of monetary policy and its impact on
residential financing in 1966. Nor should there be unwarranted expectations
about the potentialities of policy for housing in 1967.

It is contended, even by usually most careful observers, that most
of the trouble in the housing industry last year can be traced
to the aggressive competition of commercial banks for personal
savings aided and abetted by the Federal Reserve. This view, aside
from giving an inaccurate picture of the task of central banking,
clearly overlooks the decisive role of high and rising yields on
market securities against which all financial institutions found
it extremely difficult to compete.

Moreover, while all lenders reduced their acquisition of mortgages
in 1966, commercial banks maintained their participation in residential financing to a greater degree than other depository-type
financial institutions.
Finally, contrary to widely held convictions, the sharpness of the
shrinkage in residential financing was not solely a reflection of
the policies of the Federal Reserve System. Rather, given the need
to adopt a policy of monetary restraint to help check general
inflationary pressures, structural defects inherent in our basic
arrangements for residential financing made it inevitable that the
burden would fall most heavily on this sector.
Looking ahead in 1967, the prospects for a revival of home building
appear promising.
As yields on market securities have declined in response to the
relaxation of credit restraint, financial intermediaries once again
are experiencing sizable gains in deposits and share capital. New
commitments to lend are also rising.
However, the legacy of previous yester-year still lingers
in some localities: many potential home buyers apparently are unaware of the improved conditions, and there are lags in assembling
labor and resources needed for new housing ventures.
But on the x^hole, the quickening pace of financial flows does
suggest a substantial expansion in home building activity as the
year progressed.
In other words, the same structural features that cau&e housing finance
to suffer more from monetary restraint also leads it, to benefit' _
first and possibly most from monetary ease.
Simultaneously, however, a less comforting chorus is also being heard.
Increasingly, Federal supervisory agencies are being urged to hasten the
downtrend in interest rates

including those on real estate mortgages --

by reducing the maximum rates which commercial banks, mutual savings banks,
and savings and loan associations can pay on deposits and share accounts. In
my opinion, this suggestion

-- that Federal agencies should lead the market

down -- g'o^s astray in several. <*"}gnif;fcant ways.

In the first place, interest rate ceilings were adopted by Congress
last September primarily as a means of moderating excessive
competition for deposits. They should not be used to regulate the
rate setting decisions of private financial institutions too
closely and thus to abridge the responsibilities of their own
Moreover, if the structure of rates paid by financial institutions
were forced down ahead of the general market, these intermediaries
could again find themselves unable to compete for deposits. As a
result, the promising revival of housing might turn out to be more
of a promise and less of a revival.
Instead of dwelling on rate ceilings as a means of providing
permanent insulation of particular institutions from the forces
of competition, or insulating housing from the shifting composition
of the public's demand for goods and services, all of us would do
well to get on with the task of modernizing our basic arrangements
for residential financing to ensure their viability during future
periods when monetary policy may again be called upon to help
counter inflationary pressures.
Monetary Policy and Residential Financing in Perspective:

the Record for 1966

The details of monetary policy in 1966 have already been placed before
the public, and there is no need to repeat these here. It will be sufficient
to recall that, under the stimulus of quickening outlays for military activity
in Vietnam, the economy began to develop marked inflationary tendencies
in the last half of 1965. To counter these pressures, a policy of monetary
restraint was announced in early December of that year. This policy was
re inforced as the new year unfolded and became particularly restrictive
during the third quarter of 1966, Fiscal policy also was directed toward
the same goal of countering inflation; but, on balance, the major share of
the load was carried by monetary policy. As aggregate demand built up, the
quest for funds on the part of the private borrowers (especially corporate
business) exerted enormous pressure on the level of interest rates. Moreover,

the Federal Government also registered sizable demands on securities markets.
The net result was that interest rates rose to the highest level in 40 years.
In this environment, all financial institutions lived through trying
times, but as you know, mutual savings banks and savings and loan associations
were under substantially greater pressure than they had experienced in
earlier post-war periods of cyclical restraint. Because of the strategic role
these institutions play in residential financing, their lesser
funds was reflected progressively in fewer/

commitments and

inflow of new
loans, and .

