IT APPEARS increasingly likely the government will have to come to the rescue of the Farm Credit System. This quasi-public banking network holds nearly 40 percent of the $215 billion in outstanding agricultural loans in the country. About an eighth of those loans have gone sour, further evidence of the force and reach of the recession that has cut across the Farm Belt. A few of the banks have so many of these bad loans that they can no longer meet their obligations without help. The question is where the help should come from: the other banks in the system, the Federal Reserve or Congress. The official answer up to now, from the administration and from the upper levels of the credit system, has been that the healthier banks should do the job, under a loss-sharing system that, on paper at least, knits the banks together. Now there has been a turn toward the view that help will be needed from outside.
The problem is that, if the government does not come to the rescue, farmers themselves will have to, and the burden of bailing out the weaker banks could then drive additional farmers under; that might in turn put pressure on still more banks. The credit system raises its money by floating bonds. The money is then lent out to farmers, both to buy land and for short-term operating purposes. The banks are intermediaries, in effect passing on to the bondholders the interest they collect from the farmers. When some farmers stop paying on their loans, the system's only recourse is to make other farmers pay more, to make up the loss.
That creates an obvious economic problem in times such as these. It creates political problems as well. A prospering farmer in one state is hardly disposed to bail out a failing farmer he does not know in another. Nor are the officers of solvent banks inclined to put themselves at risk in behalf of their failing brethren. The system has always been pretty well Balkanized, and that is hard to turn around.
The main argument on the other side is the familiar one about the deficit. The federal government is itself stretched thin. The administration has resisted taking on a further obligation; for both fiscal and policy reasons it has been seeking to cut federal aid to farmers, not expand it. Congress is similarly torn. But there seems no alternative now, particularly as the problems of the credit system have become more visible.
The system must regularly issue new bonds as old ones come due, and the greater its troubles, the higher the interest rates it will likely be forced, first to pay, and then to charge its farmers. The issue has not been much discussed until now, at least not in the open. It should be. The government should shore up the system in the cleanest way it can; otherwise it risks even greater financial failure. But in the process it should impose new rules on the system. Loans were too loosely made in the past, and for the future the farm banks should be made to tighten up.