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FOR RELEASE ON DELIVERY
EXPECTED AT 10:30 AM, EST
FRIDAY, MARCH 2, 1979

Statement by

Nancy H. Teeters
Member, Board of Governors of the Federal Reserve System

Before the

Senate Committee on Banking, Housing and Urban Affairs




March 2, 1979

Mr. Chairman and members of the Committee, I am pleased to
be here today to comment on the Administration's proposals for
improving control over Federal credit programs.

I wish to

emphasize that my opinions and analyses are my own.

The Board

of Governors has not taken a position on this issue.

However,

1 have had a continuing interest on this subject for several
years.

In fact, I personally consider the lack of unified

Congressional control over Federal credit allocation activities
a major loophole in the Congressional budget process.
The provision of credit assistance through direct loans,
guarantees, and other means is, of course, a legitimate activity
of the Federal Government.

It has traditionally been used to

provide credit to groups that would otherwise encounter difficulties
in obtaining accommodation and/or to enable borrowers to obtain
credit at a lower cost than they would otherwise have to pay.
During periods of credit stringency, for example, loan guarantees
have been of major help to families purchasing homes.

The credit

related activities of the Government, moreover, have fostered
many worthwhile developments in financial markets.

The equal

monthly installment payments of a home mortgage, for example,
are a Federal innovation -- one so successful that private lend­
ers have fully adopted it.




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It should be recognized, however, that, while Federal credit
programs can help promote social objectives that have wide public
support, these benefits are not obtained without cost.

The lower

interest costs paid by groups receiving credit can in effect be
viewed as a form of subsidy provided by the Government.

Moreover,

since the supply of credit is not unlimited, when certain groups
obtain credit with Federal assistance, other groups find it more
difficult to do so.
There is general agreement, I believe, that procedures cur­
rently being followed to evaluate, authorize, find, and account
for the Federal Government's direct lending and credit assistance
activities are seriously deficient.

Because of these deficiencies,

the Congress in its deliberations is able to make only an imperfect
assessment of the relative value of individual credit programs and
is unable to consider the impact of all such programs on the economy's
allocation of resources.

If "off-budget" credit assistance and pref­

erential tax treatment were given the same attention as direct
Federal expenditures, for example, the extent of Federal assis­
tance to particular sectors would look much different than it does
when direct loans are considered alone.

The amount of total

assistance to agriculture and housing is approximately double
the volume of direct loans made to these sectors.




Moreover, the

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citizens of our country are not being properly informed as to
the extent of the Government's involvement in credit allocation.
The magnitude of Federal credit activities has become quite
large in recent years, and rapid further growth is in prospect.
Altogether, loans by fully-owned Federal agencies and guaranteed
loans outstanding amounted to about $315 billion at the end of the
last fiscal year; just 10 years ago the level was only $150 billion.
In addition, loans held by agencies operating under Federal sponsor­
ship totalled $127 billion at the close of last year, up $100 billion
from the level 10 years earlier.

These credit activities, moreover,

are expected to continue to grow rapidly, with loans under all pro­
grams projected to increase around $50 billion in fiscal year 1979
and fiscal year 1980.

Such activity is expected to account for

about one-sixth of the total net funds raised in credit markets
during these periods.
Only a small proportion of this credit activity is recorded
as outlays in the unified budget.

Loan guarantees, of course, do

not involve an expenditure of funds and are thus not reflected in
the unified budget, except in the cases where appropriations are
required to cover defaulted loans.

Credit extended by sponsored

credit agencies is also not recorded in the budget since these
agencies are privately owned.




However, the liabilities issued

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by these agencies to finance their operations have an implicit
(and in some cases explicit) Government guarantee.

And,

although the Administration is proposing to include these
activities only in a credit information system and not the
credit control system, the Congress should take cognizance of
them in the overall evaluation of Federal credit assistance.
Finally, only a comparatively small proportion of the direct
lending by fully-owned agencies of the Government is shown in
the budget, because many of their activities have been placed
"off-budget” by the Congress.
I am personally concerned that "guaranteed credit" has been
extended into new areas that are not necessarily appropriate.
The original uses of guaranteed credit were in the areas of home
and farm mortgages involving large numbers of relatively small
loans secured by a physical asset.

We now have proposals or

programs to fund a large number of unsecured, small loans -- such
as student loans —

and others to assist a small number of very

large loans -- such as synfuel.

The nature of guaranteed credit

or proposals for such credit has changed markedly.
Another element which clouds the picture of Federal credit
activities is the operation of the Federal Financing Bank.

The

FFB uses funds borrowed directly from the Treasury to support




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the lending activities of Federal agencies and to acquire cer­
tain types of guaranteed loans.

In carrying out this function,

the FFB has successfully performed the function it was established
to do, since it has eliminated the congestion which often occurred
when the agencies attempted to finance their operations directly
in the credit markets.

In the process, however, it has reduced

the accountability of Federal credit programs, because lending
activities are attributed to the FFB rather than to the agency
originating the transaction.
These problems of accountability are matched by imperfections
in the Congressional review process.

Ail credit programs, of

coarse, have been authorized by law and are subject to oversight
by the Congress.

In the case of some loans made by "on budget"

agencies, this oversight is conducted annually.

But for most

programs, there is no annual review, and authorizations to engage
in activities may be given for several years.

Also, limits that

are set in most cases are stated in terms of net credit extended
(or loans guaranteed) rather than in terms of the gross volume
of such lending activity.
The proposals developed by the Administration to improve
the way Federal credit programs are controlled in the budget pro­
cess are generally sound in my view.




In particular, I strongly

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support the proposal for the establishment of a Federal credit
control system which would include all credit activities by
agencies fully owned by the Federal Government.

