In the Financial Fast Lane

...Argentina, Brazil and Mexico, Latin America's biggest debtors, obtained most of their money from American banks...

...But as debts accumulated, interest rates rose and the delayed recession set in anyway, the borrowers could not meet their obligations...

...The debt mountain rose with astonishing swiftness after 1973 as surpluses from opec nations, and to a lesser extent from Western governments and multinational corporations, were recycled to finance Third World and Eastern European deficits...

...These disastrous results of misapplied bookkeeper thinking were presciently foreseen by Keynes in his 1919 work, The Economic Consequences of the Peace...

...the countries of East Asia borrowed from the Americans and the Japanese...

...But then the logical conclusion would be that the vital transfer of funds should be performed by public lenders like the International Monetary Fund (IMF), whose policies Moffitt also strongly condemns...

...Nevertheless, continuous lending is necessary to maintain markets...

...It is not surprising that watchdog arrangements, presupposing as they do consensus both within the American body politic and among the key members of the world community, have so far proved unattainable...

...He says little about the specifics of his plan, though, or the mode of transition from here to there...

...In the area of currency, he rightly dismisses the gold standard as a substitute for the Eurodollar nonsystem, preferring a new version of Bretton Woods...

...As in the 1930s, the alternative is default and the possible collapse of the international financial apparatus, with all the grave political perils that would entail...

...Moffitt particularly criticizes the speculative inclinations ofbanks.Asan example, he recalls theloansafew years ago to the brothers Hunt of Texas when they tried to corner the world silver market...

...Moreover, hepointsout, bankers have not always been content to simply finance speculative ventures on a fixed commission basis...

...Sometimes they have been partners in the schemes, or even placed their own bets...

...As speculators intensify their activities, Moffitt claims, "their behavior becomes more outlandish...

...The author freely praises his heros andindicts his villains...

...Even if an international accord was reached, selling it in this country would not be easy...

...International banks like Chase Manhattan, Citibank and Morgan Guaranty developed the transfer to an art, providing markets for both opec oil and Western industrial products as they gratified allegedly creditworthy Communist or underdeveloped nations whose appetites forim-ports exceeded their abilities to pay...

...It may be helpful to compare the present situation to what obtained after World War I. Two understandable yet enormous mistakes were made in 1918-19: The victorious European powers, led by the French, demanded reparations from the vanquished, and American concerns that had supplied the Allies with food and materiel during the conflict insisted on repayment in full...

...Moffitt sees these two lamentable situations as part of a larger pattern of changes in the global financial system over the past 40 years: from the cooperative spirit of Bretton Woods to relative anarchy...

...Unfortunately, growth sputtered almost a decade ago, and the present modest domestic expansion will probably abort before a prosperous attitude takes hold of the American imagination...

...The world was rendered economically and politically unstable by the unmanageable sums the Germans owed to the French, the French and Italians to the British, and the British and French to the Americans...

...Naturally, it would be preferable to enact the purge through renegotiation and compromise...

...The banks' maneuvers in the '70s, whatever half-baked projects they underwrote or pockets they lined, did accomplish the equivalent of Keynesian pump priming on a global scale...

...Rational procedures of that kind, however, have yet to become common in the private realm...

...The fight at this stage, on the other hand, is over principles rather than details, so I cannot really fault Moffitt for failing to provide a blueprint...

...Essentially, I concur in Moffitt's judgment that a return to greater regulation would put the world's money on a sounder footing...

...the evildoers are the free market ideologues who championed its demise, and the high rollers who have benefited from the removal of restriction...

...Director, the Project on Economic Restructuring The recent purposeless rise in the exchange rate of the U.S...

...Indeed, the trouble is circular, for the fluctuating dollar and the debt predicament are among the principal checks on any new economic upswing...

...Had the same loans been public and long-term, the current crisis would have been avoided...

...Still, the whole situation must be kept in proper perspective...

...The U.S., after all, is a network of competing interest groups historically bound together by economic growth-rather than custom, ethnicity, nationalism, love, or any other social adhesive...

...Keynes counseled compromise and reconciliation on outstanding obligations, and his advice is as apt 60 years later for many similar reasons...

...Changes in prices, exchanges or incomes cannot effectively adjust the balance...

...Debts have often been abrogated, defaulted on or otherwise avoided in periods of political disintegration or economic collapse, such as World War I or the Great Depression...

...dollar, and the determined efforts of the world's central banks to arrest it, underscore the difficulties of maintaining a global trading system when speculation is rampant...

