Rare Footage: Donald Harris, Kamala Harris' Father, Sharing Insights as a Professor in 1989 #kamala

Introduction [Applause] our final discussion is Professor Donald Harris from Stanford University I should try to uh address some of the issues that um the previous two speakers have raised by posing some questions of my own that I consider rather intriguing uh in the hope that by so I could bring out some more General issues that lie behind the arguments and positions that they've taken um first of all let me Begin by saying that one striking thing to me about the so-called debt crisis is the Striking amount of public attention it has received judging for instance from the amount of uh news print and other coverage by the media that has been devoted to it I would say it ranked second only to the coverage given to glassos perista and gashev and in the last 6 months one might even say that the noise has risen to a crescendo this I think is an important problem in itself to explain namely why all this attention uh Professor sax gave one answer to that question I have a rather different view which I hope to uh indicate as I go along in telling my own story um I think some important Clues the answer can be found in uh of all places The Wall Street Journal um which in these matters is quite perceptive I might say in the degree to which they uh evidently have communications with the inner sanctuary of the boardrooms of the various Banks and corporate structures um The Wall Street Journal in an article on June 30th 1983 entitled Money and Power money and power [Music] in an article in the Wall Street Journal on June 30th 1983 entitled money and power future political effects of foreign debt crisis worry some observers the uh author of that article explains that uh the debt crisis and the solutions being put in place could have significant long-term political implications they may among other things increase government involvement in the private sector in developing nations awful consequence I might add parenthetically reduce a trend toward a more integrated World economy and give ammunition to foreign politicians looking to attack policies of the industrial countries it may also uh reduce United States political leverage overseas the article goes on to add that the foreign Banks high visibility in the dead crisis also has begun to create a political backlash against them in developing countries in increasingly banks are perceived as the bad guys demanding tough economic changes and withholding vital foreign exchange a US Banker in Latin America recently grew a beard when asked why he replied for protective coloring on uh March 9th 1989 which is 6 years after that uh piece that I just quoted from The Wall Street Journal is again on top of the issue and it says in rather straight and straightforward and bold type while the Bush Administration searches for a new US policy on third world debt the red ink is turning to blood more than 300 people recently died in riots in Venezuela where the government had imposed tough austerity measures to please its creditors if further down in the article the uh author points out that the treasury has reached its present conclusion namely the conclusion surrounding the Brady plan against a backrop of discouraging political developments in Argentina a nationalist right-wing party appears set to win pending elections in Brazil two anti-us leftist parties have rebounded in Mexico late last year the opposition party held Mr Selenas to the ruling part's smallest margin of victory in 50 years I think that uh there's a great deal of perceptiveness in these uh articles as to what lies behind the um uh concerns and the rather vigorous concerns that we hear in the media about uh the uh Deb crisis that that was not intended for the previous speakers I want you to step uh my own view is that there's much more to the picture than this and that in a sense The Wall Street Journal has merely picked up the the uh tip of the iceberg and there's in the story that I shall tell something that will indicate uh how I would rather seek to construct this analysis I forewarn you that there's nothing in what I have to say here that implies any kind of conspiracy going on in the background uh it's all straightforwardly interpretable I think in terms of the logic of financial markets and in particular The Peculiar role of the banks in this story uh what is interesting also to me quite apart from this first question of the enormous amount of public attention given to the issue is uh that it is not the first time that the world economy has gone through a wrenching debt crisis of this sort and in fact it has gone through worse Deb crisis in particular the crisis of the 1930s but before that there was a crisis of the 1820s crisis of the 1870s crisis of the 1890s the 1930s crisis was perhaps the most severe because as we know at least 2third of private portfolio investment went into default in that period um and in that respect then the 1930s really constitute the most dramatic and generalized instance but I would regard this as an instance of a of a recurrent phenomenon and not an isolated one the point about the historical evidence also as is clear from various studies done recently by icon green Porters and others is that there are certain basic ingredients of the kind of financial crisis that we are witnessing today that have not changed much in all of the previous uh uh episodes first of all that they were linked to disturbances in the world economy associated with interest rate shocks commodity price fluctuations and so on as well as severe recessions in the leading countries which spilled over on DEA countries creditors criticized always for reckless lending and in most cases that Reckless lending is ascribed to me to myopia or to excessive competition furthermore and and in my view a terribly interesting an intriguing point is that there's very little evidence of what's called default penalty in the sense of reduced access to International Capital markets for the countries that went into default quite often it is clear and this this is sharply revealed in the evidence of iing green that defaulting debtors were able to re-enter International Capital markets only to default again um finally a striking feature of the historical episodes is that capital markets do not repair themselves quickly nor spontaneously they typically repair themselves only after a phase of systematic outside intervention by government