Date: Tue, 14 Mar 1995 11:34:17 -0500 (EST) From: Competitive Enterprise Institute To: Recipients of the CEI List Subject: CEI-List: Mexico Bailout Betrayal MEXICO BAILOUT BETRAYAL By James M. Sheehan, CEI Environmental Analyst Appeared in *Human Events*, February 17, 1995 In the face of overwhelming public opposition and a challenge from Congressional freshmen, President Clinton was forced to initiate a back-door $20 billion bailout of Mexico. Instead of asking Congress to approve $40 billion in loan guarantees as originally planned, Clinton signed an executive order regarding the Treasury Department's Exchange Stabilization Fund to bypass Congressional scrutiny. As part of the President's plan, an additional sum of $10 billion from the Switzerland-based Bank for International Settlements (BIS) and $17.5 billion from the International Monetary Fund (IMF) will be at Mexico's disposal. Clinton exercised his only remaining option, considering that 80 percent of the American public opposed the Mexico bailout. Courageous freshmen legislators led by Rep. Steve Stockman (R-TX), refused to go along with the proposed $40 billion rescue package and would have fought hard to defeat the President. Upset with the capitulation of House Speaker Newt Gingrich (R-GA) and Senate Majority Leader Bob Dole (R-KS), many Republicans joined Democrats Marcy Kaptur (OH) and Gene Taylor (MS) to challenge the president's bailout as an usurpation of the legislative branch's powers. However, that effort stalled as Speaker Gingrich, House Majority Leader Dick Armey, and their allies in the House leadership subdued the rebellious backbenchers. The American taxpayer is now at even greater risk than in the original bailout proposal, as the foreign aid to Mexico will be provided in the form of actual loans, not just loan guarantees. The Clinton bailout amounts to an end-run around Congress and a bypassing of political accountability for the use of public funds. It is a clever use of a legal loophole to money-launder U.S. foreign aid monies through the IMF, an organization under the umbrella of the publicly-scorned United Nations. Equally astonishing is Republican complicity in the bailout, which interrupted the Contract With America government reform efforts during its crucial first hundred days. In placing Wall Street bankers on the dole, the bailout neglects the Contract With America's mandate of welfare reform, a balanced budget, and restraint of United Nations control over vital American interests. Absent a successful challenge from the GOP-controlled Congress, with its Constitutional power of the purse, Clinton will not be compelled to inform Congress or the American people of the exact combination of loans and guarantees provided to Mexico by the U.S. This unprecedented use of the Treasury Department's exchange stabilization fund to bail out a foreign country is of dubious legality. According to Walker Todd, a former official of the Cleveland Federal Reserve Bank, the entire rationale for coordinated Fed-Treasury foreign currency intervention consists of the 1961 legal opinion of Howard Hackley, then-general counsel for the Federal Reserve Board. "At the end of [Hackley's] opinion," writes Todd, "he admitted that there was no explicit statutory authority for [Federal Reserve] System interventions...The statutory authority is, in Mr. Hackley's own words, neither 'explicit' nor 'clear'." Likewise it may never be clear exactly how much of the international IMF-BIS loans will come out of the American taxpayer's pocket. The IMF, receives roughly one-fifth of its funds from the U.S. For Mexico, the IMF impatiently swept aside its own rules and loan limits in making the largest and quickest loan in its 50-year history. The BIS is a highly secretive association of the industrialized nations' central banks, with even less accountability for its use of U.S. taxpayer dollars. Mr. Clinton's circumvention of Congress flouts the Constitutional checks and balances meant to safeguard a free society. William Seidman, former chairman of both the Resolution Trust Corporation and the Federal Deposit Insurance Corporation, compares the Clinton bailout of Mexico to the savings and loan bailout and its "too big to fail" standard. According to Seidman, excessive borrowing by the Mexican government led to an overconsumption binge, tricking many investors into overestimating the country's investment potential. Seidman asks: "Why should anyone be bailed out by the U.S. government, and perhaps others, for a business mistake? Market mistakes happen daily." The Clinton bailout adds to the $9 billion in subsidized credit Mexico has already received access to through Federal Reserve and Treasury Department currency swap lines. This mechanism was quietly created in April 1994 by the treasury and central bank officials of the U.S., Mexico, and Canada. It is part of the North American Financial Group, which was given responsibility for government economic and financial policy coordination under NAFTA. The editors of the pro-NAFTA Washington Post hailed the North American Financial Group as an intermediate step towards European-style currency links. Faster progress towards currency union was not possible because it would "require a sacrifice of sovereignty that would be unacceptable on this continent," lamented the Post. The peso- dollar linkage now appears to be back on track. Like NAFTA, provisions of the new World Trade Organization treaty seek to harmonize trade and financial policies and to stabilize exchange rates. The treaty specifically endorses the IMF as a means to support "adjustment to trade liberalization" in WTO member countries. As a result of the recent crisis, the IMF is planning an emergency lending facility to provide subsidized loans to countries after Mexico-style currency devaluations. The Mexico bailout could serve as a lasting precedent for the future, tempting developing countries to behave as if trade agreements imply U.S. financial support for their currencies. The expectation of U.S. foreign aid also encourages developing countries to avoid essential free market reforms, making traumatic currency devaluations more likely in the future. Tagline: James M. Sheehan is a research associate at the Competitive Enterprise Institute, a free market think tank in Washington, DC. _______ __________ ___________ / | / | | | |__________ | | | | \ | | \ _______ |__________ ___________ COMPETITIVE ENTERPRISE INSTITUTE 1001 Connecticut Ave. NW #1250 Washington, DC 20036 202-331-1010, fax 202-331-0640 Permission to copy granted as long as these lines are left intact. To subscribe to the cei list, send a message to CEI@digex.com. "The Virtual Hand: CEI's free-market guide to the information superhighway" is available for $5. CEI's monthly newsletter, "CEI UpDate," is free to contributors of $25.