hence in a sharp decline of housing starts. From an annual rate of 1.5 million
units the first quarter of 1966, starts had dropped to a post-World War II
low of less than 900 thousand in October.
At this point, it may be helpful to review the pattern of 1966 mortgage
flows and the respective roles played by different types of financial institutions. With sharply rising market yields, consumers stepped up their
purchases of securities last year to a record $11.5 billion -- four times
their acquisitions in 1965. To make these purchases, they reduced their
rate of accumulation of deposits in banks and other intermediaries. The
rate of growth of time and savings deposits of consumers at commercial banks
declined somewhat, but consumer acquisitions of other deposit-type claims
declined even more steeply. Indeed, such acquisitions represented the
smallest proportion of the increase in consumer financial assets since the
early 1950's. In absolute terms savings and loan inflows dropped to the
lowest volume since 1552 and at mutual savings banks to the slox^est pace since
1962. In both April and July, S6cLfs(savings and loan associations) suffered

large withdrawals as investors shifted their funds to other more attractive
assets. Following the April outflow, these institutions began to cut back
sharply on new commitments.
TJith inflows to many mortgage lenders reduced by the shift of consumer
savings to higher yielding market securities, total net home mortgage financing
in 1966 declined by almost 30 per cent, and — reflecting the drop in new
commitments -- from fourth quarter to fourth quarter net mortgage growth
declined by 50 per cent. At savings and loan associations and mutual savings
banks, the decline from fourth quarter to fourth quarter was about 75 per cent.
Moreover, life insurance companies -- with their lendable funds reduced by
a sharp increase in policy loans and a reduction in prepayment of existing
real estate loans — also cut their mortgage commitments sharply in 1966.
In contrast, commercial banks reduced their mortgage purchases by only
a third from the end of 1965 to the end of 1966. Moreover, these banks
increased sharply the proportion of their loans and investments allocated
to mortgages. In 1966, residential and other mortgage loans accounted for
30 per cent of total commercial bank loans and investments compared with an
average of about 20 per cent during the previous five years.
Another way of looking at shifts in residential mortgage markets in 1966
is to compare shares of the market. On average from 1961-65, depositarytype savings institutions had accounted for 70 per cent of the market; by the
fourth quarter of last year, their share was 32 per cent. Insurance companies
and pension funds increased their share of the smaller market; while they
accounted for less than 10 per cent in the first half of the 1960fs, they took
almost 14 per




Commercial banks, however, almost doubled their share -- from 15 per
cent during 1961-65 to 28 per cent in 1966. But the big residual lender
was the Federal Government. Federal agencies supplied over one-fifth of
the funds to the home mortgage market in 1966 after a mixed but essentially
neutral average contribution in the first half of the decade.
The West Coast Experi ence
The impact of monetary restraint in 1966 was pervasive, but on the
West Coast it was particularly severe. However, to some extent, this relatively weak West Coast performance can be traced to a number of special
circumstances. Many West Coast institutions prior to 1966 had sought -and attracted --a large volume of the most interest-sensitive funds. Moreover, with these very large inflows to the West Coast (including heavy
borrowing by California S&L's from the Federal Home Loan Bank at the very
time of large share inflows), housing had gone through a period of overbuilding. In fact, the pace of new starts had actually turned down in
1964-65 -- before the development of severe credit stringency last year.
Indeed, California State authorities for some time had been concerned
about the quality of mortgage credit -- particularly at the S&Lfs -- and were
emphasizing more prudent lending standards.
The effects of interplay of supply and demand forces in the West is
clearly evident in the statistics. At the large weekly reporting banks
in the San Francisco Federal Reserve District, the deceleration in the growth
of time and savings deposits was far less than in the rest of the Nation.