and international institutions Now history in that sense is very revealing and I think uh the real problem is to identify to what extent if in any serious qualitative way is the current crisis sign significantly different from the historical episodes that we've witnessed before I think certainly there are differences and that those differences are largely associated with the changes that have occurred in the interim certainly since 1930 in the structure of international lending and in the character of international financial institutions but it's not clear to me that the formula for resolving these crises has drastically changed and that in fact we will not witness as we are beginning to see and this is in fact the inference that I draw from what Professor sax calls a turnaround in the IMF the IMF is is coming to see uh all be it after a six-year lag that there's a necessary um role in this process for um writing off the debt as is clearly the practice in in most uh banking situations where the rational policy of the bank when you run into a bad debt is to write it off now Why havent debtors used the threat of unilateral partial repudiation this raises for me another intriguing question which I'll pose about the current episode which is why haven't the debtors at least the larger ones sought to exercise or use the threat of unilateral partial repudiation to push the banks into a position of making greater concessions uh one would have thought certainly that from a game theoretic point of view larger datas like Argentina Brazil Mexico and so on would be in an ideal position to do this for PR for principles and reasons that are well known in the financial textbooks by the way including a a remarkably good paper on this by gersovitz in 1985 where G shows that even in the presence of rising marginal cost of funds an exposed bank will offer will continue to offer new lending because of the uh nature of the situation between lender and borrower but in fact this has not happened the banks have not used sorry the detor countries have not used what evidently is uh from a strategic point of view a very powerful um threat uh it is it is rather the banks themselves who have emerged from the situation not only with the upper hand in negotiations but smelling Rosier than ever from each debt restructuring agreement given the amount of uh commissions that they get on those agreements and given the fact that they turn out at least in a shortterm sense to get from those agreements a substantial amount of repayment of interest and there have been over 90 such agreements by the way since 1982 in almost all of which the banks I would argue have emerged uh quite well off um the reason why this has not happened why the uh the data countries have failed to exercise what may be considered to constitute a uh a powerful threat it has a lot to do with the structure of international financial markets and in particular with the fact that the big banks are able clearly to organize a kind of Coalition that is stronger and more united than any possible Coalition that can emerge among the uh uh big deas as big as they happen to be nevertheless the Coalition of the bankers can always in a sense outdo them by blocking by effectively blocking any strategy of use of this of this weapon secondly it's clear that they the big banks have been aided in this uh counter strategy by the international lending institutions because of the very point that Professor sax pointed out namely they've insisted on dealing with banks on a case-by casee basis so that the possibility of collusion among dealing with the data countries I'm sorry on a case-by casee basis so that the possibility of collusion among them is thereby The role of banks foror uh now this brings me finally then to the question of the role of the banks and here there's no question but that the banks have played a key role I think everybody is uh uh in reasonable agreement about this um some commentators go so far as to single out the banks for special critic ISM as the villains of the peace uh for instance Bernard Lewis the well-known historian of the Ottoman debt crisis in the 1870s uh points out that what remains constant across a century of history is the inexperience of the borrowers and the rapacity of the lenders in a similar vein a well-known Harvard Economist uh refers to them as Robin hoods I think you will get the pun um it was certainly a well-conceived title and a rather neatly in my judgment Express point of view um this is a title of an article for those of you who haven't seen it in the new Republic of March 13th 1989 by Professor saxs um now far be it from me in the light of this concerted attack on the rapacity of the banks to come here and appear before you and try to defend the bank um but I would rather like to suggest that this position the position of attacking the banks for their rapacity or for being Robin hoods as the case may be is in danger of being terribly misleading and in some respects may be considered to rather badly miss the point uh I think the problem really requires more careful scrutiny and Analysis and uh in the brief time that I have here I'll try to suggest what my view on the problem is I want to leave aside first of all the question of their greed or their apacity because I don't think that that Criterion suffices to distinguish them as especially different and unique certainly not among other operators in the financial system or other corporations for that matter and banks are after all corporations I think we should never forget that and that really is my point that I want to emphasize that Banks must be and can be relied upon to do as Bankers do which is to say uh to uh distort a rather wellknown phrase of gerud Stein that banks are banks are banks uh in particular they must be expected to each and every one of them to maximize the value of their shareholders equity and and to strive to do as best they can within the constraints that they face um and in the general context which we well know of from the textbooks as well as from The Daily Press of an environment in which there is a high degree of risk and uncertainty um problems that are referred to in the literature as lack of Deposit Insurance as well as the recurrence of macroeconomic shocks over which the banks themselves as individual agencies have no direct and immediate control thirdly I would like to point out uh since in fact it it seems to be a matter worth emphasizing that there's no