How So-called Experts Mislead Us about

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Deregulation and lack of needed new regulation also led to high bank charges and soaring fees for cable television, insurance, legal services, and health care. Banks increased costs to their customers by raising service charges, levying new fees, and posting high personal loan and credit-card rates while paying unprecedentedly lower interest rates on customers’ deposits.203

Monetary policy, according to Galbraith, is a “blunt, unreliable, discriminatory and somewhat dangerous instrument of economic control” surviving partly because it is hard to understand and because resulting high interest rates are welcomed by banks and others with money to lend.

When credit rationing occurs, “it is the small firm that finds itself unable to borrow. Hence, for competitive industries—farmers, small builders, small retailers, service industries, dealers—monetary policy is effective. It will be easy to see why monetary policy is regarded with equanimity and even approval by larger and stronger firms. Unless applied with severity over time it does not appreciably affect them” as they have stronger banking connections and the ability to finance projects from retained earnings or by going directly to the market.204
Willie Sutton once was asked why he robbed banks. His answer: “That’s where the money is.” His answer would also fit the question: “Why do state and federal laws favor banks against private citizens?” Bankers’ associations are big contributors to political campaigns and are powerful lobbyists. Many years ago banks got the states to pass laws making it legal for them to send “repo men” to break into a car in the dead of night and take it from the driveway of an owner who is behind in payments. Anyone else caught doing that would be up for grand theft auto. They are just following the pattern of the railroads in the 19th century who were said to have a majority of the members of the state legislatures on their payrolls.

Banks and bankers have a very conservative image, partly stemming from the experience of ordinary people who ask them for a loan. Under some circumstances, however, they act like reckless gamblers, although always arranging it so that the public will cover their losses. While local business entrepreneurs plead for bank loans and are often rejected by loan officers who demand collateral and personal guarantees, the same bank may be making huge loans to foreign governments that are already delinquent on previous loans and highly unpopular with their own oppressed citizens.

In the 1970s banks also gambled extensively in financing the overbuilding of condominiums and apartments in southern Florida and had to write off many loans at a fraction of their value. During the 1980s more than a trillion dollars went into commercial office space, shopping malls, and multi-family developments in loans from the banks, along with the S&Ls and insurance companies.

Leveraged buyouts in the 1980s, financed by junk bonds and $50 billion of bank loans at high rates and enormous fees, did nothing to increase production, while saddling corporations with huge debt. For example, a $535 million loan to buy out Revco Drugs brought in $20 million in fees. In December 1990 the

Revco loans were selling at 60 cents on the dollar, and Federated Department Store loans were selling at 45 cents on the dollar.205

To keep banks out of the securities business, where they had helped cause the 1929 stock market crash, Congress had passed the Glass-Steagall Act of 1933, which barred banks from buying or underwriting corporate stocks and bonds. Yet in 1990 the Secretary of the Treasury assured the securities industry that the Bush administration would work for the repeal of Glass-Steagall, and banks continued to press for expanded investment powers during the Clinton administration.206 Proposals were pending in 1998 in both the U.S. Senate and the House of Representatives to allow the common ownership of banks, insurance companies and securities companies. In addition the antitrust laws have been bent to let big chains of banks swallow up their competition.

Nobody is stopping banks and finance companies from promoting “home equity loans,” which are highly risky for the borrowers. These are the same as “second mortgages” that resulted in so many families losing their homes in the 1930s. “Never again!” was the mood then, but tax law changes during the 1980s provided a tax advantage for second mortgages. Banks’ overpromotion of credit cards also encouraged families to build up a dangerous amount of debt.
Passing costs and risk to customers

As bank credit cards came into use, banks got the usury laws changed to let them charge up to 21% interest, while they paid their depositors as little as 2%. By 1996 personal bankruptcies exceeded a million, largely as the result of overpromotion of credit cards, and the credit industry moved to tighten the screws on its customers. Their National Consumer Bankruptcy Coalition’s members had donated over $700,000 to federal campaign funds in the first half of 1997 alone. The American Financial Services Association lobbyists got more than 150 members of the House of Representatives to cosponsor its “Responsible Borrower Protection Act” by December 1997. The bill would make it more expensive to get into bankruptcy, lengthen the required repayment period, and prevent debtors from

making mortgage or child support payments ahead of credit card debt.207

A prime example of putting customers at risk is a set of amendments to its bank service agreements that were circulated to Virginia and Carolina depositors by BB&T (Branch Bank & Trust), effective September 1, 1997, reducing the bank’s liability for paying fraudulent telemarketer drafts and forged checks. The bank is to be excused from liability “without regard to the Bank’s care or lack of care” not only if the depositor fails to report improper charges promptly, but also if the checks are “altered so cleverly [that it] could not be detected by a reasonable person.”

Likewise, the depositor is to be liable for any demand drafts from telemarketers using the account number and “in lieu of manual signature, a legend such as ‘Payment Authorized’” unless the depositor has not given the account number to the telemarketer. This, like another rule demanding that the depositor safeguard access to checks and account numbers, opens up a Pandora’s box of legal quibbles that could shift the burden of proof to the customer.

It is understandable that most bank transactions now are handled by computer, untouched by human hands, but the important question is what the bank will do when a fraudulent transaction is discovered. Will the bank correct the error and reverse the fraudulent transaction (charging it back to the originating source), or just dodge responsibility under these new rules?

A bank officer of BB&T, when asked about the amended rules, explained about electronic processing and gave oral assurance that errors would be corrected (thus contradicting the written rules). He claimed such problems were rare, which makes one wonder why the bank would impose losses on the very few of its customers unlucky enough to be cheated. He also asserted other banks would be establishing similar rules.

A small businessman, Fred D. Curl of McLeansville, writing in the letters column of the August 23, 1997, Greensboro (NC) News & Record, claimed the bank he had used since 1960 already imposed a similar policy. The bank refused to make good when “someone stole the company’s checks, forged my

name and altered the checks.” The bank told him to bring in the forged checks, and “after they kept the checks for a few weeks, they said there was nothing the bank could do.”
Concentration of power

Congress enacted legislation in 1994 giving banks the power to establish branches nationwide. As of June 1996, over 70% of U.S. banking assets were controlled by less than 1% of the banks, namely the 100 largest banking organizations. The largest, Chase Manhattan-Chemical (the result of big merger after big merger), had assets over $300 billion.

