US International Bailouts in the 1980s and 1990s

Nobody likes big banks, especially big New York banks.

Peter Wallison, Former US Treasury General Counsel (Miller Center of Public Affairs Interview, 2003)

A byproduct of programs designed to restore stability and growth may be that some creditors will be protected from the full consequences of their actions.

Robert Rubin, F ormer US Treasury Secretary (1998)

The statistical results in the previous chapter strongly suggest that policymakers’ desire to protect the US financial system was the primary motivation behind Exchange Stabilization Fund (ESF) rescues in the 1980s and 1990s. The interactive effects of bank exposure and systemic risk on the likelihood of US bailouts are both significant and sizable. When big US commercial banks were highly exposed to an economy in crisis at a time when systemic risk facing the US financial system was elevated, policymakers were most likely to deploy ESF resources. However, when the stability of the domestic financial system was not at risk, the exposure of systemically important financial institutions (SIFIs) to an economy in duress did not affect the likelihood of a US rescue. Thus, the empirical model supports the argument that US economic policymakers were most likely to act as an international lender of last resort (ILLR) during this period when the private interests of SIFIs were aligned with the broader public interest.

Although the statistical analysis shows that US financial interests explain a significant amount ofvariation in foreign ESF credits, it presents only a partial picture of the political economy of US ILLR actions during these years. Quantitative analysis is good at identifying the average relationship between variables—in this case, financial interests and US foreign rescues—across a broad sample of cases. However, it does not truly link the causal chain that begins with policymakers’ concerns about the health of the US financial system and ends with the decision to bail out a foreign economy. Nor can it tell us that policymakers were truly motivated by such considerations in individual cases. Additionally, quantitative analysis is not very effective at explaining cases that do not fit the proposed model. Not all ESF bailouts fit my argument, yet the statistical results do not tell us much about why these rescues were made. Lastly, the statistical analysis does not directly tie concerns about the International Monetary Fund’s (IMF’s) ineffectiveness as an ILLR to the bailout decisions. Case studies offer a way to correct for these weaknesses. They enable us to trace the process through which these events actually unfolded and identify the factors that had the greatest influence on the decision-making process. In an effort to address these issues, this chapter explores seven cases where the United States rescued foreign economies in duress as well as two cases where troubled economies were passed over for help.

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