At the largets banks
V/. the West, 1966 inflows were 65 per cent of 1965 inflows compared
with 27 per cent for large banks in the rest of the country. However, the
decline in their real estate loans exceeded that of the large weekly
with the other 11 Federal Reserve Districts; their 1966
reporting banks^/real estate loans were only 37 per cent of 1965 volume,
whereas real estate loans at banks in other parts of the Nation were
62 per cent of their 1965 volume. This more severe decline clearly
reflected not only the reduced pace of inflows to West Coast institutions,
but also the previous overbuilding.
At S&L's, financial developments even more sharply reduced the inflow
of funds and the extension of mortgage credits. But housing activity per se
was so low in California that S&L's in the San Francisco FHLB district
actually repaid advances to the FHLB in 1966

despite their greatly reduced

In looking back on their 1965-66 experience, a number of participants
in West.Qoast savings and loan and'homebuilding industries

have volunteered

the judgment that the further reduction in activity in the West in 1966
was in part a necessary adjustment that was required in any case. While
there are still some overbuilt situations, many of the adjustments needed
here as well as in the savings and loan industry have been accomplished
putting both industries on a sounder basis to move forward from here.
The 1967 Outlook for Residential Financing
Since monetary policy shifted from restraint to ease last fall, inflows
to financial institutions have increased sharply.

Declining market yields

have increased the relative attractiveness of bank time deposits and S&L shares.

In December and January, inflows of the S&Lfs rose at a 6.2 per cent
seasonally adjusted annual rate, a dramatic turnaround from the
earlier pace in 1966. At mutual savings banks, net inflox^s rose at
a 7.8 per cent annual rate. This was somewhat above their summer and
fall pace, which had already accelerated due to higher offering rates
by the major institutions at midyear. And at commercial banks, inflows
of time and savings deposits rose at an annual rate of about 10 per cent
in December, and 20 per cent in January-February. Negotiable CD's
accounted for a large part of this latter growth, but consumer-type
deposits also rose sharply.
Inflows to California commercial banks were at least as good as
those for banks in the rest of the Nation. At S&Lfs in California,
inflows were considerably better than for the country as a whole.
With larger inflows to financial institutions, the tone of the
residential mortgage market has improved considerably. Mortgage rates
as measured by the FHA secondary market series declined about 35
basis points from November through February. In fact, in January and
February the series showed the largest rate decline for any months
in the history of the series. Rates on conventional mortgages have
also declined substantially.
However, recent impressions relayed to us at the Federal Reserve
from participants in the mortgage lending and housing industries suggest
that the legacy of the recent past may delay the translation of recent yield and flow developments into new residential
construction. Although new mortgage lending is generally expected to

pick up over the next few months, the pace of the expansion may be
dampened somewhat by continued hesitancy on the part of some borrowers.
Some of this attitude seems to have been due to expectations of still
easier conditions. But other borrowers have apparently not been
sufficiently aware of the easing that has already taken place. Even
more important the technical lag in gearing up the production of new
homes after a period of very low activity is continuing to slow the
pace of expansion in new construction.
On balance, these impressions suggest that housing starts may not
show any pronounced rise until after mid-year, after allowing for the
usual seasonal increases which are particularly sharp in the spring.
The recently released figures on housing starts for February which
as you knox* showed a 15 per cent decline from January to a seasonally
adjusted annual rate of less than 1.1 million units, lend some support
to this view.

Hox/ever, the housing starts statistics frequently show

sharp month-to-month changes, and one should not attach much weight
to a one-month decline. Over the preceeding three months, home
building had registered gains, and a further expansion particularly
after mid-year, seems assured in view of the recent expansion of flows
to mortgage lenders.
on some market securities
Moreover, since February (x*hen

interest rates/moved up in

anticipation of the heavy volume of securities to be digested in
March), the Federal Reserve has provided reserves liberally through .open
market operations and by a* reduction in reserve requirements. These circumstances are clearly favorable for a strong increase in home
building in coming months.

Structural Defects and the Vulnerability of Residential Financing,
As I have already indicated, the difficulties encountered in home
financing in 1966 x*ere due as much to structural limitations in the
institutions of residential financing as to monetary policy. Mortgages
in general, and residential mortgages in particular, are rather special
financial assets. Moreover, for a variety of reasons Government policy
and regulations have tended to make them even more unusual. This is
the root of the "mortgage problem11, and 1966 is simply the latest
example — but perhaps the most striking example -- of how these
peculiarities can magnify credit market pressures and lead to stresses
in the entire residential financing fabric.
Within broad groupings, many types of debt instruments other than
mortgages are relatively homogeneous. For instance, investors usually
view corporate bonds of the same maturity and quality rating as fairly
close substitutes — with only relatively minor yield differentials
needed to encourage substitution. On the other hand, mortgages are
differentiated in so many ways —/maturity, credit worthiness of the
borrower, legal characteristics of the State in which the property is
located, etc — that they are not/ interchangeable. Federal guarantees
and insurance tend to add homogenity. But less than one-fifth of all
residential mortgages on new homes in the last four years have had this
protection, and additional fees and rate limitations have also tended
to reduce the effectiveness of plans for creating a genuinely competitive,
nationwide financial asset out of the residential mortgage.

