FOR THE PRESENT, the Reagan administration says, it is unwilling to come to the rescue of the Farm Credit System and help cover its huge losses. But that is not necessarily its last word. The White House is becoming uneasily aware that the troubles of the Farm Credit System are similar to those of some commercial banks and many savings and loan associations.
The sudden drop in inflation rates at the beginning of this decade has put the country's whole credit structure under great strains that are becoming increasingly apparent. Low inflation leaves land values, for example, lower than lenders had expected. And it leaves incomes lower than borrowers had expected. Bringing down inflation was essential, but it has had dangerous side effects.
The Farm Credit System now expects to report loan losses of some $6 billion over the next several years. It lent money on land and crops, the prices of which fell -- and the accumulated losses are now beyond the system's own resources.
Among the commercial banks there have been 95 failures so far this year, compared with 79 in all of 1984 -- and the 1984 figure was the highest since 1933. Most of the failed banks were, fortunately, small. Among the big banks the chief cause of concern is the loans to Latin American countries, reminding you that the effects of rapid disinflation have not been limited to this country. But the banks are the strongest element in the credit structure.
The weakest points are now probably in the savings and loan industry. While many S&Ls remain both sound and profitable, there are now more than 450 -- one out of every seven federally insured S&Ls -- that are insolvent and yet remain in business. Why don't the federal regulators close them down immediately? Because the federal insurance fund for S&L deposits does not have the resources to cover their losses.
The administration is now beginning to acknowledge that the passage of time alone is not going to restore stability. But progress toward positive remedies is slow. One reason is that the amounts of money required to cover these losses will be very large. The amounts under discussion for the Farm Credit System alone are enough to increase the budget deficit very visibly, and whatever the administration does for the Farm Credit System will become a precedent for the S&Ls. Another reason for the administration's hesitation is that it has lavished much enthusiasm on financial deregulation -- and yet the solutions here are going to require a great tightening of regulation and enforcement. That is already explicit in the case of the Farm Credit System. It is implicit in regard to the S&Ls.
The Farm Credit System has one thing further in common with the S&L industry. It not only needs federal help,but any extended delay is very likely to increase both risks and costs to the public.