evidence that that the banks acted irrationally from the standpoint of the normal criteria of individual profit maximization this is certainly the influence that the inference that I draw for instance from the studies of shulie ller and um Sebastian Edwards and others which indicate that the experience the experience level of a borrower contributes significantly to the variation in spreads and hence that spreads are directly correlated then with the level of experience of borrowers this seems to me to IND at quite clearly that Banks do take into account the track record so to speak of performance in uh judging and evaluating the kinds of projects that are presented to them if anything the problem for the banks in this period it seems to me was that in moving heavily into the arena of international lending to National governments they had to face headon problems that are intrinsic to the area of sovereign debt as such and for which in fact in fact the individual banks have no individual solution um I would only quickly refer you here because I don't have time to go into the theoretical literature to the work of people like uh Eaton gersovitz stiglitz Weiss and so on who point out that it's is it's extraordinarily difficult to Define in the context of lending to Sovereign um borrowers uh what one means by an appropriate credit ceiling or the optimal amount of Lending furthermore issues of insolvency and in liquidity um become very blurred at the margin when thinking about loans to uh Sovereign governments and in fact the some of these authors judg that insolvency and illiquidity is not really an issue in lending to foreign governments lying behind this argument is of course the idea that there are intrinsic problems of adverse selection and moral hazard and monitoring and so on in the international Arena when dealing with foreign governments I would take the argument much further myself in thinking of the financial system as an intrinsically unstable uh mechanism which even if there exists an equilibrium that equilibrium there may be multiple equilibria and much of the current theorizing has shown that furthermore that there are intrinsic problems of um the uh runaway of uh the financial system given the the ability on the part of banks to always introduce uh all sorts of innovation that undermine the stability of pre any stability previously achieved on the basis of previous set of financial instruments um the work of Minsky and The position of bashing banks others are uh I think relevant in assessing this uh rather abstract position now in in this light then I think we can view the uh charges that are being leveled against the banks and the view of the banks as being the villains of the peace as really stemming from The View that they overemphasize short run profit maximization and secondly that this may be at the expense of their long run position that in a sense the banks are insisting on their pound of Flesh ignoring that the patient may die in the interim in other words to put the issue even more starkly I think the position of bashing the banks uh F comes from a view that there's a fundamental contradiction between their private individual greed what I'm calling here short run profit maximization and their long-term Collective self-interest uh and it is only from this position really that one can get the policy inference that many of these critics uh recommend namely that the banks should cut their losses Now by accepting a substantial amount of debt relief or debt reduction as the case may be rather than delay and take a bigger loss later on um hence the emphasis then on the necessity for an immediate and sharp uh cut in the um in the amount of outstanding debt I I think that in the light of the position that I'm presenting here this recommendation is must be seen to be noteworthy for the fact that it comes out on the side of the collective interest of the banks as distinct from their individual greedy short run profit maximization interest um and as distinct therefore from their short shortsightedness in seeking to squeeze as much as they can by insisting on repayment now um whereas in other words the tenden is to the tendenci is to view this position as being on the side of the Angels namely the deta countries I'm saying that it's is really a position that is uh dramatically geared to um uh optimizing the long run position of the banks as a group uh it is interesting also I think that the position of bashing the banks has obviously aroused the Deep suspicion and resentment of the banks in fact in fact perhaps some of the economists who have taken this position in public and are well known to have taken this position should themselves be in be wearing in public beards so as to protect themselves with protective coloring from the bankers uh because the bankers have been rather vituperative in um in and and in The strategy of the banks expressing their resentment against uh those who have sought to criticize them in this way my view is that this is this position of the banks is not at all surprising because the banks have proved themselves in this long history of uh debt crisis that I mentioned before first first of all to be better able to understand their true Long Run position than these commentators and critics uh admit and secondly that they're in a better position to maximize their long run profits than these commentators admit my my interpretation of the strategy of the banks can be put rather straightforwardly hold out for full full debt repayment now while engaging in a lot of public relations about voluntary debt relief so as to take the pressure off um and make yourselves appear to be quite Rosy in the meantime allow public pressure to build up so as to force the government and the International Banks to come to the rescue of the banks uh this strategy I think has paid off handsomely and this precisely is how I interpret the Brady plan that it comes at a time when enough public pressure has been built up as a result of all the media attention that has been given and all of the resentment that has been ared that that has been aroused to uh get the um government the federal government in this case the treasury Department to do something about the problem uh and in this respect furthermore an implication of my argument must be seen to be that the pressure for debt relief or debt reduction plays very much into the hands of the banks because it is that pressure which generates pressure on the