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J. Bradford DeLong
Professor of Economics
U.C. Berkeley
January 21, 1998
Last week I came across an old Washington Post clipping from March 2, 1995. The headline was: "TREASURY AIDES' MEMOS WARNED OF PESO PLUNGE... ADMINISTRATION DIDN'T HEED SIGNALS." It brought back memories, for I worked at the Treasury, and the not-very-senior aide in the headline--one of them, at least--was me.
According to the story, I had warned eight months before the crisis that Mexico was in trouble. I had advised senior officials to "pay careful attention" to M.I.T. Professor Rudiger Dornbusch's predictions of trouble . The story quoted my "bottom line: peso overvalued..." In the passive voice and subjunctive mood, the reporter--Clay Chandler--concluded that my memo (and two others) "bolster[ed] ... [the] charge that {Clinton administration] officials missed warnings of trouble" and lent support to "critics of... handling of the Mexican crisis": staff warnings had been ignored.
But the story was false.
I had not warned anyone in April 1994 that Mexico was in trouble. No one needed to tell anyone to pay close attention to Rudiger Dornbusch, who has been one of the most insightful analysts of international currencies for a quarter of a century. What the article reported as my bottom line was in fact Dornbusch's assessment. And in April 1994 I dismissed it. I called it possible but unlikely: the Mexican government had only recently intervened to keep the peso from rising. The market was pushing the peso up, not down.
I wish that I had forecast the collapse. But every half-competent economist and financial reporter knows such collapses, whether in Mexico or in East Asia, can't be reliably forecast. They depend on a sudden psychological conversion of the community of investors: consensus that investments were profitable and attractive turns, suddenly, into consensus that investments are dogs.
The best that economists can do is note situations in which such a crisis is possible. But as I (wrongly) read the situation in April 1994, the Mexican peso did not look like a bubble about to burst. Even Dornbusch--out on the (then) extreme of economists' positions--thought the worst-case outcome for the next year was a small devaluation (along the lines of Britain's devaluation of 1992), not the large collapse and a subsequent severe depression (alleviated only by the peso support package).
So why write a story full of half-truths spun into whole lies? That's not an interesting question, because in Washington not-very-good reporters bossed by not-very-good editors print a lot of one-sided stories. They find the story--gift-wrapped, with a ribbon and a bow--on their front step. They print it because they want to go home early, or because they want someone to owe them a favor.
What is interesting is: who boxed and wrapped the story? The answer is as clear as if muddy prints led from the pond where the victim drowned to the suspect's front door: Alfonse D'Amato.
The lead refers to "sources familiar with the documents" that detail Treasury staff thinking about Mexico in 1994. The story discusses Senator Alfonse D'Amato (R-N.Y.) and his request for "all records... on Mexican currency policies and any assistance... provided Mexico." In Washington-speak, this juxtaposition says that "sources familiar with the documents" are Senator D'Amato's staff at the Banking Committee, and that they selectively leaked the documents.
In Washington-speak, the story tells us that it is a plant by Senator D'Amato to support his claims that the Treasury Department lied and covered-up, and so Congress should stop the loans form the U.S. and the IMF to Mexico. (Never mind that the claims were ludicrous: the story could have--but didn't--point out that the April 1994 "information" D'Amato said the Treasury "withheld" from Congress had in fact been published in the spring 1994 edition of Brookings Papers on Economic Activity.)
And when I realized that it was D'Amato who was the prime mover, I was amazed.
There were arguments against supporting the peso. I think they are weak, and that when such arguments dominated economic discourse they brought us the Great Depression. That they were wrong in this case is conclusively shown by the fact that everyone gained from the peso support package (although Mexican workers gained far less than had the U.S. put up more money and loaned it to Mexico for a longer term).
But these arguments, boiled down, amount to the claim that New York City is too large and too well-off a place: the world financial industry should be smaller, less money should be flowing through New York, and much of the financial-sector employment in New York should simply not exist. So I was astonished to see Alfonse D'Amato making them.
I was amazed because I had never before seen a Senator try his very best--using every political trick in the book, and some that added new (to me at least) pages to the book--to shrink the major industry that employs his constituents.
And now it looks like he is about to do it again. A strange alliance of the left and the right against the center is forming to try to keep the International Monetary Fund from gaining additional resources to manage possible future financial crises. Hearings will be held. I think the case for topping-off the IMF's funding is very strong, and is especially strong for anyone who lives in New York City. And what does the junior Senator from New York say? Publicly, he is on the fence--but worrying about "taxpayer dollars... put at risk" through IMF expansion.
Professor of Economics Brad DeLong,
601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/
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