sweeney@ny1mm.DEC (06/02/85)
The "Crisis" inherent in the failure of a money center bank is different from the "World Banking Crisis". Why so-called Money Center banks cannot be allowed to fail: The banking system depends on liquidity, lots of it. The money transfers necessary for Ford to buy tons of steel from US Steel and for domestic car dealers to purchase their Nissans, etc are not collateralized. The other money center banks held no collateral of Continental Illinois. As its payments would fail, there would be a domino effect that would race through the banking system. In a matter of hours, no one would be sure if there was liquidity (ie "demand deposits" would be paid in cash "on demand") in any bank that conducted transactions with Continental. Eventually everything would be sorted out but the disruption in the financial system would have serious external costs. What is the World Banking Crisis: Loans have been extended to less developed countries that have been used for consumption of all kinds. The intent of such loans was to create new capital investments that would create new employment, new products, etc. As a result the less developed countries are worse off than ever before. They have a large debt burden and no substantial capital base. Pat Sweeney