Remarks to Officials of the Federal Home Loan Bank System in Connection With the Observance of the System's 35th Anniversary

THIS IS a very thoughtful and very generous thing for you to do. It makes me feel good to know that you would want to do it--that you feel our relationship is such that we can both concentrate our efforts on trying to serve the general public as it is our responsibility to serve.

We often hear in Government about "This was a crisis," or "This is a crisis," or "This may be a crisis." Generally crisis comes to us from the word "decision." We are making decisions.

Every day there are decisions that I make and that you must make that have a great bearing on the prosperity of the country, the development of the country, and the general living conditions of the country. All of us are directly affected one way or the other by a good many things in our economy--our food, our clothes, our jobs, and our housing. I want to address myself principally to the savings and loans--with which you have a direct governmental responsibility--and the general subjects of savings and housing in our economy. And I may--if you have the time and we get around to it--speak on more unpleasant subjects, such as taxes in our economy. That is one subject nobody ever pickets us on--demanding the passage of tax bills.

I observe the members of the home loan banks and this Home Loan Bank Board here are concerned--and the staffs of about 5,000 members of your system. You have assets of $145 billion. The savings and loan industry finances about 44 percent of America's home ownership and about 42 million people have savings accounts in savings and loan, insured associations.

So I can think of few endeavors that are more directly associated with the more important needs of the American people than savings, housing, and loans.

It is your responsibility to assure the health of the savings and loan industry. We are all working to that end. We are trying to sustain a healthy economy. We have to have effective regulation. We have to have modern, 20th century practices.

We have to be prompt in our decisions to see that we correct whatever abuses appear before they appear. We never want to go back to the days of the blue-sky operations of the late twenties and early thirties when a great many homebuilding associations over the country were closing and popping like firecrackers on the Fourth of July.

Now last year we had a jolt to our economy that all of you were sensitive to and acquainted with. It was brought on by a period of tight money. And that is about as evil a thing as we can have--tight money.

That is very fresh, I think, in all of our memories. The thrift institutions and their customers, and the home builders in this country, and the home buyers in this country were the ones who really suffered and the ones who were hardest hit.

Tight money has a very strangling effect on mortgage credit--as you men know better than anyone else. These were some of the consequences:

First, we must not forget this: We must see what happened and try to avoid a repetition. Half a million homes were not built--500,000 of them--that would otherwise have been built. Still others will go unbuilt until the recovery is complete.

The buyers of the houses were saddled with extra payments for the life of the mortgage. Over the next 10 years, those extra payments alone, because of that situation, will amount to $2.5 billion.

Now this country ought to know that. It ought to know that is the penalty, that is the price, that is the fine we are paying for a situation that we could not control.

Because it became more difficult to sell existing houses, many workers were unable to change their locations and to go to better jobs. They had to pay a fine for that and a penalty for that.

We took steps to take the heat out of the economy, and now there are encouraging signs of a turnaround in that situation.

Housing starts have reached an annual rate of about 1.4 million units. That is 40 percent higher than the average during the second half of last year--40 percent higher than the average during the second half of last year. But that still is not high enough to meet the housing needs of this dynamic economy and these prosperous American people.

I doubt that there are many in this room now--with the possible exception of the speaker--who are completely satisfied with their housing accommodations. I don't know if I were building my bedroom but what I would make some changes over there.

Housing permits now issued are averaging 1.1 million--the highest level since May 1966.

The institutions you supervise--which are the real bloodstream of the whole building industry--reflect this new health.

In the first 8 months of this year, these institutions attracted almost $7 billion in savings. That is nearly nine times as much as last year. That is a phenomenal, unbelievable fact.

These institutions committed $3.5 billion in loans--most of it for building new houses, some of it for financing the purchase of old ones. Now, this is an all-time high.

Last year, these institutions have been able to pay back more than $3 billion of their debt to the Home Loan Bank System. That debt is now lower--that debt to the Home Loan Bank System--than it has been in over 3 years.

