Credit Bubble Bulletin is a bit long-winded tonight, but the conclusion is hilarious, with a great show of hubris by the Fed's one and only McSteer:
prudentbear.com
I almost discarded the following quote from Mr. McTeer and my too cynical by half comments regarding the unfolding Argentine crisis. I will attach them here at the end, but they certainly can be disregarded.
“I didn’t mean to put (in my speech) Argentina right after Europe, but you know there’s parallels. Argentina is a disaster right now. It’s a slow train wreck that we’re still watching. Ten years ago they had hyperinflation. I went down there in ’96 and went to a flea market and bought some currency – a handful of Argentine currency for $10. It was worthless. Around ’91 they pegged their Argentine peso to the dollar at a one-to-one basis to set up a currency board arrangement so the central bank couldn’t create pesos unless it had dollar reserves – a dollar for each peso created. That was killing inflation cold turkey. It worked; they went from hyperinflation to zero. In the ‘90s their inflation performance was a little better than ours, because they were pegged off the dollar. But the dollar kept getting stronger and stronger. Here they are tied to this dollar. And like Europe but worse, their internal institutions weren’t quite as good and flexible – their internal policies weren’t quite good enough to manage within that straightjacket that they were in. Particularly, they continued to run very large fiscal deficits, not just at the federal level but at a more local level. And their labor unions remain very strong and labor flexibility is pretty much lacking there as well as in Europe.
But I was there the first time in ’96. I think things were getting much better – they were in the middle of a boom. But their unemployment rate was still 17% and it’s gone up from that lately. They’ve been in recession for about four years now. They had two ways they could go. They could have strengthened that link to the dollar by going ahead and dollarizing – getting rid of their own currency and using the U.S. dollar as their currency. That would have helped them lower some interest rates. To the extent that interest rates were higher because of exchange risk, that would have eliminated that and interest rates would have been lower. On the other hand, it would have been a (inaudible) strong currency and having to suffer the consequences of having their currency strong when they are already not very competitive internationally. My conventional wisdom was that they had no choice but to stay with their peg or make it stronger with dollarization. Because of their history, they are sort of like an alcoholic who hasn’t had a drink in ten years. It’s all going to fall apart if they start drinking now. What they’ve done is they’ve just broken out the bottle.” Robert D. McTeer, President of Federal Reserve Bank of Dallas, January 8, 2002
What’s that expression about people living in glass houses and throwing stones? Argentina, like many nations (and certainly the U.S. to this day), borrowed in excess when the marketplace was overly accommodative. The outcome was a most regrettable and untenable Credit Bubble. When the speculative environment and related economic boom reversed, as they always do, Argentina’s dollar-linked Credit system ground to a halt. The economy followed. Much of the foreign-sourced finance then wanted out, but the dollars had long since been spent. The Argentines lost access to new finance, while at the same time faced with the unusual and problematic circumstance of suffering from an overvalued currency. They, unlike the U.S., did not enjoy the status of the world’s reserve currency, nor did they have the capacity to collapse domestic interest rates, incite stimulating speculation and Credit creation, whereby fostering an enormous “reliquefication” of their financial system. Their system specifically prohibited such processes that allow governmental and central bank (and financial systems) attempts to inflate out of trouble.
So I can’t resist expanding on Mr. McTeer’s “alcoholic” analogy: Having hit absolute “rock bottom,” Argentina understood clearly that it had an acute addiction problem and was willing to take the “hard medicine” to go “cold turkey” in the early ‘90s. It terminated alcohol consumption – over-expansion of its domestic money supply - with the introduction of a vaunted dollar-peg currency board program (“I am a monetary alcoholic…I will not use bank deposits…”), as prescribed by the U.S. and I.M.F “substance abuse physicians”. After a difficult “detox” period, the alcohol-free outpatient was rejuvenated and ecstatic to be off the bottle. Yet despite the reality that Argentina was becoming increasingly fond of those old-favorite little blue Credit pills, no one seemed to mind the little extra spring in Argentina’s step (“But don’t you dare take a sip of that devil’s potion!”). Indeed, the confident doctors as much as suggested that those little blue Credit pills were just rewards for “staying on the wagon.” From the get-go, the medical profession was more than happy to watch their pharmacist friends (a.k.a. little blue Credit pill “drug pushers”) excitedly run down to Argentina to walk the streets, make friends in the neighborhood, and hand out lots of free samples, while all the while preparing to deal in size. They’ve dealt in this neighborhood before, and with the introduction of this new “treatment program”…
Over time, not surprisingly, the craving for little blue Credit pills became intense, with Argentina quite willing to pay a high price to ensure an uninterrupted supply. The “profiteers” arrived in droves, having procured mountains of little blue Credit pills from lower-priced markets in the U.S., Europe and Japan to distribute to the increasingly insistent but outwardly composed addict. Everyone celebrated. The doctors were absolutely giddy with their obviously successful diagnosis and treatment. Then there were those “pushers,” more than content to deal under the auspices of the medical authorities. And, importantly, the patient was no longer a blustering, stumbling drunk, but was instead demonstrating a newfound energy, intensity – a refreshing vigor. The “pushers” and the “profiteers”, however, were becoming increasingly concerned. Not only had Argentina accumulated an enormous tab, it was becoming a more unstable customer.
As has become the accustomed “dealer” routine, they were on the lookout for “deadbeats” and ready to “cut bait.” The “pushers” terminated Argentina’s supply of little blue Credit pills and moved quickly to much “greener pastures” up north. To the helpless addict, the results were catastrophic. Knowing all too well the excruciating and unmanageable reactions in store, the acutely desperate addict is willing to do anything to ease the pain – all that matters is to get through each day – each hour. Meantime, the “doctors,” careful not to show any public alarm, remorse, or let slip any utterance that might implicate their malpractice, quickly distance themselves from the terribly ill. They’re sticking with their story: the original diagnosis and treatment were correct. It was the pathologic, once again, that succumbed to his affliction. To cover themselves, (from a safe distance) they are quick to publicly chastise the “alcoholic” for so senselessly having “broken out the bottle.” Yet those that recognize the illness and the popular delusions are terrified by the quantities of these blue Credit “horse pills” being devoured elsewhere. The “moral of the story” is that it is appropriate to fault Argentina, but there is plenty of blame to be shared by the lending and speculating communities, economic doctrine, the economic “puppet masters” and the global financial system generally. And, unfortunately, there are lots of other “addicts. |
