WEBVTT NOTE Money, Mexico, and Mañana 1 00:00:00.000 --> 00:00:05.160 At the New Year 1994, when the rest of us were vowing self-improvement, 2 00:00:05.160 --> 00:00:10.080 the federal government was wallowing in the financial iniquity of the decade. 3 00:00:10.080 --> 00:00:14.880 It resolved to bail out the Mexican government with a $6 billion line of credit. 4 00:00:14.880 --> 00:00:18.520 Weeks later, the figure began to grow. It was $10 billion, then $20, 5 00:00:18.520 --> 00:00:22.680 then including international lending agencies, $40 billion. 6 00:00:22.680 --> 00:00:27.680 The final amount, including money scrounged up from anyone with an interest in the future of the peso, 7 00:00:27.680 --> 00:00:32.600 was more than 60 billion dollars. That's the entire production for a year 8 00:00:32.600 --> 00:00:37.320 of the state of Alabama, South Carolina or Oklahoma. 9 00:00:37.320 --> 00:00:41.400 The United States entered four agreements with Mexico setting the terms of the 10 00:00:41.400 --> 00:00:42.960 assistance. 11 00:00:42.960 --> 00:00:46.160 The congressional leadership in both parties gave up their constitutional 12 00:00:46.160 --> 00:00:47.600 obligation to manage 13 00:00:47.600 --> 00:00:50.960 the US accounts and gave the Clinton administration 14 00:00:50.960 --> 00:00:55.160 its blessing to go ahead with a full bailout of a bankrupt government, 15 00:00:55.160 --> 00:00:57.760 not the U.S. of course. 16 00:00:57.760 --> 00:01:01.480 First installment of 10 billion began to flow immediately. The second 10 17 00:01:01.480 --> 00:01:04.240 was released on July 1st of this year. 18 00:01:04.240 --> 00:01:07.840 American taxpayers were never consulted and because both parties were conspirators 19 00:01:07.840 --> 00:01:08.840 in the deal, 20 00:01:08.840 --> 00:01:13.120 voters will not have a chance to retaliate at the polls. 21 00:01:13.120 --> 00:01:16.760 Yet not one dime of credit to Mexico was deserved. 22 00:01:16.760 --> 00:01:19.760 Its currency is nearly worthless. The government defaulted on its debt as 23 00:01:19.760 --> 00:01:21.760 recently as 12 years ago. 24 00:01:21.760 --> 00:01:24.780 The establishment is steeped in corruption and drugs 25 00:01:24.780 --> 00:01:28.500 and the Zedillo administration has been completely discredited. 26 00:01:28.500 --> 00:01:32.060 Then let's not forget assassinations and revolutionary uprisings 27 00:01:32.060 --> 00:01:34.560 that preceded his takeover. 28 00:01:34.560 --> 00:01:38.460 Mexico ranks among the most regulated economies of the world 29 00:01:38.460 --> 00:01:41.840 with high taxes, uncertain property rights, 30 00:01:41.840 --> 00:01:44.380 anti-competitive, anti-trust policies, 31 00:01:44.380 --> 00:01:47.540 a fixed labor market and loose money. 32 00:01:47.540 --> 00:01:50.180 Sounds like the US, I know. 33 00:01:50.180 --> 00:01:52.880 When the PESA was devalued and then tailspinned, 34 00:01:52.880 --> 00:01:59.040 The Mexican government's first response was to impose wage and price controls, 35 00:01:59.040 --> 00:02:04.040 then to shut down dozens of businesses caught ignoring them in jail businessmen. 36 00:02:04.040 --> 00:02:08.320 Under these circumstances, would you extend an unsecured loan to the Mexican government? 37 00:02:08.320 --> 00:02:10.440 Well, you didn't have a choice. 38 00:02:10.440 --> 00:02:15.440 The Federal Reserve and the Clinton Treasury decided to do it by executive fiat. 39 00:02:15.440 --> 00:02:19.400 Under regulatory statute, they don't have to ask Congress's permission. 40 00:02:19.400 --> 00:02:23.800 They only have to periodically report on how much money they've lost. 41 00:02:23.800 --> 00:02:31.400 It's not the personal bank accounts of Treasury Secretary Robert Rubin or Fed head Alan Greenspan which were put at risk. 42 00:02:31.400 --> 00:02:36.600 When the U.S. government extends credit, the American savers and taxpayers are the real guarantors. 43 00:02:36.600 --> 00:02:43.400 And like all federal debt, it eventually means a lower dollar, higher taxes or higher inflation are all three. 44 00:02:43.400 --> 00:02:47.800 One way or another, at some point in the future, we will pay. 45 00:02:47.800 --> 00:02:53.800 In the November elections, the public voted against this kind of redistribution, domestic and international. 