AVERTING A CHAIN REACTION DISASTER IN THE MONEY WORLD

A number of near defaults on sovereign debt payments by Poland, Mexico, and Brazil have awakened the world to the huge amount of debt carried by less developed countries (LDC) and the associated vulnerability of Western banks. Money lent to LDCs was supposed to be used for capital investment, which would create economic growth, exports, and eventually the hard cash needed to service the debt. However, this hope was killed by the international recession, falling commodity prices, and political mismanagement. Since about 20% of US industrial output and about 40% of US agricultural production is exported, the health of the US economy depends on the health of the world economy. New technology is facilitating instantaneous worldwide communications, resulting in an increasing internationalization of financial markets and international integration of financial institutions. As competitive restraints in the financial industry are eased, banks and other financial institutions are becoming more exposed to risk. A new direct regulation system is needed to ensure the stability of financial intermediaries in a world that is quickly becoming more interdependent.