But all of these gains are going to be lost if we let ourselves drift back into a tight money period again. All the indicators warn that this is going to happen unless we can pass our tax proposal, which calls for a tax on the individual of an average of only 1 cent of every dollar earned.¹

¹ The Revenue and Expenditure Control Act of 1968 was approved by the President on June 28, 1968 (Public Law 90-364, 82 Stat. 251).

Now, it took us many months to get the Federal Reserve and the Treasury experts, the Council of Economic Advisers, the Budget Director, and the fiscal counselors to the President--which would include the Secretary of Commerce, because of the business people; which would include the Secretary of Labor, because of the working people; and which would include the Secretary of Defense, because of the great purchases that are involved there, the contracts let, and the effect of a $70 billion budget on the economy-to agree and find an area of agreement.

But we did that. In January we submitted our recommendation that we take a little more than a half a cent out of every dollar, in the form of a surtax which was 6 percent.

However, because expenses rose and war costs went up, and because revenues went down as a result of some of these things we are talking about here--the high interest rate--between January and July, when the new fiscal year began, that 6-month period, we decided that instead of asking for a little more than half a cent out of a dollar, we should ask for 1 penny out of a dollar-instead of a 6 percent surtax.

It is not a 6 percent tax; it is a 6 percent surtax. That surtax confused a lot of people-that little over half a cent. We should ask for 1 penny out of the dollar or 10 percent. So we did that.

We are urging the Congress to seriously consider acting on that as quickly as they can because we feel that if we fail to pass it, it is going to generate a spiral of inflation, and instead of having a congressional tax, we will have an inflation tax.

Many experts believe that if we get the tax increase as proposed, that prices will rise in the neighborhood of somewhere around 2.5 percent in 1968, and they will rise by less than that in 1969.

Now I cannot underwrite these experts. That is their best calculation and their best judgment that they send to me.

Without the tax increase, they think we will get a 4 percent to 5 percent increase in 1968--with prospects of even larger increases in 1969.

So what you really have is the possibility of a r penny, 1 percent, tax, the congressional route. But, if you don't do it, through higher prices you are likely to face the difference between the 2.5 with the tax and a 5 percent without it, which is more than double--the inflation tax will be more than double what the congressional tax is.

Now, no one would want to trade $2 for $1, or nobody would want to say, "I would rather pay a $a tax than a $1 tax." But that is really what we would be doing by our inaction. I think that is something the American people are going to have to give serious thought to.

If we fail to pass it, another thing happens to us. We reduce the flow of funds into these institutions that you supervise. You thus severely hurt the American homebuilder, and you hurt the American home buyer.

When Chairman Martin testified--and as he talked to me--about all he could say about interest rates was that they would be a great deal higher without the tax increase than with it. He is the Chairman of the Federal Reserve Board. His statement should not be forgotten, and you should not forget it.

One can hope that with a tax increase, long term interest rates would begin to edge down from present levels. But I want to review with you just what concerns us and what is happening right now to those interest rates.

As a matter of fact, an editorial in The American Banker of October 5 said of interests without a tax increase, "The implications for rates are staggering .... If the Fed moves farther in the direction of restraint, which it probably will . . . the pressure on rates will get even sharper ....The conditions . . . are building up for a financial crisis of heroic proportions .... When that happens . . . the high rates now in effect on long-term money will move rapidly back through the maturity spectrum creating all the conditions for a process of disintermediation even more violent than happened last year, when investors took their money out of banks and put it in financial instruments" for paying higher rates of interest and so forth.

I cannot speak positively and with cool authority on just what is going to happen, but I think it is good for us to evaluate together some of these problems that we are going to have to try to face up to together.

Consider for a moment how unjust a tax bill would be which put a 20 percent excise tax on every new house--just think about that--or imposed a surtax only on poor people, or young people, or only on farmers, or only on businessmen.

Yet I think that could be the effect of the credit crunch that comes, unless we have our fiscal program enacted. I think that will be the effect of it.

