printing company. We had a local banker in a little town of 2,000 people; he was terrific. I mean he could put the money into our business without checking with Minneapolis or Milwaukee or some other place. That’s changing now. I just want to see if we can preserve this independence and local ownership and not have a situation where New York, and Tokyo, and London run our banking business. Let me ask you about Third World debt. I’ve seen figures of more than $300 billion in loans outstanding to Latin America and other Third World countries. First of all, are you alarmed? Well, the Third World countries, some of them, are having a very, very difficult time especially the oil producers. And, of course, those Third World countries are going to have to struggle anyway. Bradley has a proposal. Baker has a proposal. Sarbanes and Obey have a proposal. [Sen. Bill Bradley, D-N.J.; Treasury Secretary James Baker; Sen. Paul Sarbanes, DMd.; Rep. David Obey, D-Wisc.] Could you tell me what some of these proposals are? And do you see some relief for the debtor countries? Bradley would have a writedown of interest and principal. A three percent writedown of principal, a three percent writedown of interest and then a three percent writedown on principal each year across the board. I think he’s reconsidering that. How does that work? Well, say a country owed $1 billion. And they had to pay $100 million in interest. They could write that down so they pay $97 million and then $94 million perhaps and so forth for a couple of years. And as far as the principal is concerned, they could write the principal down. The difficulty with that, of course, is that it’s a sure way of turning the banks off on foreign loans. You start going down that path and establish that precedent and banks are not going to be so interested in making loans unless they get very high interest rates and cushion themselves if there are rate reductions. There’s a proposal by Baker which would provide for a $20 billion fund. It would increase the loans to foreign countries. Bradley argues that the trouble with that is that these countries can’t pay the interest and can’t pay off the principal of their present loans. This just makes it bigger. But the Baker plan would be on an ad hoc basis and I like that a little more. [To Pat Malloy:] What is the Sarbanes-Obey proposal? The Sarbanes-Obey proposal would have the creation of kind of an adjunct IMF-World Bank buy up the developing countries loans at a discount and then pass the benefit of that discount back to the developing countries themselves. So it would be a hit to the banks. But the benefit to the banks would be that they would unload these loans and they would no longer be on their portfolios. It would be in this international institution which would then have to work with the developing countries to make sure these loans were being paid back. Proxmire: And this country has a 20 percent interest in the IMF, so that we would take a 20 percent hit on these loans. If there was a billion dollar discount, we would suffer a $200 million loss. Malloy: There would be a cost You can’t find another industry that has a lower failure rate than banks over the last 50 years. perhaps to the American taxpayer in doing this if we are going to be the ones who help put this thing together. Proxmire: It will be a lot more than $200 million. Probably a several billion dollars write off and then maybe a billion or two at the beginning and maybe more as time goes on. Malloy: But the thrust of it is that we would benefit trade-wise because these loans would be . .. discounted. Developing countries would have more money to buy American-manufactured goods and overall it would be a good thing. Proxmire: Of course, what we’ve been telling these developing countries is they have to reduce their imports and increase their exports, which goes in exactly the opposite direction from helping our economy. But that’s what they have to do. That’s the course they have to follow. This is the course we ought to follow, but we don’t. We also tell them to stop running big fiscal deficits and stop printing money to take care of it, which is what we do. Do you see a position where the U. S. taxpayer could end up bailing out the banks? Well, if the Sarbanes-Obey thing goes into effect, there will be some bailing out by the U.S. taxpayer just the way you described it. What is your view on that? Well, I’m very reluctant to have that take place. I think we can’t do anything to increase our deficit, even though we’d like to, even though our heart is in the right place. I think to some extent you don’t want to be cruel, but you have to recognize the fact that in the long run it is probably better off for the countries that are in trouble to take losses and of course the banks that have loaned the money do it on an ad hoc basis have the writedown. . . . But it shouldn’t be done across the board on a permissive basis that might result, in the long run all of them, not just the ones who are in deep trouble being hurt badly. There has to be some very strong incentive for a country to do very unpleasant things. They’ll have to increase their taxes; they’ll have to cut their spending programs so they can get the money to pay the interest on their debt. These are IMF austerity programs? That’s right. The austerity programs are what you’ve got to stick with. I mean, in the long run, that’s best. And by and large, that’s worked quite well. It’s persuaded a lot of these countries to straighten out where they wouldn’t otherwise. There’s no substitute for discipline. All right. This seems to bring up the issue of bank failures. I think we’re seeing a record number of bank failures in the last three years since 1937 or 1938. Do you think deregulation of banking, along with agriculture and energy loans, is contributing at all to the collapses? Well, I think the fact is we’ve had super success over the last 50 years. And, ’85, which, as you say, is the worst year we’ve had in 50 years, was still a remarkably good year for the banks, in this sense: less than two percent of the banks failed; in fact, maybe less than one percent failed. As far as the banking assets of the failed banks were concerned, they were two-tenths of one percent. Now you can’t find another industry that has anything like that. Sure, it was a bad year, and ’86 is a worse year. When we have everything on the record, more banks failed than [the year] before. But compare it to the retail industry, compare it to manufacturing, compare it to anything else it was very good. Furthermore, what does a bank failure mean? Number one: no depositor who deposited less than 14 JANUARY 23, 1987
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