46 00:02:53.800 --> 00:02:58.800 But the Republicans let it happen and, as we'll see, actually promoted the bailout. 47 00:02:58.800 --> 00:03:06.800 Bailout of Mexico ranks among the most appalling examples of the enormous gap that exists in this country between the rulers and the ruled. 48 00:03:06.800 --> 00:03:12.800 Everywhere you go among the grassroots, there is talk about this financial mess and outrage at how it happened. 49 00:03:12.800 --> 00:03:17.800 But in the halls of Congress and the Clinton administration, there's only silence. 50 00:03:17.800 --> 00:03:22.800 And anyone who tries to raise the issue in Congress gets a rag shoved down his throat. 51 00:03:22.800 --> 00:03:29.800 Let's return to the solid days of Mexican prosperity and retrace the political and economic steps that led to this debacle. 52 00:03:29.800 --> 00:03:34.800 January 1993, the Salinas regime faced two critical challenges. 53 00:03:34.800 --> 00:03:39.800 First was the NAFTA Treaty, which meant billions for the elites in Mexico. 54 00:03:39.800 --> 00:03:45.480 Indeed, the future of the ruling party rested on its passage, or so they thought. 55 00:03:45.480 --> 00:03:49.820 In the U.S., NAFTA was once considered to be a legislative shoe-in, but it was beginning 56 00:03:49.820 --> 00:03:56.200 to come under fire by the non-establishment branch of American political activism. 57 00:03:56.200 --> 00:04:00.520 The second problem facing the Salinas regime was the Mexican presidential election a year 58 00:04:00.520 --> 00:04:01.520 away. 59 00:04:01.520 --> 00:04:05.720 Meanwhile, the economy was not doing as well as the government had promised, and the ruling 60 00:04:05.720 --> 00:04:12.720 The ruling party faced a serious challenge of the polls, possibly a challenge so great that the outcome couldn't be plausibly rigged. 61 00:04:12.720 --> 00:04:17.720 To address these two difficulties, the solution was the same as in most modern governments, 62 00:04:17.720 --> 00:04:20.720 where the paper currency inflate the money supply. 63 00:04:20.720 --> 00:04:27.720 All throughout 1993 and 1994, the government of Mexico pursued a very easy monetary policy 64 00:04:27.720 --> 00:04:33.720 and began issuing short-term dollar-denominated Mexican government bonds, referred to as TESA-bonos. 65 00:04:33.720 --> 00:04:40.720 This created an artificial boom that carried the economy until the election, a political business cycle, Mexican version. 66 00:04:40.720 --> 00:04:44.720 Few knew it at the time, but this inflation was the beginning of the end. 67 00:04:44.720 --> 00:04:56.720 The administration expected that Mexico would have to engage, that is the Clinton administration, expected that Mexico would have to engage in some inflationary activity, an action which might drive down the peso. 68 00:04:56.720 --> 00:05:01.720 To address that concern after the NAFTA treaty had been negotiated and just as these bonds came to be issued, 69 00:05:01.720 --> 00:05:08.720 A new exchange rate currency fund of $6 billion was created by the U.S. government as part of NAFTA. 70 00:05:08.720 --> 00:05:15.720 In this agreement, the three NAFTA countries agreed to prop up member currencies with their own reserves within certain limits. 71 00:05:15.720 --> 00:05:27.720 In practical terms, the new agreement meant the U.S. as a part of NAFTA agreed to back the dollar-backed Mexican bonds that were being issued to get the treaty passed so that the ruling regime could be plausibly re-elected. 72 00:05:27.720 --> 00:05:35.720 In short, the U.S. government had agreed to bankroll the Mexican establishment long before the official bailout began. 73 00:05:35.720 --> 00:05:43.720 NAFTA passed mid-year in January 1994 to perfect, along with the promise of an automatic bailout of the peso. 74 00:05:43.720 --> 00:05:51.720 That very month, and not coincidentally, the peasant uprising in Chiapas flared up again and was reported for the first time in the United States. 75 00:05:51.720 --> 00:05:56.720 The Potemkin village created by easy money had started to be invaded by reality. 76 00:05:56.720 --> 00:06:01.720 Reality hit home especially hard for the head of Mexico's biggest bank and brokerage house. 77 00:06:01.720 --> 00:06:06.720 In the first of many politically motivated private sector crimes, he was kidnapped. 