A proposed merger announced April 6, 1998, of Travelers Group with Citicorp into Citigroup, Inc., was to set a new record for size, with each company’s market value over $70 billion. The pool of customers includes 70 million in the U.S. alone and 100 million in 100 countries. Proclaimed as a convenience for customers, the merger would combine a wealth of financial information about those customers that would help the sales efforts of the new company.

Since Travelers had already absorbed the Salomon Smith Barney investment house, the Citigroup merger is to combine global banking, insurance, stocks and bonds, all in one mega-corporation. They are betting, according to the Associated Press, “that Congress will change Depression-era laws prohibiting banks from getting into the insurance or brokerage businesses.” The financial community has lobbied Congress intensively to repeal those laws, while financial companies used holding companies and other devices to outflank the spirit of the laws.208 The expectation that the 1933 Glass-Steagall Act would be repealed was characterized as “remarkable chutzpah” by William Safire, a columnist usually more friendly to business interests than to government regulators.209

The perils that the New Deal legislation attempted to prevent were illustrated by NationsBank‘s $6.75 million settlement with the SEC, the Comptroller of the Currency, and the National Association of Securities Dealers of charges of “deceptive and misleading sale of securities on the bank’s premises” to investors who were mostly elderly. In the May 4,

1998, settlement the company neither admitted nor denied wrongdoing, but it issued a statement that it had taken steps to avoid repetition of the problems. NationsBank had paid nearly $40 million in 1997 to settle a class action lawsuit by former customers in Florida and Texas based on similar charges.210

NationsBank Corp. and BankAmerica Corp. announced on April 13, 1998, a $62.5 billion merger resulting in the nation’s first coast-to-coast bank. At the same time, a $28.9 billion merger of Banc One and First Chicago NBD to create the Midwest’s most dominant bank was announced. News reports did not even mention any possibility of objections on antitrust grounds.

Ranked by assets on December 31, 1997, Citigroup would be largest of the U.S. banking companies at nearly $700 billion, BankAmerica second with $568 billion, Chase Manhattan third, J. P. Morgan fourth, and Banc One fifth with $240 billion. On the global scene, U.S. banks would still fall short of the size of Japan’s Bank of Tokyo-Mitsubishi and the proposed United Bank of Switzerland.211

One result of bank concentration is the creation of even stronger political lobbying forces. Another is establishing banks so large that the taxpayers will always be at risk to bail them out, as regulators and politicians will declare their failure a threat to the entire financial structure of the nation. As some of the risky ventures of the 1980s began to fall apart bank failures loomed, but Washington decided to save the big banks and big depositors from the consequences of a free market. When the nation’s eighth largest bank, Continental Illinois, was on the verge of failure in 1984, the FDIC saved it by guaranteeing all of its deposits, not merely those under $100,000 covered by the law. This set a precedent for other big banks that could bring the economy down if they failed.212

Despite this increasing risk, the FDIC in 1995 eliminated deposit insurance premiums for 92% of the nation’s banks and capped the reserves that financial institutions pay into the government’s bank insurance fund at $25 billion, just 1.25% of the insured deposits.

Dubious claims of efficiency

Like other businesses seeking to justify mergers, banks typically claim that the larger combined entity will be more efficient and provide better service. Objective evidence seldom supports these claims. For example, Stephen Rhodes, a veteran economist with the FRB, reviewed dozens of studies and found “little support” for the view that bank mergers result in improvements in performance. John Boyd, formerly at the Federal Reserve Bank of Minneapolis, and his colleague, economist Stanley Graham, found that most economies of scale are exhausted when banks reach $100 million in assets.

Another study by Allen Berger and Joseph M. Scalise of the FRB in collaboration with Anil K. Kashyap of the University of Chicago estimated that for banks with less than $100 million in assets nearly 82% of their loans went to business borrowers with less than $1 million in bank credit, but for larger banking corporations only 0.7% of their commercial loans went to such smaller companies.213

Federal Reserve Governor Janet Yellen told the House Banking Committee in 1995 that banks in concentrated markets “tend to charge higher rates for certain types of loans, particularly small business loans, and tend to offer lower interest rates on certain types of deposits than do banks in less concentrated markets.”214

Banks in the oil crisis

The double-digit inflation that reached its peak in 1981 was initiated by OPEC‘s sharp increases in the wholesale price of oil. The major oil companies conspired, as was later proved, to create a false scarcity and long lines of motorists at the gas pumps. The resulting public panic enabled them to further increase prices, trim costs by introducing self-service, and add extra profits for themselves on top of the increase in wholesale prices. It also gave them an excuse to limit deliveries and force independent service stations out of business in favor of their company-owned stations. The higher prices of petroleum products used in manufacturing

and transportation led to higher prices of other goods throughout the economy.

It is significant that this inflation was abetted by bankers, who normally regard inflation with great dread, especially whenever wages rise or unemployment falls. The bankers made loans to less developed countries for purchases of oil at inflated OPEC prices. Because money from OPEC profits was flowing into the banks and being loaned out for more oil purchases, this process was sometimes called “recycling.” Two harmful results were (1) fueling inflation and (2) debt burdens on the borrowing countries.

If it had been left to the market mechanism of supply and demand, the oil producing countries would have had to reduce their cartel’s prices or be unable to sell their oil. Instead, the banks made high-risk loans to finance high-priced oil purchases that enabled OPEC members to deposit more money in the banks. With this financing mechanism in place, OPEC oil revenues were $74 billion in 1974 and $300 billion in 1980, compared with only $7 billion in 1970.

