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12/10/2018 "The Black Economy 50 Years After The March On Washington"

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Getting To The Root Of Why The Bush Administration Is Permitting Argentina To Fall (Part 1)

For several weeks now we have raised questions about the nature of the Bush administration's rather callous attitude taken toward the rapidly deteriorating situation in Argentina. We have been among many who have raised eyebrows over the manner in which the President and his Treasury Secretary, Paul O'Neill, have not so much as lifted a finger to help the Argentine citizenry, the country's business elite and prominent American corporate and banking interests, all of whom have seen significant amounts of their financial capital destroyed and contracts nullified as a result of the IMF conditionality; Federal Reserve-produced monetary deflation; and Argentine government policies that contributed to the Argentine peso being devalued.

Most recently our interest in the matter was stimulated as a result of the peculiarity we noticed in the way in which the IMF was obstructing and obfuscating on the subject of monetary policy options available to Argentina. For us it all began when we learned of a disagreement of sorts between Johns Hopkins Professor of Applied Economics, Dr. Steve Hanke, and two representatives of the International Monetary Fund (IMF): Mr. Thomas Dawson, director of IMF external affairs and Ms. Anne Krueger, first deputy managing director of the IMF.

Professor Hanke, for several months, throughout 2001, had been arguing that Argentina was in a position to dollarize its economy, if it so desired, and thus avoid a painful peso devaluation. His arguments had already begun to pick up steam in both the United States and Argentina - particularly among journalists and politicians in the Latin American country. And last fall, Argentina's then-Economy Minister, Domingo Cavallo, as well as the chief of cabinet to then-President De La Rua, revealed to the local and international financial media that if push came to shove, Argentina would dollarize its economy, rather than devalue its peso.

Some specifically point to an October 5th cabinet meeting as the date when it first became known that the government intended to dollarize if its backs were placed against the wall, economically speaking. Immediately after that October meeting reporters were told of the De La Rua administration's dollarization inclinations. And in the first week of November Economy Minister Domingo Cavallo reiterated the same to members of the international financial press corps.

But in a strange turn of events that still, to this day, requires explanation, Mr. Cavallo and De La Rua were eventually out of power, and the peso was subsequently devalued, with devastating effects.

Regardless, Professor Hanke pressed on, even through the devaluation, in demonstrating that Argentina did not have to devalue its currency and if it desired to leave its peso-dollar tie, it could do so by dollarizing the economy. Subsequent to the devaluation, many of Mr. Hanke's arguments picked up additional momentum and the Argentine and international press began to pepper the IMF with questions regarding the esteemed economist's arguments. In the month of January, when pressed by reporters, the IMF, in the person of Mr.Dawson and Ms. Krueger, took the public position that it was "technically unfeasible" for Argentina to dollarize. But this was simply not "technically" true. Our read of the Banco Central de la Republica Argentina's (BCRA) balance sheet clearly indicated that Argentina had more than enough foreign reserves and asset holdings to dollarize. Why, we wondered aloud, would the IMF lie or obfuscate on the matter? And furthermore why would the Bush administration permit this to happen?

Throughout the last year, the Bush administration provided very vague, evasive and contradictory statements regarding its desire for what course Argentina's policy makers should take in order to handle the brewing crisis. And Treasury Secretary O'Neill took the lead in confusing financial markets, making comments on financial media outlets like CNBC that led many to believe that the administration was in denial over the extent of the problems in Argentina, or just didn't care. And all the while the administration was exhibiting inertia on the matter, the IMF was moving full speed ahead with handing out its bad advice to Argentina - a mixture of bad fiscal and regulatory advice and as we would later learn, bad monetary advice. It was anybody's guess as to why the U.S. was being so deferential to the IMF's destructive handling of Argentina, which spanned a time period that included much of the second term of the Clinton presidency.

And to us, it was maybe even more striking that the United States did not support the former Economy Minister, Domingo Cavallo's public indications that he believed Argentina did not have to devalue its currency and that if the peso-dollar link were to be severed at the prevailing one-to-one exchange rate, the country would have prefer the route of dollarization over the option of devaluation.

The dramatic altering in the image and handling of Domingo Cavallo, from that of a calming influence on international markets and a poster child and model student of American "brand"-capitalism and free-market economic ideology; to persona non-grata, a leader suddenly unworthy of intellectual support from U.S. policy makers, is a study in and of itself.

