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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


Writing across the historical chasm of 3 years, financial journalist Paul Blaustein looks back from 2005 to explore the slow-motion implosion of the Argentine bond market and peso from 2000-2002.

I won't do it all justice, but the book shines in a few areas:

1) How for one brief, beautiful moment, globalism was the undoing of the IMF

This is kind of funny when you think about it. There is some karmic justice here, because the International Monetary Fund (IMF) was conceived after World War 2 by international bankers, for international bankers. The institution is ostensibly an impartial international lender, there to help stabilize underdeveloped nations during periods of crisis. If you cherry-pick your examples, you can argue that it has had some success at this, but more often than not, it has been a sort of weaponized finance aimed by developed nations at underdeveloped nations, during the period of their greatest vulnerability, and used as a vehicle to force borrowers to accept the terms of globalization. As a result, IMF loans have always come with strings attached which obliterated domestic protections for fledgling industries and labor. Lending nations receiving IMF funds have been forced to watch nacent domestic employers go under, displacing labor and making it cheap for predatory multinationals to force their way in and exploit the locals.

Proceeding this way for decades, the IMF has managed to shape the global investing environment to the point that most countries no longer have protections to keep local money from leaving the country to chase better options abroad. Hooray for the efficiencies of globalism, and screw you, citizens of developing nations who can't raise any capital to start businesses or develop infrastructure!

But wait! With money traveling over borders so easily, an entirely new source of capital has been revealed in the international bond market. Failing states like Argentina no longer need to go to the IMF, hat-in-hand when they can't service their debt; they can float bonds at ridiculous rates of interest (since they're so risky) for rubes in New York, Hong Kong, and Singapore to suck up. Normally, investors might be skeptical of such risky investment vehicles, but in 2000, the "Tiger Economies" of East Asia (e.g. South Korea, Thailand, Vietnam, Indonesia, etc) were in a recession, and the US tech bubble had just burst, so Argentina's 15% municipal bonds looked pretty damn good (if you ignore the fact that there was mathematically no way they could actually be paid in full)

Suddenly, Argentina could tell the IMF to go pound salt! That is, until the "Tiger economies" started to make a comeback, and international money began flowing back out of Argentina (oh what a fickle mistress is the international municipal bond market!)

For a while, the success of globalism was the undoing of globalism's weapon-of-choice, the IMF. Not sure what the future holds, but that was entertaining!

2) Moral Hazard

If you've heard this term thrown around a lot, but wondered what it meant, Blaustein gives you as good a lesson as you're likely to hear anywhere.

When the IMF finally did come in to rescue Argentine bonds, there was a good deal of outcry about moral hazard. The bonds paid really high rates, because they were risky. High-level financiers were making 15% or more (on bonds!) because everybody implicitly understood that there was a very real risk (inevitability, actually) that Argentina might default on them. When the IMF entered to rescue these bonds, it was essentially using American (Canadian, British, Australian, etc) taxpayer's money to make these 15%-bearing vehicles into a can't-fail investment for a bunch of Wall Street (Hong Kong, etc) high rollers (as well as a lot of middle class Argentine investors). Not only is that unfair, but it completely fucks with the valuations of every other bond on the market.

and 3) There's no such thing as bankruptcy for nations (but maybe there should be)

In American law, and many other nations, a person whose debt spins out of control can essentially "hit the reset button" and walk away, leaving creditors holding the bag. There are penalties attached to this, to be sure, but on some level there is a "free pass" for mismanaging one's finances. A lot of people bulk at this, and consider it unfair... well, it is, especially if it is abused... but there is also a legitimate economic function for this process. If a person gets buried under a mountain of debt they can never possibly repay, then they can't be the good consumer/spenders that American Capitalism dreams we should all become. Worse still, if an otherwise good-businessman can't make a mistake now and then, the American entrepreneur may develop a much smaller apatite for risk... resulting in fewer business ventures, which employ fewer people, which make few innovations, and enjoy fewer spectacular successes. America's productivity and prosperity has been in large part to our risk/reward investment environment.

Unfortunately, there is not an equivalent pathway to rescue nation states from their own financial mismanagement. Paul Blaustein lays out a case for why there maybe should be, and what he thinks such a process would look like. Interesting reading, if you're into that sort of thing.

The last few chapters deal with the aftermath of the Argentine meltdown, and include a few good excerpts from Bush-era Treasury Secretary John Snow, tying himself up into pretzel-like knots of illogic, as he testifies to Congress about why he thought a country with unmanageable debt would be a good investment, why taxpayers should be happy throwing good money after bad to further prop up the failing Argentine peso, and (best of all) why "such a thing could never happen here [in America]!"

Good stuff.


You Know Nothing Jon Snow