Why did banks make loans that appeared, on the face of them, so imprudent? For one thing, the interest rates they charged were extremely remunerative, and for another, banks take the attitude that nations don’t go bankrupt; no matter how bad their financial situation, they can always get more money from taxes. At those interest rates, the banks would be content to roll the loans over and just keep collecting the interest. In some cases foreign loans have specific government guarantees. If not, banks tend to rely on their belief that the public will be forced to bail them out in the end, as in the case of the savings and loan fiasco.

The Feb. 2, 1983, testimony of FRB Chairman Volcker to the House Banking Committee was quoted by Quirk & Bridwell (1992): “At the time oil prices first rose sharply, great concern had been expressed that industrialized and developing countries alike might be unable to finance the increased cost of oil imports,” and they questioned, “Why should we worry about ‘financing’ an economic war aimed at us?” As they pointed out, the result was a distortion. “The price of one commodity was allowed to rise, which would ordinarily mean that the price of all other goods and

services must fall. Arthur Burns’ Fed, and later, William Miller’s, however, created new money to keep this from happening.”

They compared this with bankers’ sale of German bonds to the American public after World War I (for reparations to England and France) as well as bonds of other foreign countries. By 1933, $25 billion of foreign bonds were in default, and the bankers made no apologies for selling the bad bonds to the public. In the OPEC operation, they claimed, “The bankers, if they told the truth, would have to write off almost $400 billion of bad loans....The losses, the banks say, should be shifted to the taxpayer....In November 1982...FRB Chairman Paul Volcker told bankers to keep on lending: ‘New credits should not be subject to supervisory criticism.’“

The same authors noted that after Sadaam Hussein invaded Kuwait in 1990 and the Bush administration sent 300,000 troops to the Gulf, “the administration said it sent the troops to the Gulf to prevent Sadaam from gaining control of the world’s oil supply.” However, the government neither took nor threatened military action as the price of oil ran from $3 a barrel in 1973 to $39 a barrel in 1979.215

The public was told, falsely, that the troubled savings and loan associations had to be bailed out by the taxpayers. S&Ls are not banks, but since the 1970s and 1980s laws and regulations have made them almost indistinguishable. S&Ls, along with the savings banks, are known as thrift institutions and have a long, respectable history. Commercial banks originally had the exclusive right to take demand deposits (checking accounts). They also did commercial lending, could accept time deposits (savings accounts) and lend to homeowners against mortgages.

The S&Ls were created to make more funds available to finance home purchases, using funds deposited in savings accounts by individuals. Savings banks grew up in the northeastern states, and were non-profit mutual associations operating much like savings and loans. The thrift institutions were allowed by the government to pay slightly higher interest than the commercial banks.

Two things changed: (1) non-profit mutual thrifts were allowed to be converted to private corporations and become part of the corporate merger movement; and (2) restrictions on their operations were relaxed, largely in response to the pressures they felt from rapidly rising interest rates after the oil shocks. As market interest rates soared, S&Ls were at a disadvantage in competing for deposits against other investment opportunities such as bank certificates of deposit (CDs), bonds, stocks, and mutual funds. The home mortgages they had written at fixed rates before interest rates soared produced little revenue and lost market value for resale.

The unrealized losses of the S&Ls had reached $200 billion by 1982, according to Quirk and Bridwell (1992), but they wrote: “Even if the government had to buy all the outstanding

mortgages at face to provide funds for depositors there would be little or no ultimate loss because the value of the mortgages would get back to face as interest rates fell....The S&Ls were insolvent measured by generally accepted accounting principles (GAAP). Congress let the Bank Board change the accounting rules so they’d be solvent. The rules were called RAP or regulatory accounting principles....The most metaphysical things, such as ‘goodwill,’ could be counted as assets.”216

The S&Ls had a problem that would remain until interest rates dropped back to a normal level, but the solution was worse than the problem. In 1982 a new federal law allowed S&Ls to change the investment of their funds from the traditional home mortgages to other ventures, including commercial real estate, junk bonds, mortgage backed securities, futures, puts and calls, and repurchase agreements. “Like banks in the 1920s,” Kevin Phillips commented in 1990, “many S&Ls proceeded to gamble, with their (federally guaranteed) deposits, and by 1988 many had lost.”217

The original idea of insurance for deposits had been to protect ordinary people with small savings accounts. The coverage grew from the original $10,000 to $15,000 in 1966, then jumped from $40,000 to $100,000 in 1980. That last sharp increase was railroaded through the Congress without any hearings or floor debate nor any record in the Senate of who voted for or against it. The new limit helped to make the burden too heavy for the Federal Savings and Loan Insurance Corporation (FSLIC) to handle. The Federal Home Loan Bank Board, which had prohibited S&Ls from getting more than 5% of their deposits from deposit brokers, removed that prohibition in 1980. As the rules were relaxed, money flowed into the weakest thrifts, which were generally those with the highest interest rates.

As Jim Adams wrote in The Big Fix: “[The risky] thrifts grew a thousandfold and more in just four years and kept growing as their losses mounted.” Quirk and Bridwell added: “Many of the traditional S&L officers left the industry and were replaced by a bunch of crooks. Almost all of the large S&L failures show a change of ownership in 1982 or 1983 as the crooks came in.” As

the FSLIC ran out of money it could not close insolvent S&Ls because it had no money to pay off depositors. The losses rolled on, the honest S&Ls continued to be squeezed, and the crooked S&Ls gambled with taxpayer-guaranteed funds.218

In 1988, a presidential election year, the Republican president and the Democratic congress kept the public in the dark about the S&L crisis, while the news media kept the public’s attention elsewhere. The government assembled insolvent or almost insolvent S&Ls into groups and sold them to private buyers at low prices sweetened by huge tax breaks and subsidies. The General Accounting Office later estimated the cost of these tax breaks to the government at $8.5 billion.219

Under a 1981 law, due to expire at the end of 1988, S&Ls could take a tax loss on the sale of property even when the government guaranteed it against loss and paid in cash so it didn’t have a loss! Before this gimmick expired 199 seized S&Ls were sold by the Bank Board in 1988 to private buyers, whose deals in the last week of 1988 cost taxpayers an estimated $70 billion.

