koch@brahms.DEC (Kevin Koch LTN1-2/B17 DTN229-6274) (07/01/85)
I found reading about how a banking collapse would work and how
and why the government would react very informative. For those who
contributed to that, I have a couple of questions ...
How will the pile of debt outstanding to Latin America that will
never be paid off affect the banking system?
Where is the best place to have your money in the midst of a WBC?
Currently I have most of my money in long term municipal bonds, which
pay double the rate of treasuries, when you consider tax effects.
Would munis continue to be safe, or would the only sure protection
come from treasury obligations? If minuis are paying twice as much as
Tbills, somehow that must indicate greater risk.
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Kevin Koch (Koch is it!)
...decwrl!dec-rhea!dec-handel!koch
koch%handel.dec@decwrl.arpakurt@fluke.UUCP (Kurt Guntheroth) (07/09/85)
How will nonpayment of Latin American Debt affect banking?
BOOM! Actually it depends on whether it all defaults at once (BOOOOOOM!) or
a little at a time (small pop). In any case it will be very sad for certain
greedy banks which bought a bunch of these loans because of the high
interest rates. If the defaults happen slowly enough it will probably not
be a major problem unless you are a stockholder or VP in one of the affected
banks.
But remember, you are never safe from the world banking crisis. How long
will your munis keep you fed when your company goes out of business due to
inability to finance its operations or raw materials? How good will they
look if wild inflation destroys the currency? We are talking about a crisis
that could, in its worst encarnation, cripple the world economy, cause a
depression that will make 1932 look like a mild downturn, and generally make
for "interesting times" as the old curse goes.
Think of the world banking crisis as the instigator of a major recession or
depression affecting the entire world. Presumably the same things that do
well in recessions will still work. Chances are the induced recession will
not be unmanageably severe. But remember, the potential is there for an
unprecedented economic disaster. In this case you will see just what risk
is all about. It is this potential for gross disaster that is what worries
people so much about the world banking crisis. Even if the possibility is
relatively remote, it has to be accounted for.
And lets not forget political actions aimed at bringing it on. Watch Fidel
Castro, who is currently making news by trying to get Latin America together
on a debt moritorium. Some of these countries may have nothing to loose by
getting their credit rating ruined. Watch for economic terrorism to be the
next big financial story.
--
Kurt Guntheroth
John Fluke Mfg. Co., Inc.
{uw-beaver,decvax!microsof,ucbvax!lbl-csam,allegra,ssc-vax}!fluke!kurt