part of the treasury and on the part of the international institutions like the IMF and the World Bank to come to the rescue of the banks by offering to give them with one to give to the the commercial banks with one hand what they take from the taxpayers in the other hand um a a position which has been well portrayed I The importance of media attention think by Professor sax and it is in this respect I see the the significance of the media attention that I uh outlined at the outset of my discussion here the trouble with the emphasis on debt relief and with the focus on debt reduction as a singular issue so to speak is twofold first of all it says nothing about the conditions under which the de countries will emerge from the crisis once it is resolved in this way in other words once we' have had the that the debt reduction and the writing off of the debts by whatever technical means I'm not uh going into at this point uh what happens then I fear that it may very well happen that the data countries will emerge uh in a position of being uh further and more deeply uh entrenched in the um super supervisory and monitoring and um disciplining mechanisms that the international banking system has for keeping them in line and this is clearly what the IMF for instance is insisting on in yesterday's uh Wall Street Journal the IMF was uh described as insisting on the necessity for accompanying any uh intervention to provide debt relief with measures that systematically require restructuring and uh structural Readjustment in these economies and I think the imf's understanding of structural Readjustment is unique to the IMF um and certainly need not serve the interests of the Dead countries secondly I think that this position has is troublesome position on of focusing on debt relief as a singular aspect of the problem because it does not it does nothing to address the really crucial long-term problem that the world economy faces in the context of the debt crisis and a problem which is very sharply revealed by going back into the the scrutiny I think of the historical uh analysis that has been done namely that after all of these major U episodes in the past in which there was a substantial debt crisis the world economy went into a period of sustained recession or stagnation following the resolution of the crisis were it not for the systematic intervention of the uh International Landing institutions or of the uh Collective action of various governments and instructive in this respect I think is the recognition that after the F the crisis in in the f in the first world war in the in the decade following the first world war it was the so-called um uh doll's loan which really uh served by providing a massive amount of liquidity in the system to Forstall the possibilities of of a recession coming from the transfer and reparations payments secondly in the decade after World War Two it was the Marshall Plan that really provided the mechanism to stimulate the recovery of the International System through both trade and investment after the um the devastating consequences of the 1930s um uh default occurred what then I'd like to conclude by saying is that we have to think more imaginatively and creatively about the debt situation rather than focusing on these single um un unilinear views about the situation uh we need first of all a large scale stimulus and that is clearly what I infer from for instance the role that Marshall Plan played in restoring the international trade system and investment after the war um and the large scale intervention that I'm thinking of here would go beyond debt relief debt relief is itself a form of substantial intervention if it is accompanied by a 50% right off of the debt uh which essentially acknowledges that there's a 50% free transfer of uh credit to the uh DEA countries um so substantial debt reduction would necessarily have to be a part of such a broadly based strategy but it would have to be accompanied by new loans and grants as well um on a much larger scale it would have to be accompanied by an across the board cut in interest rates as well as by technical assistance programs that would allow uh a Freer transfer of technology to the underdeveloped countries so they can catch up on the substantial technology Gap that inhibits their industrialization effort and finally it would have to be accompanied as well by the substantial opening up of markets to trade that would allow the de countries to realize the possibility of payback through uh gaining uh export surpluses of course we know that that essentially means allowing a kind of begger th neighbor policies on the part of the deader countries um but and that in itself indicates why there's so much resistance to this idea of opening up markets to third world countries whatever the case I think that this kind of broad based strategy is bound to be far more effective in reversing the devastating slide that Professor uh sax has so dramatically and lucidly portrayed that has occurred in these de countries in terms of their living standards um poverty and the rise in infant mortality and so on finally um as a matter of an alternative view of this I think one has to address systematically the question of the structure of the financial the International Financial system itself and the question that has to be dealt with is what is going to be done uh to loosen the hold that the system as it is presently constituted and by that I mean uh the fact which Professor sax indicated that nine Banks virtually rule the roost so to speak and um and this by the way supports the view that um Professor how Vel has also portrayed in his book on the money mandarins which is a felicitous expression for these nine uh Banks plus the um euro dollar market um this issue of the structure of the financial system has not really been posed adequately I think in this discussion and in fact in so far as the position of knocking the banks uh borders on a purely moralistic argument about uh Bank greed it it really misses the point that Banks exist in a structure in which they have to function they have to survive and grow and the their actions must then be interpreted as uh reasonably rational policies adopted in order to survive and grow in that structure so the issue then becomes what is the nature of the structure and how can it be uh uh changed and altered in order to accommodate the needs of uh third world countries um I'll pause at that point and allow for discussions he