Risky Business

1984: UNEMPLOYMENT SUDDENLY halts its steady drop and even begins to rise again. The Gross Natural Product sustains a major loss approaching $70 billion. The national deficit surges another $26 billion on top of its already record levels. Interest rates shoot up more than 2 percent in a matter of weeks. The Democratic nominee coasts into the Oval Office amid the ruins of a recovery for which Ronald Reagan took the credit. What happened?

All of these effects are projected by economic think-tank Data Resources Inc. should South America declare a general default on debt owed to U.S. banks. The international debt crisis, which began in 1981, is deeply rooted in world events of the past 15 years, and shows with painful clarity how tightly the U.S. economy is bound to the rest of the world.

The numbers simply boggle the mind. The total debt of Third World nations to Western banks is approximately $300 billion. South American countries owe $71 billion to the U.S. Citibank, the largest U.S. bank, has made loans to Brazil alone worth fully 75 percent of its total capital. The nine largest U.S. banks have lent Third World nations more than twice their net worth--$64 billion. These concrete-and-steel Wall Street fortresses would be completely wiped out by a Latin American repudiation of all debt to the U.S.

The paradox of this truly dangerous situation lies in its dual character. On the one hand, long-standing historical forces play the major role behind the crisis. However, individuals in bank board rooms throughout the West made conscious decisions in the '70s to make choices which seem, in retrospect, to be foolhardy risks. The actions of a very small number of bank executives have put the American people in a real bind. Hopefully these same bankers will find their own was out of the mess without a major social and governmental shake up, like the Crash of 1929.

The historical roots of the crisis are two-fold. First, in the post-WWH international atmosphere, best exemplified by the United Nations, the principle of national sovereignty was raised to new heights. The "equality" of nations was affirmed by equal voting in the General Assembly, and new respect was supposedly owed to then existing borders and to the legal status of each nation.

From this international attitude arose such organizations as UNESCO and the Non-Aligned Nations Conferences, amid various calls for a "New World Economic Order." This new order would supposedly redress the imbalance of wealth between the developed industrial nations and the Lesser Developed Countries (LDC's), but has instead led to the present tenuous situation.

Second, the phenomenal post-War growth of the West, particularly Western Europe and Japan, increasingly rode on cheap Arab oil, Quietly, throughout the '50s and '60s Western dependence on imported oil steadily grew, until the sheiks gathered enough expertise and courage to take advantage of their golden opportunity. The subsequent oil shocks of '73-'74 and '79-'80, both associated with Mideast war, dealt a severe and permanent blow to the World economy. These shocks were a major contributor to three well-known trends of the '70s--inflation, unemployment, and conservation. A loss to the Western economies of over $1 trillion had to be paid by someone, and it wasn't the oil companies.

The first payments were by relatively simple inflation, but when this reached the high levels of the late '70s the Federal Reserve decided to act. The suffering of unemployed millions resulted from this monetary brake of high interest rates. Finally, Americans took a deep breath and conserved fuel. Since 1973 Western industry has achieved a remarkable 31 percent increase in energy, efficiency, and consumption of gasoline has been cut by a comparable amount. Now the U.S. is finally climbing "out of the hole" with one of the most vigorous recoveries ever.

OR IS IT? Here's where the effects of the oil crisis become really complicated. Here, too, greed shows its ugliest face. When the leaders of Arab nations found themselves virtually buried by Western oil money they initially had almost nothing to buy. Although in the last few years increasing expenditures and decreasing revenues have narrowed this surplus (in some OPEC cases eliminating and even reversing it, as in Venezuela and Nigeria), at first the leaders of Arab nations had little to do with their wealth other than send it right back to Western banks.

Futhermore, poor countries simply did not have the money to buy the oil needed for industrial growth. They borrowed it. And guess who they borrowed it from? The western banks, of course. This triangular money/oil system never had any self-sustaining reason for existence, and so when the West reacted, oil demand dropped, and OPEC stopped making the boom profits of yesterday. The bubble burst, and it's the Western economies and citizens who will ultimately foot the bill. The first installments have already been made--in 1981 $2.6 billion of debt was rescheduled, over $90 billion is pegged for 1984.

Effects of post-War sovereignty principles and the oil crisis have been cleared. The chairman of Citibank. Donald Platten, perhaps stated the underlying linkage of the U.S. economy to the rest of the world in the New Republic, when asked it he thought the banks had gone too far:

I have never worried that the international banking system would collapse as a result of the current problems It's too unacceptable to allow that to happen.

The banks had one reason for calling major national default "unacceptable" during the '70s: How could entire nations, with tens of millions of citizens, default on billion-dollar loans Now their reason for comfort is different, as stated by Platten. They've gone so far that the Western governments cannot let them fail. No one even wants to guess at the full effects of an international banking failure, but the scenario described by Data Resources Inc would surely be a conservative estimate of the outcome

In the end only greed is left. Awash with petrodollars in the '70s, big banks lent to every comer with a flag and a UN seat. Confident that this type of lending wasn't subject to ordinary precautions applied to individual customers, bankers went far out on a limb. Now the bankers are equally confident that they've gone so far with the nation's wealth that the U.S. government will have to bail them out if worse comes to worse. Attached to the recent emergency Congressional approbation for the International Monetary Fund were new regulations concerning just that. Congress should be ready and willing to go farther, much farther if necessary, to forestall a similar blunder by the nation's private banks in the future. The expectation by these bankers that they will be bailed out after their mistake achieves new heights of private-sector hypocrisy. For the present, though, all the American people can do is hope--that the very same bank executives who squandered a huge slice of the nation's treasure will be able to retrieve it. Someday.