In the abstract realm of statistics where economists dwell, the future looks brighter and brighter for the American economy. The recovery from the long recession continues much stronger than expected. Unemployment is still high but inching downward. Inflation seems under control. The numbers are very reassuring.
In the real world, meanwhile, some people are acting a little bit crazy. Frustrated and powerless, they search for tangible villains. Trapped by hardship and mysterious economic forces, they lunge at desperate, sometimes violent remedies.
In Rio de Janeiro, citizens have been looting supermarkets. These are not your legendary poor of Brazil who live in the cardboard shacks; the looters are dispossessed workers, middle-class citizens who see themselves sliding down the economic ladder toward poverty. In the last three years, while Americans concentrated on their own painful recession, Brazilians experienced an utter disaster: the real per capita income in their country dropped by an astounding twelve percent (compared with the U.S. decline of less than one percent in 1982). Brazilians who were interviewed as they carted off free groceries were eager to name the villains responsible for their suffering: American banks and the International Monetary Fund (IMF).
Meanwhile, back in the United States, a crowd of unemployed steel-workers stormed into the Homestead, Pennsylvania, branch office of the Mellon Bank and disrupted business. Their angry demonstration ended when the cops cleared them out. These jobless steelworkers have a different complaint about banks. They accuse the Mellon Bank of siphoning American capital that ought to be invested in modernizing steel mills in Homestead and shipping it overseas in the form of lucrative loans to debt-soaked countries like Brazil. They want American capital to create jobs in America.
In Buenos Aires, amid wildcat strikes and other signs of political unrest, the president of Argentina’s central bank was arrested when he returned home from the annual IMF meeting in Washington. He was accused of betraying Argentina’s “national sovereignty” by giving in to austerity conditions imposed upon the Argentine economy by its creditors, the IMF and the international bankers in New York. Facing $40 billion in foreign debt and exploding interest payments that grow larger each year, Argentina is now the leading candidate for default on its loans – simply declaring to its creditors (Citibank, Chase Manhattan, Morgan Guaranty, Manufacturers Hanover Trust, among others) that it can’t and won’t pay any longer. If that occurs, Argentina would suffer the consequences, but so might we all. If one Third World nation defaults, others will be tempted to do the same, and the entire structure of international finance, not to mention some famous names in American banking, would be threatened with disastrous losses, even collapse.
In Ruthton, Minnesota, a dairy farmer named James Lee Jenkins decided to deal directly with his personal villain, the local banker who had foreclosed on the Jenkins farm. Rudy Blythe, president of the Buffalo Ridge State Bank, was lured by a late-night phone call to an abandoned farmhouse, where he was slain by a sniper’s rifle. A few days later, Jenkins committed suicide. The tragedy, of course, is that the ambushed banker was an innocent victim himself, trapped by the same economic forces that produced record-high interest rates and farm failures across the Midwest. The Federal Deposit Insurance Corporation (FDIC) reports that nearly 600 American banks (out of 15,000) are in trouble right now, in danger of failing because they have too many customers like farmer Jenkins who can’t pay off their loans. This is the highest level of “problem” banks recorded by the FDIC since that agency was founded in the 1930s.
These scattered episodes (which economists would disparage as “anecdotal data”) are certainly not as reliable as the hard statistics. Yet they are portents of human distress that could overwhelm the standard calculations by economic forecasters. These angry people are trying to tell us something, and the economic policy makers had better listen.
In moments of wishful fantasy, I like to imagine that all of these suffering people could somehow be gathered together in one great meeting hall where all of them – Brazilian looters, Argentine strikers, America’s distressed farmers and workers – could voice their different complaints. Obviously, the first thing they would agree on is that they all blame the bankers. But that’s too easy. And it is not really a solution.
In my wishful thinking, this assembly of the aggrieved would push beyond banker bashing and discover common ground that is more fundamental. After days of arguing over the horribly complex realities of international economics, they would agree on this simple insight: none of them will get well unless all of them can get well. American well-being is bound inextricably to the economic fate of Brazilians and Argentines and millions of other distant foreigners, who need us just as we need them. We are all in the same boat – that is the easy part. What’s not so easy is figuring out the common economic strategy to bring the rising tide that will lift us all.
IN THE REAL WORLD OF AMERICAN POLITICS, unfortunately, the international debt crisis does not inspire such clear thinking. When we read the daily headlines about Latin dictators drowning in debt or Wall Street bankers lobbying for government bailouts on their bad loans, it stimulates our most primitive political prejudices: against banks and against foreign aid. If Brazil goes under, that’s tough, but let’s not play Uncle Sucker for their spendthrift excesses. If Citibank or Chase Manhattan loses a bundle on flaky foreign lending, it serves them right. Why should American taxpayers pick up the tab for David Rockefeller’s imprudence? Legitimate as these sentiments are, they have the power to obscure real solutions. The New Right, among others, has taken up the issue of bailing out bankers as a populist cause that will become “the Panama Canal issue of the 1980s,” according to Richard A. Viguerie, publisher of Conservative Digest. Ralph Nader, for different reasons, agrees.
