Financial Ills to Face New President

GEORGE L. PERRY <i> is a senior fellow at the Brookings Institution research organization in Washington</i>

With the election nearly upon us, an economics column should be about the candidates and the problems one will face starting next year. George Bush’s handlers have been congratulating themselves for steering the campaign away from issues. They have been aided in this strategy by the benign state of the economy. No recession and mild inflation are a good environment for the incumbent party, and a tough one for a challenger trying to raise economic issues.

But as any careful reader of the business pages knows, behind this benign current environment lies a number of serious economic problems. Here are some of the big ones that the winning candidate will have to confront as President.

- Ailing financial institutions. The problems of the banking and savings and loan industries terrify financial experts but have been papered over by the present Administration. Outside experts estimate that it will cost $50 billion to $100 billion to make good on the federal deposit guarantees for ailing institutions. Officials from the current Administration have been understating these costs of making good on federal guarantees and have been making deals with private investors to take ailing thrifts off the government’s books, but on terms that are likely to cost billions of taxpayers’ dollars in the future.

Lax regulation and oversight have been a major source of the present crisis. It is a fundamental principle that, if deposits are insured, the insurer must regulate use of the deposits. Otherwise, unscrupulous or desperate institutions will attract funds by paying slightly higher interest rates, depositors will gladly give them their money because the accounts are federally insured and the institution will make risky or unscrupulous investments in the hope of turning a large profit. In the Reagan years, all this has been allowed to happen.


The new President will have to face up to the huge budgetary cost of making good on deposit insurance, which is not now included in budget projections; he will have to strengthen regulation to prevent financial institutions from taking undue risks using government-insured deposits, and he ought to provide tighter control over how ailing thrifts are sold to private investors.

The problem only grows with neglect. Yet tackling it will not be easy for anyone, and particularly not for Bush. He will have trouble confronting these issues because he has favored further deregulation and a reduced role for government supervision of financial industries. What is more, the whole problem has emerged, and been mishandled, on his Administration’s watch. Dukakis as President could correctly say he inherited this calamity and justify the measures needed to deal with it on those grounds.

- Bank debts of less developed countries. The U.S. position on this submerged problem, identified with James A. Baker III from his days as Treasury Secretary, has been to assure that interest payments are met, even if the debtors must go ever deeper in debt to meet them. Others in the international financial community have recognized that the debt burden on the less developed countries must be lightened by some combination of assistance from the industrialized nations and bad-debt writeoffs by the banks. Indeed, the Japanese recently have put forward a constructive plan with these features. The United States has opposed the plan. But because our clout in the international financial community is waning as a consequence of our enormous trade deficits, other nations have not joined us.

The need for a new approach to LDC debt is widely accepted. But Bush would find it awkward to go along, in no small part because a constructive approach to the debt problem would repudiate the position of Baker, who is his closest adviser, and would be resisted by the big money center bankers who are his close allies and natural constituents.


- U.S. trade deficit. Basically, two avenues are available for improving the U.S. trade position: a lower dollar or much greater access to foreign markets for our exports. In the longer run, not even a President will have much direct control over the exchange value of the dollar. But on trade policy, there appears to be a clear difference between the two candidates: A major theme of Dukakis’ economics has been a determination to bargain much harder than the Reagan Administration has to reduce trade barriers against our exports. His approach may risk showdowns with our trading partners that could tilt our own policies too much toward protectionism. But whatever that risk, it would be an active trade policy, like his positions on most economic issues.

- Federal budget deficit. Although the budget deficit is the one economic issue that has surfaced in the campaign, neither candidate has outlined a realistic program for bringing it under control. The inability to discuss hard choices without committing political suicide is the legacy of Ronald Reagan to political dialogue. So we are left to read between the lines to judge what each candidate might do.

About the only sure inference one can draw is that Bush has tied his own hands much more tightly than Dukakis has. Bush has even gone out of his way to disavow, before the fact, any recommendations from the bipartisan commission that was created to provide guidance on the budget deficit after the election. Could he actually believe in the “flexible freeze” that serious observers recognize as no more than a campaign slogan? Or does he believe that, since President Reagan got away with nearly tripling the national debt in his eight years, he can get by ignoring the deficit for another four? We should hope not.