Click here for Full Issue of EIR Volume 13, Number 21, May 23, 1986

�TIillEconomics

What Volcker really meant by'controlled disintegration'
by David Goldman

Back in 1978, soon-to-be Federal Reserve chainnan Paulsimply crush political opposition to whatever "solutions" theVolcker endorsed the concept of "controlled disintegration"

megabanks decide to employ.

as "a legitimate objective for the 1980s," in a speech before

Volcker's usual channel for leaks, Salomon Brothers'

Warwick University in England.In the light of recent events,

Henry Kaufman, indicated what sort of financial environ­an ordinary fellow might suspect that he was doing it on

ment these people expect, in a May 6 talk before the National

purpose:Press Club:

suaded President Reagan that he need take no action against

lackluster economic growth .... This market behavior alsoFirst, the Donald Regan cabal in the White House per­"... Strong bond perfonnance has been weaned onsuggests an unquantifiable speculative participation in thethe impact of collapsing oil prices on the U.S. economy,

rally, which has undoubtedly helped to boost prices and todespite the mortal danger to the entire Southwestern banking. lower interest rates beyond levels that might have prevailedsystem.

Secondly, Regan and Co.persuaded the President to rub­without such speculation.Wic;le daily price swings reflect theFund, at the May 2 Tokyo Summit, leaving the IMF as

in trading activity in some key sectors. The average daily

tilateral cheating.

in the first four months of 1986.In the comparable periods involume of this speCUlative activity. Consider the explosion

ber-stamp the April 11 dictates of the International Monetaryvolume of trading in the Treasury bond future was $23 billion

recognized referee in an international system based on mul­Third, Regan convinced the President to endorse tax leg­

1985 and 1984, this daily volume averaged only $15 billion

omy which threaten to bring down most of the internationalin the financial markets is far greater today than at any time

and $10 billion, respectively .... The capacity-to leverage

islation which penalizes precisely those sectors of the econ­in the past 50 years.The pleasant side of speculation is thatbanking system.

it can reinforce a bullish trend. The dark side is that theFinally, Federal Reserve chainnan Paul Volcker May 13

unwinding of speculation contributes to quick, and dramatic,

demanded emergency powers to arrange shotgun takeovers

of failing regional banks. The undertaker, it appears, has

market reversals."es. The major money-center banks are taking advantage ofspecial session May 13, heard the pleadings of Paul Volcker

taken extraordinary measures to increase the supply of corps­

With this in mind, the Senate Banking Committee, in a

the relatively faster disintegration of domestic real estate,and other federal regulators, seeking emergency powers toenergy, and farm debt, compared to the disintegration of theirsave failing financial institutions by means of bank takeovers.

own holdings of Third World paper, to stage a takeover ofthe regional banking system. If they succeed, the UnitedStates will look like Britain or Canada, where a handful of

megabanks have monopoly power over the financial system.

This will not avert a crisis: The far-worse position of themegabanks will come to the surface in short order. It will
4Economics

The hearings occurred as two more agriculture-based banks•

collapsed in Idaho, bringing the number of farm-bank fail­ures this year to 42.The emergency powers which Volcker
sought in the Senate are centered on a scheme to allow take­overs of failing banks by out-of-state financial institutions­primarily Citibank and Chase Manhattan. Volcker stated,ElK

May 23, 1986

© 1986 EIR News Service Inc. All Rights Reserved. Reproduction in whole or in part without permission strictly prohibited.

"Banks heavily dependent on agriculture and energy havebeen hit particularly hard and bank failures could damage the...

entire economies of states and regions." He then added, "Thefailure of a few important institutions could raise . . . concern

about others, basically sound banks, and lead to a contagious

and spreading loss of confidence."

At the same hearing, Comptroller of the Currency Robert

Clarke stated for the record: "There are currently 300 nationalbanks on the problem list, up almost 300% from 1983."

I

After that, capital gains would be Itaxed at the ordinary income rates, which would be 15% a,d 27%.Regan, Volcker,
et al. have called a general profit-taking.

What's next for the banking system?

