[Congressional Record Volume 141, Number 25 (Wednesday, February 8, 1995)]
[Extensions of Remarks]
[Page E294]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                  ADMINISTRATION IGNORED PESO WARNINGS

                                 ______


                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                      Wednesday, February 8, 1995
  Mr. HAMILTON. Mr. Speaker, I would like to call to the attention of 
Members a column published in last Sunday's Washington Post that 
highlights the foresight of our colleague, John LaFalce, in raising the 
issue of the exchange rate of the Mexican peso during the United States 
debate on NAFTA. As the column makes clear, Congressman LaFalce 
presciently warned in May and June 1993 that the benefits to the United 
States of expanded trade with Mexico could be threatened by a 
devaluation of the peso. Congressman LaFalce's suggestion that the 
United States consider a supplemental NAFTA agreement on exchange rate 
coordination seems very wise in retrospect.
  The Post article raises several other important questions about the 
United States plan to help stabilize the Mexican economy. These 
questions deserve consideration by all Members, including those whom 
support U.S. assistance.
  The Washington Post article follows:
                [From the Washington Post, Feb. 5, 1995]

                  Administration Ignored Peso Warnings

                           (By Hobart Rowen)

       Rep. John J. LaFalce (D-N.Y.) has a right to say, ``I told 
     you so.'' At a May 20, 1993, congressional hearing on NAFTA, 
     LaFalce warned that the expected benefits to the U.S. economy 
     from the new trade treaty with Mexico and Canada could go up 
     in smoke if the Mexican government devalued the peso.
       Supported by a number of prominent U.S. and Mexican 
     economists who predicted that peso devaluation was 
     inevitable, LaFalce--who had wide experience in this field--
     begged the Clinton administration to recognize that the North 
     American Free Trade Agreement provided no method to 
     coordinate the two countries' monetary policies.
       On June 9, 1993, LaFalce wrote President Clinton (and 
     separately, Treasury Secretary Lloyd Bentsen and other 
     Cabinet members):
       ``I believe it imperative that the United States pursue a 
     fourth supplemental agreement that recognizes the importance 
     and impact of exchange rates on the operation of NAFTA . . . 
     perhaps creating a mechanism that would allow for 
     consultation, coordination, and corrections if necessary.''
       It made good sense, but Clinton & Co. didn't listen. When 
     consulted, the Federal Reserve Board, the World Bank and the 
     International Monetary Fund pooh-poohed the possibility of a 
     peso devaluation. White House political aides, already 
     flustered by the need to get side agreements for NAFTA on the 
     environmental and labor conditions, didn't want further 
     complications.
       Failure to stabilize the dollar-peso rate may prove to be 
     the worst mistake so far of the Clinton presidency. The 
     Institute for International Economics, which issued a highly 
     influential pro-NAFTA report, also missed the boat. IIE 
     senior fellow John Williamson, who like LaFalce agreed 
     something should be done to ensure a stable peso-dollar rate, 
     admitted that when the IIE reported on NAFTA was published, 
     the monetary issue ``slipped through the cracks.''
       If Clinton and his advisers had paid attention to LaFalce 
     and his supporters, he might not now be engaged in an 
     indefensible bailout of Wall Street investors, including 
     major mutual fund managers who made greedy, high-yield 
     gambles in Mexico after the passage of NAFTA.
       Clinton's revamped $53 billion rescue plan for Mexico, 
     which he can put through on his executive authority, may be 
     worse than the original plan for $40 billion in loan 
     guarantees, because it would appear that there will be more 
     pure loans and fewer guarantees. But as former FDIC chairman 
     L. William Seidman wisecracked, ``at least we're in for $20 
     [billion] instead of $40!''
       Among investments that will be bailed out are those that 
     offered interest returns of 15 percent to a reported 50 
     percent in peso-denominated bonds. But these bonds crashed 
     when the peso dropped more than 40 percent against the 
     dollar, just as LaFalce had warned could happen. But now the 
     peso bonds will be propped up by Clinton's $53 billion, made 
     up of $20 billion from the Treasury's stabilization fund, 
     $17.5 billion in loans from the IMF and the rest from other 
     global lenders, notably $10 billion from the Bank for 
     International Settlements in Europe.
       The operative result of dumping all this money into Mexico 
     is that foreign investors, including the Wall Streeters, can 
     collect their huge interest payments, then get out while the 
     getting is good. Mexico won't be paying the bill. Clinton and 
     U.S. taxpayers will pick up the check.
       ``This is basically what everyone on Wall Street was after 
     all along--a vehicle to get out of their peso-denominated 
     assets at a preferential rate,'' Walter Todd, a former Fed 
     official told The Washington Post. ``Clinton has provided it 
     to them.''
       Senate Majority Leader Robert J. Dole (R-Kan.), who is 
     backing the Clinton plan, said last week that if the money is 
     paid out and doesn't come back, ``we'll have to make an 
     appropriation to replace it.''
       In an extraordinary column in the Wall Street Journal on 
     Jan. 26, New York financier Henry Kaufman hinted at a huge 
     Wall Street coverup, in which the entire financial community 
     was engaged in ``suppressing critical evaluation'' of 
     Mexico's true economic condition.
       Mutual funds became an especially important conduit [for 
     investor-speculators], without calling attention to the 
     potential volatility in their emerging market portfolios, 
     should liquidity problems develop,'' Kaufman said.
       In other words, many small investors were suckered into 
     Mexico, through mutual funds, lured by the promise of double-
     digit returns there and in other ``emerging markets.'' No 
     one--not in the Treasury, the IMF, the Fed, the SEC--issued a 
     word of caution.
       But the first rule of investing is that if an abnormal 
     return is promised, there must be an abnormal risk.
       LaFalce told me at the end of the week that the 
     administration had refused to acknowledge the palpable 
     deterioration of the Mexican economy all through 1994 because 
     it was fearful of exacerbating the Chiapas rebellion; because 
     of Clinton's effort to push former president Carlos Salinas 
     de Gortari as the head of the new World Trade Organization; 
     and because it might jeopardize the then-upcoming vote on 
     GATT.
       So the administration didn't tell truth about Mexico.
       LaFalce believes that tapping the Treasury's stabilization 
     fund ``stretches the president's authority to the outer 
     limits.'' But, he sighs, ``it's a fait accompli and I won't 
     quarrel with him.''
     

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