The MacNeil/Lehrer Report; 7056; Wall Street Debates Reaganomics

ROBERT MacNEIL: Good evening. President Reagan`s additional budget cuts, including defense cuts announced this weekend, failed to convince the Wall Street financial community today. Financial analysts generally thought the defense cuts too small to offset feared budget deficits. Anxiety about future deficits has been one factor in keeping interest rates high and Wall Street skeptical about the Reagan economic plan. That skepticism today infected a group of economists generally sympathetic to the Reagan approach. The Shadow Open Market Committee, a group of monetarists, said the weekend decisions were a major disappointment. The Committee said the administration`s economic forecasts could not be met and should be revised. A major California bank -- Crocker National -- reduced its prime interest rate today by half a point, to 20 percent, joining three other banks to do so recently. Despite that bit of good news and a drop in the weekly money supply figures announced Friday, and the massive administration attempt to make Wall Street see the true faith, investors remained cautious today. The stock exchange saw prices drop in light trading, ending a three-day mini-rally. The Dow Jones Industrial Average dropped six points, to 866. Tonight, why is Wall Street so hard to convince? Jim?

JIM LEHRER: Robin, meanwhile back here in Washington, President Reagan and his team turned on the heat, not only on Wall Street but also on Congress to go along with the new budget cuts. In a statement this afternoon, Mr. Reagan said, "We face the choice of taking drastic action or inviting economic calamity." He even used a Revolutionary War analogy in a White House ceremony noting the 200th anniversary of the Battle of York-town. "At home our enemy is no longer Redcoats," said the president, "but red ink." The hard-sell work was done over lunch with House Speaker Tip O`Neill and House Minority Leader Robert Michel, and at a meeting with the House Democrats known as the "boll weevils" -- southerners who helped the president win victory in the earlier budget and tax cut votes. After that meeting, "boll weevil" leader Phil Gramm of Texas had this to say.

Rep. PHIL GRAMM, (D-Tex.): Well, I think that we made it very clear that we`re going to go the distance in making this program work. There`s no waning of confidence, and we believe it can work. It will demonstrate that we`re going to stay on the budget. There have been, as you know, presidents and Congresses that have set out good goals and haven`t had the guts to stay with it. We want to show we`re different.

LEHRER: Treasury Secretary Donald Regan took the Wall Street duty for the president. In statements released in Washington from speeches he was to make in Indiana and Michigan, Regan let business have it, too. First he said stock traders are nervous people who see any news as bad, who are analyzing stock market fluctuations too simplistically and coming up with explanations that are far from being plausible. The most implausible being, it`s the fear of large federal deficits that is causing all the problems. Regan`s attack on business generally centered on its unwillingness thus far to invest and expand. He said business must get with it if it`s to justify the new tax incentives it has just received: indeed, if it is to retain them. Robin?

MacNEIL: In attacking Wall Street, the administration is attacking something of an abstraction -- a collection of different markets where people buy and sell money, bonds, stocks, commodities and advice. David Jones is an economist in the bond and money markets with the investment firm of Aubrey G. Lanston and Company. Mr. Jones, do the new budget cuts make the Reagan program more plausible in your eyes?

DAVID JONES: Not yet. The defense cuts announced over the weekend were extremely small relative to the job to be done. It`s nice to hear good intention, both on the part of Congress and the administration, but the size of the needed cuts beyond the first phase of cuts are very large and Wall Street is waiting. We have our pencil ready. We`re ready to do the arithmetic, but we want to see the numbers. Not good intentions, but numbers.

MacNEIL: More cuts needed why -- in the simplest terms`?

Mr. JONES: In essence, the credibility problem rests with a$42.5-billion deficit for fiscal 1982. The latest estimates say $60 to $70 billion. The question is, can that second round of budget cuts bring the budget back to credibility at around $42 billion? It`s a long way to go.

MacNEIL: And it would take that? If Wall Street could be convinced that the budget deficit was going to be only $42 billion, would it then say, "Yeah, great, and we`ll go along with you"?

Mr. JONES: It`s a step in the right direction. You see, here`s essentially the problem. Reagan came in on a conservative Republican program and yet the best estimate of the first year of the Reagan deficit at $60-or-above- billion is the same as Jimmy Carter gave us this year -- fiscal `81 -- and indeed, last year. The question is, can we start the progress toward a significant reduction in deficits? If we can, we`ll move a long way toward a better bond market. If we can`t -- if all we get is talk -- there is going to be continued trouble in both the bond and the stock markets.