78 00:06:06.720 --> 00:06:09.720 That didn't stop the presidential campaign from gearing up, 79 00:06:09.720 --> 00:06:15.720 with the PRI or ruling party candidate Luis Donaldo Colosio leading the pack. 80 00:06:15.720 --> 00:06:17.720 Then a slight complication occurred. 81 00:06:17.720 --> 00:06:22.720 He was shot dead by assassins connected to another faction of the ruling regime. 82 00:06:22.720 --> 00:06:28.720 Some people in Mexico consider, by the way, a more US-connected faction of the ruling regime. 83 00:06:28.720 --> 00:06:34.720 It was only a matter of hours before Ernesto Zedillo, the other faction's candidate, appeared to take his place. 84 00:06:34.720 --> 00:06:39.720 On this day, March 24, 1994, NAFTA's currency agreement came into play. 85 00:06:39.720 --> 00:06:47.720 Secretary of the Treasury Lloyd Benson worked with Alan Greenspan to extend the swap agreement and make it available in the event of an emergency. 86 00:06:47.720 --> 00:06:54.720 The promise of an immediate six billion pumped up the expectations that the Mexican economy would remain in good shape. 87 00:06:54.720 --> 00:06:59.720 At a press conference that day, Clinton predicted no inflation in Mexico and said, 88 00:06:59.720 --> 00:07:04.720 quote, we continue to have every confidence that Mexico is on the right economic path. 89 00:07:04.720 --> 00:07:07.720 Zedillo then officially declared his candidacy. 90 00:07:07.720 --> 00:07:10.720 Of course, it turned out that the troubles had only begun. 91 00:07:10.720 --> 00:07:15.720 The Bank of Mexico began to intervene wildly to prop up a falling peso, selling dollar reserves. 92 00:07:15.720 --> 00:07:21.720 The Federal Reserve, Fed did what it could, but in short order, Mexico began to lose as much as a billion dollars a day. 93 00:07:21.720 --> 00:07:26.720 The U.S. Undersecretary for Economic Affairs, Lawrence Summers, announced on national television that, 94 00:07:26.720 --> 00:07:31.720 quote, Mexico is fundamentally sound and as a fundamentally sound currency. 95 00:07:31.720 --> 00:07:35.720 We are very encouraged by the situation in Mexico. 96 00:07:35.720 --> 00:07:39.720 Oh yes, the day before, the vice chairman of Mexico's largest retailer was kidnapped. 97 00:07:39.720 --> 00:07:45.960 In the very next day, the police chief investigating the murder of Colosio was himself murdered. 98 00:07:45.960 --> 00:07:50.040 Clinton's response, he told a group honoring a Mexican holiday that, quote, 99 00:07:50.040 --> 00:07:54.840 I have a profound confidence in the strength of Mexico's political institutions and its 100 00:07:54.840 --> 00:07:58.400 leadership and in the bright prospects of the Mexican economy. 101 00:07:58.400 --> 00:08:02.780 Get the feeling these guys don't always tell the truth? 102 00:08:02.780 --> 00:08:06.840 Even this early in the political crisis, the entire political establishment in this country 103 00:08:06.840 --> 00:08:08.580 began to panic. 104 00:08:08.580 --> 00:08:13.020 Prospects were terrified about their investments, corporations were nervous about a pacer devaluation, 105 00:08:13.020 --> 00:08:18.300 and political leaders were quaking in their loafers about the prospects of a NAFTA blow-up. 106 00:08:18.300 --> 00:08:22.820 They didn't know at this time that their worst fears, and then some, were about to come true. 107 00:08:22.820 --> 00:08:27.660 As an example, in late May, the U.S. Embassy in Mexico wired the Treasury Department in 108 00:08:27.660 --> 00:08:28.660 Washington. 109 00:08:28.660 --> 00:08:34.140 It's a remarkable cable that tells us about the way that governments gather economic information. 110 00:08:34.140 --> 00:08:36.740 Here as always, they can only play catch-up. 111 00:08:36.740 --> 00:08:38.940 The cable reads as follows, 112 00:08:38.940 --> 00:08:46.140 We made a swing through Western Mexico and found that while bank and street peso dollar rates were comparable to those in Mexico City, 113 00:08:46.140 --> 00:08:51.240 using greenbacks to make purchases in the local economy could gain significant discounts. 114 00:08:51.240 --> 00:08:56.840 For the first time so far from the border, most street merchants began by pricing their goods in dollars. 115 00:08:56.840 --> 00:08:59.840 Several merchants said they were willing to pay a premium for dollars 116 00:08:59.840 --> 00:09:07.040 because the Salinas administration, like its two predecessors, would finish its term with a snap devaluation." 