Bailing Out the Banks

Two major proposals before Congress addressed the debt crisis facing developing countries. Heated controversy attended the hearings on the increase in U.S. financial support for the IMF and on new facilities for the Export-Import Bank. Many government and banking industry representatives who testified at the IMF hearings called the proposed increase a form of jobs bill for the United States—the same argument they had used during Chrysler's bailout hearings (see U.S. Congress, House 1983a, 1983c; Senate, 1983b).

Volcker insisted that if the United States did not resolve the debt problems of developing countries (particularly of those most important to the United States, such as Mexico), "the prospects for growth in the industrialized world and then in the developing world and in the U.S. would be impaired. We would jeopardize our jobs and our exports and financial markets if this situation is not managed" (U.S. Congress, House 1983a, 10). Volcker reminded Congress that approximately 5.1 million U.S. jobs in 1980 were export related (U.S. Congress, House 1983c, 7). Mexico, the third largest importer of U.S. goods and services, is a key market for U.S. exports. The foreign debt crisis (and the imposed austerity program) had a profound effect on Mexico's imports; in 1983 imports fell 60 percent below 1982 levels and nearly 70 percent below

1981 levels. The United States suffered a $6.2 billion drop in exports to Mexico in 1982 and another $3 billion drop in 1983; "almost 85% of that decline occurred in the manufacturing sector, and that total translates to almost a quarter of a million lost jobs for American workers" (U.S. Congress, House 1983b, 44; see also House 1983c, 38; Senate 1983b).

Volcker repeatedly denied that the increased quotas to the IMF were designed to bail out the banks, but he could not categorically deny that the increases would benefit them. Indeed, Volcker acknowledged the pivotal role of the banking community in international and national affairs by asserting that the financial stability of the nation and of the world system depended on the health and stability of the banks (U.S. Congress, House 1983a, 14, 15).

Bankers did not deny the benefits to them of the proposed increases and at times were blunt about their power to inflict a world crisis unless they received help from the state. William S. Ogden, vice chairman of Chase Manhattan Bank, N.A., noted, "With one out of five U.S. jobs export-related, and with over one-third of U.S. exports going to LDCs ["less developed countries"], it is an inescapable fact that this country's well-being is vitally affected by the debt problem and by our ability and willingness to solve it" (U.S. Congress, House 1983a, 183; emphasis added).

Many opposed increasing quotas to bail out the banks' investments. Congressman Stewart B. McKinney criticized Volcker for equating increased support of the IMF with an insurance policy against the collapse of the international financial system. McKinney was annoyed that the banks had avoided both accountability and concessions while learning on the IMF as their insurance policy. He argued that banks do not worry when borrowers can't repay their loans, because they assume that "Uncle Sam is going to come across and take care of them" (U.S. Congress, House 1983a, 99; see also Gonzalez 1985, 65). Congressman Fernand J. St. Germain echoed McKinney's anger and frustration: "You and I both know if push comes to shove . . . the Fed will come riding to the rescue. The chariots will be thundering down the streets of Manhattan" (U.S. Congress, House 1983a, 131). Congressional opponents throughout the hearings reiterated that any increased quotas to the IMF represented a bailout of the banks and warned that taxpayers would ultimately pay for defaults incurred by developing countries. Since the banks had made the loans without consulting the

taxpayers or sharing their profits with them, congressional leaders did not think that the public should have to share in the losses.

Moreover, some doubted that increased quotas to the IMF would in fact solve the crisis. On the contrary, such increases might have deleterious effects on the United States. Congressman Charles Schumer pointed out that the austerity measures the IMF imposed had potentially negative effects on the United States, since they had a history of depressing imports and retarding gross national product growth. Schumer cited a Morgan Guaranty estimate that "the kind of austerity settlements being imposed would decrease the growth of our own . . . GNP by a full percentage point which is quite significant" (U.S. Congress, House 1983a, 115). Schumer termed the austerity settlements "self-defeating." Without denying the charge, Volcker objected to Schumer's antagonism to the up-front fees the banks charged for renegotiating debts, but he would not respond directly to reports that the fees were higher than necessary. It seemed that Volcker and the banks refused to entertain alternative solutions that were not in the banking community's interest.

Despite the opposition, anger, and frustration expressed at these congressional hearings about forcing U.S. taxpayers to bail out the banks, the state did not cross the banks. The proposal for a 47 percent increase in quotas to the IMF passed (Kraft 1984, 55).

Similar debates and struggles ensued when Congress considered a proposal to establish a special $2 billion facility at the Export-Import Bank (Eximbank) for Mexico and Brazil (see U.S. Congress, House 1983b; Senate 1983a). The Eximbank is a key factor in U.S. exports, providing assistance to foreign countries to purchase U.S. goods and thereby giving the United States a stronger position than other exporters in the world market. The Eximbank was originally created in 1945 to provide an institutional supplement to the private credit market and to offer credit that commercial banks were unwilling to provide because of high risks. Eximbank credit supplements were crucial to the world's recovery from World War II. The proposed new facilities were designed to help the Mexican and Brazilian governments pay for U.S. goods and services by underwriting their trade with the United States. Ultimately, proponents hoped, the new facilities would encourage private banks to "reestablish their trade finacing roles with Mexico and Brazil" (U.S. Congress, Senate 1983a, 2). Like the proposal to

increase IMF quotas, the Eximbank proposal was cast as a jobs bill. Because Mexico is the third largest export market for U.S. goods and Brazil is the ninth largest economy in the world, Eximbank support of those two countries' imports would preserve U.S. jobs. Lionel H. Olmer, under secretary for international trade, U.S. Department of Commerce, estimated that for every $1 billion of lost exports, U.S. workers lost 25,000 jobs (U.S. Congress, Senate 1983a, 77). He pointed out that the decline in Mexico's importation of U.S. goods might cost as many as 250,000 U.S. jobs (U.S. Congress, Senate 1983a, 8; see also Senate 1983a, 292–297; House 1983b, 3).