MacNEIL: The administration and some Republican leaders have been saying now for about a week that you guys are just wrong, that you just don`t have faith. And if you`d get behind him and have that faith -- collectively - - that it would all be different, and it would work. How do you respond to that kind of criticism?

Mr. JONES: Well, you see, it`s not faith; it`s reality. And the reality is really two things, not only the deficit. The other very harsh reality is that our Federal Reserve has set for the economy in 1981 and 1982 two very tough and very tight monetary targets. And in fact, the Federal Reserve was so tight and tough almost to the point of overkill earlier this year that money growth is in fact below the target. We`re talking about less than 2 percent money growth this year, and we`re talking about a very low growth rate next. There is not much new money to go around, and if the federal government comes in -- elbows its way into the market -- very few borrowers are going to have anything left over -- state and local governments, mortgage borrowers, and most importantly, small businesses will have nothing left.

MacNEIL: And it is that scarcity of money to borrow which, you would argue, keeps the interest rates as high as they are?

Mr. JONES: Exactly. Not good intentions, not faith, but harsh reality of tight money. And you see, the longer tight money lasts, the more the spotlight goes back to Washington. One round of budget cuts isn`t enough. Suddenly the budget is starting to run high again. So there is no way to cover up the situation. You simply have to come back to another round of cuts.

MacNEIL: Could the financial community do as the administration seems to be asking it, and by a collective act of will or psychology just, say, get on board and turn confident?

Mr. JONES: No. You cannot talk interest rates down. They come down by reality, not talk, or not good intentions.

MacNEIL: Okay. Thank you. Jim?

LEHRER: Now what it looks like to a trader in stocks. He`s Robert Stovall. first vice president and director of investment policy for the Wall Street brokerage house of Dean Witter Reynolds. As a stockbroker or stock trader, do you think the administration is justified in jumping on Wall Street?

ROBERT STOVALL: I don`t think so. The stock market is not just a local or even a national thing. It`s an international marketplace. Stocks go up or stocks go down depending on the collective expectations of investors all around the world. And we`re happy when stocks go up. Most of us have positions. We`re not here to lose money, you know.

LEHRER: Well, what do you say to Secretary Regan`s point today that you people are just too nervous, and that you`re overreacting to all this: you need to calm down a little bit and look at this thing a little more realistically.

Mr. STOVALL: Well, the secretary is obviously disappointed that things aren`t going his way. The administration thought last spring, and frankly, a great many of we forecasters thought last spring, that by this time we`d see the economy much more sluggish than it now is, and demand to borrow money much less, interest rates down, and in effect, a bond market that was rallying, pulling the stock market along with it. That hasn`t happened. I don`t think that because interest rates are still high, and the stock market is following the bond market down that that means we`re nervous. Maybe we`re disappointed, too.

LEHRER: Well, Secretary Regan comes from Wall Street. He ran Merrill Lynch, one of the largest of them all. Why don`t you listen to him? I mean, my goodness, he`s one of you all.

Mr. STOVALL: Well, I do listen to him. I listen to him and then I watch the trades every day, and I think I`m more convinced by the consensus of people voting with their money than anybody`s statement on a day-to-day basis. I mean, I`m on his team, too. I think this program has a good chance of working, but I don`t expect too much until next spring.

LEHRER: Are you one of those who believe the new -- the proposed $13- billion cuts in defense is not enough, is not going to be enough?

Mr. STOVALL: The defense idea was a great idea, I think, when it was first proposed a year or so ago -- seriously proposed and accepted by the electorate -- but it doesn`t seem to fit into the current mix of demand to borrow money, high interest rates and all the rest of the economic mosaic. Those of us who have been around a while know there is a lot of waste in defense procurement, know that the various services are still competing for similar products and duplication. I think we`d be more impressed if President Reagan would announce that he was going to seek a meeting with Mr. Brezhnev to discuss Brezhnev`s problems of food and trouble on his borders, and our own problems of not really wanting to spend that much on hardware. I think the market might give us a snappy rally if we thought there might be an international peace discussion.

LEHRER: You didn`t happen to read David Broder`s column in the Sunday Washington Post, did you?

Mr. STOVALL: No I didn`t.

LEHRER: Well, to paraphrase, what he said is, you people are playing unfair with the president -- that he did just exactly what you asked him to do. In fact, it was reported that 35,000 phone calls came from Wall Street to members of Congress urging that this initial tax cut and initial budget cuts go through. And it gets through and then you run scared and don`t go with him.