117 00:09:07.040 --> 00:09:10.840 Even with this information, there was no open discussion of a devaluation. 118 00:09:10.840 --> 00:09:15.540 Three months later, the IMF was still officially ruling out any chance of such a thing. 119 00:09:15.540 --> 00:09:20.540 The U.S. government claims it would have been taken by surprise seven months later and still do. 120 00:09:20.540 --> 00:09:23.540 So much for the experts. When the government wanted really good information, 121 00:09:23.540 --> 00:09:26.340 it talked to street merchants in interior Mexico, 122 00:09:26.340 --> 00:09:31.940 seemed to know much more than the politicians in either Mexico City or Washington D.C. 123 00:09:31.940 --> 00:09:39.340 This cable repeating the words of the underground entrepreneurs was the first to use the dread word devaluation. 124 00:09:39.340 --> 00:09:44.140 There was one MIT economist who seemed to know much more than anyone in Congress at the administration, 125 00:09:44.140 --> 00:09:50.640 Rudy Dornbusch, a Mexican expert who had been calling for a 20% devaluation for an entire year. 126 00:09:50.640 --> 00:09:54.140 Dornbusch was then most famous for his influential ex-students, 127 00:09:54.140 --> 00:09:59.460 Mexican President Roberto Salinas and Mexican Finance Minister Pedro Aspe. 128 00:09:59.460 --> 00:10:05.660 Dornbücher's words of advice were eventually taken to heart, but not until after Zedillo stole the election. 129 00:10:05.660 --> 00:10:11.260 In the days before and after the election, a series of emails and faxes flew wildly among the U.S. Embassy in Mexico, 130 00:10:11.260 --> 00:10:15.400 Federal Reserve Bank of New York and the Federal Reserve Offices in Washington. 131 00:10:15.400 --> 00:10:21.160 The messages spoke openly about the possibility of a radical devaluation and even a complete default. 132 00:10:21.160 --> 00:10:28.460 As a sample, Charles Sigmund, the Fed's Director of International Finance, sent a 22-page memo to Alan Greenspan and Alan Blinder, called... 133 00:10:28.460 --> 00:10:37.060 Is there something wrong with him? They're two top guys in the Fed with the same first names. Anyway, the implied probability of a peso devaluation. 134 00:10:37.060 --> 00:10:48.760 In this memo, dated August 17th, Sigmund told Blinder and Greenspan about the high likelihood that Mexico would not only openly devalue its currency, but then suspend all convertibility. 135 00:10:48.760 --> 00:10:54.760 Now, recall that the Clinton administration claimed to be taken by surprise when the devaluation actually occurred four months later. 136 00:10:54.760 --> 00:11:00.760 To the rest of the world, and especially that part convinced by a hysterically pro-Mexico national media, 137 00:11:00.760 --> 00:11:04.760 Mexico may have seemed shaky, but certainly not in dire straits. 138 00:11:04.760 --> 00:11:11.760 In September 1994, Mexico's government business agreement, called the Pacto, received accolades from one and all. 139 00:11:11.760 --> 00:11:17.760 It said that the government would maintain the present rate of exchange and raise the minimum wage. 140 00:11:17.760 --> 00:11:20.100 Say, this was not a smart idea. 141 00:11:20.100 --> 00:11:23.900 As the pace continued to fall, the US Treasury Department's internal memoranda 142 00:11:23.900 --> 00:11:26.340 were getting increasingly frantic. 143 00:11:26.340 --> 00:11:31.180 In one declassified document dated September 26, 1994, Assistant Secretary 144 00:11:31.180 --> 00:11:35.520 Lawrence Summers described Lloyd Benson, the current situation, 145 00:11:35.520 --> 00:11:41.820 predicted evaluation and recommended a course of action, providing a box for Benson to check yes. 146 00:11:41.820 --> 00:11:45.420 It's all been declassified with the exception of the specific course of action. 147 00:11:45.420 --> 00:11:51.820 That's been blocked out, as have been many of the crucial documents. The bailout, I'll show you a typical one. 148 00:11:51.820 --> 00:11:55.020 So they're blocking out all the hot stuff. 149 00:11:55.020 --> 00:11:59.020 This is typical, of course, the way the government uses classification. 150 00:11:59.020 --> 00:12:02.820 It's to prevent things from the American people from learning things the government is doing. 