I think every day the Congress delays in passing the tax measure costs the Government not just $20 million in revenues--every day that goes by while we wait, it costs us $20 million more. But that delay is causing inflated prices and sharply rising interest rates, despite everything the Federal Reserve System, you and I, and the rest can do to keep rates low.

--3-month Treasury bills have risen from a 1967 low of 3.33 percent to 4.52 percent yesterday.

--6-month Treasury bills from 3.71 percent to 5.06 percent.

--12-month Treasury bills from 3.80 percent to 5.15 percent.

--1-year Federal agency paper from 4.35 percent to 5.60 percent.

--AA corporate bonds from 5.22 percent to 6.33 percent.

--New municipal bonds from 3.40 percent to 4.19 percent.

And this is only the beginning of the ride, unless we get the fiscal action taken--including the tax increase.

The people of this country have every right to expect their homebuilding industry to surge ahead with even greater strength in the years ahead--and the builders predict that.

I met with a group this morning from a Midwestern State. They are optimistic about the prospects, provided we don't have one of these situations develop, because of the inaction that we are taking there.

Millions of substandard dwelling units in this country must be replaced. We can see that from the studies we have been making in the cities that have been accentuated by the riots this summer.

New families, whose numbers are rapidly growing, are going to have to have a roof over their heads. I found that out when I had a young daughter who got married not long ago--and another one is going to get married.

Over the next 10 years, we are told, at least 20 million units must be built, if our people are to be decently housed.

If we are going to meet these challenges-- and if we are going to keep our economy healthy and vibrant--we all have to get our shoulders to the wheel. It is a big job for all of us.

I think you can serve this purpose by working to strengthen the vital institutions that you supervise. I think you ought to carefully review this legislation you have pending in the House with the members of your Board and with the people in the industry, and you ought to try to get action taken this session, because it is long overdue, in my judgment.

After the wreck, it is too late to come along and correct things.

We ought to take these needed steps now and face up to them, even if they are unpleasant. We are going to try to work with the Congress, with the leadership, the Speaker of the House of Representatives, the Chairman of the Appropriations Committee, the Ways and Means Committee, and the Senate committees to ask them to take action on the 10 appropriation bills and on the tax measure which is so essential to the sustained health of our economy.

Now, the House cut out $2 billion worth of participations that would reduce our deficit $2 billion. We hope that we can get those restored. The Senate has restored them. That would take $a billion off of our deficit.

There were plans to pass a billion dollar extra pay increase over what we recommended. Now the bill they reported is only $63 million in excess of it.

You always hear about these economy moves, about savings and about what the Congress wants to do on savings. You don't hear about these increases that are effected in there.

They have a bill increased. It was a billion dollars, but it is now $63 million.

If we can save that potential billion dollars there, that is $3 billion that we could move from our $29 billion deficit down.

Then we would hope that if we could get approximately $6 billion or $7 billion in taxes that would amount to a total of $10 billion. And then if we could restrain, impound, and withhold expenditures approximately the same amount, including the pay and the participating, with other impounding we could do, we would hope we would withhold in restraints about as much as we could have in the tax bill.

In effect, if we had a $29 billion deficit, as estimated here, including participations and pay, we would borrow $15 billion, which would be 50 percent roughly--and the other over here that would be half of it--the other over here would be divided between the restraints and budget adjustments such as the pay, one, and the participating, two, and the others, three, or four, would be impounding reductions and then $7 billion--about the equal amount in the tax bill.

So we could split--not have that whole load go on the market. We could have half of it to be a restraint. We think with that, we could keep our inflations down--our increases down--to 2 1/2 percent or 3 percent, instead of having them go up 4 percent, or 5 percent, or whatever you estimated.

Now, that is what we are working for. This sounds like a crisis, a problem, and a serious economic situation. We put these things out on the table and we face up to them.

I know it is not a popular thing for a President to do--to ask anyone for a penny out of a dollar to pay for a war that is not popular either.

If I were concerned only with my own popularity or my own poll, that wouldn't be the way I would go about it--to suggest higher taxes or more wars. But you have to do what is responsible and you have to do what is right, if you sit in this place.