To understand the debt crisis, which mostly leaves third-world nations in hock to Western bankers to the tune of more than $600 billion, you have to begin at the beginning – the oil-price shock of 1973-1974, when OPEC nations doubled, tripled and eventually quadrupled the price of oil. This constituted a historic shift of wealth in the world, and while it hurt us, it practically strangled the poorer nations struggling to develop modern economies. They simply couldn’t pay their bills for imported oil.
The solution was “recycling” by international banks, worked out privately and unofficially but with direct encouragement from our government and others. The rich Arab nations deposited their bloated surplus cash into multinational banks in New York and Europe; the banks then lent those funds to the hard-pressed countries who couldn’t pay their bills. Critics warned from the start that this process couldn’t go on indefinitely and they were right, but the only alternative was instant depression for dozens of countries. Recycling postponed that catastrophe on the fragile hope that eventually those third-world nations could build up their economies and someday clean up their debts.
When the second oil shock hit after the Iranian revolution in 1979, the odds for a happy ending grew worse. Not only did higher oil prices deepen the dilemma for oil-importing countries, but bank lending seemed to become looser and riskier. Huge chunks of new capital were made available to any tin-pot government eager to build dams or airports or new factories, and during the last five years, the debt total ballooned dramatically.
The banks, pursuing narrow self-interest as banks tend to do, had strong profit motives for keeping the debt game growing. The loans to third-world countries were made at the highest premium, with interest rates sometimes exceeding twenty percent; that’s considerably more profitable than investing in new steel mills in Homestead, Pennsylvania. Even when debtor nations got into trouble, the banks made more money: the rescheduling of existing debts always demanded huge fees for the transactions. This frenzy of lending was ostensibly an exercise in private free enterprise, unsupervised by agencies of government, yet all the players knew deep down that if a crisis developed, the U.S. and other governmental lenders would have to step in and bail them out. The consequences of international financial collapse would be too grave; the governments would have to prevent it.
That is what occurred in August 1982 when the debt bomb exploded. Mexico revealed to nervous New York bankers that it could no longer keep up its interest payments, and it was joined swiftly by other debtor nations in deep trouble. The recycling process that had continued for nearly a decade was brought to ruin by the world recession of 1981-1982. America’s economy got a bad cold, but the third-world countries caught pneumonia, and with some justice, they blamed U.S. economic policy. As the list of potential bankrupt governments multiplied, agencies of international finance – led by the Federal Reserve Board, the IMF and European central banks – frantically began patching together new debt-refinancing deals to keep them afloat. Those deals, the source of constant anxiety for the past year, require new loans from the private banks, supported by additional billions from international lending agencies like the IMF. One day it is Mexico at death’s door, then Mexico gets better and the doctors switch their attention to Brazil or Argentina or the Philippines or Chile. It’s a very dicey game, in which the doctors do not dare lose a single patient. If one country succumbs to default, renouncing its debt and opting out of international financing, other nations might conclude that they too can no longer stand the “cure” imposed by the IMF and the refinancing deals – programs of domestic austerity that require the debtor governments to depress wages and living standards in order to clean up their balance sheets. Like Harry Homeowner who lives beyond his means then finds himself buried in monthly payments, a Latin American or Asian or African government eventually might decide that bankruptcy looks like a good deal – especially if there’s a mob of citizens in the streets demanding an end to the “austerity” imposed by Yankee bankers.
The other form of political unrest that threatens a gradual solution to the international debt crisis lies in the creditor nations who make the loans – specifically, the United States. When the Reagan administration reluctantly concluded that it had to pitch in and support this grand global bailout, it asked Congress to pony up an $8.4 billion loan as an additional American contribution to the IMF. European governments would commit their own proportionate shares. Otherwise, the IMF would soon run out of money, and the great game of debt-patching would unravel.
The IMF legislation was expected to pass eventually, but it got hung up in a series of political impasses, reflecting deep popular resentments. It carried the House by only six votes. Ralph Nader complained, correctly, that the American taxpayers’ money would travel by “electronic boomerang” and wind up on the balance sheets of New York banks. Congress approves the U.S. loan to the IMF. The IMF promptly lends the dollars to Brazil and Argentina and the others. Those countries then cable the dollars back to Citibank, Chase Manhattan, et al. It sounds like a bad deal for everyone except the bankers.
