The Free Market 13, no. 10 (October 1995)
Finally, thought some Mexicans, part of the $50 billion that Western taxpayers sunk into the bailout would get to native investors. In late August, Finance Minister Guillermo Ortiz waved $1.1 billion in the air for indebted individuals and companies. The result: the peso sunk like a rock, again.
Is there no way to shore up this sunken ship? There is, but Mexican officials and their international lenders have other ideas in mind. Trouble is, they keep backfiring. It was widely and rightly assumed that Ortiz hadn’t been hiding this money in his mattress from forwarded U.S. funds. It had been manufactured in the old fashioned way: printed by the central bank.
Ortiz’s announcement came one day after an intriguing IMF study on how the Mexico meltdown had occurred in the first place. It had previously been assumed that foreign lenders suddenly decided to pull out after Nafta passed. But it wasn’t primarily foreign lenders at all, but Mexican depositors, most likely the large and connected ones, who converted their pesos and sent them out of the country.
But this puts the U.S.—Mexico’s primary benefactor—in an odd position. Taxpayers are now paying the Mexican government to lend money and pay bills that Mexico’s own most sophisticated investors refuse to touch. This piles ignorance on ignorance.
If Ortiz’s stash of cash didn’t do the job, what can we say about the new $58 billion IMF fund created by the G-7 to counter private currency trading it doesn’t like? Clinton had an idea: “We must work to identify and prevent potential economic problems like Mexico’s before they become disasters and wrack the global economy. And when crises occur, we must have efficient ways to mobilize the international community.”
Speaking in the government’s echo chamber, Treasury Secretary Robert Rubin and IMF director Michel Camdessus said the same thing. At one level, the fund represents an attempt by the U.S. government to force its trading partners to shoulder more of the bailout burden. U.S. elites still suffer politically from the Mexico bailout.
The bailout fund is also meant to show private financial markets that the government is boss. Investors fled the peso when Mexico got its treaty and stopped pegging the currency to the dollar. A reality check revealed that Mexico had issued a mountain of short-term debt to create a Potemkin Village. The run on the peso gained in strength as speculators “shorted” it and the dollar against the yen and D-mark.
The fund is meant to prevent financial markets from discounting government financial instruments, even when reckless fiscal and monetary policies suggest they should. Looked at in this way, the fund is an attack on the free market itself.
Let’s recall why it is that markets rule in the first place. They impose rigid discipline on governments that engage in irresponsible economic policies. When the Mexican central bank inflated the money supply prior to the 1994 Mexican national elections, the signal sent to the markets was: sell! Nafta only made matters worse by linking the fate of Mexico with the U.S.; thus the dollar fell proportionally.
Clinton, Rubin, and Camdessus are betting that the new bailout fund will allow the IMF to rig the game, preventing private financial markets from taking the same decisive action that greeted Ortiz’s $1.1 billion debt fund. The IMF wants the world’s central banks to inflate, while creating a mechanism to interfere with markets.
But won’t this tempt every government to inflate to the brink of ruin? This can be “considered in theoretical terms,” said Camdessus, “but not in real terms.” Which only goes to prove how unreal the world can seem when you’re not spending your own money.
