Page Norman Strunk, executive vice president, U.S. League of Savings and Loan 177 Ralph W. Pritchard, first vice president, National Association of Realtors, accompanied by Jack Carlson, executive vice president and Al Abrahams, senior vice president... 209 Prepared statement of Ralph W. Pritchard 212 Savings below rate of inflation 209 Tax relief 210 James J. Heagerty, president, First City Federal Savings and Loan Association. 249 252 Commercial bank monopoly. Sustained inflation rates Panel testimony: 249 250 National Association of Realtors; recommendations of the ad hoc task force on mortgage credit 230 National Association of State Savings and Loan Supervisors... TABLES, CHARTS, AND EXHIBITS SUPPLIED FOR THE RECORD Comparative change in passbook accounts at commercial banks and savings associations..... Cost of funds and return on mortgages federally insured savings and loans, Deposits by Institutions, as a percentage of total financial institution liabilities. 206 60 137 138 208 59 147 Income and expense ratios for federally insured savings and loans, second half, 1978 61 Interest rate ceilings compared to rates on alternative money market instruments 151 Percentage change in savings deposits at FSLIC-insured savings associations DEPOSITORY INSTITUTIONS DEREGULATION ACT OF 1979 WEDNESDAY, JUNE 27, 1979 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, D.C. The subcommittee met at 9:35 a.m. in room 5302, Dirksen Senate Office Building; Senator Alan Cranston (chairman of the subcommittee) presiding. Present: Senators Cranston, Proxmire, Morgan, and Garn. I would like the members of the first panel to come to the table: Hilda Cloud and Rob Gnaizda, Gray Panthers. STATEMENTS OF HILDA CLOUD AND ROBERT GNAIZDA, ON BEHALF OF THE GRAY PANTHERS; IRVINE H. SPRAGUE, CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION; ANITA MILLER, REPRESENTING ROBERT H. MCKINNEY, CHAIRMAN, FEDERAL HOME LOAN BANK BOARD; J. CHARLES PARTEE, MEMBER, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM; LAWRENCE CONNELL, JR., ADMINISTRATOR, NATIONAL CREDIT UNION ADMINISTRATION; AND CANTWELL F. MUCKENFUSS III, REPRESENTING JOHN G. HEIMANN, COMPTROLLER OF THE CURRENCY Senator CRANSTON. I want to welcome Anita Miller, representing Mr. McKinney, and Mr. Muckenfuss, representing Mr. Heimann. If you would proceed in whatever order that you would devise among yourselves. We would appreciate it if you would summarize your opening statement, because we have so many witnesses today, and a second panel. Your full statements, of course, will appear in the record. Senator PROXMIRE. I would like to make a statement either now or later. Senator CRANSTON. Let's do it now. STATEMENT OF SENATOR PROXMIRE Senator PROXMIRE. This morning we continue hearings on S. 1347, Depository Institution Deregulation Act of 1979. Last week Secretary Blumenthal gave a forceful endorsement of this legislation on behalf of the President. (1) SAVINGS FIGHT INFLATION One of the points made last week that I want to stress again this morning is that by removing the artificial restraints on the rate that can be paid on savings, we encourage savings and discourage consumption. This is exactly what is needed now to fight inflation. Perhaps as important is the removal of interest rate ceilings will end blantant discrimination against savers. It is unconscionable to continue the present tax on savers so that all types of borrowers can be subsidized. This is the wrong policy at the wrong time. Many savers are elderly citizens on social security. Secretary Blumenthal cited one estimate that between 1968 and 1979, a 10-year period, savers over the age of 65 lost $19 billion in interest because of regulation Q. That is almost a $2 billion per year tax on older citizens. Should the older citizens be taxed to subsidize borrowers, even if they are home buyers? They should not. This is a well-balanced bill designed to stop discrimination against small savers, to insure the competitive viability of thrifts and their commitment to home mortgage lending. This legislation seeks to take the Government out of the business of setting rates in favor of letting the free market regulate the rate savers are to receive. The Government should not keep savings rates pegged artificially low while allowing lenders to earn market rates on their loans. The Federal Home Loan Board has recently authorized variable rate mortgages nationwide. The potential for huge windfalls needs to be counterbalanced by making lenders pay a market rate of interest on their deposits. I look forward to hearing from the distinguished witnesses this morning. HILDA CLOUD AND R. GNAIZDA, GRAY PANTHERS Ms. CLOUD. May I speak first? Senator Cranston, Senator Proxmire, Senator Morgan: From last October, less than a year ago, when the Gray Panthers and several other organizations, with the capable guidance of Robert Gnaizda of Public Advocates, presented a petition for a fairer rate of interest on passbook savings, until today, we have seen a remarkable turnabout on the part of high public officials and even banks. Perhaps that is what everyone involved in the banking business and its regulations was waiting for. They weren't going to take the initiative in pointing out that small savers, among whom are numbered at least 24 million elders, were being cheated by a mandatory low interest rate. INJUSTICE FOR SMALL DEPOSITORS But when we, the small depositors, cried out against this injustice, they all, including the President, nodded their heads solemnly and agreed. Even that reluctant public servant, the august Secretary of the Treasury, who refused to meet with us a few months ago, is now saying that President Carter's plan to raise interest rates for small savers is a potent anti-inflation weapon that could prevent a recession. We