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PASTOR GENERAL'S REPORT, FEBRUARY 28, 1986
PAGE 7
Venezuela1 Chase Manhattan has lent 98 percent of its total
eguity to those two debtors1 Citicorp has lent 91 percent and
Manufacturers Hanover 102 percent to Mexico and Venezuela.
Ten Texas banks wrote off $673 million in bad energy loans in
1985 and still carry almost $4 billion in non-performing energy
loans on their books.... Numerous bank failures and quge big
bank bailouts are coming in 1986 ��result of the oil price
plunge.
It's not just the big-name banks that are worrying either. According to
the Federal Reserve, more than 1,400 separate U.S. banks are involved in
loans to Latin American countries. Many of these small banks were junior
partners in the several "jumbo• loan packages that have been arranged over
the past few years.
Is there any way out of this business? Perhaps--but only at the price of
accelerated inflation.
Early in this decade, federal legislation--the
little-known Monetary Control Act of 1980--was enacted, enabling the U.S.
Federal Reserve System to monetize (to create money out of thin air) to
cover the debts of banks threatened with huge overseas losses, by extend
ing to them long-term, low-interest loans to cover their exposures. The
Fed can also directly assume part of the debt and issue Federal Reserve
notes as collateral--something the Federal Reserve System, the banker's
bank, has never attempted before.
This action is not something U.S. F.ederal Reserve Board chairman Paul
Volcker, a noted anti-inflationist (and, claims NEWSWEEK magazine, the
•second most powerful man in America") wants to do. Bailing out big banks
is clearly a last-resort option. It means serious inflation and a plunge
in the value of the dollar. But what is the alternative? A string of
spectacular bank failures, followed by deflation and depression? No one
wants that either.
(
As financial consultant Ashby Bladen wrote in the
February. 24, 1986 issue of FORBES�
The very fact that the last financial debacle we suffered [in
the 1930s] was deflation and depression means that this time
the political imperative is to fend off deflation and depres
sion at any cost--including runaway inflation. By the end of
1985 our Congress had, for all pr�ctical purposes, decided to
bail out everybody wh.
ose failure would cause unemployment or
financial distress. If the politicians now have their way, the \_
danger we face this time is runaway inflation, not deflation.
It is much too late for our country, or the world as a whole,
to avert the developing financial crisis•• ;. I have always said
that the ultimate outcome of the attempt to avoid the defla
tionary consequences of excessive debts by universal bailouts
is unknowable because it has never been done successfully
before. But in the short run the fall of the dollar inevitably
means worsening inflation.
Europeans Worry Over U.S. Arms Proposal
President Reagan, in a letter to
Soviet leader Mikhail
s.
Gorbachev, has called for elimination of medium
range missiles in Europe as a •constructive first step" toward worldwide
curbs on the nuclear arms race, the Associated Press quoted an unnamed
U.S. official as saying on February 22.
The President's decision was