The institutional structure of mortgage markets has also limited
the ability of the mortgage to compete with other financial assets.
Rate limitations on mortgages established by the separate States and
by Congress tend to make mortgages non-competitive in periods when
generally rising interest rates force yields on market securities
up against their limits. At such times lenders who have a choice
naturally become less attracted to mortgages. While discounts can
increase the yield on mortgages, many lenders find the use of discounts
a difficult procedure for technical and other reasons. Moreover, both
laws and administrative regulations inhibit their use, and the cash
effect on the seller or builder is often so large that it further
reduces the use of discounts.
While mortgages have their limitations as a readily marketable
debt instrument, as was demonstrated in 1966, perhaps the most serious
weakness in the institutional structure of mortgage markets stems
from the difficulty that major mortgage lenders have in obtaining funds
in times of rising yields. The essential reason for their difficulty
is clear. Over one-half of all home financing is usually supplied
by S&Lfs; if mutual savings banks are added, the share rises to twoare
thirds. When their portfolios/heavily invested in/mortgages with rates*below
the .current /
these institutions find it difficult to raise/ rates they
for deposits and shares and .thus/to compete for savings against

While the new mortgages they acquire have a higher return,

unden existing practice, when these institutions try to pay depositors

more, they typically must raise the rate across the board on all
deposits and shares — even though they obtain higher earnings only
on their new loans.
The problem of rate competition for these non-bank types of
intermediaries has, of course, been intensified in recent years by
the changed role of commercial banks. Banks, which had rather
passively permitted other financial institutions to cut into their
market during the 1950*8, began to compete more aggressively for
business and consumer savings in the 1960fs. As you know so well,
this change was encouraged by successive increases in the maximum
rates which banks could pay on their time deposits;

following the

further late 1965 increase in this ceiling rate,banks made an especially
vigorous effort to attract funds, with considerable further success.
Yet, despite these banks1 efforts, the rate of growth in their
savings and consumer-type time deposits slowed in 1966 as consumers
allocated a greater proportion of their funds into higher yielding
market securities. Thus, the general role of high yields on market
securities should not be underestimated. For S&L's and mutual savings
banks too, competition from the market seems to have been as large -a
if not/larger -- factor than the aggressiveness of commercial banks.
The key point of the above discussion is that housing bore a relatively

large portion of the brunt of monetary restraint last year

because of the inherent peculiarities of both the mortgage instrument
and the major lending institutions active in home mortgage markets.

In these circumstances,

simple logic suggests several alternative

ways to minimize mortgage market problems in future periods of monetary
restraint. One would be to refrain from the use of monetary policy to
restrain aggregate spending because of its potential discriminatory
effect on the mortgage capital. Clearly, this prescription cannot be
followed, for monetary policy -- 4s was demonstrated last year — is
an indispensable tool in any period of excess demand and inflationary
pressures. A second alternative is to try to improve the marketability
of the mortgage instrument. This/has already been taken, with the
development of insured and guaranteed mortgages and of secondary market
support from the FNMA. But further innovations to develop a secondary
market in conventional mortgages might be tried. A third alternative
is to try to insulate the mortgage market from the effects of rate
competition for savings. This road was traveled a bit further last fall
when interest rate ceilings were established on time deposits in
commercial and mutual savings banks and on shares in S&Lfs.
Cautionary Approach to Interest Rate Ceilings
As I noted above, an increasing number of persons, from various branches

the financial sector, are beginning to look longingly at rate

ceilings on deposit-type claims as a means of achieving a mixture of
objectives — including leading the market to a generally lower level
of interest rates, wider profit margins, and greater safety for particular institutions.

In my judgment, all of us should be especially cautious

in trying to employ rate ceilings for such purposes.