Despite the recent advance in oil prices, from the $ 1 1- 12

level to the $ 14- 15 level, there is little hope of a price in­crease, for the simple reason that we are continuing our slide
into depression. Gasoline demand actually fell in the UnitedStates between March and April, despite lower prices. InThe tax falls

At least 6 of the 10 largest Texas banks are represented

in the Comptroller's list of 300. We reported previously that
the Texas big 10 are less endangered by their energy loans,which amount to roughly 150% of shareholders' capital, thanLondon May 15, the directors of Shell Oil warned stockhold­ers at the company's annual meeting that oil prices would
continue downward from the $ 15 level, further reducing oilcompany revenues.

The stricken oil-producing regions of the country areby their real-estate loans, which amount to about 500% of

producing little else than a wave of business failures. Tulsa's

estate boom had already brought the proportion of delinquent

withdrew $5 million the previous day. Bank of Commerce's

their solvency. That was before the oil price collapsed.

homa bank, and this year's fourth failure. On May I, theshareholders' capital. The washout of the Southwestern real­loans to the level of those banks' capital, i.e., threatening
In January, EIR warned that tax reform proposals for­mulated by the House of Representatives could knock down
the value of most commercial real estate by a solid 40%,

Bank of Commerce failed May 8 after panicky depositors

failure marked the second depositOrs' run against an Okla­First National Bank of Carter became .the year's third bankingfailure.

Oklahoma banks have lost an eStimated $200 million insince the pricing of such properties depends heavily on tax

capital during the past two years, even before the crashingported by the White House, is actually worse than the worst­

The state's three largest banks are all posting losses for theadvantages. The Packwood legislation in the Senate, sup­case scenario we examined at the time. It is a prescription fora real-estate market crash. Not that such a crash is not long

overdue, and perhaps even beneficial under the right circum­

stances. But under present conditions, Packwood is in theposition of the firemen in the old British wheezer, Pure Hellat St. Trinians, who mistakenly attach their hoses to a gaso­

oil price put their energy loan-paper through the shredder.
first quarter of this year-even before the full impact of theoil price crash hit. Bank of Mid-America, the state's largest,

showed a $5.9 million loss; BancOklahoma showed a $44

million loss; and First Oklahoma Bancorp projects a loss ofup to $67 million.

These are banks that have already had to scramble forline truck.

cash, borrowing funds from out-of-state banks under toughwritten off in 19 years; the new legislation stretches this out

the minimum agreed to with its creditors, who may now force

Both commercial and residential properties can now beconditions. First OklaIioma's capital:has already fallen below

to 27.5 years for residential properties and 3 1.5 years forthe bank into a distress sellout.

the alternative minimum tax. Even investors who take a more

New York buyout

be claimed. Landlords could use up to only $25,000 in losses

process of passing a bill permitting dut-of-state banks to takecommercial property. Depreciation would also be subject toactive role would be limited in the amount of losses that could
to offset other income. That wipes out the unlimited deduc­tion for interest expenses, which was the secret of successful

In desperation, the Oklahoma State Legislature is in theover failing Oklahoma institutions.' The bill, supported by
the state bankers' association, passed on May 7. In effect,

real-estate speculation under the 198 1 tax bill.

the Wall Street mafia headed by White House chief of staff

at the real-estate bubble, but at the speculative bubble in all

buying out regional institutions at garage-sale prices. Texas

The designers of the tax legislation are not merely aiming

markets. Paul Volcker's recent jeremiads conceming the $8.5
trillion in domestic debt he is responsible for creating were acrude hint to this effect. As a whole, the tax package proposes

a $22 billion tax increase, a classic deflationary measure, forfiscal-year 1987, due to the time gap between the eliminationof tax deductions, and the phasing-in of a lower general tax

rate.

Because of the elimination of the special 20% tax on

capital gains, many stockholders will sell investments before

July 1, 1987, to take advantage of the lower current rate.

EIR

May 23, 1986

Donald Regan, the former head of Merrill Lynch, will startis the next target, where crashing oil prices and a dissolving
real-estate market endanger the state's $200 billion in bank­ing assets.

Texas suffered another billion-dollar failure earlier thismonth, when Houston's Mainland Savings was shut down

by regulators, and several more are expected during the next

several weeks. The fallout from the Southwest banking col­lapse has already produced a conttaction in bank lending

nationally, as of the first quarter of 1986. That is the first timebank lending has contracted since the Great Depression.

Economics

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