Fleet Economist Says Rate Cuts Curb Lending

Almost everyone seems to expect that lower interest rates will eventually stimulate borrowing and invigorate the economy. But not bank economist Gary Ciminero.

Mr. Ciminero, chief economist of Fleet/Norstar Financial Group in Providence, R.I., said he foresees exactly the opposite result. His view calls into question the Federal Reserve's current monetary policy, which brought a cut in the federal funds rate Friday.

Instead of raising lending, "lower short-term rates may curtail lending some more," Mr. Ciminero said in a telephone interview last week.

One reason for this, he said, is that deposit rates will fall faster than loan rates, reducing bank customers' incomes and making them less eager to take on debt.

Mr. Ciminero's slant on the news is contrarian, but don't ignore it. His forecasts frequently identify trends that other economists overlook. For example.

* A year and a half ago, Mr. Ciminiro was virtually alone in arguing that a flareup in inflation was unlikely. Today, many economists agree. He sees annual inflation holding to 2.5% to 3% through 1993.

* When the phrase "soft landing" was on everyone's lips, Mr. Ciminero ridiculed it as "pablum" from the Fed to keep people's minds off the inevitable crash of economic growth.

Skeptical on Discount Rate

These days, Mr. Ciminero, who is 47, is highly skeptical of the prevailing notion that another Fed discount rate cut, widely expected before yearend, might do some good.

In an effort to stimulate the slumping economy, the Fed has eased the key rate for bank borrowings five times since last December. It now stands at 4.5%, the lowest level since 1973.

So far, the cuts haven't had the desired effect. Mr. Ciminero offers some reasons why:

* "The cuts in short-term rates are not helping edge down long-term rates," he said. Rates on 30-year Treasury bonds remain unusually high - 7.75% to 8% - because of lingering worries about the federal deficit.

So instead of lending aggressively, financial institutions are opting for the 6% to 7%, risk-free returns on intermediate-term Treasury securities.

* Everyone is "egregiously overborrowed, and healthy borrowers are using whatever extra cash flow they have to pay off debt," the economist said. After eight years of deteriorating balance sheets, individuals, businesses, and state and local governments are averse to more borrowing and spending.

* Each rate cut is a blow to commercial banks' interest income. To balance things out, banks are cutting deposit rates faster than loan rates.

In short, Mr. Ciminero said, each rate reduction sets off a vicious cycle that reduces consumers' incomes and makes them even less likely to borrow. The brunt will be borne by rank-and-file bank customers whose core accounts - passbook savings and certificates of deposit - could soon be paying less than 3%, he said.

Banks Take a Little Extra

Mr. Ciminero gave this rough example: Commercial banks have more than $1 trillion of loans on their books that reprice periodically. Each percentage-point drop in interest rates slashes interest income by $10 billion.

Banks "simply pass it back as a more than $10 billion cut in deposit rates." If banks cut their cost of deposits by $12 billion, "the consumer is $2 billion worse off."

Instead of "the unimaginative policy" of rate-cutting through monetary policy, Mr. Ciminero would prefer a combination of public works spending and tax breaks. "Even if it bloats the deficit, it would help the economy a lot more than some tricks with IRAs," he said.

He also thinks it is time to quit defending at all costs the budget agreement between Congress and the administration. He noted that the federal deficit is "welling up to $400 billion" and added, "Why should we keep this thing on automatic pilot when we're heading over the edge of a cliff?"

Though he sees many trouble spots in the economy, Mr. Ciminero thinks one bright spot - increasing export strength - deserves more notice.

Importance of Exports

"Exports have been an important ingredient in whatever growth we've had, yet they don't get the prominence they should get," he said. "People keep talking as if housing is going to lead us back, but housing is small compared to exports."

Mr. Ciminero said he thinks U.S. bankers should take note, even if they don't want to lend overseas or open foreign branches. "If banks don't offer a fuller range of services - foreign exchange, for example - they could end up losing their best customers at home.

"In a slow-growth environment, with increasing competitiveness, even domestic clients will be engaging in foreign trade."

PHOTO : Contrarian view often useful

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