THE Federal Reserve System ``is dragging its feet too long'' in easing credit. That's the view of James O'Leary, an economic consultant to the United States Trust Company, a New York money management firm. And his opinion is spreading among economists.
The Fed, he says, has been holding off on lowering interest rates by adding to the nation's money supply until the Bush administration and Congress negotiate a program to trim the growing federal budget deficit. Fed Chairman Alan Greenspan has promised that if fiscal policy is tightened, the Fed will offset that restraint on the economy by relaxing monetary policy.
But such a deal could come too late.
``Given the worsening financial picture,'' states Mr. O'Leary, a veteran Wall Street economist, ``it seems clear that a recession is an increasing danger, and that the dynamic forces of a deteriorating financial condition could touch off not only a moderate, short-lived recession but a deeper and longer-lasting one.''
The Commerce Department reported Wednesday that the government's main economic forecasting gauge, the Index of Leading Indicators, was unchanged in June. That suggests sluggish growth, but no recession, for the remainder of this year.
However, one of the nation's experts on leading indicators, Geoffrey Moore, director of the Center for International Business Cycle Research at Columbia University, cautions that an index of his own design that looks farther into the future gives a more pessimistic reading. It has declined since January - ``consistent with the idea that the slowdown continues this year and turns into a recession next year.'' So Dr. Moore also holds it is ``a good time for the Fed to do a little stimulating.''
One element in his ``long leading index'' is the nation's money supply in deflated dollars. For this fuel for economic activity, he uses a measure known as M2 that includes checking accounts, currency, and most savings. In 1982 dollars, M2 has declined from $2,460 billion last December to $2,427 billion in June. That has already trimmed both inflation and the growth in output.
Newly revised statistics show national output last year was skating closer to a recession than previously estimated. Gross national product barely grew in the last quarter of 1989, before mild winter weather helped it bounce back to a 1.7 percent annual growth rate in the first quarter of 1990 and a weak 1.2 percent rate in the quarter ended June 30.
Fed officials have been reluctant to relax monetary policy for fear of reviving inflation and weakening the US dollar. ``They are on the horns of a dilemma,'' says O'Leary sympathetically.
Nonetheless, he figures this strategy offers a ``danger of tipping the economy into a recession given the pervasive and very serious problems in our financial system.'' O'Leary devotes most of a recent paper to outlining those problems.
One is the highly leveraged position of the US economy as a whole. Total outstanding debt has expanded from $4.2 trillion at the end of 1979 to $12.1 trillion at the end of 1989. In that decade, federal government debt has risen by 233 percent to $2.2 trillion; household debt has grown 154 percent; nonfinancial business debt 160 percent; financial business debt 361 percent; and state and local government debt 115 percent.
Not only are the savings and loan institutions in trouble, commercial banks also have problems. L. William Seidman, chairman of the Federal Deposit Insurance Corporation, said this week the bank insurance fund could lose as much as $2 billion this year, leaving it only $11 billion in assets. Lenders, notes O'Leary, are experiencing high and rising delinquencies and foreclosures on their mortgage loans for both commercial properties and homes. The number of delinquent payments on consumer loans also has risen.
In addition, O'Leary worries about the greater toughness of regulators, spooked by the savings and loan crisis, prompting banks and insurance companies to tighten loan conditions.
President Bush gave the Democrats a deadline of today for submitting a deficit-reduction plan, seeking to get serious negotiations on the budget going in early September. But O'Leary wants the Fed to lower interest rates now, thereby reducing the risk that a recession would shake the nation's financial system.