The Reagan administration is now working swiftly and deliberately to dampen several major economic flare-ups that could affect the current recovery -- including a banking crisis at home and a possible disruption of Persian Gulf oil supplies abroad.
What must also be said, however, is that neither the White House nor Congress is yet taking the tough steps -- namely, a cutback in defense spending and reduction in costly entitlement programs, as well as meaningful tax increases -- that will be necessary to contain the most potentially serious economic dhallenge of all.
That challange is the drag on the US and world international financial system stemming from massive US federal budget deficits projected to be about $200 billion annually during the next several years.
Noting all this is not to fault the administration for its current efforts. At home, the US government, some 28 private banks, and the Federal Reserve Board have put together a $7.5 billion financial assistance package to shore up the troubled Continental Illinois National Bank, the nation's eighth largest bank. In helping to win Senate approval last week of an administration-backed three-year $141 billion deficit reduction package, the White House is seeking to quell financial community concerns about rising interest rates and a possible resurgence of inflation -- concerns that continue to pummel the stock and bond markets. The Senate package must now be reconciled with a $182 billion House-passed measure.
Finally, Treasury Secretary Donald Regan, in Paris for a meeting of Western financial ministers, is seeking to assuage European leaders about the high value of the US dollar and the US deficits that many Europeans believe could yet abort the recovery. President Reagan will face similar concerns when he attends the London economic summit conference next month.
For the layman, just trying to keep trakc of all this financial legerdemain may seem somewhat overwhelming. What does stand out, however, are two key factors: the interrelatedness of the various elements; and the importance -- need we say it? -- the absolute urgency, of coming to grips with the budget deficits.
Interest rates are now moving upward largely because of increasing competition for credit between US businesses seeking to expand to take advantage of the strong consumer-let recovery, and the US government, which must borrow funds to finance the deficits. The resulting high interest rates attract capital from abroad. Indeed, a large part of the deposits pulled out of the Continental Illinois Bank were funds from abroad. Many other US banks also have deposits from abroad, while the same US banks in turn have also made large loans to debt-burdened third-world nations that find it increasingly difficult to meet their interest obligations because of the rise in interest rates in general.
The current deficit-reduction effort now working its way through Congress is not, of course, to be totally dismissed; yet, its significance is largely symbolic. congress must get the plan wrapped up. Beyond that, it is imperative that early next year Congress and the new White House -- whoever sits in the Oval Office -- at least put together a comprehensive deficit-reduction plan.