For example, Quirk and Bridwell, quoting Mayer,220 reported that Ron Perelman paid $315 million for First Gibraltar and Vernon Savings and got tax deductions valued at $897.3 million, as well as assets listed at $12.2 billion supported by a $5 billion FSLIC assistance package. They added: “In 1989...First Gibraltar reported payments from the government of $461 million and net profit to Perelman (tax-free) of $129 million.”221

Why taxpayers bailed out the S&Ls

After massive propaganda, most taxpayers probably believe they were legally obligated to bail out the savings and loans. Quirk and Bridwell stated: “The President, Congress, and the media all tell the taxpayer he is legally obligated. But it’s not true.” Federal liability was limited, of course, to the assets of the Federal Savings and Loan Insurance Corp. (FSLIC) and then to its successor, the Federal Deposit Insurance Corp. (FDIC).

They listed the government’s options in early 1989 as (1) do nothing, which would cost the taxpayer nothing, (2) pay for the S&L losses with taxes at a cost of $130 billion, or (3) pay for the S&L losses with 20-30 year bonds at a cost of $500 billion (noting that the second and third options were subject to being doubled or tripled). The third and most expensive option was selected.

The reasons offered by FRB Chairman Greenspan at a hearing of the House Banking Committee for making the taxpayers shoulder this burden were: (1) basic benefits to the economy as a whole and (2) to avoid the deposit withdrawal and losses “that disrupted the payments system and the savings and investment process in the 1930s.”

American public gets stuck with the bill

The Reagan economists had estimated the S&L bailout price might reach $50 billion. By April 1990 the estimate reached $500 billion and growing, according to Haynes Johnson, “bigger than all the bailouts of New York City, Chrysler, and Lockheed put together and far exceeding the cost of the Marshall plan....Some experts reckoned the overall cost to be twice as much as the entire Vietnam War in comparable dollars and nearly four times that of the Korean War!”

The 1990 Economic Report of the President stated: “The irony is that Federal Government policies have led to this debacle.” Typical of government reports, the culprits were not named.222 The bailout was not restricted to deposits within the $100,000 limit. Nor was there any provision for the inadequacy of FSLIC or FDIC insurance reserves to be made up by higher future premiums from the S&Ls. The politicians decided instead to pass the buck to the taxpaying public. In fact, people who had no money to save after basic necessities would be taxed to make up losses of those who deposited even more than $100,000 with high-paying but risky institutions. Talk about redistribution of wealth!
This solution was worked out behind the scenes between politicians of both parties and the powerful S&L lobbies. Allowing conversion of mutual S&Ls and savings banks into stock companies, and the merger of such companies, had done much to strengthen the political influence of the thrift institutions. No wonder there was a conspiracy of silence during the 1988 election campaign.

With the election over, Washington quietly arranged for the bailout to be financed by 30-year federal bonds to be issued by a quasi-governmental corporation so that it would be off-budget although adding $500 billion to the national debt. Economists at Stanford University calculated that total outlays might reach $1.3 trillion, with $900 billion representing interest payments alone.

At about the same time, as reported by columnist Warren Brookes, FRB Chairman Greenspan moved Federal Reserve deposits to troubled institutions, including Lincoln Savings and Loan, and loaned nearly $100 million to Lincoln, delaying its failure for four months (until Apr. 13, 1989) “to allow all those depositors with accounts of more than $100,000 to get out ‘whole’ from the Lincoln mess without losing a dime.”223

Greenspan described the S&L costs to the Financial Times as illusory, just a transfer of money from one pocket to another that does not affect our productive resources. He omitted that the transfer was from the taxpaying public to financial wheelers and dealers. The guilt of both major parties was made clear by Ralph Nader: “Congress went along with President Bush’s demand (under threat of vetoing his own bill) to remove the bailout from the federal budget....The bipartisan effort to hide the cost of this calamity continues apace.”

The bailout was entrusted to an unwieldy bureaucracy called the Resolution Trust Corp., which budgeted $500 million for 1990 to be paid to outside lawyers and continued to encourage mergers and takeovers. Chairman J. S. Seidman announced in 1991 that $100 billion of properties would be sold in bulk to big buyers who would make only a small down payment and agree to

pay part of future profits, if any, toward the rest of the purchase price.

Making out like bandits

Although President Bush, attributing the S&L crisis to dishonesty, announced an all-out investigative and legal war on the culprits, relatively little came of it. Most of the problem originated with the government itself for encouraging risky speculation with depositors’ money and tolerating shady practices. People who came to control the S&Ls, however, sailed close to the law and sometimes over the edge, but they tended to have friends in high places who let them off the hook.

One of the S&Ls that failed was Silverado Banking, Savings and Loan of Denver, whose board of directors included the President’s son, Neil Bush, who loaned millions to his friends and business associates (most of which they did not repay) and received $500,000 himself plus millions for his failing business. He was reprimanded by federal authorities after Silverado failed, requiring a $1 billion bailout, but the brief flurry in the media quickly died down.4142

The other failure involving a Presidential family didn’t fade away so quickly. This was Madison Savings and Loan in Little Rock, Arkansas, and its connection with the Whitewater development in which Bill and Hillary Clinton were involved. Although it happened long before Clinton’s election, Republican special prosecutors spent over $40 million, and Republicans in Congress spent more millions trying to turn Whitewater into the same disaster for the Clintons as Watergate had been for Nixon. It was still being investigated in 1998, but Special Prosecutor Kenneth Starr then turned his attention to the Monica Lewinsky sex scandal that he submitted to Congress as possible grounds for impeachment.

There was no shortage of other political connections with S&L principals. In the biggest failure of all, the $2.6 billion Lincoln Savings scandal for which Keating was convicted in 1991 and went to jail, the intervention of five Senators—Alan Cranston

(Calif.), John Glenn (Ohio), Don Riegle (Mich.), Dennis DeConcini (Ariz.), and John McCain (Ariz.)—had delayed its being declared insolvent by the Bank Board from 1987 to 1989.