151 00:12:02.820 --> 00:12:09.720 It's nothing to do with the Russians or red Chinese or whatever it has to do with keeping the government's 152 00:12:09.720 --> 00:12:14.020 crimes and mistakes secret from the American people. 153 00:12:14.020 --> 00:12:18.460 Whatever the plan of action that Summers was urging, Benson agreed, and two days later, 154 00:12:18.460 --> 00:12:25.220 a high-level Mexican ruling party official, José Francisco Ruiz Maciao, was also murdered. 155 00:12:25.220 --> 00:12:29.660 What followed was a series of October 1994 meetings between Greenspan Summers, Benson 156 00:12:29.660 --> 00:12:34.140 Pedro Aspe, and Zedillo's top economist, Luis Tellez. 157 00:12:34.140 --> 00:12:38.020 It was in this month that they talked openly of drawing on U.S. reserves, not just for 158 00:12:38.020 --> 00:12:42.180 exchange stabilization, but for a bailout of the entire financial and public sector 159 00:12:42.180 --> 00:12:47.780 of Mexico. Very month that the American people threw out the old politicians for exactly 160 00:12:47.780 --> 00:12:52.580 this sort of insider deal and elected new ones who promised to change the system, the 161 00:12:52.580 --> 00:12:57.220 unelected economic power of the government was plotting the massive bailout of its client 162 00:12:57.220 --> 00:13:02.580 state. Pace have continued to decline from both internal and external selling, and Jeffrey 163 00:13:02.580 --> 00:13:07.060 Schaeffer, head of Treasury's International Division, warned that the Ruiz assassination 164 00:13:07.060 --> 00:13:12.000 and the Chiapas rebellion could lead to more instability. Meanwhile, JP Morgan and company 165 00:13:12.000 --> 00:13:16.840 issued a report saying that Mexico faced a choice between maintaining its exchange rates 166 00:13:16.840 --> 00:13:21.740 or reviving the Mexican economy. Lawrence Summers, meanwhile, was issuing internal predictions 167 00:13:21.740 --> 00:13:26.520 that the peso would collapse soon, all the while writing speeches for his boss, praising 168 00:13:26.520 --> 00:13:31.120 the glories of Mexico's economy and the new Zedillo administration and its commitment 169 00:13:31.120 --> 00:13:35.680 to free markets, low inflation and a balanced budget. 170 00:13:35.680 --> 00:13:39.840 On December 19, 1995, a hysterical message came from within the treasury addressed to 171 00:13:39.840 --> 00:13:45.840 Professor Lawrence Summers and Jeffrey Schaeffer. Memo is most interesting, although the author's name has been kept secret. 172 00:13:45.840 --> 00:13:49.840 It reports that the peso is in serious trouble in the news of the Chiapin rebels. 173 00:13:49.840 --> 00:13:55.840 It raises the possibility that the new government will devalue the peso, quote, without consulting us. 174 00:13:55.840 --> 00:13:58.840 Why should the Treasury worry? Well, as the memo says, quote, 175 00:13:58.840 --> 00:14:04.840 I fear that a devaluation will have a negative impact on congressional support for our trade policy initiatives, 176 00:14:04.840 --> 00:14:07.840 particularly if done unilaterally, unquote. 177 00:14:07.840 --> 00:14:15.840 The next day, to the shock of everyone but the tiny network of faxers among central bankers and lifetime bureaucrats, the PESA was devalued by 20%. 178 00:14:15.840 --> 00:14:18.340 Benson released the following statement. 179 00:14:18.340 --> 00:14:23.640 Mexico's exchange rate action today will support the healthy development of the Mexican economy. 180 00:14:23.640 --> 00:14:31.440 With a balanced budget, continuing economic reform and a prudent monetary policy, Mexico's fundamentals remain sound. 181 00:14:31.440 --> 00:14:33.840 The NAFTA swap line was immediately looted. 182 00:14:33.840 --> 00:14:36.140 Six billion poured down the rat hole. 183 00:14:36.140 --> 00:14:40.440 Investors paid, of course, no attention to the statements that continued to spill out of the administration. 184 00:14:40.440 --> 00:14:44.240 The Mexican economy is sound, the Mexican economy is sound. 185 00:14:44.240 --> 00:14:48.740 Smart people were no longer listening and they continued to sell pesos by the truckload. 186 00:14:48.740 --> 00:14:54.240 Selling even caused the central planners in Washington to announce that the peso collapse had, 187 00:14:54.240 --> 00:14:59.440 gone beyond what can be justified by Mexican economic fundamentals. 188 00:14:59.440 --> 00:15:07.040 The bailout was in the cars even while Clinton was claiming that they were simply experiencing a short-term liquidity crisis. 