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Mexico Bailout Con Game
After Messrs. Rubin, Greenspan, and Clinton proposed a $50 billion bailout of Mexico, it took only a couple of days for Congress to reject the idea. Though "only" $20 billion was to be our money (the rest from the International Monetary Fund, the Bank for International Settlements, and players to be named later), constituents called, wrote and telegraphed ten to one opposition.
The negative national response has a two-part foundation. First, most Americans believe that we have no responsibility to bail out a mismanaged nation. Second, and more powerful, is the conviction that we are not bailing out Mexico at all: the beneficiaries of this bailout con game are a bunch of Wall Street greedies who guessed wrong and now want to be saved by taxpayers.
Opposition is bipartisan. Pat Buchanan and Paul Wellstone rarely agree about anything. The NAFTA opponents are back to fight the bailout on both sides of the warpath aisle. In a 407 to 21 vote, the House demanded that the White House turn over its bailout files to investigators. Barely contained in committee is a Republican bill to forbid assistance to Mexico without the express consent of Congress.
This bailout opposition is growing, not fading, for new reasons: the bailout doesn't seem to be working, an endless succession of re-bails may lie ahead, we'll never be able to seize Mexican oil revenue to get our money back, and Mexico's political situation looks pre-revolutionary.
That just about sums up the opposition.
The opposition is wrong. There is a confidence game underway, but it's not the bailout. Everybody is a player in the real game, the Big Con.
Never in the course of human events has so much money been borrowed by so many individuals, traders, banks, corporations, political subdivisions, and sovereign nations. Planetary debt has set an immense record by any measure: per capita, per nation, or per unit of national product, income, trade, or national savings.
Sheer magnitude is a problem, but catastrophe lies in one, narrow aspect of the debt: nearly all the debt in the world is short term.
The US national debt, all $4.5 trillion, has an average maturity of less than four years. We roll over $30 billion every Monday, and odd tens of billions during the rest of each week. Though America is supposed to be the Great Satan of debt, Japan will borrow more money this year than we will. Mexico's $40 billion national debt has to rolled over in less than a year, every year.
Short term lenders share a delusion: "If my borrower looks shaky someday, I won't roll over the next time. I'll just take my money someplace safe." Unfortunately, when one lender notices shakiness, so will most other lenders. If many lenders simultaneously refuse to roll over, the borrower can't find enough new cash to pay off the non-rollers.
That's what happened to Mexico in December. Mexico's devaluation of the peso was effect, not cause. If Mexico had not devalued, the markets would have done it within days.
"Default" is the technical term for what happens to a borrower who can't roll over. The practical experience is less antiseptic, and is contagious. When many voices are screaming "My tesobono (CD, T-bill, whateverÉ) has matured! Give me my money!", other lenders become suspicious of other borrowers.
In a true panic, lenders irrationally demand payment from borrowers everywhere, no matter how creditworthy they are. That's what a "run" is. Few Americans under the age of 70 have personal knowledge of a run; younger Americans should hope to avoid the experience.
Short term debt is a confidence game.
If Mexico is allowed to default, we have no way of knowing ahead of time whether a run will follow, or how far one might spread. A run of sorts is already affecting Argentina and Brazil. Panic could easily travel to weaker nations in Latin America and Asia, and signs of stress are showing in Eastern Europe, Greece, Spain, Portugal, Italy, and Sweden.
Surely a run would stop there, you say? The central banks of the great industrial nations can restore confidence, right? Not necessarily. The power of the central banks is based on the strength of their economies; if most of the world is crashing into default-induced depression, the industrial nations would struggle to earn enough income to make debt payments.
It's true that this bailout will pay off a lot of people who don't deserve to be repaid. So did the S&L bailout. So do all bailouts. Mexico's foolish, even wicked mismanagement of its economy shouldn't be rewarded. Certainly, no signal should be sent to investors that other countries are "too big to fail." However, the risks of an uncontained lender panic cannot be ignored.
It is a tempting indulgence to tell a misbehaving nation and assorted Wall Street thieves to roast on their own. Sam Rayburn once told Lyndon Johnson: "Don't ever tell somebody to go to Hell unless you can make him go." We can make them go, but we can't be sure they will go alone.
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