The Free Market 14, no. 1 (January 1996)
Stuff those corks back in the champagne bottles. The Republican leadership in Congress can’t celebrate the New Year until it breaks silence on the Mexican bailout. This is a debacle that makes subsidies for midnight basketball seem sensible.
With the Mexican precedent, who knows what 1996 will bring? Is Japan next? What about China? Why not the whole of Europe or even Africa? If Mexico was a good idea, why not back all the world’s governments with the full faith and credit of the U.S.?
The truth is that foreign aid is always and everywhere a curse. It shifts resources from market uses to government misuses. It forces good resources to chase bad projects. And it taxes Americans for the benefit of foreign governments, helping further lower U.S. median income. That the foreign governments bailed out are inevitably corrupt, profligate, and oppressive only compounds the error.
Governments have an inherent tendency to squander resources. When their currency crashes as the peso did, it’s a sign that its policies are seriously off. If such governments are bailed out, they will never learn that there’s a price to pay for bad policy.
But the Mexican oligarchy was dealing in more than bad policies. Every day brings new revelations about the drug payoffs, murders, and widespread graft linked to ex-president Salinas, his family, and his successor. Even Salinas’s allies in this country may be entangled. Did they receive drug money, laundered through the Mexican government and its affiliates, to lie about Nafta?
At home, the Salinas regime was bleeding Mexico dry, with the enthusiastic backing of U.S. elites, including Wall Street. So when things went sour, the U.S. Treasury volunteered to perform a transfusion with American tax dollars. Taxpayers paid the bulk of the $50 billion-plus rescue effort. But like the victim of a vampire, the Mexican economy couldn’t be saved at any price.
The Nafta-created Inter-American Development Bank slapped together a $1.25 billion loan package. The World Bank approved a $1.5 billion loan—the biggest of its history. The U.S. finagled $17.5 billion from the International Monetary Fund and $10 billion from the Bank for International Settlements—under what conditions we do not know. Add the $20 billion from the Exchange Stabilization Fund, and we’re talking real money.
Congress could have stopped this crime, and would have if the leadership had allowed a vote. But Gingrich and Dole refused. We know this from the press stories about a secret January 26, 1995, meeting with the White House. During it, reports the Wall Street Journal‘s Paul Gigot, “Mr. Gingrich became the most vocal supporter of the rescue.”
Mexico—despite the Beltway baloney about privatization and free markets—was and remains among the most controlled and cartelized economies in the world, with high taxes, shaky property rights, vicious antitrust laws, rigged labor markets, and loose money. And the Mexican government had defaulted on its debt as recently as 12 years ago. Its first act in this crisis was to impose price and wage controls amidst a horrendous inflation, and close down businesses caught ignoring them.
Few would now extend a loan to Mexican politicians—unless they could put someone else’s money at risk. And when the U.S. government extends credit, American savers and taxpayers are the guarantors. Like all government debt, the Mexican loans eventually mean a lower dollar, higher taxes, or higher inflation, or all three. One way or another, we will pay.
Americans know it. Everywhere you go, there is fury about this financial mess, and outrage at those who made it possible. But not in Washington. Senator Al D’Amato made himself unpopular by conducting even limited hearings. One reason: they revealed how and when the U.S. government really learned that the peso was going to be devalued.
It wasn’t through high-level government sources and it wasn’t the day it was announced. In countries with controlled exchange rates like Mexico, the U.S. embassy employs people to do nothing but roam the country trading money so they can know what the real exchange rate is.
In late May 1994—five months after Nafta passed and eight months before the bailout—these agents were wandering through western Mexico when they found that traders were paying premiums for greenbacks and that prices were being quoted in them. It was the form of money that seemed to be driving the markets.
When a U.S. agent asked what the heck was going on, a peasant replied, according to a panicked memo from the Mexico City embassy to D.C., that everyone knew a “snap devaluation” was coming as soon as President Salinas left office.
Then the lies began—and they still haven’t ended. E-mail flew wildly among the U.S. embassy in Mexico, the Federal Reserve Bank of New York, and the Fed headquarters in Washington. They spoke about the possibility of a complete default.
Months later, the IMF was still officially ruling out any chance of devaluation. Clinton never mentioned it. Neither did Greenspan, the Treasury, nor the Republicans. As late as October, the Wall Street Journal ran a 14-page sycophantic section entitled “Nafta: So Far, So Good.”
The Mexican printing presses, however, had been running overtime for two years, creating a classic business cycle: a capital sector pumped up by credit and preparing to explode. Nafta’s negotiators suspected as much because the treaty contained stop-gap currency measures designed to prevent a total meltdown.
Reality hit hard for the president of Mexico’s biggest brokerage house. He was kidnapped. Then the presidential campaign geared up, with the official party’s candidate Luis Donaldo Colosio leading the pack. Then he was shot dead. Ernesto Zedillo appeared like an apparition to take his place.
The vice chairman of Mexico’s largest retailer was also kidnapped. The next day, the police chief investigating the murder of Colosio was himself murdered. Clinton’s response to all this? He told a gathering honoring Mexico’s left-wing revolution that “I have profound confidence” in the “bright prospects for the Mexican economy.”
Meanwhile, polls showed 80% public disapproval of the bailout. Both parties, their private sponsors, and their paid intellectuals were terrified that they would be forced to eat their 10,000-page trade treaty. Wall Street had “growth” funds to protect. And U.S. banks had $21 billion in loans to Mexican public and private institutions.
Gingrich and Dole knew that a recorded vote in favor of sending taxpayer money to Mexico could have set off a fire storm of populist protest, discrediting their whole phony “revolution.” So they took the back door to bailout.
The entire enterprise was, of course, unconstitutional and unjust. It drained American savings on behalf of failed investments and monetary deals south of the border. Worse, the U.S. government had begun to act as the lender of last resort for the world.
Despite the propaganda, there was never any economic downside to letting the Mexican economy sink. It’s no bigger than that of Los Angeles, and it is only through a broke and debilitated government that Mexicans have any chance of liberty and prosperity.
If the Mexican government had to pay the price for its extravagance, it would have sent a message to every government in the world: if you can’t manage your affairs, you’re on your own.
As to Goldman Sachs and the other investment banks at risk, under capitalism, you can’t divorce the opportunity for profits from the risk of failure. They go together, and by accepting only profits in the short-term, we are guaranteeing a future of losses in the long-term.
Central bankers, like white-collar criminals, long for economic quiet in which to commit their capers, parceling out big bucks to big banks and their friends on Wall Street. But currency traders, like honest cops, insist on telling the truth and making exchange ratios reflect reality.
No penalty could approach the seriousness of this crime, but let’s make a few gestures towards justice. The top players should be forced to resign. Congress should allow no executive agency to transfer tax money outside the borders without an on-the-record vote. All subsidies should be withdrawn from the IMF, the World Bank, and the BIS, and then the U.S. should quit them as well. Then Congress should outlaw the bailing-out of any government anywhere in the world for any reason.
