A Deficit of Civic Courage

Report of the National Economic Commission

US Government Printing Office, 64 pp., $3.50 (paper)

In his approach thus far to major questions of economic policy President Bush is like a man who has just inherited his grandparents’ house and has to sift through their accumulated belongings before putting the property up for sale. He carefully picks up item after item, examines it fondly, allows it to prompt reminiscences of days gone by, and finally, to his credit, discards it after deciding—something never openly stated, of course—that with the passage of time it has become, well, junk.

First to fall into the rubbish pile was the insistence that the nation’s savings and loan industry wasn’t broke, and therefore didn’t need fixing. To be sure, neither the President nor anyone else in the administration has acknowledged the extent to which deregulation of the savings and loan associations in the early 1980s, and the laxness of what regulatory oversight remained, have created a crisis in the industry. The owner-operators of thrift institutions were able to milk literally hundreds of them by offering to the public, at above-market interest rates, federally guaranteed certificates of deposit worth billions of dollars, and using the cash collected in this way to make dubious loans, while compensating themselves well for their ingenuity. But at least Mr. Bush promptly put forward a plan to close the sickest of these institutions, and to tighten the government’s control over those that remain.

Next to go was the four-year-old “Baker Plan,” under which banks made whatever new loans were necessary to cover the amounts of interest that borrowers in the developing world owed but could not pay on their mounting debts. This plan did not require US banks to admit what everyone already knows as a practical reality—that US loans to Latin America and sub-Saharan Africa are worth far less than their value on paper. Critics of the Baker Plan argued that its transparent save-the-banks-at-all-costs approach would overburden many developing countries with new debt, and as a result would sacrifice significant long-standing interests of US foreign policy. The rioting over price increases this March in Venezuela, a country most Americans have long regarded as one of the stablest Latin democracies, helped produce general agreement that the critics of the Baker Plan were right. Despite Mr. Baker’s move to become secretary of state, the plan that bore his name has given way to the “Brady Plan,” named after the new secretary of the treasury. It explicitly advocates that even if the debts of developing countries are not being paid they still should be reduced, which means implicitly that bank earnings will suffer—and ultimately that banks will have to write down the value of their loans.

That leaves the deficit—or, more accurately, the Reagan administration’s strategy of wishing the deficit would go away on its own, without anybody’s having to make hard choices about either spending or taxes. What to do about the chronic excess of federal spending over federal revenues, which has led the government …

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Letters

The Deficit: An Exchange September 28, 1989