Date: 1981-06-24
Speaker: ROBERT C. BYRD (democrat)
Chamber: S

Mr. President. high interest rates are stifling economic activity in all parts of the country. Something must be done about these unbearable interest rates. Otherwise. our economy could be headed for an extended era of sluggish growth. It appears that the administration fails to appreciate the very critical situation which derives from sustained high interest rates. They affect every sector of our economy. They choke off the very investment which is so vital to increased efficiency and productivity. I continue to be astounded by the economic theory underlying the administrations recovery program. On the one hand. the administration urges significant fiscal stimulus with large. consumptionoriented personal tax cuts. and the most significant buildup in defense spending since World War II. On the other hand. the administration expects the Federal Reserve to apply firmly the monetary brakes. This administration must come to understand that the economy cannot withstand the contrary pressures of fiscal stimulus and monetary restraint. Most objective observers will agree that the level of interest rates is determined by two things: The relation between the supply of money. the demand for that money. the speed with which it changes hands. and the anticipated level of inflation. The level of inflation tends to create a floor under which interest rates rarely fall. But with oil prices plummeting and good fortune on the argicultural front. inflation has abated significantly over the last several months. This positive news should be reflected In the level of interest rates unless supply and demand factors are having the predominant influence over rates. The fact that the Federal funds ratethe cost of money which banks lend among themselves at the end of the dayhas been in excess of 20 percent for some time indicates that the current level of interest rates has much more to do with a tight money policy than it does with shortterm inflationary expectations. High interest rates are not an accident of fate. They are the result of a conscious. restrictive monetary policy. They also stem from a fear among investors that the Presidents fiscal policy could spur a new wave of inflation. wiping out the progress we now see as a result of falling oil prices. On October 19. 1979. I stood on the floor of the Senate and warned that the new monetary policy recently launched by the Federal Reserve could spell real trouble for the housing and construction industry. and for small business. I said that. "Prolonged artificially high interest rates may be of shortterm benefit to the dollar and a boon to holders of capital. but they will not result in significantly cheaper energy. housing. medical care. or food." I believe that those predictions made 1W2 years ago have proved disappointingly accurate. I said at that time that. "Before any conclusive judgments can be reachedon the new tight monetary policywe will have to determine whether an adequate flow of credit remains available to those engaged in productive business enterprises." A review of housing. construction. and thrift institutions offers ample evidence that the supply of credit has been choked off. Today. the inventory of unsold homes is at record levels. Housing starts for the first quarter of 1981 are expected to be 60 percent behind last years level. We have now doubled the rate of unemployiment in the construction industry. It is estimated that high interest rates have already led to the unemployment of almost 1 million Americans in the construction industry. Savings and loan and other thrift institutions are the bedrock of the housing industry. Not long ago. Republican economist Alan Greenspan said that the U.S. Government may have to rescue the thrift institutions of this country. In the first quarter of this year. we saw the largest withdrawal of thrift reserves in our Nations history: the net outflow of savings from these institutions was $1 billion. Also in the first quarter alone. the earnings of insured savings and loan associations fell by $071. million. and their net worth fell by 2.1 percent. All of us want to prevent a serious situation from getting worse. But unless thrift institutions are able to attract new deposits. their future appears troubled. Thrift industry leaders tell us that. as a rule of thumb. annual earnings rise by about $3 billion for every percentage point drop in shortterm interest rates. But it appears that. once again. interest rates are rising. with the prime rate returning to 20 percent and Treasury bills increasing almost 1 point on Monday. It is my hope that the administration will heed the concerns being expressed by Senators on the floor today and yesterday. During the campaign. President Reagan indicated that interest rates would be one benchmark test of his economic recovery program. He predicted that inflation would abate and interest rates would naturally fall. This was to occur over the long term. Ironically. now that it seems certain the Congress will pass large portions of his economic reco~ery program. interest rates are rising again. Last week. when it became clear that interest rates were once more on the upswing. the stock market took a sharp drop. Bond prices showed substantial losses. High and volatile interest rates are undermining the Reagan economic recovery program because they are wiping out the ability of businesses to make sound. longrange capital financing plans. Without such investment. our future productivity will drop. According to Henry Kaufman. a leading Wall Street economist. Amer!can corporations are earmarking 45 percent of their pretax profits for interest costs. The reality of our present situation should make us all pause to reconsider the fiscal radicalism of a 3year. %!onsumptionoriented tax reduction. We cannot let the Federal Reserve Board play the only antiinflation game in town. The Presidents multiyear tax cut could keep interest rates from falling to an acceptable level. Therefore. I am considering an amendment to the tax bill that would provide that the third year of the tax cut will only become effective if interest rates have fallen to. or near. the level predicted by the administrations economists. Recent increases in interest rates signal a lack of confidence in current monetary and fiscal policies to reduce inflation ouickly and permanently. Without a credible statement of Federal economic poliev. investors will not invest in the productive capacity of our Nation. upon which future noninflationary growth depends. Not long ngo. Henry Kaufman said that the administrations fiscal policy was "exceedingly expansionary. does not pursue a course that fights inflation vigorously along the way. rnd will place all the antiinflationary effort squarely on monetary policy." The reality is that the casualty list of high interest rates has already grown too long. It includes American dreams of buying a new car. a home. of operating a small business or family farm. The time for a new interest rate policy is now. The time for a program to help the thrift industry is now. Before it is too late.