This system

would be presented by the Administration and considered by the
Congress in concurrence with the regular budget process, and
thus all programs would be subject to annual review and control.
I also agree that this process should set an aggregate ceiling
on all credit programs and binding limitations on each direct
loan and loan guarantee program.

These deliberations should

consider how each program will affect the ceiling for all credit
programs and how it will integrate with other credit and non­
credit programs designed to accomplish specific budget functions.
Moreover, the process of evaluation should be made within
the framework of the overall demand for credit.

Flow-of-funds

statistics are now available, and projections of "flow of funds"
are legion —
ful.

not as pervasive as GNP projections -- but plenti­

This will serve to emphasize that the nation*s credit

supply has limits and will indicate the extent to which it is
used by the Government, directly and indirectly.
I also agree that a program's gross lending (or extension
of guarantees) should be a major concern, as well as the net
increase or decrease in total commitment In each functional




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area.

And the proposal that sales of loans or certificates of

beneficial ownership in pools of loans should be recorded as a
form of borrowing rather than as a negative outlay is also well
advised.
I find myself in general agreement with most of the Adminis­
tration's other proposals.

In particular, the Administration has

indicated that, as part of its control system, it is considering
a requirement that would call for FFB outlays and budget authority
to be attributed to the agency and function where loans are origi­
nated.

This seems a sensible approach to me.

I recognize that if such an approach were adopted, agencies
may be tempted to obtain funds directly in the credit markets.
If this were to occur, the benefits being provided by the FFB in
reducing agency demands in credit markets would be lost.

Thus,

it may be necessary to develop guidelines to discourage agencies
from guaranteeing obligations to be sold directly to the public,
if these obligations are of the same nature as those presently
being acquired by the FFB.

The inclusion of all loan guarantee

programs in the credit control system and the imposition of limi­
tations on these programs, of course, will reduce incentives to
channel loan guarantees away from the FFB.

Safeguards will also

have to be established to constrain agencies from turning to




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other arrangements -- such as long-term leasing agreements and
price support agreements —

which can be used to achieve the

same purpose as loan guarantees.

The budget control system,

being prepared by the Administration, does not have provisions
for the establishment of such constraints, and it will thus be
necessary to develop procedures to achieve this objective.
One of the Administration's proposals in the scorekeeping
area should not be adopted in my view.

Rather than continuing

to include direct lending of Federal agencies in the budget, I
believe it would be advisable instead to take these loans out
of the unified budget and to record them only in the credit
control budget.

Direct loans are not the same as other Govern­

ment outlays, since financial assets are acquired in conjunction
with the dispersal of funds.

In addition, direct loans appear to

have essentially the same implications for economic stabilization,
resource allocation, and income distribution as do loan guaran­
tees.

In recommending the removal of direct loans from the

unified budget, I am, of course, assuming that coincidentally
the Federal credit budget will be put into place, so that there
would be no loss in scrutiny and control over these various
programs by Congress and the Administration.




Certainly, the

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direct lending programs should not be removed from the budget
until these alternative budgetary arrangements are working.
While a broad range of questions pertaining to the budgetary
treatment of Federal credit activities are covered by the
Administration's proposals, I believe there remain important
issues that require further study.

I wish to emphasize the

great need to develop guidelines for determining the trade-offs
between accomplishing social objectives through direct outlays,
on the one hand, and through Federal credit programs on the
other.

Similar criteria need to be developed to provide guid­

ance for choosing between giving credit assistance through
direct loans or guarantees.

Because guaranteed loans are spe­

cifically exempt from the budget control act, there has been a
proliferation of questionable "loan guarantee" proposals and
programs.
In addition to these broad issues, there is a need to
study the appropriate budget treatment of non-recourse loans,
such as those made by the Commodity Credit Corporation to
farmers.

Since these loans need not be repaid and in many

cases are not repaid, there is the ongoing question as to
whether these transactions should be treated as outlays or as
loans at the time when funds are dispersed.




Similar questions

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as to appropriate budgetary treatment can also be raised in
connection with other direct non-recourse loan programs,
especially foreign loans.

For example, it is far from clear

how to account for funds dispersed as loans under programs of
International Development Assistance and International Security
Assistance.

The ultimate collectibility of such loans depends

on international developments, which are, of course, highly
uncertain.
Given the importance of these unanswered questions, I
believe it would be advisable to appoint a new budget commis­
sion to study these questions and other related issues.

Such

a commission study would not, in my view, create any need to
delay the implementation of the Administration's proposals.
Rather, it would be advisable to push ahead and set up the
new control system, and then make amendments to this system
should the commission study indicate that procedures need to
be augmented or changed.
It is to be hoped that establishment of an effective frame­
work for appraisal, control, and scorekeeping of Federal credit
programs will lead to proper evaluation of new programs and
activities to prevent such activities from falling outside the
annual budget process.




Past experience, however, suggests that

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the mind of man is highly inventive in this regard.

Whatever

restrictions are put on fiscal activities, or credit allocation,
ways will be found to circumvent them.

Thus, I would further

recommend that the Congress carefully consider the advisability
of establishing formal rules to require the reconvening, at
regular intervals, of a budgetary commission to review conceptual
and measurement problems that may have developed with respect to
the unified budget and the credit budget.
Allocation of credit either directly through Government
loans or indirectly by Federal guarantees (regardless of what­
ever inventive name is applied) falls between the traditional
concepts of "fiscal" and "monetary" policy.
between the two.

It is a gray area

The decision, I believe, is basically a fiscal

one, but, if the amount of priority credit assigned is too large
a part of the total available supply of funds, there inevitably
will be impacts on general interest rates and the conduct of
monetary policy.

Clearly the allocation of credit on better

than market terms is a Federal activity that creates a preferred
status for certain groups in the credit market.

Government has

a responsibility to make sure that this activity is serving the
public interest.




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