people are priced out of the housing market right now because of the cost of the homes. You add this interest rate onto it, and that means that Uncle Sam is going to have to build a whole lot of subsidized housing, because people are not going to be able to afford anything else but Government housing.

Mr. Schmults, you talk about the little depositor, here we are talking about $5,000 here for your first and $1,000 increments beyond that, so who are we kidding when you say you are going to help the small depositor. Frankly, I cannot buy one of these, and I do not know how many people up here could buy one of these. So you are not really talking about your small investor. If you are interested in the small depositor, then why do you not lower your Treasury notes-the 90-day notes-to $5,000?

Mr. SCHMULTS. Our interest in the small depositor is a real one. I think one way that he is going to be able to take advantage of market rates of interest is under the proposed Financial Institutions Act.

Mr. ST GERMAIN. I am sorry, sir. Let us stick with the issue today. Mr. SCHMULTS. Well, one of the issues we have discussed today is what can be done, in terms of your question, to help the small depositor, and he ought to be able to take advantage of market rates of interest. The Financial Institutions Act will permit him to take advantage of these rates. Incidentally, I would hope that we could get something on it this year and press forward on that legislation.

Mr. ST GERMAIN. My time has expired, but the thing that bothers me is this is now 1 percent above the rate, so if the competing institution was to come up paying 2 percent above the rate or 1.5 percent above the rate, what is to stop them? Where does this end? Thank you. Mr. BARRETT. Mr. Wylie.

Mr. WYLIE. Thank you, Mr. Chairman.

While I was back in Columbus, Ohio, over the weekend I had asked of me several times two straight forward questions, and I think they have a relation to these hearings this morning: What is Congress doing to get more money into the housing market or into the mortgage market? I might ask this of each member of the panel. What can Congress do, in your opinion? And, two, what can we do to reduce interest rates?

I say to you these questions are on the minds of Mr. and Mrs. Average American Public, believe me; and I am not certain they relate directly to our hearings today but they relate indirectly to the subject this morning. Would anybody attempt to give me an answer to these two questions?

Mr. Bomar?

Mr. BOMAR. Congressman, there is a simple answer to both of them, and that is, the primary villain is inflation. If inflation is reduced, both of these problems will be substantially lessened.

Mr. WYLIE. All right, then, the real problem at the present time is the management of our public debt. In other words, we are just spending too much more than we are taking in; is that what you are saving, as far as the Government is concerned?

Mr. BOMAR. Yes, sir; that is a very large part of it.

Mr. WYLIE. The fact that we had to pay out $27.8 billion in interest on our debt last year is the real cause of inflation, the cause of the high

interest rates, and the reason for the lack of money in the mortgage market?

Mr. BOMAR. It does not stem necessarily from the interest payment, but it stems from the volume of Government obligations that are necessary in order to support the governmental programs. All this increases the money supply and it all adds to inflation and comes back to haunt us in these ways and multiple other ways.

Mr. WYLIE. I am persuaded that the root cause of most of the problems we are discussing is deficit financing by the Federal Government. So, I have introduced a bill, H.R. 15375, which would, if passed, limit spending to income, and reduce the Federal debt on a graduated basis, starting at 2 percent. Would you be in favor of a bill like that?

Mr. BOMAR. Congressman, I would like to read the bill. But the fundamentals of it sound very appealing.

Mr. WYLIE. How about you, Governor Mitchell?

Mr. MITCHELL. I would subscribe to what Mr. Bomar said with regard to reading the bill. I have not seen it.

Mr. WYLIE. Would you care to comment on that Mr. Schmults? Mr. SCHMULTS. I am sorry; would you repeat what you said. Mr. WYLIE. My question is. I have introduced a bill, H.R. 15375, which, if passed, would provide that Congress could not appropriate more money than is collected in revenues. It would provide for a reduction in the Federal debt on a graduated basis, starting at 2 percent for the first fiscal year.

