[PEN-L:5238] William Greider article

[D Shniad <shniad@xxxxxx>]

Social programs "unaffordable" ....but millions to
bail out Mexico

While Canada and the United States are hacking away
at social programs they claim they can no longer
afford, both countries somehow found billions of
dollars to help Mexico prop up the peso and
overcome its latest economic crisis.  The $40
billion lavished on Mexico by the U.S. amounted to
that country's entire spending on food stamps,
school lunches, and its other food and nutrition
programs, which the Republican majority in Congress
now proposes to reduce by $5 billion.  The $1.5
billion supplied to Mexico by Canada comes from a
government whose last budget made deep cuts in
funding in programs for the poor, the sick and the
needy.  In the following article, U.S. economist
William Greider explains that the beneficiaries of
this massive government handout are not really the
Mexicans, but the speculators and money lenders who
invested heavily in Mexico following the
implementation of NAFTA.

       By William Greider

  The essential purpose of the Mexican bailout was
not about saving Mexicans or defending American and
Canadian jobs.  It was about rescuing the financial
investors of Wall Street (and Bay Street) and other
global financial markets.  Their capital was
stranded south of the border, facing horrendous
losses, and they wanted the American and Canadian
governments to help them get their money home
safely.
  In the last couple of years, leading banks and
brokerages have bought and sold many billions of
Mexico's financial assets and underwritten most of
the deals by which Mexico's state-owned companies
were sold off to private investors.  Mammoth mutual
funds scooped up big portfolios of Mexican stocks
and bonds, as did some pension funds.
  Trouble is, this boom was based on a bubble of
false expectations.  The investors' plunge was
encouraged by the business establishment's own
propaganda about the benefits of the North American
Free Trade Agreement (NAFTA), but the action was
fundamentally sustained by an overvalued peso,
which made the Mexican economy look much healthier
than it was.
  When the Mexican.government abruptly announced a
15% peso devaluation last December, it amounted to
a flagrant doublecross of those gullible Wall
Street money managers (though some Mexican
millionaires reportedly got their wealth out before
the fall).  The shocked American investors rushed
for the doordumping stocks and bonds.  Their
panicky sell-off made things even worse,
dramatically driving down the peso's value and
rapidly depleting Mexico's foreign currency
reserves.  The panic spread to other emerging
markets in Latin America and Asia, where financial
profits had soared on similar expectations.
  Facing these huge losses, capital was still
stuck.  American and Canadian investors who sold
off peso-denominated stocks or bonds in Mexico
expected to convert their wealth back into their
own currency and bring it home safe and sound.  But
Mexico was running out of dollars (and yen and
deutsche marks).  By mid-January, its currency
reserves were down to about $6 billion.  Yet its
outstanding short-term debt was nearly $30 billion,
not counting its much larger long-term debts.  If
everyone tried to collect on all those eso
investments at once, Mexico would be tapped out.
  That was the swamp American and Canadian
investors were stuck in, and that's why the U.S.
government, with some help from Canada, rode to the
rescue.  Their credit guarantees would be used to
recapitalize the Mexican government so it could
make good on the currency-exchange claims and pay
off the fleeing foreign investors.
  Meanwhile, domestic priorities of many kinds are
being put aside or slashed in the name of fiscal
prudence.  Yet a multi-billion dollar bailout for
Mexico gets put: on an express track.  This whole
transaction doesn't add up.  Are the U.S. and
Canada broke, or aren't they?  If they can so
effortlessly bail out Mexico, why can't the U.S.
bail out Orange County in California, which is also
bankrupt?  Why can't Canada maintain its current
levels of social spending?  Is Mexico a viable
economic partner for free trade, as the boosters of
NAFTA claimed?  Or is it a politically corrupt
basket case that the U.S. and Canada have silently
assumed responsibility for?  How can Mexicans be
expected to buy more American and Canadian goods if
their nation is broke?  Or is Mexico really being
prepared, as NAFTA critics argued, to serve as a
low-wage export platform convenient for
transnational corporations that want to sell into
the U.S. and Canadian markets?
  The puzzle is why so many supposedly savvy
investors were caught by surprise.  After all, the
leading opponents of NAFTA understood this was
going to happen and predicted as much.  They
pointed out that Mexico was propping up the peso at
an artificially high level to lure in foreign money
and promote a false prosperity that would pacify
domestic political unrest.  Rising wages and
booming markets would help Mexico's authoritarian
ruling party, the PRI, get through the 1994
elections and hold on to its 65-year monopoly on
power.  Right after the election, the critics
predicted, the peso would be devalued, Mexican
workers would discover again that their wages were
being depressed, and a deep recession would follow.
Those guys had it right.
  These financial manipulations are eventually
going to produce much more serious economic
consequences for American and Canadian workers --
with or without the bailout.  Given the collapse of
its financial affairs, Mexico is now being forced
to appease capital investors by adopting severe
austerity measures --wage suppression, higher
interest rates, budget cuts -- that will guarantee
that the country cuts back on buying American and
Canadian products and instead becomes a low-wage
exporter, selling cheaper goods into the markets of
its NAFTA partners.  That's the opposite of what
the U.S. and Canadian governments promised -- but
in line with what the opponents of NAFTA clearly
foresaw.
  Ironically, the reversal of Mexico's fortunes
may actually prove beneficial for the TNCs that
have located production there -- not just American
and Canadian companies, but Japanese and German
firms as well.  Mexican labour has just gotten more
than one-third cheaper than it already was because
of the devaluation.  That much wider wage
differential with the U.S. and Canada may set off
another round of moving factories to take advantage
of these cheaper costs -- something like the "giant
sucking sound" Ross Perot talked about.
  There are many questions that cry out for honest
debate.  Both U.S. President Bill Clinton and
Canadian Prime Minister Jean Chretien have
committed their countries to the creation of one
huge deregulated trading zone in this hemisphere,
and no one really knows what obligations this may
some day entail.  If we bail out Mexico, for
example, how could we say no to Venezuela or
Argentina?  If Mexican politics explode and slide
into civil war, will we send in troops to restore
order and protect the interests of our business
firms and bankers?
  What we do know already is that in its broad
outline the Mexican bailout resembles the recent
multi-billion-dollar savings-and-loan bailout in
the U.S. The circumstances are quite different, of
course, but both episodes contain the same stark
contradiction: Finance capital wants to be free
from government regulations or social obligations
so it can roam the globe in search of the most
profitable investments.  Then, when those
investments go sour in a big way, the investors and
speculators insist that government rescue them from
the consequences of their own folly.  Like the S &
L operators before them, the global investors in
Mexico reaped the profits on the upside, while the
taxpayers are supposed to cover their losses on the
downside.
  This system calls itself "free market
capitalism," but maybe the right name for it is
"free-ride capitalism." Global investors should not
have it both ways --attacking governments and
national loyalties as impediments to efficiency and
maximum profits, then calling on governments to
cover their mistakes in the marketplace.

(A different and longer version of this article
appeared in the March issue of Rolling Stone.)