...As for the debt dilemma, Felix Ro-hatyn of the Lazard Freres investment banking houseand John Williamson of the Institute for International Economics, a Washington think tank, have proposed that private short-term IOUs from the Third World be replaced by public long-term notes...

...A merciful act of book-balancing is occasionally required to eliminate the braking effect of the accumulated debt and facilitate the start of the next boom...

...The great lenders performed their historic function...

...To a considerable degree, I share Moffitt's view...

...The sawtooth dance of the dollar (depreciating until 1980 and appreciating since) has not been choreographed by changing market "essentials"-that is, domestic and foreign income and internal price levels...

...Specifically, he rejects the IMF's attempt over the past few years to contain global demand by refusing to certify the creditworthiness of Third World debtors unless they reduce trade deficits, fiscal deficits and domesticconsumption...

...The tune has been called by speculators speculating on what they think other speculators are thinking...

...Nonetheless, the banks' demand that accounts be settled quickly highlights their greatest weakness: they retain a bookkeeper's mentality...

...he finds the banks too indiscriminate in their lending and the IMF too restrictive...

...Credit is necessary, and if public institutions are not providing it, the private sector must...

...And until recently rich rewards seemed to be in the offing in the Amazon, Yucatan and the pampas, too...

...Both conditions have their roots in the early 1970s, when the replacement of the Bretton Woods system by the Eurodollar "nonsystem" set the stage for oscillating exchange rates, and when opec's enormous price increases created the circumstances for the debt explosion...

...from public foreign aid to private loans...

...When economic growth ends, the lenders and borrowers have served their purpose...

...Rapidly shifting currency values disrupt global trade and investment, as well as penalize the fiscal and monetary agencies of any country that tries to bring order to the chaos...

...It is true that this option may not have existed at the time the troublesome loans were made...

...Henry Kaufman, Robert Roosa and Albert Wojnilower -all advocates of some financial market regulation-are mentioned as representatives of the sane minority...

...Although debt is not by itself the cause of the world's economic crises, it is a source of political contention and economic friction...

...Eastern European nations became indebted largely to German banks...

...Reviewed by Leonard A. Rapping Professor of Economics, University of Massachusetts, Amherst...

...Michael Moffitt, a financial analyst with Shearson/American Express and an associate fellow at the Institute for Policy Studies in Washington, traces the origins of these and other destabilizing economic developments in his thoughtful and lively book...

...and Africa's IOUs were scattered through various Western European states as well as the U. S. So long as there was modest expansion, the borrowers were paying simple, and in many cases compound interest, and no thoughtful banker was foolish enough to terminate a mutually profitable agreement by demanding the return of his principal...

...Interacting with other problems at a volatile time, it certainly has the potential for exacerbating conflict...

...Here the author's position is somewhat contradictory...

...The stakes in the game, he suggests, may ultimately be measured in megatons as well as dollars, and far too few voices of reason can be heard today...

...Granted, the IMF's approach has obvious political implications, yet the economic rationale is also genuine...

...Meanwhile, the mass of evidently unredeemable loans t hat Western banks have pressed upon t he Thi rd World over the past 10 years has grown to the point where it threatens the fragile apparatus of international borrowing and lending...

...from fixed gold and silver prices to speculative assaults on those "barbaric relics," and from low, stable interest rates to the highest, most volatile rates since the beginnings of the Industrial Revolution...

...This would give some debt relief, but my guess is that the sensible suggestion would not be acceptable to the creditors...

...He maintains that the only reliable corrective would be the containment of market processes in most areas through the re-introduction of an international regulatory authority...

...The process is not always a tragedy from history's point of view...

...They "worsen the prospects for a genuine economic recovery" and increase the possibility of "a major financial crisis...

...We have come to the point where debts must be renegotiated without constipating the flow of credit to countries with trade deficits...

...This passion for gambling, coupled with odds that were often quite favorable, has yielded handsome profits in foreign exchange markets, frequently at the expense of central banks...

...A world trading system requires a mechanism that allows surplus units to finance deficit units...

...By the early '80s, the large banks were worried about repayment and no longer enthused by their middleman role...

...Personally, I believe the banks deserve censure not for lending out too much, but for setting up repayment schedules that everybody knew had endgame difficulties...

...Chief among the white hats are John Maynard Keynes and Harry Dexter White, the acknowledged architects of the regulated postwar financial order...

...Of course, one might very credibly argue that the financiers' "piece of the action" was excessive...

...Witness the outrageous events that have accompanied the Argentine election campaign...

...they staved off the rapid economic decline that would have been the natural consequence of the oil states' lopsided accrual of revenue by giving borrowers the money to continue buying the industrialized world's overflow output...