Mexico: As Bad as it Gets
Jude Wanniski
February 22, 1995


There is no other term for Treasury Secretary Bob Rubin’s performance on Mexico than “terminal incompetence.” As bad as it was for Mexico to devalue the peso in December (on the urgings of U.S. Treasury officials before Rubin arrived), things are now much worse. Every public and private recommendation made by the Republican leadership in Congress to Rubin on how to fix the problem was rejected by him. The insistence by Senate Majority Leader Bob Dole that the $20 billion in the Exchange Stabilization Fund be used to revalue the peso to 3.5 was ignored. The warning by Chairman Al D’Amato of the Senate Banking Committee against using the ESF inappropriately to buy dollar-indexed tesebono bonds instead of pesos was ignored. D’Amato has been vehement about allowing any U.S. funds to be put at risk to bail out private investors in this manner. With a happy Rubin standing at his side and applauding yesterday, Mexico’s Finance Minister Guillermo Ortiz announced that a portion of the funds provided by America’s taxpayers will be used to buy tesebonos. Senator Bob Bennett [R-UT], Dole’s agent in the discussions with Rubin, argued on the Senate floor that the ESF should be used only to buy pesos as the means of restoring the currency’s value. He even had long discussions with Rubin on why this was the only policy that could succeed and was the only policy the Republicans would support. Similar warnings were made in a friendly fashion to Sen. Chris Dodd [D-CT], chairman of the Democratic National Committee. Each and every shred of GOP counsel was completely ignored, as if the 104th Congress were still controlled by the Democrats. 

The outline of the plan was characterized initially in the media as one that aimed at reducing the money supply of Mexico by extinguishing pesos. This characterization was at least in the ballpark, as Bennett had made it clear to Rubin that unless the plan extinguishes pesos, it would not work. Alas, there is nothing in the agreement, including the fine print, that involves the extinguishment of a single peso. There are a few words about how the “floating peso” will be managed in a way that will attempt to correct for its “undervaluation.” This is followed by a pledge to manage “credit and interest-rate policy” to that end. This can only mean that the United States will require the Mexican government to starve its business and commercial community with the Mafia-like interest rates now available -- 59% on thirty-day paper. Rubin, on the MacNeil-Lehrer News Hour last night, told us what a brilliant financier he had been on Wall Street and then explained how his plan for Mexico will require them to shrink its “real money supply.” The man clearly has no idea what he is gabbling about. Mexico’s real money supply has already shrunk by more than 40% as a result of its devaluation. It was worth $16 billion on December 20 and it is worth only $9 billion today. From the moment when Rubin and Ortiz announced the “rescue plan” yesterday, the “real money supply” has already shrunk another 10%. The peso was at 5.3 per dollar and when last checked was at 5.9. What the nitwits who are advising Rubin mean by shrinking the “real money supply” is that they will only allow the Bank of Mexico to print 40% more pesos from this point forward, which will, on this nitwit theory, cause the price level to rise by less than 50%. Instead of extinguishing pesos, we now have a rationale for expanding the supply of pesos by another 40% in the year ahead! This will accommodate the devaluation to date, with a severe economic depression thrown in. Rubin smiled broadly when describing the tough times the people of Mexico will have to endure. Jim Lehrer, who asked Rubin how 50% interest rates could possibly do any good, remained properly horrified throughout the interview. Ted Forstmann of Forstmann, Little & Co., had told me before Christmas that it was essential that the peso devaluation “be undone.” He called today as horrified as Lehrer at what he read of the agreement and said it would have been better if Mexico had simply been told to work things out with its creditors on its own. Ross Perot had the same thought.

An emissary of the Mexican government telephoned me this morning, hoping to calm me down. “What the markets need now,” he insisted, “is a period of quiet and calm, in order to absorb the meaning of the plan.” I politely advised him that he did not know what he was talking about, explaining that people who are investing millions and billions of dollars in Mexico do not care if there is quiet and calm or noise and clamor. They want to see competence, I said, and what they see is a Mexican government that does not know what it is doing, taking advice and instructions from an American government that knows even less. I asked him to explain how his government could agree to a plan to raise interest rates skyhigh, after wiping out half the value of the wages, pensions and savings of the Mexican people, and promise to run a budget surplus when a) tax collections implode as the economy shuts down, b) spending climbs as social costs soar, and c) the national debt has to be refinanced at 59% interest rates. I told him that I have to keep pinching myself to make sure I’m not dreaming all this. Can you imagine, Alan Greenspan this morning endorsed this ugly mess, saying he thinks it will work? I asked the Mexican official to do us both a favor and find out when and where someone is going to start buying pesos in unsterilized interventions. 

Is there any good news in all of this? Not that we can find. The only good thing I can think of is that Mexico could still be fixed. Unlike Humpty Dumpty, it has not broken beyond repair. The agreement does not prohibit the Bank of Mexico from buying and extinguishing pesos and it does not prohibit the Fed from using the ESF legitimately to buy pesos instead of tesebonos. Unfortunately, nobody seems much interested in Mexico’s problems now that Rubin has announced a successful rescue. In the Senate Banking Committee hearings this morning on Humphrey-Hawkins, little was said of Mexico, and nobody challenged Greenspan’s easy assurances that everything was under control. Senator Bennett has complained, but the news media will pay no attention to him unless he is backed by Senate Majority Leader Bob Dole. There has been no statement yet from Dole and none from Newt Gingrich, one way or another. Insofar as their silence means assent, we now have to expect that things will have to come to a boil in Mexico before there is any interest in taking another look.