Mr. STOVALL: We had the stock market moving right along with the president until recently. It`s barely a month ago -- the 13th of August -- that the American Stock Exchange index made a new all-time high. And here it is, it`s down about a dozen percent or so, in barely a month. I think what has a lot of us flummoxed is the fact that interest rates don`t come down because the economy isn`t slowing down to a degree where we can have the luxury of a big increase in defense at the same time we`re cutting taxes.

LEHRER: Are you annoyed, finally, Mr. Stovall. that Wall Street is being made the villain in this?

Mr. STOVALL: Oh, I`m not annoyed. I`ve been in the business off and on since I was 14. and I probably have experienced, and will experience, worse than this in the future. I`m not annoyed. I just think it`s rather amusing. But I do think also that we`re in a volatile business, and in a volatile time. It could very well be that by the time this is debated on the floor of the Congress, and so on, that we`ll have an entirely different outlook, and the market may be substantially higher.

LEHRER: Thank you. Robin?

MacNEIL: Now a view from the investment banking community which raises the capital to finance industrial growth and economic activity. John Paulus is vice president and economist at Goldman Sachs. Mr. Paulus, has the financial community turned its back on the president unfairly?

JOHN PAULUS: Perhaps we have, but I don`t think so. I think on the one hand, you can see some positive elements in the Reagan program. Number one, we have arrested a very disturbing trend -- in government spending outstripping the rate of growth of private sector spending, and as a result, the percent of government spending relative to private spending -- relative to total spending -- has risen to something like 22 percent at the end of the Carter term. The Reagan program does move that back down toward 20 percent. But on the other hand, we have, I think, a problem with -- and it`s been said here before -- with a very large government budget deficit. The Reagan program will cut taxes $280 billion in the next three years. It will cut expenditures $130 billion. We think there will be very big deficits over the next three years. In additions, we have to worry about the contingent liabilities facing the Treasury in the form of possible bailout of the Social Security system, a possible bailout of the S&Ls. And the investment community I think, is rightfully concerned about the inflationary consequences of big budget deficits. I will just cite two numbers. In the last 12 years since 1968 -- the last 13 years -- the consumer price index has increased by 151 percent. Outstanding government debt has increased by 154 percent.

MacNEIL: A lot of people in Washington are blaming you and your colleagues for keeping interest rates high -- you in the banks and in the money markets. Are they wrong to blame you for keeping interest rates up?

Mr. PAULUS: Well, it depends on who you mean by you. If you mean Wall Street, Wall Street consists of the collective judgments of thousands and thousands of investors. Not located, necessarily, in lower Manhattan. I think the collective judgment of investors in this country is that the Reagan fiscal program, though it has some positive elements, simply is inflationary because it will produce unusually large budget deficits for an extended period of time.

MacNEIL: AN right. How do you react to the threats by some Republicans -- Congressman Michel on this program a week ago, and Senator [Howard] Baker, the majority leader -- to penalize Wall Street for the high rates? In other words, if you guys don`t get them down, they`re going to do something about it.

Mr. PAULUS: Well. I personally am concerned about attempts by the government to do something cosmetic, or to resort to gimmickry. We had credit controls last spring and they, I think in the end, were not successful in bringing interest rates down because they persuaded the Fed to unwittingly ease monetary policy too fast and too far. And we got a snap back in the economy. You can go back to the wage and price control program -- `71 through `74. Inflation was 5 percent and interest rates were 6 percent at the beginning or that program. Al the end of it inflation was 10 percent and interest rates were 12 percent. What we need is not gimmicks. What we need is a good hard look at the budget. We need further cuts, and we need further revenue-raising measures.

MacNEIL: May I ask you this? Does it make you and your colleagues - -- well, just you personally -- does it make you uneasy, apart from the current criticism, to think that you might be collectively undermining probably the most sympathetic president Wall Street has had for many years?

Mr. PAULUS: Well, I have to go back to a comment that David Jones made. The financial community is interested in reality. The financial community is responsible for making sensible judgments on the course of inflation over the next -- not just the next six months, but the next several years. And the program that the Reagan administration has put into place to date is inflationary. And it`s, I think, the responsibility of each individual investor to make his own judgment, and to act accordingly. And what we`re seeing in the financial markets is, once again, the collective judgment of many thousands upon thousands of investors which says that this program is going to -- if something isn`t done to change it -- it`s going to produce high inflation, and as a consequence I need a higher rate of interest in order to protect my capital.

MacNEIL: Well, thank you. Jim?