Vernon Savings, a Texas S&L that was bought by Don Dixon in 1982 and failed in 1987, owned a 112-foot yacht moored on the Potomac River, on which the Democratic Congressional Campaign Committee held eleven fund-raising parties in 1985 and 1986. Dixon was sentenced to five years in prison for making illegal campaign contributions through Vernon Savings to Speaker Jim Wright, House Majority Whip Tony Coehlo, Senator Jake Garn, and Senator Alan Simpson.

Control of another Texas S&L, Gibraltar Savings, was acquired in 1983 by former Democratic National Committee Chairman Bob Strauss with his son and a colleague. It was seized by federal regulators in 1988 and sold, with tax incentives, to Ron Perelman.43

Some of the politicians involved with the S&L crisis were Republicans and some were Democrats. There were probably few, if any, members of Congress who did not receive large political donations and favors from individual savings and loans and their national association. That is the only explanation for the way the crisis was settled at the expense of the general public.

To Kevin Phillips in Arrogant Capital (1994) the S&L rescue operation was just another step in the bipartisan corporate welfare process of bailouts under which “Lockheed was saved in 1971 under the Republicans, Chrysler in 1979 under the Democrats, Continental Illinois Bank in 1984 and several big Texas banks during the mid-1980s under the GOP.” He said Bert Ely, a Virginia-based banking consultant, calculated that the financial institutions forced into FDIC and FSLIC rescues in the late 1980s and early 1990s held a higher percentage of total national deposits than the institutions that failed outright in the late 1920s and early 1930s.

“This time,” Phillips pointed out, “abuses were protected. Shareholders did not lose their shirts, and the big depositors generally got paid off by federal authorities even when their

multimillion dollar deposits were far above the insurable limits.” Furthermore, the FRB drove down interest rates and “shaky banks reveled in huge gains on the spread between high long-term interest rates and low short-term borrowing costs....By the mid-1990s, banks and investment firms were not only liquid again, but had enjoyed several years of high profitability.”224 It is probably not coincidence that banking and finance led the categories of political action committee (PAC) contributors to Congressional candidates during some 15 years from January 1981 through November 1996 as reported by Common Cause.

As the American economy has been put in a straitjacket by bankers who run the Federal Reserve, much the same has happened on the global scene. Just as war is said to be too important to be left to the generals, world finance is too important to be left to the bankers, but the bankers of the World Bank (or International Bank for Reconstruction and Development) and the International Monetary Fund are dictating the global economy.

Those two international organizations are nominally arms of the United Nations, but operate largely outside the control of any government and cooperate with each other to structure the world to their liking. Both were created at the Bretton Woods Conference in 1944 and have grown enormously since then. The IMF was established to maintain stability in the exchange rates of the currencies of member nations. The World Bank’s mission was to make loans (and insure private loans) to assist the growth of underdeveloped countries. Later the IMF got into the business of loans and loan guarantees with strings attached.

These international bodies are as much permeated with true believers in pre-Keynesian classical economics (recycled under new-sounding names) as are the Federal Reserve System and other organs of establishment economics. On the international scene, the buzz-word is “neo-liberalism,” construed, strangely enough, to mean the sovereignty of private enterprise. In practice, it results in “liberating” multinational corporations to engage in exploitation of workers and natural resources without interference from government.

The rulers of Planet Earth are compared by David C. Korten to episode 74 of “Star Trek”: This episode “took place on the planet Ardana...whose rulers devoted their lives to the arts in a beautiful and peaceful city, Stratos, suspended high above the planet’s desolate surface. Down below, the inhabitants of the planet’s surface, the Troglytes, worked in misery and violence in the planet’s mines to earn the interplanetary exchange credits used

to import from other planets the luxuries the rulers enjoyed on Stratos....

“How like our own world it is, where the truly rich and powerful work in beautifully appointed executive suites in tall office towers; travel to meetings by limousine and helicopter; jet between continents...pampered with the finest wines by an attentive crew; and live in protected estates, affluent suburbs, and penthouse suites amid art, beauty, and a protected environment....They too are living in a world of illusion, dependent on draining the world of its resources and so isolated from reality that they know not what they do, nor how else to live....” At a joint annual meeting of the Boards of Governors of the World Bank and the IMF in Washington, DC, according to journalist Graham Hancock, there were 700 social events in one week that cost about $10 million, and one formal dinner alone cost $200 per person.225

The World Bank and the IMF impose what they call “structural adjustment.” They tell countries applying for loans that they must reduce government help to their citizens, sell off government-owned operations to private investors, remove price controls on food, and open their markets to foreign competition. This has caused impoverishment, unemployment, and growth of slums, but created opportunities for multinational exploitive and polluting industries. By contrast, the World Bank and IMF have never, to my knowledge, required crooked politicians in these countries to repay the loot they stashed in foreign bank accounts.

The World Bank bidding procedure, which ignores externalities (results that don’t affect the company’s profits), tends to favor large foreign corporations with the resources to create successful bids. This forestalls the development of local industries. “We have been witnessing the transfer of public funds from the wealthy industrialized nations to developing countries,” according to Greenpeace energy expert John Willis, “so that they can be sent right back—with interest—as profits” for oil, coal, and nuclear industries, and interest to banks.226

It is significant to remember that these agencies are not at all answerable to the citizens of the nations they affect. They are answerable to the UN, at least theoretically, but under the UN’s

present charter might makes right in the Security Council and representation in the General Assembly is highly disproportionate to population. In fact, all posts in the UN are filled by governments, none by election (unlike the European Community, which chooses its parliament by election).