And yet, like it or not, the consequences of ending this game would undoubtedly be far worse for all of us. Huge losses probably wouldn’t threaten the solvency of the major New York banks but might wipe out some smaller regional banks. That threat might prompt U. S. bank regulators, whether the Federal Reserve or the FDIC, to step in with emergency loans or other devices to prop up the losers. American banking is so intermeshed with pooled financing deals and other shared risks that a bank failure in, say, Texas would ripple losses throughout the entire system, and lots of failures at once would be a profoundly destabilizing experience. The U.S. government is not going to stand passively by while the American banking system wobbles. It would do something, even if that meant a messy and expensive bailout.
The central danger, in any case, is not domestic bank turmoil. In fact, if the world financial system shudders, American financial institutions may find themselves awash in money, because nervous foreign investors might rapidly shift their capital to the United States, figuring America is always the safest haven in any storm. The real danger is that the cataclysm of foreign defaults would chill, perhaps even freeze, the intricate machinery that finances international trade. When a major player loses big, other players reflexively turn cautious, call in shaky loans or refuse to make new ones until things settle down. If the routine borrowing and lending required for international trade suddenly stalled, that could force a new contraction on the world’s economies, including ours. We are still getting over the last deep recession; another one so soon would be devastating.
The Reagan administration is clearly worried about this possibility.
While the political controversy has focused on the IMF financing, the U.S. Export-Import Bank is quietly planning to funnel an additional $2 billion to Brazil and Mexico through the back door in the form of open-ended loan guarantees to underwrite imports by those countries. This is a most unusual use of Ex-Im financing and may simply be another attempt to help those countries with their foreign debts.
Our own economic self-interest does increasingly depend upon the prosperity of those benighted debtor countries, even though Americans do not wish to face implications of this. If Brazil and Mexico aren’t buying, then we aren’t selling. The developing countries have become a major market for our manufactured goods; it is literally true now that a prospering middle class in third-world countries – those made up of people who can buy the consumer products we export – is required to keep factories open in America, producing everything from chemicals to clothing. Ten years ago, the third-world nations bought twenty-nine percent of our exports; in 1981, before the recession hit, they bought thirty-eight percent. The banks’ recycling, even with all its excesses, played a crucial role in this development, permitting the third-world economies to grow rapidly and expand middle-class consumption, even though their balance sheets were soaked in red ink. The bank lending, as a practical matter, became a nonofficial form of “foreign aid” that, despite popular prejudices and do-good rhetoric, has always been aimed at this essential goal: developing new customers for American products.
Should we now pull the plug on these invalid nations? Make Brazil and Chase Manhattan and the others face the music? On a visceral level, that would be deeply satisfying. It would probably also condemn millions of Americans to permanent unemployment.
MOST RESPONSIBLE POLITICIANS IN Congress are familiar with these arguments, so they voted for the IMF bailout money and kept their heads down, knowing the deal would infuriate many voters. The political risk was compounded when the House Republican Campaign Committee sent out nasty letters denouncing several dozen House Democrats for voting to aid communist countries with American dollars (yes, there are nine communist or socialist governments among the IMF’s 146 members, and they buy American products, too). The Republican propagandists neglected to mention that the Democrats were voting in support of Ronald Reagan.
A few lonely voices, like Representative Byron Dorgan, a populist Democrat from North Dakota, have tried to sketch out an alternative approach – one that would hold international banks accountable for their carefree lending but also give the third-world countries some breathing room so their economies can recover. Dorgan argued that, in exchange for the $8.4 billion loan, Congress has the leverage to demand that the major banks be compelled to “write down” the terms of their loans, thereby taking a loss by reducing interest charges and extending the repayment schedules by many years. The banks should set up loan “loss reserves” to absorb any failures, and the government should step in with much closer supervision of the foreign lending that continues.
This would restore prudence, but that’s only half of the solution. Given easier terms on their debts, the third-world nations could then shift from the IMF’s austerity conditions to a strategy for restoring robust economic growth – increased buying and selling that helps them while it helps us, too. Pumping up Brazil eventually makes jobs for Americans. Right now, while other sectors of the economy flourish, our exports continue to decline.
“None of us wants to unleash a worldwide banking collapse,” Dorgan explained. “But if we are going to prevent a collapse, then we must act now to put permanent restraints on big U.S. foreign lenders. We must force the IMF to take a more realistic view of the developing nations’ repayment abilities, and we must assure that industrialized nations coordinate their national economic policies to encourage growth and full employment worldwide.”
Too bold for Congress and for the economic policy makers, Dorgan’s approach has lost for now. It will be heard from again, however, especially if the debt crisis deepens and the IMF must come back for more billions in a year or two, as Dorgan predicts. The economic experts are gambling that somehow things will work out – that the slow, steady recovery of the world economy and the continued debt patching will gradually nurse those debtor nations back to health. There is one big if – if the political turmoil of angry citizens doesn’t unhinge the process. The experts may be right about the economics, but I have a hunch that they are wrong about the politics.