Bailout Costs Seen Stalling The Recovery
The government's massive payoff of deposits at failed banks and thrifts is contributing to the money supply's slow growth and hindering the recovery, according to Northern Trust Corp. economist Paul L. Kasriel.
The outspoken money market economist contends that people are draining their checking accounts to buy the securities that the government must sell to finance the Federal Deposit Insurance Corp. and Resolution Trust Corp. bailouts.
"The bottom line is, deposits disappear from the system," says Mr. Kasriel, who was a researcher at the Federal Reserve Bank of Chicago before joining Northern Trust in 1986.
In an interview, Mr. Kasriel added that the Fed is preventing the federal funds rate from falling to its natural level. Even with the Fed's 50-basis-point cut of Dec. 20, Mr. Kasriel claims the Fed is continuing to keep the federal funds rate artificially high.
The fed funds rate, which banks charge each other for short-term loans, is now targeted at 4%.
Savings, Reserves Drop
In a nutshell, Mr. Kasriel is saying that when consumers decrease their savings at banks to buy the securities financing the bank and thrift bailouts, the reserves that banks are required to hold at the Fed also fall.
As demand for reserves falls, the cost of reserves - the fed funds rate - should also fall.
But the Fed is "short-circuiting" this process by siphoning off excess reserves by selling government securities, to prop up the fed funds rate, Mr. Kasriel said.
The central bank targets the fed funds rate on a day-to-day basis, pushing it up or down by selling or buying government securities.
If the Fed allowed the funds rate to fall naturally, banks would have excess cash with which to make loans or buy securities from the public, which would increase the money supply.
Money Growth Is Key
A growing money supply is key to economic growth. Money supply growth in the second and third quarters of 1991 was the slowest in 30 years, Mr. Kasriel reported.
The Fed has lowered the fed funds rate 15 times since July 1990, and Mr. Kasriel applauded the most recent half-point cut.
"I'm feeling vindicated to some degree," he said. "I suspect that we are rattling their cage a little bit."
But he wants more, especially because Congress just re-funded the FDIC and RTC and both agencies are likely to spend more in the first quarter of 1992.
"What the Fed has to do is be more aggressive in pushing down the fed funds rate," he said. Rate cuts to date are "not enough to counteract these head winds coming from the FDIC and RTC."
Idea Sprouted at Chicago Fed
Mr. Kasriel credits Robert D. Laurent, a senior economist at the Chicago Fed, with conceiving the theory.
"I'm basically his agent," Mr. Kasriel said of Mr. Laurent. The two have published their idea in several forums, including an article on The Wall Street Journal's editorial page last Monday.
Mr. Kasriel is doing the most to hawk the idea. And he is quite a salesman - not your average banker or economist, but an iconoclast who is not overly cautious about what he says.
Asked what he does for fun, Mr. Kasriel blurts: "I read other economists."
Most economists, according to Mr. Kasriel, are "professional mourners." But not him. "They don't pay me to worry. They pay me to predict."
He blasts economists who try to explain away their faulty forecasts by saying that they are glad their dire predictions did not come to pass.
"You never want your forecast to be wrong," he said.
So far, Northern Trust is taking Mr. Kasriel's humor, candor, and competitiveness in stride.
He admits that he and his boss, the bank's chief economist Robert Dederick, don't agree on much.
"We come at things from 180 degrees," Mr. Kasriel said. Mr. Dederick does not buy Mr. Kasriel's slow-money-growth thesis, but encouraged Mr. Kasriel to promote it.
"He didn't agree with it," Mr. Kasriel said. "But he read it and couldn't refute it, so he said |Let's put it out there.'"