In a 1993 speech, Krugman traced the evolution of the conventional wisdom on international economic affairs from the 1920s belief in free markets and sound money, through the 1940s World Bank policy of industrialization to substitute for imports, and the 1970s prescription doing away with import substitution, to the late 1980s reversion to free markets and sound money. “Like any conventional wisdom, it was based more on the circular process of important people reinforcing each other’s current dogma than on really solid evidence....”227

During the tenure of Robert McNamara as president of the World Bank 1969 to 1981 “structural adjustment loans” began to force debtor countries to accept trickle-down economic policies that have caused great suffering in the Third World. I had cheered for McNamara when he was brought in by President Kennedy as the whiz kid from Detroit to head a more unified Defense Department and make the Pentagon efficient. Remaining under Johnson, he doggedly pursued the Vietnam War, which he later confessed was a big mistake. His appointment to the World Bank seemed like a chance to redeem himself, but instead he managed to do great harm in another important field! McNamara was quoted as declaring land reform off limits because it would “affect the power base of the traditional elite groups in the developing society” who could subvert Bank policies if alienated.228

Global banking; the new colonialism

The tragedy of poverty and starvation in Africa resulting from programs that were supposed to raise living standards by development were explained by Richard Lombardi, a former vice-president of the First National Bank of Chicago in charge of lending in Africa, in his book, Debt Trap: Rethinking the Logic of Development. This failure occurred because governments have forced farmers off their land or induced them to raise export crops rather than food for local consumption. Many farmers have

moved to the city and many more have switched to crops for export, like sugar and coffee and cola nuts. The governments, in some cases, have made deals with multinational corporations to share in profits from mining operations that drive native populations off their lands either by using military force or by contaminating their sources of livelihood, resulting in cities crowded with unemployed, homeless adults and children.

In 1989, as ongoing World Bank projects were displacing 1.5 million people and new plans threatened another 1.5 million, Bruce Rich asserted Bank staff were unable to point to a single bank-funded project in which the displaced people had been relocated and rehabilitated to a standard of living comparable to what they enjoyed before displacement.229 The World Bank’s own studies show many of its projects to be failures, even on its own terms. A 1992 study of Bank-funded projects completed in 1991 found that 37.5% were failures at the time of completion. An earlier study found that 12 of 25 projects that the Bank had rated as successful at the time of completion turned out, when followed up after four to ten years, to be failures.

Under pressure from the global bankers to attract foreign investors, governments have suppressed labor unions and held down wages, benefits, and labor standards. They have given special tax breaks to foreign corporations and relaxed environmental regulation. As international debt collectors, according to Jonathan Cahn (1993), the World Bank and the IMF have imposed consultants who often rewrite a country’s trade policy, fiscal policies, civil service requirements, labor laws, health care arrangements, environmental regulations, energy policy, resettlement requirements, procurement rules, and budgetary policy.230
IMF intransigence

The IMF, originally established to help Western countries stabilize their currencies under fixed exchange rates, redefined itself in the 1970s era of floating currencies and began offering loans to developing countries in exchange for strict “structural adjustment“ programs of austerity and deregulation. Now it has taken on an additional role guaranteeing the loans of private

international bankers—free of cost to the lenders, but causing great hardship to ordinary citizens.

Since 1989, the U.S. Congress has tried to influence the IMF by provisions in funding legislation requiring official U.S. representatives (known as “executive directors”) to use “voice and vote” to promote “long-term sustainable management of natural resources, the environment, public health and poverty.” Seeing little result, in 1992, the U.S. Congress tried to remove any possible ambiguity about promotion of anti-poverty and pro-environment programs, policy audits, and public access to information by providing a detailed list of specific policy recommendations. Still this did not lead to changes other than rhetoric. The IMF changed the job description of one of its senior economists, Ved Ghandi, to include environmental issues, resulting in papers explaining why the IMF should not be involved in environmental issues.

In 1994, the Sanders-Frank Amendment to the Foreign Operations Appropriation Bill, further required U.S. executive directors to push for international financial institutions, including the IMF, to encourage guarantees of worker rights under International Labor Organization (ILO) conventions, such as the rights of association and collective bargaining, a minimum wage, maximum hours of work, occupational safety and health protections, and prohibitions against forced labor. Instead of reporting on its progress in promoting these reforms after one year, as specified, the Treasury Department took almost three years and then merely offered ideas on how to begin implementing the Sanders-Frank amendment.

Also in 1994, frustrated with the lack of IMF responsiveness, Congress withheld three-quarters of a $100 million proposed contribution, urging that the IMF be opened up to more public scrutiny. The power of the purse finally caused the IMF to remove the secrecy from some of its documents, but still, according to economist Jeffrey Sachs, “the IMF provides virtually no substantive documentation of its decisions as the documents are shorn of the technical details needed for serious professional evaluation of the program.”231 Congressional efforts to make

reform language enforceable have been hampered by the lack of recorded voting and by secrecy of Board discussions at the IMF.232
They know not what they do

Korten described the 1991 meeting of World Bank and IMF directors in Bangkok to show how the global bankers are shielded from seeing poverty where projects have been financed with their loans. In the shiny new convention complex rushed to completion by the government of Thailand in downtown Bangkok, they did not have to see where 200 families were evicted from their homes to widen roads nor a squatter settlement that was leveled. They were spared the normal traffic congestion and air pollution because schools and government offices were closed. “Bangkok, a once beautiful city,” he wrote, “has been ravaged by the consequences of its development ‘success.’ ...On more than 200 days a year, air pollution in Bangkok exceeds maximum World Health Organization safety limits, and emissions are increasing by 14% a year.”233

A few examples from around the world will illustrate the unfortunate results of the policies of these international bankers, as interest payments took up a portion of government budgets that increased in Latin America from 9% in 1980 to 19.3% in 1987, and in Africa from 7.7% in 1980 to 12.5% in 1987.234


In Haiti, after the military dictatorship was removed from power and the elected president Aristide returned with U.S. help, the IMF, the World Bank, the U.S. Agency for International Development, and the Inter-American Development Bank offered to help Haiti rebuild, but the economic program they imposed was the so-called “neo-liberal” structural adjustment that bankers have favored around the world. Similar plans forced on Haiti’s neighbors—Mexico, Nicaragua, and Venezuela—were supposed to reduce poverty and external debts. Instead they widened the income gap, increased poverty, and undermined national sovereignty. These conditions involved privatization of state-owned industries, deregulation of the economy, and opening the country to massive foreign investment.

