Nixing the Nexus
LEVINSON, MARC
Nixing the Nexus In Whose Interest? International Banking and American Foreign Policy By Benjamin J. Cohen Yale. 347pp. $19.95. Reviewed by Marc Levinson Senior Editor, "Dun's Business Month...
...He further foresees this sort of dialogue leading to a permanently closer association between the government and the banks...
...Depositors seeking the higher interest rates available from the unregulated side of an institution would have strong incentives to investigate its safety and soundness, which would in turn insure more prudent lending behavior...
...Without supervision to assure their safety and soundness, the bankers' drive to maximize profits by engaging in increasingly risky activities could undermine the entire financial system...
...frames the questions well...
...Concern about the possibility of a default on some or all of Warsaw's foreign debt significantly weakened Washington's bargaining leverage as it sought to pressure the Polish authorities to reverse their suppression of Solidarity," Cohen finds...
...Cohen seems, then, to be pulling in opposite directions simultaneously...
...Insured deposits would be invested only in "safe" securities, say, Treasury bonds, while all other transactions of bank holding companies would be unregulated and financed by unguaranteed borrowings on the open market...
...Embassy in Teheran in 1979, the presenceof Iranian deposits inU.S...
...Though I find fault with Cohen's specific remedies, he deserves nothing but praise for bringing the thorny questions about international banking before the public in a lucid, nontechnical style...
...The existing setup practically assures close ties, for the Federal Reserve Board, the agency charged with maintaining the safety and soundness of bank holding companies, is also the most powerful economic actor in Washington, able to inject banks' interests into the policy arena and leave other economic entities standing at the gate...
...creditor banks...
...Here Cohen is less successful...
...In any event, relations between the government and the big banks are far too close already...
...Since the Latin American debt crisis broke into public view in 1982, for example, the banks have consistently received the lion's share of attention and sympathy, expressed in such measures as the Reagan Administration's sudden profession of faith in the International Monetary Fund and the Fed's unwillingness to force debt to be written off...
...Financial institutions , awash in cash, lend their money to governments abroad...
...The result, hardly an extremist tract, should do much to advance debate on the issue...
...At the same time, though, he urges tighter government supervision of banks' international lending, as well as agreements among maj or banking countries on uniform standards for analyzing the quality of financial institutions...
...Rather than seeking ways to institutionalize bank influence, public policy should seek to minimize it...
...There has been little similar sympathy for manufacturers whose Latin American export markets have dried up because every available dollar is used for debt service, or for workers whose jobs have been sacrificed to imports made feasible only by artificially depressed currencies...
...Profits roll in—until one country refuses to repay...
...To its credit, the Council refused to give in...
...imposed weak but highly-publicized sanctions against General Wojciech Jaruzelski's regime while keeping a careful eye on Poland's $ 16 billion foreign bank debt...
...If a structured forum had been in place in the early 1980s, Cohen speculates, Washington would have had to clarify its attitude toward the Marcos regime in the Philippines and the white supremacist government in South Africa before encouraging banks to lend money to these countries...
...government's influence in the region grew enormously because of its influence over U.S...
...He calls for a voluntary "structured dialogue" between top officials of selected U.S...
...The government could, as Brookings Institution fellow Robert Litan recently proposed, require financial conglomerates to separate deposit taking from other business...
...institutions...
...Bankers knew the risks, and they also knew that their government was not in a position to intervene if foreign loans went sour...
...Although the two have been connected for quite some time, it was not until opec's oil revenues began to flood into Western banks in 1973 that the linkage between international banking and foreign policy first received significant pub-he attention...
...The tougher task by far is redefining the relationship in institutional terms...
...As with virtually all businesspeople, bankers prefer to pretend they have no government nexus, and hence no need to consider government interference with their activities...
...After the Solidarity trade union movement was suppressed in Poland in 1981, the U.S...
...In other cases, the relationship is more problematic...
...But he also has a deeper worry, stemming from his historical perspective and his close reading of Charles Kindleberger's classic study of financial market behavior, Manias, Panics and Crashes...
...During the tumultuous events that culminated in Edward Ill's repudiation of England's debts in 1327, the government of Florence could do little other than watch helplessly as the banking houses of the Bardi and Peruzzi collapsed...
...Like any bankers, they don't want their money back so long as interest is paid on time, and will even lend more to help a worthy debtor if the need arises...
...Their home governments will make sure of that because, like it or not, banking has become an indispensable instrument of foreign policy...
...Their security, a pledge of future tax revenues, seems as good as gold...
...Bankers still make loans to foreign rulers, of course, but in the 1980s bad foreign loans won't drag any major bank down...
...Documenting the often contentious bank-government involvement, however, important as it is in building the argument for new government initiatives, is the easy part of Cohen's undertaking...
...banks andFederal officials of Cabinet rank...
...Banking and foreign policy were two different realms...
...The relationship between banking and foreign affairs is not always to the benefit of the banks, Cohen finds...
...When the Latin American debt crisis broke in 1982, the U.S...
...banks became a powerful weapon in the hands of Washington policymakers, much against the wishes of the banks themselves...
...Today, as Benjamin Cohen's important new book points out, the ground rules have changed...
...Reviewed by Marc Levinson Senior Editor, "Dun's Business Month " The story is familiar...
...policy justify some sort of government guidance, Cohen contends...
...In such situations, the constraints that banks' aggressiveness poses for U.S...
...One can only hope it will succeed in triggering a search for answers...
...In fact, some bankers were so alarmed at Cohen's line of thought that they sought to dissuade the Council on Foreign Relations, the sponsor of this book, from studying the matter...
...After Iran seized dozens of hostages at the U.S...
...S3 billion of which was owed to U.S...
...The two sides would meet to exchange information on international lending issues and on the government's foreign policy intentions, in the process trading views of potential risks arising from each other's actions...
...Even now, it is not a subject mentioned in polite company...
...Their interests are not heard in the halls of government half so clearly as Citicorp's and Manny Hanny's...
Vol. 69 • December 1986 • No. 19
