The following article appeared in the July/August ERA newsletter.

THE TOWER IS TOTTERING WARNS COMER

The following excerpts are from an article by William Krehm, publisher and editor of Economic Reform,
the monthly newsletter of the Committee on Monetary and Economic Reform (COMER).

'Over a century ago Americans resolved the engineering problems of building skyscrapers.
As more and more storeys were piled up, the foundations were strengthened to support the
weight. How differently a similar problem is being handled in the economy!

To-day we are told that we must put up with joblessness, fewer public services, and other
inconveniences because the world economy is being ‘restructured’ for higher efficiencies.
However, if we summed up our global restructuring it would be : markets, especially financial
markets, are to be freed from all constraints. When the price of stocks and derivatives goes
up, ‘value’ is said to have been ‘created’. But any upward blip in the prices of real goods must
at once be repressed with higher interest rates. Those higher interest rates stimulate the
appetites of those who juggle securities and add further storeys to the financial superstructure.
But the same high interest rates eat away the footings of the top-heavy structure. It must be
obvious that the structure must crumble and keel over.

This is exactly what has begun happening. The Bank for International Settlements (BIS), habitually
silent as the grave, has taken to issuing releases that smack of cover-up. "In a report issued
by BIS, central bankers of the world’s 11 major industrial countries said many banks don’t
appreciate the size or complexity of settlement risk and that they lack formal mechanisms to
measure and cope with their exposures. The amount at risk even to single counterparty (another
bank) could easily exceed a bank’s capital. Some of the 80 major international banks studied
acknowledge that their senior executives ‘had never been briefed on the foreign exchange
settlement process and the associated risks".(Wall Street Journal, 28/3/96).

Yet the BIS and central banks have consistently pressed for ever more deregulation of finance.
Even when banks, mutual funds, local govern-ments, industrial corporations were losing
astronomical amounts of money on complex derivatives gambles, central banks recoiled in
horror from any suggestion for imposing a modest tax on financial transactions. It would, they
argued, lessen the ‘efficiencies’ that result from giving speculative money a diplomatic passport.
Worse still, it might reduce the very volume of money swishing across frontiers, the very volume
which for good reason, now alarms them.

But many of the risks BIS now deplores can be traced back to the Risk-Based Capital Require-
ments BIS itself formulated in the late eighties. To allow the banks to load up with government
debt with little or no capital of their own, these guidelines declared the debt of members of the
OECD countries risk-free. With BIS fixated on high interest rates as the only tool against inflation,
Economic Reform at once predicted that the banks would suffer massive losses on their govern-
ment debt hoard the next time central banks jacked up interest rates. Wholly unforeseen by our
central bankers, that happened in 1994. Lurching interest rates make it impossible to say what
the capital of a bank is at any moment might be.

Removing the ceilings on interest rates over three decades ago created an environment where
self-styled financial engineers readily obtain financing for take-overs. ..When a firm is bought out,
it is often loaded with high interest debt that made possible the purchase. The new owners
address the problem with mass firings of staff and by selling off individual units. Then they seek
the next buyer so they can decamp with their capital gains.

In the late eighties a good many corporations restructured in this way went bankrupt, and soon
the private sector seemed picked clean of such opportunities. Attention therefore shifted to
opportunities in the public sector. The procedures were parallel. The government was loaded
up with high-priced debt, as central banks pushed up the interest rate. The stage was set for a
slashing of public services public services , the dismissal of civil servants, and the privatization
of public assets.' (Economic Reform, May 1996)