Mr. SCHMULTS. I do not think we would support that. Of course, we would have to review that bill. But I think Congress has taken some steps which are extremely helpful in this regard. The new budget control legislation, I think, is very desirable legislation. I think Congress is doing something about it. I think the administration is committed to doing all that it can, vigorously, to combat inflation. I think so far as interest rates are concerned, it is perfectly clear that, when you have inflation running at 10 percent, no one is going to loan out money at less than that. He is losing money; he is losing his position. The important thing to bring down interest rates, which really just allocate credit, is to fight inflation. We have to get it down.

Mr. WYLIE. But how do we do that? That is the point. How do we fight inflation?

Mr. SCHMULTS. We basically have to restrain demand. Our demand is greater than our ability now to produce goods. And where we can, we have to also increase the supply.

Mr. WYLIE. Most of that demand comes from the Federal Government.

Mr. SCHMULTS. Well, with respect to debt markets, that is right; and we have to reduce Federal spending; that is critical.

Mr. WYLIE. Would you want to comment on my bill Mr. Wille? Mr. WILLE. Comment on your bill, sir?

Mr. WYLIE. Yes.

Mr. WILLE. My reaction is that I really do not see how you can take an intelligent position without knowing what kind of public demands are going to be facing this country in the future and the kind of economic climate within which you are trying to solve the problem of meeting those demands.

Mr. WYLIE. How about over a period of 6 months?

Mr. WILLE. The immediate 6-month period? I think there would be some merit in it for the short term. Clearly, we are trying to take out some of the excess demand out of the economy.

Mr. WYLIE. Would you have a comment Mr. Roob?

Mr. ROOB. I would agree very much with Mr. Wille. There are times when deficits are appropriate. In times of relatively high unemployment, you have to pump some money into the economy.

On the other hand, in periods like the present, we have to draw it out. Over the next 6-month period, I think it would be a very appropriate kind of thing to do, but I would certainly want to have my finger pretty close to the button, so that if it looked like it was putting the economy into a recession, we could reverse it. But I do not think that you want to put these things into a rigid formula. I think you put yourself into a straitjacket.

Mr. WYLIE. Thank you very much.

Mr. BARRETT. The gentleman's time has expired. All time has expired. We are grateful for you gentlemen coming here this morning and giving us this testimony.

Mr. Gonzalez?

Mr. GONZALEZ. Let me say for the record at least, that actually I do not see anything that this legislation would or could do. You-the banks going to go on ahead-I do not see any forced to prevent the issuance of this type of credit. The savings and loan industry will of a necessity follow suit and the example of the banks, and I don't see how Congress can justifiably disallow it. In fact, what we have had for 6 years is the law of the jungle. The Congress and the administration have abdicated a solemn trust: the defense of the public interest, and have let the Darwinian doctrine of the survival of the strongest take over. I do not see how in the world, short of governmental enforcement such as credit control, we in the Congress can do anything. But even this one hesitates to advocate to a corrupt regime that has just emerged from the administrative sabotage of economic controls.

As I see it, we are on the threshold of watching this process of the weak getting eliminated, not only in the banking industry, but also in the savings institutions. I do not know what it will take-maybe an exhaustion on the part of Mr. Wille's institution's capability to really save the end total of banks that will go under; I do not know what it will take, but certainly the sense of urgency has not been strong enough to motivate the Congress since 1966, or this administration since 1969, to do anything from the standpoint of the general public interest-just the special interests.

When we had the June crisis of 1969, and both the Congress and the administration sat by helplessly and let such things as your variable prime interest rate take hold, and you had a jump of one whole point in the prime rate in one announcement, that should have been clear warning. The Congress did nothing and the administration did less. So, gentlemen, the only thing I can see is to just sit here and watch the giants thrash it out and see how many will survive, unfortunately, we are all getting hurt in the process.

Thank you, Mr. Chairman.

Mr. ROUSSELOT. Mr. Chairman.

Mr. BARRETT. Mr. Rousselot.

Mr. ROUSSELOT. Thank you, Mr. Chairman. I will try to be brief. I agree with some of my other colleagues that have expressed the point of view, and I share it very strongly, that part of the problem is Congress, because we constantly overappropriate more dollars than there are in the Treasury and this forces the Treasury to go out into the marketplace and borrow money and to compete with everybody else, and that forces up the price of money. We are to blame for much of the problem we are complaining about today, and especially that giant housing bill we passed out of here the other day that is going to cost well over $10 billion. We are going to have to accept part of the blame ourselves.

