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You Know Nothing, John Snow

And the Money Kept Rolling In (and Out) Wall Street, the IMF, and the Bankrupting of Argentina - Paul Blustein

Looking back across the historical chasm from 2005, financial journalist Paul Blaustein dissects the 2000-2002 slow collapse of the Argentine bond market, which ended with the devaluation of the Argentine peso, and the resignation of their president.

 

There are a few good angles explored here, which I won't do justice, but I can at least list off-the-cuff:

 

1)  Why it wasn't a good idea for Argentina to peg the peso to the US dollar:

Going back to the 1930's, Argentina has had chronic problems with confidence in their currency, often resulting in hyperinflation. In the early 1990's, linking the peso to the US dollar looked like it would be a good solution. This means that no matter what happened in the Argentine economy, 1 peso would always be redeemable to 1 dollar. This made foreign investors more likely to invest in Argentine bonds, because if the bond earned (say) 6%, it would really be 6% they were getting back.. the Argentine government couldn't just inflate the currency so they could nominally pay 6%, but deliver considerably less buying power.  This worked for a while, and the economy really prospered in the mid to late 1990s (for many assorted reasons). Problems arose when (a) the U.S. economy took off relative to the Argentine economy, and Argentina had a hard time coming up with money to pay its debts in U.S. denominated notes. Also: linking the peso to the dollar essentially abrogated Argentina's ability to control its own money supply, which limited their ability to stimulate or moderate the economy.

 

2)  How globalization carries the seeds of its own undoing:

The International Monetary Fund (IMF) was conceived at the end of World War II. Ostensibly, it was founded to be an international lender, an underwriter to help weaker currencies weather difficult times, and in general to assist in international debt restructuring (as a preferable option to economic collapse).  In practice, it has become (and may always have been intended to be) a tool of globalist international banks, who have used it in a somewhat predatory way, by lending money contingent on hard-up nations accepting harsh "restructuring" terms which destroy domestic protections of indigenous developing industry, and often displacing labor and rendering it vulnerable to egregious exploitation by multinationals who force their way in under the IMF terms. (All in the name of efficiency, natch.)

 

For decades this worked well for the international banking cartel and a few cherry-picked success stories, and very poorly for everybody else.  But... as globalization has extended its tentacles around the world, and has advanced its agenda more and more forcefully, it has loosened up international investing and money transfers to the point that the international investor class can slush money around the world with virtually no legal or economic restrictions.  It is the realization of the globalists' dream, when they minted the IMF!   However, one consequence of this new Earth investing environment emerged around 2000:  private money became so easily available in the form of bonds sold on the international market, that countries with unstable debt didn't actually need to come hat-in-hand to the IMF for bailout money... they could find enough suckers on the international bond market!  

 

This worked to Argentina's benefit from 1999 into 2001, as Argentina was unable to service its old debt, yet was somehow able to accrue MORE debt to service the old debt. With each round of new bond issues, the interest promised would get higher and higher, reflecting the risk (i.e. the unliklihood that Argentina would ever be able to actually repay the amount borrowed)... and investors loved it!  Who wouldn't want to buy a bond paying 15% interest?? (Hint: somebody who knew they'd never actually see the money promised.)  When economists at the IMF threatened to cut Argentina off from any bailouts, Argentina (figuratively) laughed in their face!  "Who needs ya?  We just sold another round of municipal bonds."

 

Argentina could get away with this for a while, because the "Asian Financial Flu" of 1998 made international investors skittish about putting their money in the "Tiger Economies" of South Korea, Thailand, Singapore, Indonesia, Vietnam, etc.  Argentina was still living off its "rising star" reputation of the early 1990's, so people looking for somewhere to put their money didn't ask enough questions when Argentina started putting bonds on the market.  The gravy train ended when the Asian economies started to come back from their mini-recession, and pronouncements from the IMF started to raise questions about how good a deal these Argentine bonds actually were.

 

3)  Moral Hazard:

This term gets thrown around a lot. It has to do with rewarding investors who take on more risk. If I spend my hard-earned money on a risky investment, it's because I think it might have a spectacular payoff.  Everybody loves to dream about the penny stock which grows to become the next Microsoft, etc. (In the case of this book, the investment vehicle wasn't penny stocks, it was Argentine municipal bonds, but the mechanism is the same.) This relationship between risk and reward can get short-circuited, when some outside force like the IMF comes in and promises to bail out the venture, if things go bad.  Suddenly the penny stock company becomes a venture that can't fail!  (Whereas in reality, failure is statistically the most likely fate of most penny stock companies.)  Now it's a too-good-to be-true investment! ...But why should taxpayers (of member nations of the IMF in this case) money go into making these high-payoff investments a sure-thing for a few investors?  Where's the justice in that?  And not every penny stock company gets bailed out, only some, so how does that get decided (hint: corruption), and how is that fair?  It isn't, and such interference with moral hazard can fuck with the fair valuations of every investment vehicle on the market, if you aren't careful.  Argentina and the IMF ran into some of that, when the IMF finally agreed to help Argentina service some of its debt.

 

4) There is no international equivalent to the American legal device of "declaring bankruptcy".  

 

A lot of people think it's unfair that individuals who get into deep enough financial trouble can essentially "hit the reset button" and walk away from their obligations, leaving lenders with a big loss.  Yet, there is actually a legitimate function to this legal pathway, so long as it isn't abused.  Without it, individuals might be forever trapped under unmanageable debt, unable to ever be the good consumers American-style Capitalism wants us all to be. It would also preclude somebody with otherwise good business acumen from ever overcoming a one-time mistake, to once again become a successful entrepreneur (i.e. employer, taxpayer, innovator, etc).  

 

Unfortunately, no such pathway exists for nations which mismanage their debt. Blaustein lays out a good case for why there probably should be. 

 

 

If you are interested in any of this kind of stuff, this is a decent (but not great) read. There are a lot of nice details sprinkled in, about the different players in this story, and what they are like on a personal level. If you tend to be unsympathetic towards predatory banks like JP Morgan, it is nice to see Blaustein cutting them exactly zero slack for their role in Argentina's undoing.  Likewise for the Treasury Dept under George W. Bush. The final few pages detail then-Treasury Secretary John Snow tying himself into knots of pretzel logic in front of Congress, testifying why he thinks countries with unmanageable debt are a great investment, why he thinks American taxpayers' money should go into saving unrealistically-risky bonds from failing just so a few mega-rich investors won't have to take a loss, and (best of all) why what happened to Argentina "could never happen here" (!!)