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Many savings and loan associations, which have always been the mainstay of home financing, are also hurting. To keep their deposits, these thrift institutions must pay as much as 16% interest, though many of the old mortgages on their books earn them less than 10%. As a result, an estimated 85% of all S and Ls are losing money. Administration officials are confident that most of the S and Ls have large enough capital reserves to tide them over until rates fall. But some financial experts are not so sure. Says the president of one of the largest U.S. commercial banks: "It could be a major setback to Reaganomics if a bloody disaster of failing S and Ls were allowed to happen. We are on the verge of that now, and it could so hurt confidence that everything accomplished by Reaganomics to date could be wiped out."
Last week the West Side Federal Savings and Loan in New York City and the Washington Savings and Loan in Miami were acquired by National Steel Corp.'s financial subsidiary. The Government played matchmaker by paying National Steel subsidies—currently around $9 million a month—until its new partners return a profit.
As businessmen suffer more and more from the sky-high interest rates, pressure will build for Federal Reserve Chairman Volcker to ease up on the monetary brakes. Although monetary responsibility is supposed to be one of the keystones of Reaganomics, the Administration has hinted on several occasions in the past few weeks that it might consider a somewhat looser credit policy. Treasury Secretary Donald Regan first mentioned this possibility in an interview last month. At a California fund raiser, the President said that high interest rates were "hurting us in what we are trying to do." In an interview with FORTUNE magazine, the President called for "some loosening" of the money supply, while admitting that "we can't dictate to the Fed."
Among Reagan's advisers, battle lines are already being drawn between the monetarists, who back Volcker's tough stance, and the supply-siders, who are afraid that tight money will not give the tax cuts a chance to work their magic. If they in fact change policy, it may be from very tight to merely tight. Says a White House aide: "There is an attitude by some of the supply-siders within the Administration that the monetarists have until the end of the year. Then we may have to jawbone the Fed."
But forcing the Federal Reserve to adopt a looser money policy might be an extremely shortsighted strategy. As Reagan Adviser Greenspan warns: "If the Fed eased, it would reignite inflationary expectations." Though interest rates would come down for a while with a program of easy credit, they would then probably rise quickly once again because financiers would be anticipating still higher inflation and demand still more interest. In the end, rates could well go higher than they are now.
As has happened so often before, the Federal Reserve is caught in a no-win situation.