Many congressional leaders (including Senator William Proxmire) questioned the appropriateness of the proposal. Because one of the IMF-imposed austerity measures was the radical curtailment of imported goods, the enhanced facility would not help those countries import more U.S. goods and hence would not preserve any U.S. jobs at all. Furthermore, Proxmire asked, are the proposed facilities "really in keeping with the primary purpose of the Bank, which is to assist U.S. exports, or . . . will they function to assist the Governments of Mexico and Brazil to resolve their balance of payments difficulties?" (U.S. Congress, Senate 1983a, 52, 3). In noting that the IMF is the more appropriate source of credit to close balance-of-payment gaps, Proxmire identified the relation between the two proposals before Congress: both sought to bail out the banks' investments.

Marc E. Leland, assistant secretary of the Treasury for international affairs, explained the connection between the proposed guarantees for U.S. exports and debt servicing, noting that both were an integral part of the financial system as a whole:

One simply can't separate one part of this system from the rest. One cannot . . . look at debt servicing and balance of trade as . . . separate problems. Our banks and banks around the world loan these monies. They have every reasonable expectation that these countries, with proper adjustment policies, will be able to continue servicing their debt. (U.S. Congress, House 1983b, 20)

Leland's remarks suggest that austerity programs and programs from the IMF and the Eximbank (which minimize banks' risks) ensure debt servicing and profits to the banks. Indeed, William H. Draper, chairman of the Eximbank, acknowledged that if loans the

Eximbank has guaranteed go into default, U.S. taxpayers would have to pay them off. He noted that the guarantees would cover both principal and interest, and that the Eximbank could not control the interest rates demanded by the private banks. Apparently, with the support of the Eximbank—a state institution—a unified banking community that sets a high interest rate could make a great deal of money at no risk.

The struggles over the proposals to increase IMF quotas and improve the Eximbank's facilities highlight the role of the state in assuring the financial community's interests in international finance capital relations. Previous structural imbalances in developing countries' economies (produced by trade dependency and dependent development) generate balance-of-trade gaps, which lead to increased foreign debt (Delacroix and Ragin 1981). To avoid aid agencies' restrictions, many developing countries seek loans from private banks. Worldwide inflation and recession, characteristic of trough periods of long-wave cycles of economic development (Kondratieff 1979), further aggravate balance-of-trade gaps and jeopardize the ability of developing countries to repay or to service their existing debts. The Eximbank helps the structurally distorted economies of developing countries to continue to import U.S. goods and services while restoring private banks' confidence and profits by guaranteeing a risk-free investment. Similarly, the IMF provides bridge loans to close the balance-of-payments gaps and interim loans between private bank loans. Thus the Eximbank and the IMF, both international state agencies, guarantee private bank loans—mitigating the risks to banks—and actually encourage loans that are of dubious value to U.S. taxpayers but are ultimately profitable to the banks. Austerity programs and assistance programs from both institutions ensure debt servicing and huge profits to private banks. Furthermore, both the Eximbank and the IMF discipline developing countries to focus significant proportions of their gross national products on debt repayment.

No one in the debate over alternatives to the traditional IMF austerity programs raised the issue of increased taxes for the private sector, although such a plan had been proposed and quashed a decade earlier. One alternative to the austerity program might have been an IMF-imposed private-sector tax increase to raise revenues and close Mexico's budget deficit. The bailout program also failed to address the banks' excessive front-end fees for nego-

tiating and renegotiating debt, a practice acknowledged in congressional hearings to have contributed to Mexico's foreign debt crisis (U.S. Congress, House 1983c).

Why would the state and various state agencies do so much on behalf of finance capital interests? The historical process of concentrating finance capital in fewer and fewer hands, coupled with bank unity and the finance capital needs of developing countries, has placed the banking community in a pivotal position in the global economy. Congress expressed great concern during the hearings that a sharp contraction in new credit to developing countries with financial difficulties could have "a cumulatively depressive impact on the world economy" (New York Times, 31 Aug. 1982, D5; see also U.S. Congress, House 1982, 72). For example, by 1981 Mexico owed more than $80 billion to more than 1,600 banks around the world (Kraft 1984, 35; see also New York Times, 17 Aug. 1982, D1; 20 Aug. 1982, D15). If the state did not bail out the banks, the international financial system could collapse. Leland underscored this insight when he noted that the enormity of the debts of developing countries requires the involvement of governments and their agencies to aid the private banks (U.S. Congress, House 1983b, 20).

Assistant Secretary of Commerce Alfred H. Kingon inadvertently portrayed the process by which banks contribute to the difficulties of developing countries, necessitating a state-sponsored bailout of the banks' investments. He noted that banks were increasingly demanding that all loans be "fully collateralized: titles to real estate, cash deposits, or payment guarantees"—all of which further concentrate capital flows in the banking community. Kingon added that disruptions in cash flows, trade credits, and financing have "undoubtedly complicated attempts by Mexico and Brazil to adjust to their debt burdens and reorder their economies" (U.S. Congress, House 1983b, 34). Ironically, these bank-induced complications threaten the banks themselves. Because of the contradictions inherent in international finance capital relations, the state and its institutions must bail out the banks or risk jeopardizing the world economy (and with it the economy of the United States).

Ultimately, despite the often heated controversy and the critical insight into finance capital relations and processes, Congress approved the proposal to create a special $2 billion facility at the

Eximbank for Mexico and Brazil. Once again the banks appeared to compromise the relative autonomy of the state.