Don't Let '80s Remorse Choke '90s Growth
There are financial woes, headaches, and hangovers. And then there is the regulatory legacy of the Excessive Eighties: A migraine that reminds Washington policymakers each day just how badly they misjudged the speculation that became the hallmark of the era. For sheer pain, nothing matches the agony of the savings-and-loan debacle, which could cost taxpayers as much as $500 billion over the next three decades.
Given the S&L fiasco, the response of politicians and regulators to the forces unleashed in the U80s was predictable: promises to batten down the hatches in the U90s. But policymakers must be careful that they don't overreact. While they need to get tougher to prevent the abuses of the recent past, they must be flexible enough to avoid crippling the U.S.'s economic growth, slowing financial innovation, and limiting America's competitive position in the global capital markets. Finding that happy medium will not be easy. Regulators have moved appropriately to wring the abuses of the 1980s out of the markets: Bank examiners have ordered lenders to take sharp write-downs on shaky loans, forcing painful losses, if not insolvencies, at many institutions. Insurance companies, stuck with too many worthless junk bonds and real-estate loans, now find state regulators considering tougher capital requirements and restricting the investments they can make. And, in the wake of revelations that several Treasury Dept. auctions were rigged, reformers would like to break up the cozy club of Wall Street firms that enjoy preferential rights in purchasing government bonds, preventing any recurrences that they feel could threaten the integrity of the Treasury market.
But regulators must not go too far. Bank field examiners, for instance, have forced many institutions to write down their commercial real estate loans to what amounts to liquidation value in today's depressed markets. That's true even when the borrowers are current on payments and expect to be for the foreseeable future. While real estate loans should be suspect these days, forcing banks to write them down that far is going overboard. Similarly, the new capital requirements banks must adhere to may be stiffer than needed. Without undermining them entirely, regulators could allow more preferred stock to be used to meet the standards, as the Treasury Dept. has proposed. That would achieve the laudable goal of boosting capital without impairing some banksU ability to make loans.
In the 1980s, Reagan Administration regulators saw their mission clearly: Stay out of the way of capitalism. But that strategy proved to be flawed when deregulation was not accompanied by increased surveillance. The Bush Administration seemed prepared to take a more balanced approach. But with the economy stumbling and an election year just around the corner, there are some troubling signs that the White House may be weakening its resolve. To jump-start the economy, the Administration wants examiners to rethink their standards so that banks can continue lending to such highly leveraged borrowers as cable-TV franchises and real estate developers. But the bloom is off the cable-TV rose, and the country has enough commercial office towers to last for years. Tossing good money after bad would be foolhardy. The vital question now is whether the White House will ditch a healthy long-term regulatory strategy for short-term political gains. The answer will demonstrate whether the Bush Administration has learned any lessons from the Excessive Eighties.