The Inside Story on Mexico Jude Wanniski September 26, 1996

Memo To: Thomas L. Friedman, NYT
From: Jude Wanniski
Re: Your 9/25 Foreign Affairs Column

Once again, you are clearly out of your depth in writing about foreign economic policy. You are allowing yourself to be used as the unwitting agent of the foreign policy establishment, which of course encompasses the money-center international banks. Ultimately, foreign policy is about money. Your column yesterday could have been written by Larry Summers of Treasury and Bob Hormats of Goldman, Sachs. Larry of course was complicit in the unnecessary and destructive peso devaluation in that he was the acting Treasury Secretary in the December 1994 period when the crisis — which was fomented in September by the IMF, Treasury and their pals at the big Wall Street banks — came to full flower. The bear raid that these guys engineered was one of the biggest financial scandals in all of American history. It was so big that it led to the biggest news cover-up of our time. The WSJ subsequently did a blow-by-blow of how closely Treasury was involved in pushing for the devaluation, but there is no sound when one hand claps. Your source in Mexico City, Finance Minister Guillermo Ortiz, himself offered incontrovertible proof of overwhelming U.S. involvement in the plot, in a speech on the floor of Mexico's Chamber of Deputies just one month after the initial devaluation. "We had the endorsement of the World Bank, the IMF, the OECD, stockbrokers and analysts," said Ortiz. "We had clear support."

As an outside advisor to Bob Dole during this scandal, it pains me to see the way you give him credit for his role in the bailout. Dole was responsible for recommending the route of the exchange-rate facility, in order to bypass the Congress. This is what the team that I was on recommended, in order to save face both for the administration and for the Mexican government. We operated in good faith, but in the end were screwed by Summers and Rubin. Dole had designated Sen. Bob Bennett as his "Mr. Mexico." In exchange for GOP support, we wanted the administration to roll back the peso devaluation in order to prevent the suffering of the Mexican people and the immigration problems it would cause the U.S. Southwest. Summers, though, lied to Bennett, a fellow who takes people at their word, so many times about how Treasury would handle the facility that when it was all over, it was too late to do anything but sign on. If I were as complicit as Summers, I would have lied too, anything to clean up the giant poop he had left in Mexico. Summers has told so many lies he now really seems to think that he was Mexico's savior.

The $20 billion we coughed up was simply to pay off the Wall Street banks that had gotten burned when the nice little IMF devaluation of 10% turned into a fiasco. Little boys play with matches. According to Bennett, Summers subsequently told him that, ahem, well, yes, the Bank of Mexico could have prevented the devaluation by selling peso bonds from its portfolio to their banks. There was a critical meeting of Bennett, Sen. Connie Mack, Wayne Angell, David Malpass (a former Asst. Secy, of State for Latin America as well as a Treasury official), and myself, chaired by Jack Kemp, to advise Bob Dole on how to handle this. The decision was made to advise Dole to say the devaluation should be rolled back with the $20 billion used to facilitate the process. It never need be used, just stacked up to impress the markets that the problem would be solved. The idea was that none of the funds would be called upon if the Bank of Mexico sold peso bonds from its giant portfolio as we advised. The Bank had enough to buy up every liquid peso in Mexico 20 times over. Greenspan knew of the entire play. I had actually met with him in his office the day after the devaluation, and he agreed it could be rolled back if done quickly enough, within at least several months. Dole went on Meet the Press two days after the meeting and conveyed the weight of our advice — knowing it was backed by Kemp who he still saw as his major competition for the GOP nomination. I had at that point advised Dole that Jack would not run for President.

The bailout never helped Mexico, because Summers and Rubin took the money and ran, laughing at Dole and Bennett and D'Amato for being so gullible. The peso devaluation was not rolled back to 3.5, which would have restored the wages and savings of the Mexican people, the only thing that could prevent them from being driven into a deep, miserable recession. The peso finally did stabilize at 7.5. The damage done to the economy was horrific and the misery continues to this day. The country remains under the IMF/Treasury boot, unable to take the steps necessary to get living standards rising again — which of course is the source of California's immigration problem. The fact that we are being paid back on our loan is hardly anything to celebrate, here or in Mexico. We told Mexico to raise the cash so Clinton could take credit for his bailout policy. Mexico has not dug itself out of its debt, merely transferred it to European creditors willing to buy high-interest government bonds.

Your column reads like a wonderful fairy tale story, with the cheerful little Mexican munchkins bearing up under the weight of a 30% decline in their living standards because of "the strength of the Mexican family." You say "there should have been a revolution, but there was barely a demonstration." You fail to note that the Zedillo administration has actually boasted about its border with the United States providing a safety net for the most miserable and most revolutionary of its citizens. Californians and other Southwestern U.S. citizens are having their own living standards dragged down by the social costs of caring for the illegals that have poured across the border — courtesy of Larry Summers and Bob Rubin of Treasury, Stan Fisher of the IMF, and various and assorted Ph.D. nitwits in the Fed bureaucracy. A huge champagne dinner was flung on Wall Street with the participants from several of the leading banks cheering their success and the ton of money made, of course, at the expense of those cheerful little Mexican munchkins.

Your idea that Mexico was not ready for Nafta because it is not our equal is among the most patronizing of the assertions you obviously parrot in your column today. Parrot? I will not allow myself to think that a journalist as original as you are on geo-politics can come up on your own with these terrible ideas in international finance. A great reporter is one who does not stop asking questions until he runs out of people with answers. You do yourself and the Times a disservice by regurgitating the Treasury party line on these matters.

It is not that Clinton needs a bump in the polls that this campaign has begun to take credit for Mexico. The black whale that we know of as the IMF needs to be fed again. The big banks are getting restless with bad loans made at the instigation of the Ph.D. nitwits at the IMF. The groundwork is being laid for another replenishment of taxpayer cash. The public has to be sold on the idea of IMF gold stocks being peddled to help the poor little black munchkins of Africa pay their bills at Goldman, Sachs. That's why you were handed a column to write, Tom. Just be sure you know what it is you have been put up to.
The United States cannot act in such irresponsible ways if there is to be a Pax Americana. We now have a President who drops bombs on countries with whom we are at peace, and triggers currency devaluations in our neighboring countries so his Wall Street pals can make a few bucks. How could he possibly get away with this if our free press were questioning him closely instead of parroting a Party line?

What should be done in Mexico? Ask Pedro Aspe, who left the finances and economy of Mexico in perfect working order. No sooner had Aspe, a fanatical defender of the peso, left the government, than the vultures from Wall Street and Washington swooped down for the kill. If it gets to the point where Dole is in the White House and we can get someone in Treasury who does not represent the interests of the Wall Street banks, we might be able to help Mexico a lot more than we have so far in our NAFTA partnership.

If you would like to get further background, you can check the archives for my February 10, 1995, testimony on the Mexico crisis, before the full House banking committee chaired by Rep. Jim Leach.