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RISE IN TROUBLED REAL-ESTATE LOANS PUTS LID ON CHANCES FOR GROWTH

THE ECONOMY is having a hard time regaining its growth footing, much to President Bush's discomfort, and now events seem to be conspiring to knock it down again.

An especially troubling sign is the sharp rise in troubled real-estate loans held by life insurance companies.Life insurers traditionally have had the best mortgage loans, in part because they usually lend only to finished and occupied properties. The big jump in office and retail store mortgage delinquencies, however, indicates that even the best properties are now under pressure.

This is bad news for the credit expansion needed to help the economy grow. More real estate troubles forcing more loan writedowns will be especially tough on bank capital just at the time when new regulations give regulators sweeping powers over bank management.

Last year, Congress passed an ill-considered law that permits federal regulators to seize and manage banks when equity falls to less than 2 percent of assets. When this line is crossed, regulators are empowered to fire the managers and directors, to set compensation standards and even set the price of bank shares.

This rule encourages bankers to increase their equity ratio by reducing their loans. The problem is worsened because the required equity capital is "risk-weighted" by assets.

Since regulators regard Treasury securities to be risk-free, bankers are meeting their capital requirements by loading up on government bonds. As a result, the banking system is financing the federal deficit rather than private sector growth.

The problem is not so much the deficit as it is last year's banking act, the so-called FDIC Improvement Act. Balancing the budget would leave the government less in need of financing, but it would not change the incentive bankers have to lend to the government instead of the private sector. As long as existing regulations prevail, reducing the deficit will not free up money for private investment.

The spread of commercial real estate problems into the prime properties held by life insurers indicates worsening woes that will further curtail bank lending. A new round of real estate loan writedowns will push more banks to the brink, where they can be seized by regulators. To avoid losing control of their institutions, bankers will shrink their loans to reduce capital requirements.

If the economy triple-dips, the deficit will grow no matter what deficit-cutting actions might be taken by Congress. Indeed, the Federal Deposit Insurance Corp. estimates the new regulations themselves will double the number of banks that will have to be closed or taken over in 1993, thus hiking the deficit by the additional bailout of deposit insurance.

Something must be done to stabilize real estate prices before the banking system ceases to provide financing for private business. Two things would help.

One would be an economic growth policy from Washington. A growing economy would boost occupancy rates and rents.

Another helpful action would be to reverse in whole or part the provisions in the 1986 tax reform act that wrecked real estate values. In retrospect, it was clearly a mistake to shrink values by lengthening the depreciation period, repealing the normal tax deductions and raising the capital gains tax rate.

(Paul Craig Roberts is a former assistant secretary of the U.S. Treasury.)