Date: Fri, 10 Mar 1995 12:07:36 -0500 (EST) From: Competitive Enterprise Institute To: Recipients of the CEI List Subject: Peso Bailout THE BAILOUT BETRAYAL By James Sheehan, Policy Analyst at CEI appeared in *The Washington Times* Febrauary 3, 1995 In vain, President Clinton asked Congress to support a bailout of the Zedillo regime in Mexico. In opinion polls, at least seventy percent of Americans disapproved of his original plan. Seeing reform in Washington as a higher priority than cleaning up Mexico City, Congress' freshman class derailed Mr. Clinton's plans for a quick bailout with $40 billion in loan guarantees. Undeterred by public rebuke, Mr. Clinton now has announced a smaller $20 billion bailout that will move forward without Congressional approval. Mr. Clinton's rash move is not the first use of public funds for Mexico. Our southern neighbor already has received access to approximately $9 billion in subsidized credit from the U.S. government through Federal Reserve and Treasury Department foreign exchange reserves. Then, a separate $7.8 billion bailout was announced by the U.S.-subsidized International Monetary Fund, an arm of the United Nations. In doing so, the IMF impatiently swept aside its own rules limiting such loans to a fixed quota, and made the largest loan in its 50-year history. Now the IMF will money-launder the lion's share of the Mr. Clinton's Mexico bailout. American taxpayers should be outraged at Mr. Clinton's use of a United Nations loophole to funnel taxpayer dollars to a foreign country against their wishes. Likewise, the use of the Treasury Department's exchange stabilization fund is of questionable legality. As House Banking Committee Chairman Jim Leach admitted, "this will be a novel use of [exchange stabilization fund] resources." Mr. Clinton's circumvention of Congress is an end run around the Constitutional checks and balances meant to safeguard a free society. The leading politicians of both parties are actively thwarting the will of the people. Mr. Clinton's oft-repeated justification for the bailout is that it will protect U.S. jobs tied to exports to Mexico. Those jobs, along with soaring portfolio investments, were initially stimulated by exaggerated perceptions of Mexico's economic stability and growth potential under NAFTA combined with loose credit policies. Essentially, the Mexican government financed a false stimulation to U.S. exports with loans, and it cannot repay its debts in full. Facilitating bad loans, or giving away the dollars to buy American products, can no more create jobs than giving away the goods and services outright. By diverting credit away from U.S. capital markets, the bailout's true impact on American jobs will be negative. Subsidized credit for Mexico will mean higher interest rates for American businesses, home-buyers, and farmers, and higher inflation for consumers. In addition, a U.S. bailout will bolster the draconian IMF-supported economic plan of the Zedillo regime, punishing the Mexican people with wage and price controls, user fees, and tax increases. Higher interest rates will lead to a proliferation of commercial bankruptcies, adding pressure to the country's sagging banking system. In the near future looms a severe recession, rampant inflation, and mounting civil unrest -- a recipe for declining trade opportunities for the U.S. Mr. Clinton has denigrated bailout opponents in Congress as populists, protectionists, and isolationists. However, Congress can best ensure the health of foreign markets by demonstrating confidence in market forces, not by manipulating investor confidence using other people's money. For starters, the mercantilist thinking behind the NAFTA preferential trade bloc should be abandoned. Instead of free trade, the agreement has permitted Mexico to employ protectionist devices such as bureaucratic regulations, labelling requirements, domestic content rules, "anti-dumping" investigations and other non-tariff barriers against imports. Managed trade provisions on labor rights and environmental standards have been ineffective to date at protecting workers or the environment, but have been used to penalize productivity, savings, and investment. The anti- competitive trade barriers in the Zedillo economic plan will prevent Mexico from attracting adequate foreign capital. A free market strategy necessarily excludes the IMF. Over the last fifty years, Mexico has been one of its heaviest Third World borrowers, leaving a legacy of punitive taxes, currency devaluation and skyrocketing public debt. The austerity-minded IMF is less concerned with promoting long-term growth in Mexico than it is with ensuring that the Mexican government extracts enough private sector wealth to make IMF loans appear viable. The IMF's latest sweetheart deal rewards the incompetent architects of Mexico's current meltdown and increases the likelihood of a repeat performance. It will promote reckless risk-taking by private lenders, who will be influenced by government subsidies to divert credit resources away from healthy countries into a notoriously mismanaged economy. Congress should introduce a resolution demanding that the IMF return all U.S. funds immediately. Like the UNESCO of the early eighties, the IMF is a U.N. institution that is careening out of control. Moreover, Congress should reverse the Mr. Clinton's entire ill-advised bailout. Without a Congressional vote, the executive branch escapes all accountability to the American people for use of public funds. Mr. Clinton must be reminded that these funds belong to the taxpayers, and not to the President. _______ __________ ___________ / | / | | | |__________ | | | | \ | | \ _______ |__________ ___________ 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.