But Mr. Bomar, is it not true that last week you issued almost a billion dollars of 3- to 5-year notes at 9.5 percent? Is that not correct? Mr. BOMAR. We issued a billion dollars worth, and there was $500 million worth in each block-9.6 on one, and 9.5 on the other.

Mr. ROUSSELOT. The reason that interested me, because you mentioned the problems that the savings and loans have-and I assume some of them are going to pick these up, these notes up, the Home Loan Bank notes that you have issued

Mr. BOMAR. We hope not many savings and loans are buying them since we are selling them to support them. But I can assure you that it does happen.

Mr. ROUSSELOT. My concern was, if they have to come to you for that kind of cost of money, and their problem, as you have already stated and everybody else has, is that they try to, at the side, put out mortgages on the long term and those are already pretty high, how are they going to cover that kind of cost?

Mr. BOMAR. It is for most of them, they do not have the income on average to cover it. Most of the borrowings that are being taken down

Mr. ROUSSELOT. So, all they can do then is increase the cost of mortgage money?

Mr. BOMAR. Yes, it certainly acts to do that.

Mr. ROUSSELOT. Then, of course, we will have all kinds of screams and yells that the poor little mortgage home buyer is going to be discriminated against because that cost of money is going so high.

Could we consider the possibility in Congress-and I think the Senate did this in the housing bill-of allowing variable interest rates, so that they could compete on at least a trial basis and in a small way, so that we could test it to see if it got out of hand?

Mr. BOMAR. Congressman, we think that that, with adequate consumer protection, is an excellent idea. In fact, you do not need another bill. The Board has the statutory authority to do that now.

Mr. ROUSSELOT. To allow savings and loans to issue-are you going to do that?

Mr. BOMAR. Yes, sir, we intend to propose some regulations in the near future in this regard. Something like this is an important enough change that before we do that, we certainly want to consult with

and receive the views of key members of Congress before we propose something like that.

Mr. ROUSSELOT. Then if they were able to issue variable interest rate mortgages, they could probably increase-assuming you allowed them to the price that they could pay for the savings to attract savings and compete with some of these other instruments; is that not correct? Mr. BOMAR. Yes, the gentleman is correct. After they were on the books awhile, they would move in tandem, so that when they went down, rates would go down.

Mr. ROUSSELOT. You have the authority to compete with this to some degree?

Mr. BOMAR. We have the authority to compete, but the thrift industry does not presently operate on that kind of a basis, so it does not have the current wherewithal. But over a period of years, it could be developed.

Mr. ROUSSELOT. Has your advisory committee that you met with last week advised that this might be a possible way to compete though? Mr. BOMAR. Yes, sir, they have.

Mr. ROUSSELOT. I appreciate your candid answer.

Mr. BARRETT. Gentlemen, all time has expired for this panel. We are grateful for your being here.

The committee will stand in recess until 2 p.m. this afternoon, when we have a different panel.

[Whereupon, at 12:20 p.m., the committee recessed, to reconvene at 2 p.m. the same day.]

AFTERNOON SESSION

The CHAIRMAN. The committee will please come to order.

This afternoon we are privileged to have as our witnesses the AFLCIO. Who represents the AFL-CIO?

Mr. GOLDFINGER. I do, sir.

The CHAIRMAN. All right. We are glad to have you sitting there. And the American Bankers Association?

Mr. Morthland? Fine.

The National Savings and Loan League?

Mrs. SULLIVAN. Right here.

The CHAIRMAN. Thank you, ma'am.

The National Association of Home Builders?

Mr. ROGG. Right here, sir.

The CHAIRMAN. And the U.S. Savings and Loan League?

Mr. Scorr. Yes, sir.

The CHAIRMAN. And the Mutual Savings Banks.

Mr. CRAWFORD. Yes, sir.

The CHAIRMAN. All right, fine.

The committee will resume the hearings this afternoon on these witnesses, and it is not contemplated we will require too much time because the witneses, I understand, are pretty well in accord. If that shows up differently, we will stay here the length of time it is necessary to hear all of you.

But first we will start off with Mr. Goldfinger of the AFL-CIO.