World Recovery Through Regulation

Last month, Monitor assistant editor Kathleen Selvaggio interviewed Congressman Charles Schumer (D-New York), who has led an unusual coalition of liberal and conservative Congressmen in tying stricter regulation of the banks to support for an increase in the U.S. contribution to the IMF. Schumer believes that IMF and bank policies have worked to inhibit world growth.

Schumer has introduced H.R. 2931, which he plans to offer as an amendment to the IMF increase bill. According to reports at Monitor press time, the bill is due to reach the floor of the full House of Representatives during late July. H.R. 2931 calls on the U.S. executive director to the IMF to push for consideration of the overall effect of austerity programs on world growth; to work with private banks to devise plans for converting short term, high interest loans to longer term, lower interest loans; and to assure that a country's yearly repayments are a reasonable percentage of its export earnings. The U.S. director is told to vote against IMF loans that do not meet these criteria.

Monitor: Do you support the IMF in. crease?

Schumer: I do not support the increase in vacuo. I think what we have to do is put certain provisions into legislation so that a debt crisis doesn't happen again and so that we will benefit the world, not just the banking system.

The IMF needs confidence to put its deals together; it needs money to put deals together, but most of all it needs international cooperation. If American banks do one thing, German banks do another, and Japanese banks do a third, that will just create complete havoc in the world economy, particularly with Third World countries. Therefore I think you need to give the IMF something.

My position is that I would support this $8.4 billion but only with certain changes. And second, I would be very reluctant if they came back for more money later.

Monitor: So you do think the IMF serves a beneficial function?

Schumer: Well, it can serve a beneficial function. I believe in government regulation. I think there are lots of abuses in the private sector. The free market theory is a nice theory, I think it's probably better than any other basic theory, but there are many deviations from it. You cannot escape the fact that you need, in my opinion, some kind of overall world regulation of the world financial system. In that IMF does coordinate things among nations, I think it's better than not having it. I'd like to see things done differently in the IMF, but I think it would be anarchic to have nothing.

Monitor: I'm wondering if you would comment on the role of the banks in the current world debt crisis.

Schumer: First, let me start by saying that Third World countries need money. The United States from 1850 to 1930 was a debtor nation and our transformation into an industrial society was based on the availability of British, German, and other kinds of capital.

What I think has happened in this crisis that has occurred is that the banks - quite naturally, they're capitalist creatures - have worked to get out of the crisis bearing too little of the burden. The profits they are making, the fees that they have charged as well as the rates of interest that they have charged at a time of crisis and austerity is bad for three groups.

It's bad for Third World countries, because it means that they have to pay a percentage of their foreign exchange simply to repay debt. It's bad for the world economy because if Third World countries are going to be devoting greater and greater resources simply to repay debt, to repay interest, and to repay fees, then they're going to be devoting less of their resources to building up exports, building up their country and eventually getting out of the crisis altogether - as well as less of their resources to buying our goods. Third, it's bad for the banks. They are being very short range and that's one of the problems of this whole crisis, that everyone is thinking, "Well, let's get through tomorrow," even if it makes next year worse.

You have what has been called the paradox of austerity: if you are going to increase the amount of money these countries are going to have to pay, the likelihood that they'll pay it back decreases. So I've been asking for some forbearance on the banks' part. Don't demand all these up-front fees. Don't demand the highest rate of interest.

And by the way, the ultimate blame to me in this crisis does not lay with the banks. The ultimate blame falls with the regulators. Because the regulators are supposed to make the security and soundness of the banking system paramount over immediate quick-hits for short-run profits. Had they required banks to put reserves against some of these shaky loans, there would have been less profit there and less eagerness to keep lending and lending.

Monitor: Do you think that your provisions will discourage banks from making imprudent loans? I spoke to an IMF official recently who stated very emphatically that Congress had no business requiring it to tell banks how to set the terms of their loans.

Schumer: Sure, the IMF want $8.4 billion, and than wants more money and more money, but doesn't want us to look at anything. The folly of that position speaks for itself.

Monitor: Do you believe there is a bank bailout?

Schumer: Well, is it a bank bailout? In part, yes. There's no doubt about that. To me the question of a bank bailout is somewhat rhetorical. If it's going to improve the conditions of the world to help the banks out of their problem, I'd be all for it.

Monitor: What do you think of the IMF austerity program? In what way do you think they should be changed?

Schumer: I've always described it as this: the IMF has one plate on its table - getting their loans repaid. I'd like to see two plates on the table. I'd like to see the loans repaid, but I'd like to see them take into account the world economy.

The thing that the IMF is not looking at is while it is OK to impose pretty strict austerity on one country at a time, when you have five or six or ten countries that constitute a significant proportion of the world's buying power, the IMF can't impose too much austerity on all of them at once, or the whole world economy will continue to decline.

The other part of the IMF's problem is that they're lending more money to pay back old debts. When Mexico got its refinancing at seven percent, each bank was persuaded to increase their lending by seven percent when the IMF said, "Well you know you get high interest rates and fees as part of the deal." But that means Mexico has to do seven percent better this year than last year just to stay even. That policy does not make sense. So I think the IMF has to be a little tougher on the banks.

I'm very much influenced by having served in the state legislature during New York City's fiscal crisis. Same exact thing. More short-term, high interest loans. There was a hope and a prayer that the crisis would go away. It didn't.

Monitor: Can you speak more specifically about the effect of austerity programs on poor people in Third World?

Schumer: Well, of course, we don't know the specific details of the austerity programs because they're kept secret. The kind of programs that are needed to develop a country requires money to be put in a form that creates jobs, that raises standards of living, that just makes a country a lot better.

The austerity proposals are counterproductive. Admittedly, when a person or an entity has too much debt, austerity is necessary. I'm not saying there should be no austerity. There has to be. Otherwise, debt would get too great. But there shouldn't be too much.

Monitor: Do you support the antiapartheid amendment?

Schumer: Yes. But that's a tough one. I find that a very difficult question in that the people who are against the amendment say that the IMF ought to not get involved in the internal politics of any country that it aids. But to me, you have to make moral stands. Apartheid is reprehensible, and the world can make all sorts of excuses as to why we shouldn't be involved, and then apartheid would just continue.

Monitor: Do you believe the IMF has been politicized during the Reagan administration?

Schumer: I guess I have a tough time answering that question. I guess the answer back from the IMF is that, "Schumer, you support the anti-apartheid amendment; we have a right to say Sandinista-ism" - whatever that is - "is as morally abhorrent to us as apartheid is to you." But it is a slippery slope.

Monitor: The U.S. prohibits its representatives to other multilateral institutions like the World Bank and the regional development banks from voting for loans to countries that have a clear record of human rights violations. The IMF is the only institution for which this is not required.

Schumer: Yeah, but what's a human rights violation. I, for instance, think that Israel has violated human rights. So, it's a slippery slope. You have to rely on each person's judgement. I've always felt that, on moral questions, it's very difficult to find oneself morally superior. I'm reluctant to make those kind of judgements. But I'm torn because if an abhorrent thing is happening, you can not just ignore it.

Monitor: The bipartisan support for some of the efforts to change IMF and bank policies have received a lot of attention. Are you surprised to find yourself agreeing with people like Jack Kemp on this matter?

Schumer: Well, I guess he can be right once in awhile.