Falling Home Prices May Hurt Banks, Gonzalez Warns

The entire country, including California, is “beginning to get the Texas taint” of falling real estate prices, and the nation’s banking system soon may suffer, House Banking Committee Chairman Henry B. Gonzalez (D-Tex.) said Thursday.

Declining prices are threatening the financial health of banks, which have joined savings and loan associations in heavy real estate lending, Gonzalez said.

“California was gung ho; everyone said (real estate) prices were going to the sky, but now they’ve had a drop,” Gonzalez told reporters after a speech at a meeting of the Consumer Federation of America.

The Banking Committee chairman said he is concerned about the health of the federal insurance fund that protects bank deposits up to $100,000 and indicated that he would pay close attention to the insurance system in hearings next year.

“When you have great bubbles of speculation, financial institutions are the soft underbelly of the economy,” Gonzalez said.

The collapse of the Texas real estate market, following a plunge in oil and agricultural prices, contributed to the insolvency of hundreds of thrifts. Gonzalez played a leading role in developing the massive S&L; rescue legislation approved by Congress in August. The ultimate cost of closing hundreds of insolvent S&Ls; and paying off their depositors may reach nearly $300 billion over the next 30 years.

Gonzalez expressed fears that the ultimate costs may be even higher and said he would summon Bush Administration officials to discuss the issue when Congress returns next month.

President Bush indicated recently that more money might be needed to rescue the thrift industry, but he did not mention specific figures. The Administration “will have to move from the vague to the specific on the numbers,” Gonzalez said during his speech.

The Banking Committee chairman said the Administration might be too optimistic in its assumptions about the amount of money the government will recover by selling the real estate and other assets of failed institutions.

On another matter, Gonzales, a longtime critic of the Federal Reserve Board, said he will begin a reform effort to end the “splendid isolation” of the nation’s monetary authority.

“I recognize the need to give the Federal Reserve room to operate and make objective judgments,” he said. “But this doesn’t have to mean the Federal Reserve operates as some separate government, free to veto economic policy spelled out by the Administration, the Congress and the American people at the voting booths.”

Gonzalez suggested after his speech that the Fed, dominated by banking interests, might be expanded to include more members of other groups. The seven Fed board members are selected by the President for 14-year terms.

Gonzalez said he would conduct an extensive examination of the Fed during hearings next year, with possible legislation coming later.

Any effort to restrict the Fed’s independence, however, would be an uphill battle in Congress.