It will be recalled that, when Congress last September granted
Federal bank supervisory agencies the authority to set rate ceilings
on a variety of bases, the principal aim was to halt the competitive
escalation of interest rates offered on savings by financial intermediaries which threatened to develop serious difficulties for the
financial system as a whole. It should also be recalled that Congress,
recognizing that legislation adopted to meet an urgent immediate
situation might not be appropriate to meet long-run needs, set a
one-year expiration date for the new authority. It was hoped and
expected that the agencies would not only use their new flexibility
to dampen the excessive rate competition — but would make a serious
effort in the interval to develop an approach to rate regulation
which would also be suitable for the long run.
Immediately after the President signed the new law, the Federal
Reserve Board, the FDIC and the FHLB Board -- after consultation
together as required by law — promptly set maximum ceilings for the
institutions under their supervision. The Federal Reserve Board reduced
to 5 per cent (from 5% per cent) the maximum rate which member banks
could pay on any time deposit under $100,000. The FDIC adopted the
same ceiling on the same basis and also applied it to mutual savings
bank passbook accounts; passbook ceiling rates for commercial banks
remained unchanged at 4 per cent. The FHLB Board limited to 4-3/4
per cent the rate member S&Lfs generally could pay on passbook
accounts — except for associations in areas where 5 per cent was the
prevailing rate, and units in California, Nevada and Alaska could pay

up to 5% per rent. Those paying 4-3/4 per cent on passbook accounts
could also is me certificates paying up to 5% per cent.
My own position is this: under normal circumstances, there
should be no/ceilings set by Congress on rates payable by member
banks. But given the possibility that competition among financial
institutions for savings can at times become excessive and thus
for regulatory agencies
destabilizing to the entire economy, standby authority/to set variable
/ should be available to be used as needed.
I realize, of course, that some people have a very different view
of what is needed — even in the long run. They advocate a permanent,
coordinated structure of rate ceilings on time accounts for all major
kinds of depositary-type institutions. As I understand this alternative
view, the principal supporting arguments are as follows:

The unusually high rates currently being paid on depositary-

type claims are too costly in relation to returns on mortgages, and
hence are forcing a number of institutions to operate with net earnings
that are too small to permit adequate additions to reserves.


the operating status of different depositary-

type institutions is so varied, however, that given institutions in
local market areas are hesitant to cut rates paid on savings because
they have no assurance that competing institutions will follow suit
with matching rate reductions of their own. Past experience has stuwn
that in the highly interest-sensitive market for personal savings, any
individual institution which attempts to lead with a rate reduction risks
a heavy loss of funds, if competing institutions do not follow.

For this reason, it is argued, an across-the-board rollback
of savings rates in a period of generally declining rates can be
accomplished only when it is initiated by Federal supervisory agencies
in the form of a coordinated reduction in the structure of rate
ceilings for all types of depositary institutions• In the absence of
such a coordinated rate roll-back, marginal institutions with already
depleted reserve positions will be driven to the wall; moreover, the
failure to reduce savings rates will tend to slow the downward
adjustment of mortgage rates• And in present circumstances further cuts
in mortgage rates are needed to help stimulate the recovery of
residential construction activity.

The preceding arguments concerned

the immediate need for a

coordinated rate ceiling policy. Beyond this, proponents of a permanent
ceiling approach also argue that ceilings are needed to insure the
long-run viability of financial institutions that specialize in home
mortgage financing. They believe that both the savings and loan
associations, and to a lesser extent the mutual savings banks, are at
an inherent disadvantage when forced to compete for savings with the
more flexible and diversified commercial bank lenders. Hence they
contend that inter-institutional ceiling rate differentials have to be
fixed on rates paid for savings in order to prevent the ultimate demise
of the specialized lenders and a resulting reduction in the relative
availability of funds for home mortgage financing. Finally, they assert

that rate differentials must be maintained between institutions of the
same type in different geographic areas of the country, in order to
continue to channel funds from capital surplus to capital deficit areas.
This need is stressed particularly where lenders in capital deficit
areas have relied so heavily in the past on rate differentials to
attract interest-sensitive savings into their markets; any sudden
reversal of this trend would be disruptive,
above cases
The /

for permanent rate ceilings — and for the immediate roll-

back of existing ceilings —are admittedly worthy of careful consideration.
But I believe personally that an even stronger case can be made for
being cautious in following