189 00:15:07.040 --> 00:15:11.340 Despite a series of calming statements, the bailout began on January 25th of this year. 190 00:15:11.340 --> 00:15:17.440 With the single largest loan or grant the IMF has ever given, $7.58 billion in one shot. 191 00:15:17.440 --> 00:15:20.040 The administration swung into gear with its rescue plan. 192 00:15:20.040 --> 00:15:26.640 After several weeks of upping the ante, the administration, under the influence of Greenspan, Rubin, Summers and others, 193 00:15:26.640 --> 00:15:31.520 settled on a plan for a forty billion dollar loan guarantee. Greenspan started combing 194 00:15:31.520 --> 00:15:36.500 the halls of Congress to lobby for the bailout. You see, U.S. banks had twenty-one billion 195 00:15:36.500 --> 00:15:41.240 dollars in loans to Mexican business and public institutions. These banks refused to accept 196 00:15:41.240 --> 00:15:45.960 such losses as the cost of doing business. Neither did the investment banking firm of 197 00:15:45.960 --> 00:15:52.760 Goldman Sachs, whose former and probably future chairman was Treasury Secretary Rubin. Greenspan, 198 00:15:52.760 --> 00:15:58.760 The head of the U.S. Bank Cartel even got on the phone to rush Limbaugh and urged him to support the proposed bailout. 199 00:15:58.760 --> 00:16:01.760 In fact, Limbaugh didn't need much persuasion. 200 00:16:01.760 --> 00:16:06.760 By the way, I don't remember anyone complaining about the central bank compromising its alleged independence 201 00:16:06.760 --> 00:16:10.760 by being directly involved in political lobbying and media lobbying. 202 00:16:10.760 --> 00:16:15.760 Limbaugh's listeners, however, weren't buying it, and neither were the rest of the American people. 203 00:16:15.760 --> 00:16:19.760 A huge public outroar against the bailout shook Washington. 204 00:16:19.760 --> 00:16:22.760 The entire freshman class swore they would defeat the bailout. 205 00:16:22.760 --> 00:16:26.760 Polls showed more than an 80% disapproval rate. 206 00:16:26.760 --> 00:16:30.760 Both Gingrich and Dole went on record immediately as supporting the bailout, 207 00:16:30.760 --> 00:16:33.760 as did Richard Army, so did the Wall Street Journal. 208 00:16:33.760 --> 00:16:37.760 This was the entire Republican leadership at work, claiming to cut government 209 00:16:37.760 --> 00:16:41.760 and meanwhile willing to spend 40 billion on bailing out a foreign government. 210 00:16:41.760 --> 00:16:44.760 In a matter of days, however, it became clear to Gingrich and Dole 211 00:16:44.760 --> 00:16:47.760 that such a bailout would never clear Congress, even if it did, 212 00:16:47.760 --> 00:16:55.760 If they did, getting a recorded vote on sending taxpayers money to Mexico would have set off a firestorm of popular protest. 213 00:16:55.760 --> 00:17:00.760 On January 26th, the Congressional leadership and the White House met to make a deal. 214 00:17:00.760 --> 00:17:06.760 The Washington Post reports that it was Gingrich who first proposed the trick that everyone eventually agreed on. 215 00:17:06.760 --> 00:17:09.760 Paul Gigaud, who himself supported the bailout, wrote that, 216 00:17:09.760 --> 00:17:14.760 Mr. Gingrich became the most vocal supporter of the rescue at the last Thursday's meeting. 217 00:17:14.760 --> 00:17:18.760 Whether someone had previously whispered in Gingrich's ear, we don't know. 218 00:17:18.760 --> 00:17:22.760 But Gingrich suggested that the administration entirely bypass Congress 219 00:17:22.760 --> 00:17:25.760 and announce a bailout on its executive authority. 220 00:17:25.760 --> 00:17:30.760 The money would come from an account in the Department of Treasury called the Exchange Stabilization Fund. 221 00:17:30.760 --> 00:17:34.760 They would take $20 billion in cash distributed in two installments 222 00:17:34.760 --> 00:17:37.760 and send it directly to those affected by the peso collapse, 223 00:17:37.760 --> 00:17:42.760 meaning American banks invested in Mexican debt, American corporate holders of Mexican debt, 224 00:17:42.760 --> 00:17:46.680 and large institutions invested in the stocks of companies whose values had plummeted in 225 00:17:46.680 --> 00:17:48.160 the last month. 226 00:17:48.160 --> 00:17:52.640 The whole thing, of course, was unconstitutional, unjust and economically dangerous. 