Continuing our examination
of a program that could be instituted to rebuild Puerto Rico and the rest of
the Caribbean, today we continue looking at Part II of the “strategy paper”
that led to the Presidential Task Force on Project Economic Justice, “Project
Economic Justice: A Beachhead for Regional Infrastructural Reform,” to be
followed by President
Reagan’s speech to the Task Force.
Today we post the first part of the second section of Part II, along
with the introductory section from yesterday that will be repeated for each
section as it is posted:
PART II
Basic Components of an Agenda for Economic Justice
Basic Components of an Agenda for Economic Justice
To succeed on the
ideological front, it would help to organize on a regional basis, perhaps
within a regional bank with central banking capabilities, such as the Central
American Bank for Economic Integration. From such a base it would be easier to
advise on the infrastructural changes that would be necessary within one or
more of the developing countries willing to cooperate on the new agenda for
stimulating private sector growth linked to broadened ownership.
The strategic
objectives would be to maximize growth rates, jobs, and productivity of the
private sector within selected countries or target areas, with a zero rate of
inflation, and maximum ownership and profit sharing opportunities among all
private sector workers as a supplement to free market wage rates.
The four main
components of this agenda for economic justice are:
·
A
new social contract with workers based on expanded capital ownership;
·
A two-tiered capital credit
system for local banks;
·
A
regional SDR to establish lower-tier-capital credit; and
·
The
multinational corporation as a primary vehicle for accelerating private sector
growth linked to expanded ownership.
Today we look at —
A Regional SDR to Establish Lower-Tiered Capital Credit (II)
The third major
component in the agenda for economic justice is to mobilize friendly countries
in a development region like the Caribbean Basin in support of a new unit of
international credit. The IMF cannot be expected to play this role. As
mentioned earlier, the Central American Bank for Economic Integration might be
the ideal place to start this new initiative. CABEI could, with the backing of
the United States and countries which might respond positively to these ideas,
issue a new currency, a Caribbean Basin SDR, to be used for regional economic
development linked to expanded capital ownership and issued exclusively through
the lower-tier discount window of the regional central bank as outlined below:
Eligibility for
access to the lower-tier discount rate at the regional central bank should be
based on the following criteria:
(1) The privilege
of discounting “eligible” paper should be limited exclusively to commercial
banks declared “eligible” by the regional central bank.
(2) “Eligible”
loan paper should be:
(a) Limited to
private-sector productive credit instruments;
(b) Issued for
any commercial, industrial, or agricultural purposes or ventures determined to
be economically feasible by the lending bank. (Credit for speculation in
securities or commodities, unfriendly acquisitions, consumer or home purchase
credit, public-sector programs, or for other non-productive purposes should be
declared specifically ineligible for lower-tier interest rates.);
(c) Designed to
be repaid on a self-liquidating basis, primarily through projected future
pre-tax profits of the enterprise guaranteeing the loan’s repayment;
(d) Made the
direct debt obligation of a capital credit mechanism that is “qualified” for
ownership-expanding purposes by the regional bank or some expanded ownership
authority approved by the cooperating countries in the region, including an
ESOP trust for corporate employees; a general stock ownership corporation
(GSOC), a professionally-managed real estate planning and development
corporation for spreading equity ownership among residents of development
communities; production and marketing cooperatives owned by workers and
farmers; and small businesses and family farms which provide all their regular
full-time workers with equitable opportunities to share in ownership and
profits; consumer stock ownership plans (CSOPs) to spread equity ownership
among customers of highly capital-intensive enterprises, like public utilities,
cablevision, mass transit systems, etc.; and Village Corporations, for equity
participation by rural workers in integrated agro-industrial enterprises;
(e)
Collateralized by whatever tangible and intangible assets are to be acquired
with the loan proceeds, plus shares of corporate stock to be acquired by an
ESOP or other qualified capital diffusion mechanism;
(f) Guaranteed by
the general credit of the sponsoring enterprise;
(g) Endorsed for
negotiability by the member bank or banks discounting such paper;
(h) Insured to
cover the risk of default, when appropriate, by a premium paid by the borrower
or the lending banks to a regional central bank-approved public or private
capital diffusion insurance company;
(i) Supported,
when appropriate, by documented business plans and feasibility studies
justifying the need for capital credit; and
(j) Endorsed by
every collective bargaining unit representing employees of the sponsoring
enterprise whose members are to receive ownership benefits as a result of the
loan.
(3) All credit
charges (including bank administrative charges and profits, the risk of
default, etc.) above the fixed central bank discount rate of 1% or less, would
be set by marketplace competition between qualified member banks. While
higher-risk loans would naturally cost more, the normal bank mark-up on money
to their best business customers would still keep the lower-tier prime rate at
about 3%.
(4) The regional
central bank could also require that all new currency issued through the
lower-tier discount window be matched by “eligible paper,” creating an
asset-backed currency reflecting the economy’s true increases in productive
capacity. The central bank could add a 100% reserve requirement for lower-tier
participation. This would eliminate the power of member banks under fractional
reserve banking to leverage their lending capacity for “non-eligible” purposes
with currency supplied at lower-tier rates. The supply of new money would thus
be tied closely to real income-producing growth of the economy, thus keeping
the region’s overall money supply under tightened control of the regional
central bank.
 |
| Project Economic Justice means less tax on our backs. |
The two-tiered
interest system would not involve tax-payer dollars. No loan funds or interest
rate subsidies would come from the taxpayers or in any way increase government
borrowings. (In fact, this radical lowering of the cost of money to local banks
and their business borrowers-by accelerating growth in private investment,
jobs, and productivity should quickly begin to cut government deficits.)
Since the
two-tiered interest strategy would strike directly at the underlying causes of
inflation-by discouraging excessive demand with higher interest rates and by
encouraging maximum production with 3% prime rates or lower–an “inflation
premium” would not be justified for capital credit linked to broadened
ownership.
“Eligible”
commercial banks, not the regional central bank itself, would still scrutinize
feasibility of each loan before it was made. Approved local banks with access
to the discount windows of the regional central bank would make all loans and
set interest charges to eligible borrowers. Thus, bank lending practices could
continue to insulate the central bank from political pressures to favor one
borrower over another.
For both the
upper and the lower tiers, the market would still determine the cost of money,
including bank charges and profits. Bank markups and differential risk premiums
which are normally included in interest rates would not be reduced. Both the
volume of loans through the commercial and agricultural departments of local
banks would greatly expand, along with bank profits. Once commercial loan
officers fully understand their expanded role and new business opportunities
under the two-tiered credit system, they can be expected to support it. (Today
less than 20% of all U.S. new capital formation is financed through commercial
banks.)
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