We must pay attention to bubbles

August 3, 2003 12:20 PM

Argentina Didn't Fall on Its Own. (Single-page, printer-friendly version here.) I don't normally read long articles on economic subjects, but this one is riveting, because it links Argentina's collapse to larger issues of how the world of money works today.

"The time has come to do our mea culpa," Hans-Joerg Rudloff, chairman of the executive committee at Barclays Capital, said at a conference of bank and brokerage executives in London a few months ago. "Argentina obviously stands as much as Enron" in showing that "things have been done and said by our industry which were realized at the time to be wrong, to be self-serving."

...It is like "a bizarre AA program in which you remove booze from the homes of people who are reducing the amount they drink and put it into the homes of people who are drinking more every day," Pettis said. "This is probably not the best way to reduce drunkenness."

posted by languagehat (7 comments total)

cool article, languagehat, I'll be mulling this over all afternoon.
posted by elwoodwiles at 12:50 PM on August 3, 2003

The formula for an "IMF riot".
posted by euphorb at 4:22 PM on August 3, 2003

A key factor in the Argentina debacle was the convertibility law which artificially pegged the value of the peso to equal the value of the dollar. This is the equivalent of a gold standard, an article of faith for monetary conservatives that spells disaster when combined with large budget deficits. It just isn't possible to maintain zero inflation (a fixed peso) while at the same time printing money (selling bonds). The IMF and financial analysts clung to their conservative dogma in the face of reality until collapse ensued.
posted by JackFlash at 5:22 PM on August 3, 2003

Solid analysis in both the article and JackFlash's comment... However, I've been wandering the silly sections of the Web too long to accept use of the word "ensues" that is not preceded by "hilarity"...
posted by wendell at 7:24 PM on August 3, 2003

While the Washington Post article was interesting and well written I couldn’t shake the feeling that it was yet another Johnny Comelately talking a kick at the already floored investment banking cat. The brickbats would be been better aimed elsewhere.

euphorb’s excellent posted article focuses more on the IMF’s role and its opaque accountability trail and I think that this is much more interesting than yet another sub-Bonfire of the Vanities screed decrying the merchant banks for avarice. If Argentina’s financial implosion was market led, the dollar peg was its event horizon. Whose idea? The IMF’s.

However the aspect that I feel is most overlooked is the quasi-regulatory yet almost wholly unregulated nature of the credit ratings agencies. If the buy-side is compelled to buy proportions based on S&P / Moody’s / Fitch investment-grade ratings then surely these organisations should be to do more than meet certain ‘recognition’ criteria which currently serve only to perpetuate the position of the ruling triumvirate.

The time for action is immediate however, Basel Committee dictate states that capital adequacy of financial institutions will be assessed in terms of ratings agency opinion.

The fact of the matter is that the ratings agencies have demonstrated themselves to be "behind the curve" and in the thrall to sell side analysts time again both with regards to commercial paper and sovereign debt. To my mind this is an Augean stable in need of a Herculanean mucking-out.
posted by dmt at 2:22 AM on August 4, 2003

To anyone interested in the real problems of globalization and the IMF/World Bank, I highly recommend Palast's book The Best Democracy Money Can Buy. The link above does a good job at summarizing the IMF, but for those too lazy to click, here's their pitch to developing countries: First, create a system that keeps inflation low and discourages deficit spending (of course, the U.S. can deficit spend as much as it likes). This makes your country more attractive to investors, unfortunately what normally happens is that money comes in due to speculation in real estate, currency or privatization of industries, then gets pulled at the first sign of trouble. National, centralized banks may seem evil and socialist, but they're there for the long haul, as opposed to investors who can divest themselves and drain a nation's treasury in a few days without consequence to their own lives.

You've also got to have something they want to buy, which leads to step two: privatize all national businesses. In other words, all the things a country needs and built up with (ack!) socialist policy, like energy, the water supply, oil and gas lines, etc., get sold to the highest bidder. When you have a state run system controlling these things, they tend to operate with very small returns, because it's seen as a greater-good business. For instance, it's better that you have a good water supply that's clean and disease-free and only make just enough to pay for itself, than have a money-making system where if people don't pay up, they get shut off, and costs are cut right and left to increase revenue. When that happens, you get thyphoid and cholera and people dying, which is far worse for business. This is what happened in Bolivia, and to a lesser degree Ecuador.

Next, the prices for all those industries that used to be public but now are in the foriegn hands get raised to their "market price". According to Palast, this is when the riots happen, as people can't afford even basic services and have to dig in the streets for food (like Argentina).

Their final nail in the country's coffin is openning up the doors to free trade. Of course, it's anything but free, and the countries are trying to compete head-to-head against other systems that are not only more economically stable, but also protected -- take, for instance, the barriers put up against Third World agriculture. In Palast's book, he compares it to the kind of "free-trade" you saw during the Opium Wars -- your doors will be open, even if by force. These days you don't have to station battleships off the coast; a financial blockade is easier, cleaner, and more deadly, anyway.

One of the things that struck me as irritating about all of this was the fact that if Bush had his way, the country would have followed California's deregulation plan (except the reality of how bad it was stopped them dead in their tracks), and he's already deficit spending like a madman. So it's OK to impose unrealistic economic limitations on developing countries, but we're not beholden to any of the same policies. Seems to me like bald-faced robbery.
posted by Civil_Disobedient at 4:21 AM on August 4, 2003

An Argentinian visits a gringo friend. "This is a really nice house, how did you afford it?" "See that big skyscraper over there?" says the gringo, "well, my company built it and the profit paid for this house".

A while later the gringo is visiting the Argentinian. Who has an even fancier house. "Geez, how did you afford a house like this?". The Argentinian points to a river and says "My company got the contract to build a huge bridge over that river". The gringo, confused, looks for the bridge.

OK, so maybe Chileans don't like Argentinians. But the general opinion here is that they got what was coming, to a large extent. The country is famous for its corruption (searching for "corrupt" in that article didn't turn up a single match). On the other hand, I've heard this opinion expressed less often since a couple of scandals broke out over here.

Chile has, I believe, a more open market and yet doesn't have the financial problems that hit Argentina - the critical trigger was the fixed conversion rate, rather than open markets.

The USA is spending like crazy for a reason - they're trying to buy their way out of recession (I was in the USA last week and amazed to see adverts on TV directly encouraging people to spend govt cheques; the analysis of the recent growth figures for the economy was way over-sold in the papers I read - there's a serious, concerted effort, to get money moving through the economy). If they manage, it's likely to be good for everyone; if they fail everyone will be hosed. If Chile (or Argentina) goes mad spending money, it's not going to have that same world-wide effect.
posted by andrew cooke at 6:39 AM on August 4, 2003