227 00:17:52.640 --> 00:17:56.000 The fund was allegedly to be used for propping up the American dollar in the event of an 228 00:17:56.000 --> 00:17:57.000 emergency. 229 00:17:57.000 --> 00:18:03.520 Certainly legal experts said it was not properly emptied absent the authority of Congress. 230 00:18:03.520 --> 00:18:07.840 The U.S. government had begun to act as the lender of last resort for the world. 231 00:18:07.840 --> 00:18:13.920 The Inter-American Development Bank and other creation of NAFTA sent a $1.25 billion loan. 232 00:18:13.920 --> 00:18:18.640 The World Bank approved a $1.5 billion loan, in addition, the U.S. finagled an additional 233 00:18:18.640 --> 00:18:24.200 $17.5 billion from the IMF and $10 billion from the Bank for International Settlements. 234 00:18:24.200 --> 00:18:29.560 BIS has long been called the Central Banker's Bank for its role in achieving informal agreements 235 00:18:29.560 --> 00:18:31.680 on world exchange rates. 236 00:18:31.680 --> 00:18:35.560 This was the first time in modern history that the bank actually stepped in to act as 237 00:18:35.560 --> 00:18:46.560 as another lender of last resort, and eventually the Group of Seven itself would agree to expand its ability to bail out governments increasing their fund from $27 billion to $55 billion. 238 00:18:46.560 --> 00:18:51.560 A trader for Goldman Sachs told the New York Times that all the international coordination was necessary. 239 00:18:51.560 --> 00:18:57.560 We need, he said, quote, the financial equivalent of Desert Storm, unquote, to rescue Mexico. 240 00:18:57.560 --> 00:19:00.560 Still, the peso continued to fall. 241 00:19:00.560 --> 00:19:09.560 Even as the U.S. kept pouring the money on, the freshmen in Congress got organized to investigate the improper use of the Exchange Stabilization Fund. 242 00:19:09.560 --> 00:19:21.560 A procedural motion sponsored by Mississippi Democrat Gene Taylor would have as a very mild step led to a study by the General Accounting Office as to the action's constitutionality. 243 00:19:21.560 --> 00:19:24.560 But Gingrich blocked this from ever coming to a vote. 244 00:19:24.560 --> 00:19:34.560 Senator Al Demado of New York organized hearings on the affair, but it wasn't until July before any anti-bailout bills were allowed to make it to the House floor. 245 00:19:34.560 --> 00:19:44.560 Thanks to Gingrich's control of the House Rules Committee, by the time the House was able to vote on putting a stop to any more Mexican-style bailouts, the last of the money had been dumped. 246 00:19:44.560 --> 00:19:53.560 And who was finally responsible for bringing it to a vote? Bernard Sanders, the Vermont Socialist, who as an independent wasn't controlled by either party on this issue. 247 00:19:53.560 --> 00:20:00.200 But this too late vote even shook the Mexican markets again, which was blamed by the Wall 248 00:20:00.200 --> 00:20:03.040 Street Journal on the freshman class. 249 00:20:03.040 --> 00:20:08.480 In the meantime, Mexico agreed to an economic recovery plan that consisted of spending cuts, 250 00:20:08.480 --> 00:20:12.760 tightened monetary policy, and huge tax increases. 251 00:20:12.760 --> 00:20:17.480 As in this country, only the last plank of this platform was actually implemented. 252 00:20:17.480 --> 00:20:23.480 Clearly, there is no hope for a prosperous Mexico until we see a commitment to sound money. 253 00:20:23.480 --> 00:20:27.480 And that in turn will not happen unless the U.S. stops bailing the country out. 254 00:20:27.480 --> 00:20:34.480 There was never much economic downside, in fact, to letting the Mexican economy sink into the mire without the bailout. 255 00:20:34.480 --> 00:20:37.480 The total economy is no bigger than that of Los Angeles. 256 00:20:37.480 --> 00:20:42.480 From the point of view of American economic health, it's not a serious thing if it tanks. 257 00:20:42.480 --> 00:20:50.480 and, indeed, they would have been forced to lower tariffs to incoming goods and to export even more than American consumers would have made out like bandits. 258 00:20:50.480 --> 00:20:55.480 Plus, average Mexicans would have been better off with a broke and debilitated government. 