don't really mind having the credit for bringing this up taken away from us. If the President wants the credit, who are we to deny it to him? We'll take the cash that's due us, instead. But, this is what we must tell you gentlemen: we cannot wait 10 years to have those interest rates brought up to what richer people are getting now. I am 75 years old. In 10 years, I and millions my age will be dead. But let's forget that. In 10 years, if in the meantime we do not have a catastrophic depression and no one can guarantee that we won't, not even the Congress of the United States-then we must anticipate the same galloping inflation we now have continuing. So if we get 9 percent on our money in 10 years, what good will it do us if the inflation rate is by then 18 or 20 percent? I don't claim to know more than Secretary Blumenthal about stemming inflation. I am glad to defer to his judgment that giving us now what we're entitled to would be a potent anti-inflation measure to reverse the serious trend of more and more passbook withdrawals. LESS THAN A PENNY A DAY However, in spite of all the fine talk, we must look at the facts. And the facts are that the regulatory agencies have permitted a rise of a whole quarter of 1 percent. On a $1,000 account, that comes to 21 cents a month, less than a penny a day. Big deal. What kind of anti-inflation measure is that, Mr. Chairman? We don't like talk out of both sides of the mouth. We don't like the implication that we should be grateful for the big statement and the miniscule action. Do they really think the moment we reach the age of 65, our brains dry up? Now, I have a proposal which we hope will meet with your approval. What about issuing through the Treasury "Inflation Fighter Certificates for the Elderly"? They could be indexed to the CPI and pay 2 percent above the inflation rate. People could buy these in $50 denominations up to $3,000 maximum for any one individual. They'd be limited to $3,000, so that those few of us who are in the upper income bracket would not unduly benefit. Don't you agree that it's a great idea? I present it to you as one of the finest gifts you can make to us elders who look to the Congress to make life a bit easier in our last years. Before I stop, I would like to give out some things that would be, I think, of interest to the members of this committee. May I? Senator CRANSTON. Certainly. Ms. CLOUD. Thank you. [Distributing documents]. This one, which is an ad which appeared in a number of the newspapers in California, seems to us to be a very dangerous and misleading ad, which our attorney, Robert Gnaizda, is going to speak to. And this has become the slogan of the older people, because we recognize that if we put money in a savings account we are going to lose money. Senator CRANSTON. Thank you very much. Mr. Gnaizda? Mr. GNAIZDA. Yes, thank you. Members of this committee: First, we would like to thank you for your efforts in encouraging both the President of the United States and the Secretary of the Treasury to speak out on behalf of the small saver. It probably would not have occurred had you not held your hearings in April. I would like to briefly address four interrelated issues, and I would like to preface it with this observation. The Gray Panthers and my other clients concur with the spirit of S. 1347. But I must say, we do not concur with the substance. The four issues I would like to discuss briefly are: First, the inadequacy of the penny a day May 30 Federal regulations and the interrelationship of that to S. 1347. Second, the antipooling regulations of May 30; third, misleading advertising regarding which the Federal regulatory bodies are taking no effective action; and fourth answer your questions with regard to the inflation fighter certificate for the elderly. We believe the May 30 regulations are wholly inadequate. On a $1,000 account, it comes to less than a penny a day. On a $3,000 account, it comes to 2 cents a day. Contrast this with the Secretary of the Treasury's statement that in the last decade consumers have lost $42 billion and the elderly $19 billion, or the fact that this year consumers will lose $17.5 billion and the elderly alone approximately $8 billion. We concur with Senate Resolution 59. This provides for a $1,000 certificate at money market rates. We thank you, Senator Proxmire, and hope that you will pursue this and it will go into full effect by July 1, 1981, at the latest. DELAY IN BENEFITS Regarding S. 1347, it won't work, it is not fair and it won't save the thrift institutions. As Ms. Cloud has indicated, the elderly will not receive the benefits, nor other consumers, for 5 to 10 years. The vast majority of senior citizens will not be alive by then. It will not stem the erosion of savings, which the Secretary of the Treasury has spoken so dramatically about. The market will speak in regard to that. Liquid funds have increased by over $13 billion just in the first 5 months of this year. At the present arithmetical rate-and I am not sure it will only be arithmetical-by 1983, $131 billion will be invested in alternative markets known as liquid funds. That is not very hard to imagine, because in only 1 year $10,000 money market certificates have escalated from zero to $158 billion, by June 1, 1979. And what of the cost to the consumers? Let's just examine the first 5 years through 1984. The first 5 years will mean a loss, assuming present inflation rates and money market rates, of $72 billion to the consumer, including approximately $33 billion to the elderly. We would like to suggest, at a minimum, an amendment to S. 1347. That is, the interest rate increase should commence on January 1, 1980, and it should be one-half percent per year divided into quarter percent per half-year, except that whenever the Treasury |