Earlier international programs had already undermined Haiti’s self-sufficiency, so that in ten years rice production dropped from 100% to 50% of the rice consumed in Haiti. In 1986 the World Bank had convinced the Haitian government to slash the tariffs that protected domestic rice production, so peasants have been abandoning the rice bowl in the Artibonite valley and fleeing to the city in search of illusory jobs, while the valley’s intricate irrigation system is falling into disrepair. Also in 1986, under pressure from the U.S. and the World Bank, Haiti’s government sold off the state-owned sugar mill to the wealthy Mevs family, who shut the mill and opened a sugar importing business.

In September 1995 millions of dollars of aid were withheld to force the Aristide government to speed up privatization. The World Bank has called for privatization of nine state-owned businesses, including the telephone, electric, flour, and cement companies, although all nine state enterprises had been made profitable before the 1991 coup that ousted Aristide. The bankers urge exports to pay the interest on their loans and finance the products, such as rice and sugar, that now must be imported.

Most of the plants that assemble apparel for export are tax-exempt for ten years or more and use imported raw materials. Piece-workers make as little as 87 cents a day, despite the minimum wage of $2.40 a day, and the U.S. Agency for International Development “has no position” on violations of minimum wage law. Workers at the Seamfast company, stitching nightgowns that sell for $25 in the U.S., receive one and one-half cents per nightgown.

The only ones who prosper in Haiti are the business elite who make their money through import/export business or collecting rents, and look forward to getting a piece of privatized businesses, profiting from expanded imports and exports, and enjoying freedom from government regulation.235

To attract foreign investment, according to Friends of the Earth in 1998, IMF has pressured the Haitian government to exploit its low wage labor and abolish its minimum wage, which is only eleven cents an hour.236

In 1997 the Associated Press reported that drought was causing starvation and the spread of disease in a crisis that was “the accumulation of years of neglect in which Haiti has gone from near self-sufficiency thirty years ago to depending on imports for 34% of its food needs.” The drop in annual rainfall is directly related to deforestation, according to meteorologist Renan Jean-Louis, who said rainfall began diminishing at the end of the 1980s. The AP story concluded with a report from the World Bank that the Haitian farmer has been left with two choices, “either to cut down the few remaining forests” and increase topsoil erosion “or join the exodus to the cities and abroad.”237

Costa Rica

Costa Rica has long been known as one of the most democratic of Latin American countries with less of an income gap than its neighbors. The IMF and the World Bank have begun to change this, ostensibly to pay off foreign debt.

Thousands of small farmers have been displaced in favor of large agricultural export operations. Increasing crime and violence have resulted in higher police costs, and the country now imports its basic food requirements. Although foreign debt has doubled, Costa Rica has been able to meet its debt service payments, so the IMF and the World Bank call it a success story. Economic growth has increased according to the conventional national production measures that are misleading for the reasons already discussed in the chapter on measuring growth.238

Between 1960 and 1980 some 28 million people in Brazil were displaced by the conversion of agriculture from producing food for domestic consumption to capital-intensive production for export.239 Brazil also built up industry, particularly steel, investing money that banks refused New York City because it was a “bad risk,” and the steel from its low-wage mills has been driving American steel out of the world market. To repay the loans, Brazil is forced to export still more steel and reduce its imports.

Brockway (1985) commented: “If the bankers’ scheme succeeds...additional American steel workers will lose their jobs.

Should the scheme fail, the banks will come crying to Uncle Sam to bail them out...and we will in effect have given Brazil the steel mills that are destroying our industry and putting our fellow citizens out of work.”240


Opening Mexico’s borders to U.S. agribusiness uprooted peasants and all but the largest Mexican farmers, as explained in Zapata’s Revenge: Free Trade and the Farm Crisis in Mexico by Tom Barry (1995). The World Bank, which awarded Mexico 13 structural and sectoral adjustment loans between 1980 and 1991, imposed the following conditions on its 1991 agricultural loan: slashing tariffs, canceling price controls on basic foods, privatizing state-owned monopolies, and eliminating price guarantees for corn—the mainstay of the rural poor.

While Mexico rolled back state support, the U.S. provided billions of dollars that helped U.S. agribusiness drive Mexicans out of business, and U.S. interests gained control of a third of Mexico’s food processing capacity.241 There is a connection between these structural adjustments and the rebellion of native populations in Mexico during the 1990s.


Bloody outcomes resulted in Guatemala from projects supported by the international bankers. The World Bank and the Inter-American Development Bank provided funding and technical support for the Chixoy [chee-SHOY] Hydroelectric Project, a massive dam, reservoir and power station built by the Guatemala state electricity company, INDE. World Bank personnel worked in supervisory capacities with INDE officials at the Chixoy site regularly from 1979 to 1991. The people of the village of Rio Negro, which stood in the path of the project, were forcibly ejected with much bloodshed, because they refused to leave the village unless they were provided fertile land and water instead of the rocky, marginal land they were offered.

In the first massacre, on February 13, 1982, 74 men and women were tortured, raped and murdered. On March 13, 1982, military and “civil defense” patrol units forced nearly 200 Rio

Negro women and children to march several hours up a steep hill, where they began to rape the women, and to kill—some shot, others slashed with machetes, strangled, or beaten with rocks and rifle butts. They killed the children by smashing their heads against rocks.

On May 14, 1982, 84 refugees were discovered and killed by soldiers and patrollers at Los Encuentros. On September 13, 1982, patrollers and soldiers killed 92 people in Agua Fria. They forced them into a community house, machine-gunned them, and burned the house to the ground.

What was the World Bank connection? It was not only involved closely with INDE and the Chixoy Project prior to the violence, but granted an additional $446 million loan in 1985. Bank documents even indicate that in 1984, the Bank hired “an expert on resettlement policy to assist in the [resettlement] supervision function.” In 1987, an INDE president described Chixoy as “a financial disaster...which should never have been built.” The World Bank in 1991 stated that Chixoy “had proved to be an unwise and uneconomic investment.”