We believe, on the best information we can get from every source, that as unpleasant as this is that both of these things must be faced up to.

If we don't, we will have to meet them further down the road, when they will be even more unpleasant.

So I would summarize by saying that we are very, very proud of our economic system in this country, our free enterprise system. We think that it is primarily responsible for our leadership in the world and primarily responsible for our strength. And we want to keep it that way.

We are grateful for what our forefathers have handed down to us. We want to perpetuate it and we want to improve it, if we can. We believe that each generation does improve it.

We have much to be thankful for. If you will take the standard of living that you had as a boy, or your father had as a boy, or your grandfather had as a boy, and compare it with yours, you see the progress that has been made, without bragging about any particular administration that has occurred over our national life.

We have a great deal to be thankful for. The last 3 months we have hired a million and a half people on new jobs. That is something we are grateful for.

We have a record-breaking gross national product. We have the highest personal income, highest wages, highest profits, higher than we even thought of a few years ago.

We are grateful for all of that. But if we are to preserve it and to perpetuate it, we have to take these necessary steps.

When you see a little fever developing, you don't want to wait until it gets to 105 before you take the necessary medicine.

We think the necessary medicine here is a combination of a moderate fiscal restraint that will permit us to eliminate all waste possible, save every penny that can be saved without jeopardizing our security or our national interest.

We want the Congress, who has that decision-they control the purse; we can't spend a dime unless they appropriate it; we can't hire a person unless they appropriate it; we can't enter into a contract unless they authorize it--we want them to do it and we will try to cooperate with them in doing it.

It is difficult to see what the whole Congress wants to do, because there are 531 Members. Sometimes you hear one man who says he feels this way, a Senator says this, and a Congressman says this. They don't always say the same thing. They are different.

But we need the collective judgment of the 531 of them. Then we will take that and try to stretch ourselves to approve what they recommend. If we think that we can improve it, as well as approve it, by taking something they have spent, appropriated, and save something out of it, we will sure do that.

We don't want to just spend it because we have it authorized--and we haven't. The last 2 years they have authorized and approved $3 1/2 billion more than we have by doing it, and we are going to try to do it again.

Now, you are going to hear a lot. They are going to try to get into personalities and have big fights between the Republicans and the Democrats, between the House and the Senate, and between the President and the Chairman.

That always comes. I don't want to agitate them and promote them. I like to prevent them, where I can.

But they develop despite what you can do sometimes.

The next months are going to be trying ones, because, as I say, there are no pickets out here saying, "We want an extra penny put on our tax bill."

I find even some of them come in afterwards and say, "Well, we ought to have had it last year," but it is always a year behind time.

I am very proud of this Home Loan System we have developed. I am proud of this Home Loan Bank System that John Horne heads, that the members of his Board supervise, that you bank presidents administer, and that the savings and loans participate in.

I think we have a very unusual credit system. Other countries are envious of it and are trying to emulate it--and that is a good sign.

But in all of our prosperity and all of our growth, let's not overlook the things that we need to do, the things we need to correct, and the steps that we need to take, even if it is not the thing we want to do.

I have gotten up a lot of mornings in my life when I didn't want to get out of bed. I have stayed up a lot longer at night sometimes than I wanted to, when I nodded my head a little bit.

I even remember my mother following me to the gate to just go over with me one more time the poem I was supposed to recite or the geometry exam I had to face up to.

We have to face up to these unpleasant things. Let's do it and let's do it reasonably-nonpolitically--being able to justify it from the economics that we know.

If we do, I think that we will all be proud of it and maybe we will have the good fortune to meet back in this Cabinet Room again with the men from Boston, Chicago, Des Moines, New York, Pittsburgh, Little Rock, Topeka, Greensboro, San Francisco, Cincinnati, Indianapolis, and Spokane.

Maybe the next time we have a conference the President can present to the presidents of this Home Loan Bank System a citation as attractive as this in gratitude and appreciation for what you have done.

MEMBERS OF THE AUDIENCE. This group is all with you, Mr. President.

THE PRESIDENT. Thank you very much.