kurt@fluke.UUCP (Kurt Guntheroth) (06/04/85)
What happens in a world banking crisis? Money disappears. Bank A goes under, typically because a large number of loans go non- performing. Bank A also owes banks B, C, and D money. Banks often take out loans from one another overnignt to meet unpredictable daily demands for cash. Banks B, C, and D don't normally look too hard at these loans because they happen all the time. Now suddenly B, C, and D are out a bunch of bucks. This is bad by itself, but there is also a law that banks must have liquid reserves of 10-12% of their total deposits. (The Federal Reserve determines the actual percent, and varies this percent to achieve social policy; thereby "loosening" or "tightening" the money supply.) Banks B, C, and D now have a sudden demand for cash. They borrow money to get it. Also they call in loans, or don't give out loans, and this is the essence of the world banking crisis. Banks are taking money out of the economy suddenly to repair their reserves. Now money is scarcer so the interest rates go up. Nearly-insolvent companies needing an additional loan are confronted with higher interest rates too high to pay, and they go under, taking with them any outstanding loans. Banks B, C, and D, already saddles with bad debts from bank A, are under more strain, and bank C becomes insolvent. Now the chain reaction begins. The results are; interest rates skyrocket, companies begin to fold, first the weak ones, but eventually even strong companies that just really needed a loan just then. The economy is depressed, putting more pressure on remaining companies, banks, and you and I of course. Naturally the Fed doesn't just sit still. They try to inject cash in critical places, try to take over bank A as it fails and operate it with federal money to keep the chain reaction from beginning. They also audit bank books to look for banks in trouble. However, a really big debtor can screw up a bank suddenly by going under by surprise. The Fed doesn't really have all that much cash to shore up banks with, and surprisingly, some of that cash is actually siphoned off the banking system(!). That's just a banking crisis, here's the world banking crisis. El Salvador owes bank A money (a LOT of money). In fact El Salvador (this country picked on only as an example, there are many such countries) owes everybody a lot of money. Their economy is in a mess, rebels just wrecked another power plant or factory, etc. The US dollar is too strong due to the defecit, and leadership just doesn't know how it is going to pay off those economic development loans. Strange thing about being a sovereign nation, though, is that you can just say "I wont pay." Of course your credit rating goes to hell, but for El Salvador, it already has gone. THey can't get any more money through loans, but imagine how much there would be if they just stop making payments. Blam goes US bank A (Lets call it Chase Manhatton). Now all really big banks in the world loan money to each other, and have each other's money due to international trade. Also, western countries kind of pooled financial resources for development loans to 3rd world countries. When a really big bank (A) folds, banks B, C, and D are in London, Amsterdam, and Tokyo. The USSR laughs for about six months as the western economy spirals into oblivion, and then gets very quiet when it finds it can't buy wheat or steal computers anymore. Soon their economy is hurting too. What is ugly is that 3rd world nations think interest rates on their development loans are usurious and occaisionally think "Boy we could really screw those bastards..." by not paying up. They use this as a threat "Give us more loans or we'll default." But of course giving them more just makes the eventual crisis worse. -- Kurt Guntheroth John Fluke Mfg. Co., Inc. {uw-beaver,decvax!microsof,ucbvax!lbl-csam,allegra,ssc-vax}!fluke!kurt