All of these issues came to mind on February 6th when the Treasury Department's Under Secretary for International Affairs, John B. Taylor, appeared before the House Banking Committee's Subcommittee on International Monetary Policy and Trade. At the hearing, after some intense grilling and pressure from Rep. Barney Frank (D-Mass.), Assistant Secretary Taylor admitted that it would have been his preference for Argentina to have dollarized its economy instead of devaluing the peso. This was certainly a newsworthy item as the Bush administration had denied it had a preference on the matter and because it was the IMF which had endorsed the devaluation course. Yet and still with exception of a small Dow Jones report and some articles in the Argentine press, the news of Mr. Taylor's remarks did not make headlines.

At this point we began to become convinced that something more was at work. Why would the Bush administration hold back its monetary policy position - one that could have saved billions worth of financial capital, especially when American corporate and banking institutions were among the "victims" of what was happening in Argentina? In addition, we learned that on February 1st, Congressman Jim Saxton (R-NJ), Chairman of the Joint Economic Committee released a statement, which the White house received, entitled, "IMF SHOULD PROMOTE RESPECT FOR PROPERTY RIGHTS IN ARGENTINA" which contained the following comment:

"Argentina's current government, which assumed office January 1, has promised to develop a coherent and sustainable approach to end the country's recession. However, it has taken steps that have been counterproductive. By upsetting well-established property rights and nullifying contracts, the government is reducing Argentina's prospects for returning to economic growth." As a result, a number of U.S. companies and through them many U.S. investors have suffered losses, along with millions of Argentines

U.S. law provides for cutting off assistance to foreign governments that seize the property of, or nullify existing contracts with, U.S. citizens or corporations. Relevant parts of the U.S. Code are the following sections of Title 22: section 283r; section 284j; subsection (e) of section 2370; and subsections (a) and (b) of section 2370a.

We fact-checked the second paragraph and found that Rep. Saxton was indeed correct. This information was explosive, as we realized that the Bush administration, though cognizant of this aspect of the U.S. Code, was permitting the IMF to persuade, endorse and encourage the Argentine government to take economic measures that resulted in the blatant nullification of contracts. Furthermore, as we learned from the revelation of Assistant Secretary Taylor, members of the Bush administration were not only deferring to the IMF, but were themselves withholding their beliefs as to what policy steps Argentina should take in reference to monetary policy. The Bush administration allowed Argentina to devalue its currency and break contracts, all under the watchful eye of the IMF, while it kept quiet about a policy option that could have spared Argentina, Latin America and the world of the worst effects of such drastic steps. Then, the Bush administration continued to remain silent while the IMF obfuscated and obstructed a clear view of the BCRA's balance sheet that would prove that the monetary policy option preferred by Assistant Treasury Secretary Taylor, was a viable option.

To make matters worse we then learned that indeed U.S. corporate and banking interests were pleading with the Bush administration to do something about what was happening in Argentina, to no avail. obtained a list of the U.S. interests that were taking a hit in Argentina and the list was staggering. It was almost unfathomable that an administration would allow a list comprised of an all-star team from the nation's business establishment to lose enormous amounts of money without that administration expressing its frank opinion, searching for some form of redress or providing the typical "bailout." To say the least, the Bush administration was acting out of character. What was happening in Argentina was nothing short of unheard of.

Here are the American entities that have lost varying amounts of financial capital or had contracts nullified as a result of what has happened in Argentina:

Banking/Financial Services
2)JP Morgan Chase
3)Bank of America
4)FleetBoston Financial

1)Ford Motor Company
2)General Motors


2)CMS Energy
3)AES Corp
4)Key Energy Services

Note: As a possible precursor of things to come for U.S. banking interests, just yesterday Group Chief Executive of HSBC Holdings PLC, Keith Whitson, reported that the bank's pretax profit plunged 18 percent to $8 billion last year due to a jump in its bad loan provisions for Argentina. HSBC, which is based in London but controls the leading bank in Hong Kong, the Hong Kong and Shanghai Banking Corp., said its earnings dropped from US$ 9.78 billion in 2000.

Never had we seen so many multinational interests suffer significant losses, right along with the local business elite and citizenry, only to have their losses go unattended. To the unsuspecting, it looks as if no one wins from what has happened in Argentina, in economic terms.

And that impression is correct but what had not yet crystallized in our minds was the fact that there were more than just the usual current and short-term economic interests at stake in Argentina. There were also geopolitical and long-term economic interests at stake.

End Of Part 1

Tuesday, March 5, 2002

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