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the scliool board might have to pay a higher interest rate on school 

 bond issues if investoi"S were attracted instead to the added supply 

 of tax-exempt bonds, with Federal guarantees. 



(4) These guarantees conflict with our own Federal debt manage- 

 ment policy. They create a class of securities wliich the Federal Gov- 

 ernment itself by law is prohibited from issuing. 



We are also concerned with the growing tendency to rely on Gov- 

 ernment support of borrowings in the private credit market. There 

 have been many studies in recent years of different ways of provid- 

 ing credit assistance to States and other borrowers. The general con- 

 clusion has been that providing credit properly is a f imction of private 

 lending institutions. 



These studies conclude that direct Federal credit assistance should 

 generally be provided only where borrowers are unable to obtain credit 

 on reasonable terms in the private market and only for programs of 

 high national priority. 



In this regard, section 307 permits Federal guarantees of tax- 

 exempt bonds for any borrowmgs for the purposes set forth in that 

 section. Thus, all eligible borrowers would be encouraged to seek 

 this Federal credit aid regardless of their ability to obtain funds 

 from normal private market sources. 



The Treasury is not aware of any specific problems which coastal 

 States might have in borrowing for the purposes stated in S. 582 in 

 the private market without Federal guarantees, or, indeed, whether 

 the States desire to borrow for these purposes. 



We are especially concerned with the need to husband Federal credit 

 resources. There have been very large increases in these credit pro- 

 grams financed outside the budget. Compared to increases in fiscal 

 1970 of $13 billion in outstanding Federal assisted loans, the new 

 budget shows an increase of $30 billion, a massive increase in just 2 

 fiscal years. 



In the January budget message, the President dealt with this spe- 

 cific problem and I will quote briefly : 



Federal credit programs wMcli the Congress has placed outside the budget — 

 guaranteed and insured loans, or loans by federally sponsored enterprises — 

 escape regular review by either the executive or the legislative branch. * * * 

 I will propose legislation to enable these credit programs to be reviewed and 

 coordinated along with other Federal programs. 



We are now working on such legislation. We hope to be in a posi- 

 tion soon to submit a proposal to the Congress for your consideration. 



I now would like to — as requested by the committee — turn to al- 

 ternative methods of providing credit assistance under S. 582. 



Looking at the entire problem from the viewpoint of financial effi- 

 cienc}', the most direct, and least expensive, method of financing is, 

 of course, direct Federal loans. Treasury can borrow at lov/er interest 

 rates than other borrowers. However, Treasury direct Federal loans 

 show up in the budget and limitations on the budget in recent years 

 have not permitted much expansion of direct Federal lending. 



In order to avoid both the budget outlay problem as well as tax- 

 exemx:)t interest coupled with loan guarantees. Congress last year pro- 

 vided — and this is a real innovation — a new method of financing Fed- 

 eral guarantees and interest subsidies on taxable municipal bonds. 

 This new financing technique was first authorized in the Medical 

 Facilities Modernization Act of 1970, which involved credit aid to 