line of action. In any system of fixed

inter-institutional and geographic rate ceilings, the winds of economic
change will always pose problems of equity and social priority in the
allocation of funds. Efforts to resolve these conflicts would tend
inevitably to extend the Federal presence increasingly into rate
setting decisions which should be the prerogative of management in each
Moreover, in my opinion, it would be a mistake to allow the broad
principles of Federal policy on savings rate ceilings to be determined
by what are essentially supervisory questions about the quality of
management in the least viable firms in the segment of the thrift industry
to compete against market securities.
with the least capacity/These supervisory problems should be approached
directly through examination techniques, leaving savings rates free to
be determined by competitive market forces. It is only in this way that
flows of available funds can be allocated where they

are most needed.

Moreover, efforts to insulate S&L shares from the pressure of
competing liquid assets by holding down rates on claims of all depositarytype institutions will tend to be counter-productive in periods when
rates on market secutities are attractive. Such an approach would simply
accelerate the diversion of savings flows from depositary-type claims
into market instruments*
There has already been ample illustrations of the types of problems
that arise when rate ceilings are established for a financial sector
with as many diverse and rapidly changing institutional and geographic
charateristics as the thrift industry. For example, the management of
some commercial banks and S&Lfs located in the New York City area have
asserted that the initial relationship established last September between
ceiling rates on savings deposits, S&L shares, and consumer-type time
deposits at commercial banks gave an unfair advantage to the savings banks.
Although the rate ceilings for S&L's were subsequently liberalized, there
is little question that flows to savings banks deposits in New York City
have recently grown more rapidly than those to similar types of claims
at competing types of institutions. Setting of a nfairff structure of
rate ceilings applicable to the New York situation was complicated by
the fact that savings institutions in that area emphasize rather different
types of instruments. Similar types of problems arise in attempting to
fix a reasonable geographic rate differential for institutions on the
West Coast compared with rates paid in other capital short areas.

Concluding Observations
Nevertheless, the 1966 experience stands as a haunting reminder
that under existing institutional arrangements, S&L's (and to a lesser
extent savings banks) do not have the capability to compete freely for
savings with commercial banks and market instruments when interest
rates rise sharply.
To resolve this problem, the proper solution would seem to be
not to set permanent ceilings on all savings rates

but rather to

improve the competitive ability and management of the weaker types
of institutions. This would involve changes in institutional arrangements xfhich would permit both S&L's and savings banks to diversify the
types and maturities of the assets they hold; to offer a wider range
of savings instruments differentiated by maturity; and to borrow for
longer terms from the Federal Home Loan Banks, using funds raised by
these banks J n capital markets.
One might reasonably ask

just how some S&L's (which in many cases

have encountered difficulties in managing a much more limited range
of assets) could be expected to extend their range of operations
efficiently to encompass even more demanding activities, such as
consumer credit. Here the answer must be that many S&L!s have exhibited
a high order of management ability, and that further steps should be
taken to encourage mergers of weak with strong institutions. This
process could be accelerated through Federal chartering of mutual
savings banks, since a number of the larger, more efficient S&Lfs
would undoubtedly decide to take advantage of this option. This would

be particularly promising if the asset and geographic investment
flexibility of the mutuals were expanded at the same time.
I realize, of course, that S&L managements have often tended to
resist the above approach to institutional innovation on the grounds
that broadening of their asset options would operate to reduce further
the availability of funds in mortgage markets, particularly in periods
of general credit stringency. Recent experience suggests that this is
not necessarily true. For example, as mentioned above, in a number of
areas last year commercial banks proved to be the more permanent mortgage
lenders. This suggests that a shift to broader lending capabilities
by the S&Lfs and savings banks (in effect making them more like
commercial banks) would create more general strength among financial
institutions to adjust to monetary stringency and thus help to spread
the impact of monetary actions more evenly throughout the financial sector.
Finally, if this result were accomplished, the chance of future
experiences like 1966 would be minimized. This would mean that there
would probably be less reason to require future use of stand-by powers
to set rate ceilings. Likewise with relative financial strength more
evenly distributed among types of financial institutions, there might
be less need than in 1966 to use rate ceiling powers to curb the pace
of bank credit expansion.