During a visit to the House of Representatives recently, towering Paul Volcker, chairman of the Federal Reserve Board, confided to a Congressman his opinion that the US Banks’ interest rates and rescheduling fees on their loans to third world countries were outlandishly high.
A mile away at the US Chamber of Commerce building near the White House, chief economist, Richard Rahn, indicated his personal opposition to a Reagan-sponsored bill in Congress that would commit the US to an additional $8.3 billion in funds for the International Monetary Fund (IMF) to help the US banks collect on these overseas loans.
Nonetheless, the Federal Reserve’s Volcker and the US Chamber of Commerce are pushing strenuously to get this bill through the Congress (it has already passed the Senate). Why the difference between private and public positions? Because the giant New York banks want to keep themselves profitably mired in billions of dollars of loans to Brazil, Mexico, Argentina and Chile over the past decade at massively high interest rates. Recently, these Banks have been loaning more money to these countries which are in a recession and balance of payments crises. But these loans are largely for the recycling purpose of continuing payment of interest on earlier loans or replacing older loans with shorter term new loans.
Neither lenders nor borrowers can afford a default. According to the American Banker of March 17, 1933, the largest US banks had the following staggering ratio of their bank investments in just Mexico and Brazil to their bank capital at year end 1982: Citicorp – 158%, Bank of America – 105%, Chase Manhattan – 147%, Manufacturers Hanover – 135%, Morgan Guaranty – 102%, Chemical Bank – 144%. In short, if those two countries declared a sudden defiant default on their loans and if Uncle Sam did riot turn into Uncle Sugar to bail out the big banks, these over-extended, imprudent financial goliaths would collapse. But those developing countries also would be well on the way to collapsing their overly overseas-dependent economies as well.
The situation reminds one of the statement by the famous British economist, John Maynard Keynes who said: “If you owe your bank manager a thousand pounds, you are at his mercy; if you owe him a million pounds, he is at your mercy.” And it was William Shakespeare who wrote: “Borrowing only lingers and lingers … the disease is incurable.”
Shakespeare could not have heard of Uncle Sugar. But the big New York banks certainly know how to shamelessly secure their Sugar Daddy. Bank lobbyists, in close contact with the Reaganites, are determined to get American taxpayers to amplify the IMF’s coffers which will give more credit to Brazil, Mexico and other troubled debtor nations to keep those super-profits the NY banks are making on these loans pouring in. These Banks are telling Congress and the public that this is a jobs bill. If the developing countries don’t keep getting loans they won’t keep buying products from the US.
Just the opposite will be true, says Congressman, Charles E. Schumer item.-NY). Without stretching out these loans, reducing the interest rates, setting aside reserves for bad debts and disclosing more information, the large US banks will continue to overexpose the world financial system, reduce US exports and US jobs. Moreover, he says, the “austerity measures” imposed on these debtor nations by the IMF as condition for its credits push these countries into further economic stagnation and greater political risk with their own people. Such measures include reducing imports (including US food and machinery), cutting real wages and needy consumer subsidies, and reducing spending on public projects. The recent Sao Paulo street riots and work stoppages are only the early harbingers of the likely reaction to these restrictions by the increasingly deprived mass populations.
The oligarchies in these countries are not suffering nor are they expected to sacrifice. And the NY banks will make even more profit if this American taxpayer bailout passes the Congress. Should this occur, Schumer and other legislators expect repeated, similar demands in the coming years.
A unique coalition of liberal and conservative groups are opposing the IMF indirect bank bailout legislation. The National Taxpayers Union, Free the Eagle, the Environmental Policy Center and the United Methodist Church are trying to inform Americans about the raw unfairness of subsidizing the large banks while credit is being drawn away from the needs of farmers, small businesses and families wanting to finance their future homes. They are calling for sounder economic development policies for third world countries as the only way out of these debt crises. Arid they are debunking the hysterically false alarms by the banks and the Reaganites that if this bill does riot pass, banking calamity will follow.
As Dr. Robert Weintraub, economist with the Congressional Joint Economic Committee, wrote in his recent report on the international debt crises, without bailouts the banks and the nations will sit down and negotiate realistic agreements that will enable the latter to pay most of their loans over a longer period of time at a lower than exorbitant interest rate while the banks write off a portion of these loans gradually over a period of years. Why isn’t Ronald Reagan sobering up the Banks instead of squeezing taxpayers and consumers?