Reagan Economic Aide Would Lower Deposit Insurance

In a parting shot at Congress, President Reagan’s chief economic adviser blamed lawmakers Tuesday for worsening the savings and loan industry crisis and recommended that the federal deposit insurance system, which protects depositors against losses of as much as $100,000, “should be significantly curtailed.”

“We’ve got a mess” in the thrift industry, Beryl W. Sprinkel, the usually upbeat chairman of Reagan’s Council of Economic Advisers, acknowledged.

The Reagan council’s final annual report admits that “federal government policies have led to this debacle” and suggests that the existing ceiling on insured deposits be lowered, although it does not recommend any specific new level.

The current $100,000 limit, the report argues, is so high that it encourages large depositors and speculators to pour money into poorly run thrifts that offer higher interest rates to stay afloat.

But Treasury Secretary Nicholas F. Brady, who is close to completing work on a study recommending how the federal government should go about bailing out the loss-plagued S&L; industry, immediately sought to distance the incoming Bush Administration from Sprinkel’s report.

Assistant Treasury Secretary David W. Mullins Jr. told alarmed GOP members of the House Banking, Finance and Urban Affairs Committee, which was conducting a previously scheduled hearing on the S&L; issue Tuesday, that curtailing deposit insurance “is not Treasury’s thinking and not a part of our study,” a Treasury spokesman said.

And several committee members called the $100,000 insurance limit sacrosanct. “Congress will stand four-square behind the $100,000 agreement,” Rep. Charles E. Schumer (D-N.Y.) said. “I’m appalled at the timing of the Administration . . . . I think the public needs some reassurance.”

But Banking Committee Chairman Henry B. Gonzalez (D-Tex.) said that a gradual reduction in deposit insurance may be considered as part of solving the S&L; crisis.

And Sprinkel, attacking unnamed members of Congress for watering down earlier Administration efforts to close failing thrifts and reform regulation of the industry, told reporters that the current system is deeply flawed and that it has fostered fraud and corruption.

“If you encourage irresponsible management,” Sprinkel said, “you’re going to get it.”

Redesigning the system and reducing the insurance ceiling, which was raised by Congress to $100,000 from $40,000 in 1980, would “restore some much-needed discipline” and cause depositors to more closely “monitor the financial health” of the institutions holding their money, the report states.

Thrift industry executives immediately jumped all over Sprinkel’s report.

“I don’t think it will happen, and we could never, ever, endorse such an idea,” said Fred Webber, chief executive of the U.S. League of Savings Institutions.

Webber, who said that his group has not yet developed its own recommendations for dealing with the S&L; debacle, challenged other ideas in the report, such as charging higher insurance premiums for the most financially risky institutions. “There is absolutely no way you can do it and be fair,” he said.

The council’s report containing Sprinkel’s parting recommendations accompanied President Reagan’s last formal economic statement, in which he said that he is leaving office having restored the health of the U.S. economy and “reversed a 50-year trend of turning to government for solutions . . . .

“Just as the first American revolution, which began with the shot heard ‘round the world, inspired people everywhere who dreamed of freedom, so has this second American revolution inspired changes throughout the world,” Reagan contended.

Sprinkel also used his final report to defend the sharp rise in the dollar during the first Reagan term, when he was the key official for international economic policy at the Treasury Department.

Former Treasury Secretary James A. Baker III reversed U.S. policy toward the dollar shortly after taking office in 1985. But Sprinkel said that the earlier increase in the dollar’s value, which contributed to the bloated U.S. trade deficit, was the inevitable consequence of Reagan Administration policies designed to bring inflation under control and reflected the inflow of capital caused by fast economic growth in the United States.

Sprinkel, a free-market advocate, acknowledged that the Reagan Administration had a relatively poor record on trade protectionism. He blamed Congress for the pressure to shelter U.S. industries.

“I wish we had a lily-white record on protection,” he said.

Sprinkel acknowledged that the Reagan Administration’s forecast of sharply lower interest rates looks improbable. But he said that he is “not willing to throw in the towel yet.”

A frequent critic of the Federal Reserve before becoming Reagan’s chief economic adviser, Sprinkel hinted that he is worried the Fed might go too far in its anti-inflation policy, bringing the economic expansion to a halt by continuing to push up interest rates.

Moreover, he blamed the Fed for the 1981-82 recession, saying that the Reagan Administration had recommended gradualism in bringing down inflation. But “we didn’t get gradualism,” he said, “we got cold turkey.”