LEHRER: Finally, a commercial banker, George McKinney, senior vice president and economist of the Irving Trust Company in New York, the nation`s l3th-largest commercial bank. Mr. McKinney is also chairman of the American Bankers Association`s economic advisory committee. Mr. McKinney, my hunch is that if Secretary Regan were here and had just heard Mr. Paulus` explanation of what the problem was, he would have described it as being simplistic. Well, how would you describe it?

GEORGE MCKINNEY: Well, I don`t know that it`s simplistic. I think as a matter of fact that`s really a fair description. Wall Street gets blamed for an awful lot of troubles, and Wall Street is not just a few thousand people that happen to work in lower Manhattan. Wall Street is you and you and Dave Jones and thousands of people that are watching this program who have the opportunity, if there are such good bargains in bonds and stocks today, they -- you -- have plenty of opportunity to express your part of the -- of Wall Street, because you are part of Wall Street. You`re a U.S. investor.

LEHRER: But Mr. McKinney, all of the thousands of people out in the country, don`t they call people like you, and the other three of you sitting around that table, and say, "Hey, look. Tell us. What do you think the deal is? Is this economic plan going to work? What`s your advice?" I mean, Wall Street -- I mean, you experts influence an awful lot of what the ordinary investor does.

Mr. McKINNEY: Most investors look at the figures. I think that`s right back where we started, that if the figures were sufficiently convincing, or if they become sufficiently convincing, then markets will react accordingly.

LEHRER: What do you think of the suggestion that Robin was just acting Mr. Paulus about, that has come from some congressional leaders, that if something doesn`t happen soon that there could be credit controls or severe action taken by Congress?

Mr. McKINNEY: I think that`s very, very counterproductive. It`s one of the most dangerous things that could occur. We tried it on March I4th of last year, and I`ll bet that Americans all across the nation remember that one. Remember when they cut up their credit cards and mailed them in to Paul Volcker because they thought there was something wrong with using credit cards?

LEHRER: Right.

Mr. McKINNEY: Well, one result of that was that we had a very sharp recession, and it always goofs up financial markets. It always goofs up the economy when you put in selective controls of that sort. One other point on this, if I may, is that markets are very fluid, and money can be put wherever the highest yield is. If the controls are put in so as to block off one avenue to credit, then there`s usually some other avenue that can be used for the same purpose.

LEHRER: It has been suggested, as I`m sure you know, that one of the reasons Wall Street is reacting the way it is, is that you guys are making a killing on high interest rates. You`re not really that interested in interest rates coming down.

Mr. McKINNEY: Well, I wish you would tell my chairman that. He`d sure like to see interest rates coming down. You don`t make much money -- we`re pretty much -- all of us -- in the business of buying money and selling money. We just make a spread; we don`t -- the level of interest rates doesn`t help us too terribly much one way or the other. Basically we hope we can buy it at a lower rate and sell it at a higher rate, but sometimes lately we`ve found it`s the other way around, and we`re buying it high and selling it low, and you got to have an awful volume to make money that way.

LEHRER: Mr. McKinney, what do you think of this latest round -- this latest suggestion from the president -- $13 billion in defense cuts, and the other cuts generally? Do you think that`s going to be enough?

Mr. McKINNEY: It`s a very encouraging move in the right direction, and if you were able to see concrete facts; if, for example, the $10 to $15 billion that is still remaining from the budget resolution earlier this spring, where specific expenditures have not been laid out. if those specific expenditures were outlined and other specific cuts that are going to be made over the next couple of years were laid out in front of the American people -- as the tax cut has been laid out in front of us -- I think confidence would improve.

LEHRER: Thank you. Robin?

MacNEIL: David Jones, aren`t you and your colleagues being more demanding on this administration for its performance on inflation and keeping deficits in check than it has been on other recent administrations where confidence on Wall Street has sometimes been very high, and there has been a general optimism. Are you not demanding more blood from this administration than you have from others? And isn`t that a paradox?

Mr. JONES: There is a kind of watershed situation right now, I think. In essence, it`s this; we`ve seen budget deficits for two decades, with maybe two years of interruptions. And what the Street is saying is, finally, that we don`t want to see any more. We thought we had a president who came into office on a relatively conservative budget program, and suddenly, when we put the numbers together -- of the tax cuts plus the defense spending -- we don`t have as much conservatism as we had hoped. So it`s two things. It`s disappointment in terms of the arithmetic of this budget, and it`s the fact that year after year after year -- and particularly over the last eight years -- the bond market has consistently underestimated, one, how big the deficits would be, and two, how much inflation we would have. I`m not saying, by the way, that inflation only comes from the deficits. We had oil shocks and food Shocks and other things. But the reality is, the bond market wants results, and this is the opportunity in which to receive them.

