Breaking the banks
It is unfortunate that Continental Illinois,
the eighth largest bank in the United States , was not allowed to go under.
tuilowing the $4.5 billion whip-round by the other banks, the Federal Reserve Board announced that it would be prepared. to meet urgent liquidity requirements (i.e. ready cash to pay the panicky queueing depositors outside), and, as if that were not enough, the Federal Deposit Insurance Cor- poration undertook to protect all _depositors and general creditors of the bank. It is extraordinary just how leniently the banks are being treated when, as a result of Years of persistent folly, they inevitably go broke. Attracted by the possibility of easY profits from Third World countries with a potential (but no more than that) for rapid growth, the banks encouraged them 'buy' an ever increasing number of
loans. The interest payments that came back were counted as profits. But these proved to be illusory, for they assumed that the initial capital outlay was recoverable. As the banks began to hit liquidity crises they were forced to call in the IMF to bail them out through its usual method of compelling debtor governments to implement an austerity regime as the only condition for any rescheduling of the loans. The debtor countries suffered the inevitable conse- quences: a massive fall in living standards, decline of industrial output, a collapse in purchases of manufactured goods from the West. But the banks survive. The high in- terest rates that they charge have, however, become a little awkward to justify. If it is the case that the debtor countries would not dare to default for fear either of destroying one bank after another and thus losing their creditworthiness for ever, or of compelling the Western governments to step in to rescue the banks with the consequent disastrous inflation, then the banks are not suffering the great risks that their interest rates would have us believe. But there must be more than a fair chance that one or other of these nightmarish conjectures will become reality. In which case, it is surely time some of the major banks were punish- ed for having run a business along such un- business like lines.
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