259 00:20:55.480 --> 00:21:00.480 Most importantly, the Mexican government would have had to pay the price for its extravagance, 260 00:21:00.480 --> 00:21:07.480 which would have sent a message to every government in the world that if it inflates and runs up debt, it cannot count on the U.S. to bail it out. 261 00:21:07.480 --> 00:21:11.480 What about the mutual funds and the banks that were heavily invested in Mexico? 262 00:21:11.480 --> 00:21:18.480 Well, under capitalism, you can't divorce, or at least shouldn't divorce, the opportunity for profit from the risk of failure. 263 00:21:18.480 --> 00:21:26.480 They go hand in hand, and by accepting only profits in the short term, we're guaranteeing losses, much larger losses, in the long term. 264 00:21:26.480 --> 00:21:31.480 In the NAFTA debates, we heard a lot about protectionism versus free trade. 265 00:21:31.480 --> 00:21:35.480 In fact, this had precious little to do with the substance of the agreement. 266 00:21:35.480 --> 00:21:40.480 We got new bureaucracies to impose government regulations and controls on the Mexican economy. 267 00:21:40.480 --> 00:21:46.320 and Economy. We got a, quote, border cleanup fund of subsidies to big business. And we 268 00:21:46.320 --> 00:21:52.160 got the first steps of a currency union in the North American Financial Group. Most importantly, 269 00:21:52.160 --> 00:21:57.560 as Murray Rothbard wrote in June 1994, quote, one of the unheralded aspects of NAFTA was 270 00:21:57.560 --> 00:22:02.280 a joint government action in propping up each other's exchange rates. In practice, this 271 00:22:02.280 --> 00:22:07.800 means artificial overvaluation of the Mexican peso, which is one more step towards arrangements 272 00:22:07.800 --> 00:22:12.840 that will distort exchange rates, create monetary crises and shortages, and waste taxpayers' 273 00:22:12.840 --> 00:22:20.600 money and economic resources." Will the Republicans do anything about it even now? No, the party's 274 00:22:20.600 --> 00:22:25.320 elites made NAFTA possible, a fact which will not be easily forgotten by the millions of 275 00:22:25.320 --> 00:22:30.060 people who begged them to do otherwise. Again, the public proves to have had better instincts 276 00:22:30.060 --> 00:22:35.560 than Washington's managerial class, which has been outwitted once again. NAFTA was sold 277 00:22:35.560 --> 00:22:40.440 is free trade, but that could have been accomplished by simply reducing tariffs. Free trade had 278 00:22:40.440 --> 00:22:44.500 nothing to do with NAFTA's real aims. And indeed, whatever benefits could have come 279 00:22:44.500 --> 00:22:49.240 from tariff reductions have been wiped out by the pace of collapse, which acts like a 280 00:22:49.240 --> 00:22:54.820 tax on traders. But now NAFTA's grand plans lie in tatters, and the US should take the 281 00:22:54.820 --> 00:23:00.560 opportunity to withdraw from it. Most Europeans are coming to realize the impossibility of 282 00:23:00.560 --> 00:23:05.060 of Creating a Political and Monetary Union Run from the Center. 283 00:23:05.060 --> 00:23:11.560 Instinctively, most Americans also know that the same thing transferred to North America was preposterous. 284 00:23:11.560 --> 00:23:18.160 Sad history of the Mexican bailout teaches us the lesson of how much damage a central bank can cause. 285 00:23:18.160 --> 00:23:22.560 None of this would have been possible without the Federal Reserve and its fiat money. 286 00:23:22.560 --> 00:23:28.060 If we'd been on a gold standard, the government would have been powerless to bail out anyone. 287 00:23:28.060 --> 00:23:35.300 And until we get a gold standard, we have to rely on the sound instincts of the public to create barriers to such bailouts. 288 00:23:35.300 --> 00:23:43.700 The conspirators did indeed fear public opinion, which is why they spent so much time and energy putting a good spin on the entire debacle. 289 00:23:43.700 --> 00:23:51.060 We can say that any time a politically manufactured economic union is destroyed by market pressures, freedom lovers should celebrate. 290 00:23:51.060 --> 00:23:56.860 At least it reminds us that even the wealth and power of government cannot abolish economic law. 291 00:23:56.860 --> 00:24:01.560 As for the individuals and groups involved in perpetrating this gargantuan financial 292 00:24:01.560 --> 00:24:08.580 scam, they should never be forgotten or forgiven, but instead driven from public life. 293 00:24:08.580 --> 00:24:11.220 And then we can think about the appropriate punishments.