A million people died in Mozambique, a Cold War hot spot where rebel forces backed by apartheid South Africa and right-wing U.S. business with covert U.S. government approval fought the Marxist-Leninist Frelimo liberation movement that took over the government in 1975. That occurred after fascism was ended in Portugal and the Portuguese abandoned Mozambique, leaving destruction behind. Halting the economic collapse by 1977, Frelimo restored the economy to pre-independence levels by 1981.

South Africa, which had previously subsidized Mozambique as a buffer against free African nations, began to launch attacks in 1981 and by 1984 the war had devastated the country. As conditions for peace, the U.S. forced Mozambique to join the IMF and World Bank in 1984, to impose a modified form of World Bank-mandated “structural adjustment” in 1987, and in 1990 an IMF-controlled “stabilization.”

The IMF said its objective was to curb inflation, even though it had been falling steadily, but after the IMF took charge, it rose from 33% in 1990 to 70% in 1994. GDP per capita, industrial production, and exports all fell dramatically. As the IMF imposed cuts in government spending, salaries fell dramatically; for a doctor from $350 a month in 1991 to $175 in 1993, and less than $100 in 1996. For a nurse or teacher, monthly salaries fell from $110 to $60 to $40—not enough to support a family.

According to author Joseph Hanlon (1996), “the IMF is actually forcing donors—including the World Bank—to give less aid and lend less to the world’s poorest country. It argues that post-war reconstruction is inflationary and must be delayed until the economy is ‘stabilized.’”62 63


In the small, landlocked nation of Lesotho, which is entirely surrounded by South Africa, the World Bank and other agencies funded the Katse dam, which at a height of 182 meters (600 feet) is the highest dam ever built in Africa.

It is part of a huge, but little-publicized, $8 billion project to export water to the Johannesburg region, the industrial heartland of South Africa. The banks and agencies financing the project were apparently not troubled by the fact that the 1986 treaty for this undertaking was negotiated by the South African apartheid government and a Lesotho military government reportedly installed in a coup sponsored by South Africa shortly before the treaty’s signing.64


The World Bank used many loans in the 1950s in an effort to win India away from policies of building local production to displace imports and of government intervention in the economy. The Bank organized aid donors and promised more aid if India moved toward free-market, export-oriented policies. By 1971, the Bank chaired 16 such donor groups, increasing the Bank’s policy leverage. Large-scale development projects have displaced 20 million people over a 40-year period.65

As part of a $400 million loan package in June 1993 to expand power plants in India, World Bank officials had stipulated that living conditions in Chilkanand and other resettlement sites be improved. Chilkanand is a slum where people were evicted from their homes to make way for power plants and coal mines. An electric line was installed in 1990 and, in September 1994, for a visit to the area by World Bank officials, Chilkanand was connected to the power grid, but a few months later the power was cut off again.242

Although the World Bank has a few small sustainable development projects, almost all of its energy loans totalling $9.5 billion to India have financed environmentally and socially destructive projects. Its officials treated Indian government programs for alternative energy as an unwanted source of competition with Bank energy programs, “turning the screws on the Indian government to reduce subsidies for its own programs and shift the focus from rural to urban markets to ensure better returns,” according to Roychowdhury and Cherail in the Jan. 15, 1995 issue of Down to Earth, published by the New Delhi-based Center for Science and Environment.

The World Bank also opposed the government electrification program for rural areas where 80% of India’s poor majority live and 70% do not have electricity, on the grounds of excessive financial risks and inadequate profit margins. After the World Bank withheld $750 million in Indian energy loans to enforce compliance, the Indian government, in 1995, scaled back alternative energy subsidies and power projects in its poorest states.243

Asian financial crisis

When the booming stock markets of Asia tumbled in December 1997 and caused sharp drops in markets around the world, the global financial powers hastily put together a rescue package, amounting in the case of South Korea to $57 billion. Did the global lenders persuade the government to punish the corrupt politicians behind the crisis and to give more freedom and justice to the workers? Of course not.

Two former dictators or “presidents” guilty of massacres and corruption were pardoned in a move said to be “aimed at uniting the country politically” as it faced “grave economic woes.” Amnesty had already been granted in September to their partners in crime, the heads of seven giant conglomerates convicted of bribery or embezzlement, and 14 executives from Hyundai, separately convicted for embezzlement connected to presidential politics. The official reason was “to raise the morale of businessmen as a whole.”244

The IMF and the World Bank, as well as the Asian Development Bank and the G-7 countries, rushed to provide a $10 billion first installment on the $57 billion bailout, and, as always, there were strings to the deal. South Korea agreed to give foreign corporations more access to its domestic market, open its bond market, and speed up the opening of branch offices by foreign banks and stock companies. What about the workers? President-elect Kim Dae-jung declared: “Companies must freeze or slash wages. If that proves not enough, layoffs will be inevitable.”245 The enormous leverage of the IMF over democratic institutions in borrowing countries was made plain in South Korea’s presidential elections, as the Fund insisted that all presidential candidates endorse the IMF bailout agreement.246
U.S. exports to developing countries

The IMF and the World Bank celebrated their 50th anniversaries in the summer of 1994. They were credited by the U.S. Treasury Department with stimulating growth in developing regions that increased the demand for imports from the U.S. by $5 billion a year, thereby creating 100,000 jobs in the U.S., but the Treasury refused to reveal its methods for arriving at those figures.

The Institute for Policy Studies concluded, on the other hand, that these institutions have cost U.S. workers 20,000 jobs per year, while the loan recipients’ development was hindered by the requirements that the IMF and World Bank imposed upon them. The growth rate of U.S. exports to the countries involved fell, on average, from 8.1% in the years before the loans, to 6.2% after loans, according to the IPS. Of the 54 nations that received high conditionality loans, 33 decreased their imports from the US.

The IPS explained that reducing tariffs and imposing requirements to purchase U.S. goods and services boost U.S. exports, of course, but these measures are outweighed by other policies. First, a country must devalue its currency, which makes imports more expensive. Second, it must reduce government spending, and third, it must eliminate government subsidies on domestic necessities, both of which cut consumption. Finally, countries are required to privatize publicly-owned corporations—resulting in the loss of many jobs, and further harming consumption levels.247

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