Recent economic developments suggest the need for a new version of the Reconstruction Finance Corporation of the 1930s. In the private sector, there now exists the prospect of major business failures. We need only examine the present conditions in the auto, airline and steel industries to foresee the possibility of future petitions, similar to Chrysler's, for federal assistance to avert massive bankruptcy. Certain of our large financial institutions are also considerably more fragile than they seem.
A comparable condition besets major American cities. New York City is unlikely to regain full access to public markets by the end of fiscal 1982, as anticipated when Congress authorized loan guarantees in 1978. The combination of economic decline and reduction in anticipated federal aid has caused repeated modification in the city's financial plan, showing potentially large budget gaps for 1982.
With some variation, the same picture may be drawn for Cleveland, Chicago, Philadelphia, Newark and other cities. Local action to raise revenues or cut expenses beyond a reasonable point only deepens the economic crisis.
Both of these national problems -- large business failures and major municipal difficulties -- require national initiatives. Over the long term, fiscal and monetary policy, formula revisions, federal aid and other changes in the fiscal relationships among levels of government will no doubt be debated. These are surely needed. But in the present circumstances, some action is needed now to provide a safety net for both businesses and municipalities in crisis.
A new Reconstruction Finance Corporation could supply the capital assistance and serve as the catalyst needed to avert even larger problems. The RFC would be created by the federal government and authorized to assist businesses and municipal governments whose failure would have a material impact on the country or a significant region. This assistance would take the form of loans or, in the case of businesses, loans as well as equity investments.
There are several reasons that support the creation, through federal legislation, of a new RFC:
First, the threshold determination of whether the public interest supports federal intervention has essentially been made. In the cases of Lockheed, Chrysler and New York City, Congress did commit large sums to take the company or city out of bankruptcy. The philosophical line has been crossed with the argument that the social consequences of both business and municipal failures, of the scope indicated, are vast, and largely uncharted.
Second, applying the appropriate remedy requires a professional nonpolitical approach as well as a broader set of options. Providing guaranteed loans at high interest rates to a failing company, overburdened with debt and with inadequate permanent capital, may buy time but will clearly not cure. The ability to make equity investments, as part of an overall, multilateral rescue package, can come only from an RFC.
Third, it should be evident that the legislature is a poor forum to determine specific cases. Under the pressures of the emergency, delicate negotiations with unions, banks, stockholders and suppliers are impossible. Congress is besieged with simple but urgent demands for action. Negotiations would benefit from the insulation provided by setting up a professional mechanism that could make the decision to commit or not to commit aid using the leverage that often does not exist in the legislative process.
Fourth, the problem of massive business and municipal collapse is a national responsibility simply because neither private lenders nor states are able to cope with needs of this magnitude. Each of the participating interests must play a part in any rescue plan, but it requires a coordinating agency with sufficient authority and capacity to bring about a solution.
Fifth, the RFC would have the advantage of providing continuity as well as professionalism in the design of a fiscal strategy for each particular case. aThe RFC should be managed by paid professionals with its own board of directors, the majority of whom would be private citizens and would include the secretary of the Treasury, the chairman of the Federeal Reserve, the chairman of the Securities and Exchange Commission and the chairman of the Council of Economic Advisers.
Finally, the RFC should only be a temporary investor. It should remain an investor only until it can divest itself of its commitments through the marketplace and should never provide more than 50 percent of the capital required by any type of rescue. It should be a revolving fund -- profitable, one hopes -- stepping in where no alternatives are available and stepping out when the public interest has been served and market forces operate.
Certain risks and objections to the RFC have to be acknowledged: the risks to federalism and to private entrepreneurial decisions; the contention that it might reduce incentives for efficiency and for good management; that it amounts to discrimination against small companies and cities that may not be eligible for aid; that its intervention in credit allocation will politicize competitive markets; that the government will be left in a conflict of roles, as lender-investor and as regulator.
Each of these objections and others should be explored in detail. Some may be mitigated by the procedures for accountability and the standards for intervention that are built into the RFC legislation. Others are more fundamental and require a basic judgment about the need for some institutions and a comparative analysis of the alternatives. Since part of the RFC's activities would be for the benefit of private business, part of the capital should come from the business sector. The management, as in the original RFC, should be professional and non-political.
On balance, I believe that the RFC is needed and is preferred to the kind of ad hoc legislative response that has characterized the Lockheed, Chrysler and New York City petitions. This does not lead to state capitalism. If Chrylser ultimately fails, it will not prove that government should not have tried the cure; it will prove that the wrong medicine was applied too late. The right medicine should be available in the future. It will quite probably be needed. m