MacNEIL: Does anyone want to add to this? I mean, do you feel that having got this new faith -- no more uncontrolled deficits -- that Wall Street is now being more exacting, and the financial community is making larger, and perhaps even unfair, demands on this administration, which you all agree has at least turned the comer, and begun to go in the direction you would like it to go?

Mr. STOVALL: I think Wall Street wants to believe in this administration. The previous one would make a statement, and then inside of 30 days do a 180-degrce turn. So far. the Reaean people have said what they want to do and proceeded to do it. So we take them very seriously, while we weren`t too sure what was up with the Carter people. So when they say want to spend a certain amount more on military procurement, etc.. we take them at their word, and worry how the government`s going to finance that.

Mr. McKINNEY: I suspect that most of the people that we`re talking about here assume that the Reagan administration is going to be able to accomplish what it has said that it will accomplish over the long haul. It`s how do you get from here to there?

MacNEIL: But as Congressman Michel, the Republican leader in the House, said on this program just about a week ago, if the financial community doesn`t begin to act positively -- and he used a figure of something like 60 days -- the whole thing may go down the drain because you won`t have begun to take the actions and make the investment and guide other investors around the country in such a way that it will really begin to work. In other words, if you guys don`t get the faith soon, it won`t work at all. And the chance will be lost. Do you have a comment on -- I think that`s, in short, the argument the administration is making. What`s your comment on that?

Mr. PAULUS: Well, in reading the latest news, it appears that perhaps the administration is getting the faith. They are talking about making sizable budget cuts. They haven`t announced any sizable cuts as yet. but we`re hearing more reports that they are beginning to take the budget deficit seriously. And that`s a very healthy development. I think. You could almost say there was a cavalier attitude toward the deficit six months ago when we first started seeing the beginnings of this program.

MacNEIL: But what about this -- that the administration has begun going -- you`ve said it earlier -- in the direction you would all like it to go. Why can`t you take that positive step that they`ve made and say. "Okay, we think it`s going to work: they`re asking us to help make it work; let`s take a leap of faith and start to make it work?"

Mr. JONES: It`s a simple issue. Jimmy Carter said he would balance the budget in four years. We`ve had an endless string of people -- presidents, administrations -- saying the budget was going to be balanced. We want to see results. And the problem was. I think, with the entire Reagan program -- most of the pieces looked good, particularly the stimulus to plant and equipment spending from accelerated depreciation, but when you put the whole program together now, for the next six to twelve months, it meant major pressure on the financial markets, and possibly interest rates that would offset that stimulus. So we have to ease the pressure. There`s only one way to do it, and that`s to go through a major second round of budget cuts.

MacNEIL: Do you think that Wall Street is forcing the administration to do its will? Are you putting its feet to the fire?

Mr. STOVALL: I don`t think we should give people the idea that we really have any power to make things happen. I could issue a blast tomorrow morning around my firm -- and we have an office in every state -- to buy everything, and the market might go down anyhow, and we could all do that. It`s the collective investors voting with their money. But I do think that the administration is seeing the same things happening on the trading markets as we`re seeing. And we`re all getting the message at the same time. This is an international vote of some concern

MacNEIL: Is it an encouraging sign that prime rates have begun to come down? That Crocker National Bank in California lowered it half a point today; there were a couple of others last week that did the same thing. Is that the beginning of an encouraging sign?

Mr. McKINNEY: Well, it`s more than the beginning of an encouraging sign. Some interest rates are down 3, 4. 5 percent from what they were earlier this year. The basic underlying inflation rate is down at the wholesale level, it`s half what it was at the beginning of the year. And that is one remarkable accomplishment. You know. I think that in all of this discussion about this one problem that the point ought to be brought out that the Reagan administration has in fact accomplished an unbelievable amount of useful things in a very short period of time. So I don`t think anybody here is unhappy with what they have done. There is concern over the speed with which they are rectifying one small problem, a deficit of a few tens of billions of dollars.

MacNEIL: And you think they are doing that?

Mr. JONES: We`re moving in the right direction. But again, the question is. can we see results?

MacNEIL: All right. Well, thank you all very much. That`s all for tonight. That`s the end of our time. And good night, Jim.

LEHRER: Good night. Robin.

MacNEIL: We will be back tomorrow night. I`m Robert MacNeil. Good night.