[Congressional Record Volume 141, Number 26 (Thursday, February 9, 1995)]
[House]
[Pages H1532-H1533]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                       U.S. MEXICAN AID SENSIBLE

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Arizona [Mr. Kolbe] is recognized for 5 minutes.
  Mr. KOLBE. Mr. Speaker, I wanted to take this time today to address 
the House on a recent crisis that occurred in Mexico. I have not had an 
opportunity to do it before now, and there has been an awful lot of 
information and misinformation that has been stated in news media, the 
floor of this House, by a lot of speakers all over the country, and for 
that matter, the world.
  Let me begin with this observation: What we saw in Mexico I think was 
a great liquidity crisis, and it was the first one to result from 
mutual fund redemptions, as opposed to the operation of central banks.
  Mutual funds determine their values minute by minute with each and 
every transaction, so they are vulnerable to very small market ticks 
which can result in very large scale losses and redemptions.
  Banks, on the other hand, report their earnings quarterly. They have 
wide latitude to hold on to nonperforming loans in their portfolios. 
This is an important distinction and one which will affect us in the 
future, because today mutual funds have 90 percent, as much on deposit, 
as banks do, while only 12 or 14 years ago it was 10 percent of what 
banks had on deposit.
  The bottom line is this: Mutual and pension funds drive the financial 
markets today. Because of this distinction, the crisis was 
fundamentally different from the ones we have witnessed before in 
developing countries, including Mexico.
  What would have happened if we had taken no action to meet this 
stated $40 billion loan commitment that the President and the 
leadership in this House and Senate gave a few weeks ago? We do not 
know for sure what might have happened, but there are some facts we do 
know.
  First of all, Mexican reserves were at a perilously low level, and 
they simply would not have been sufficient to cover the redemption of 
the treasury bonds called tesobonos. Since loss of confidence had 
eroded any chance to roll these notes over at virtually any price, the 
government was resorting to printing pesos to redeem the bonds as they 
came due. The holders of those bonds were converting them very quickly 
to dollars, so that resulted in further loss as the peso deteriorated. 
Unless checked, this combination of events was certain to lead to high 
inflation and very, very deep recession.
  As if these problems were not enough, Mexican private banks were 
seriously at risk as well. With interest rates soaring to offer 50 
percent levels, debtors were simply unable to repay in the short-term. 
Nonperforming bank loans would have skyrocketed within the Mexican 
financial system. Widespread bank failures would have been almost 
inevitable.
  The social and political consequences for the United States resulting 
from such a collapse in the Mexican economy are not too difficult to 
imagine. Certainly we would have seen the loss of U.S. jobs stemming 
from the inability of our second largest market to buy our exports, and 
we would have seen a significant increase in illegal immigration.

                              {time}  1850

  Indeed, some of that is likely to happen because of the contraction 
that we have seen in the Mexican economy. That has already occurred. 
But the results of a total collapse could have been catastrophic and 
impossible to reverse in the short term. It is clear to me that it is 
in our national interest, our national security and our national 
economic interest to have a prosperous and stable neighbor on our 
2,000-mile common border.
  By the end of this year Mexico will have a population of at least 90 
million people with a growth of 2 percent a year. With 50 percent of 
the population under the age of 20 and 25 percent over the age of 56, 
the Mexican job market over the short and medium term must continue to 
expand to provide jobs to a very competitive Mexican youth who are 
coming of age. In addition, 700,000 jobs here in the United States are 
directly tied to the exports we have to Mexico.
  If only Mexico had been at risk in this, it is possible we could have 
ridden out the crisis, although even then with 
[[Page H1533]]  some considerable difficulty. However, when it became 
apparent that this crisis was spreading
 like a huge ink blot across world financial markets and in particular 
among the emerging markets, it became clear that the economic and 
national security costs of U.S. inaction were going to be much higher 
than the risks associated with action.

  The collapse in Mexico would have adversely affected our ability to 
continue steering developing countries on a path to free markets and 
democratization. Mexico has been viewed as a litmus test for the 
success or failure in our model of development. It is the largest of 
the emerging markets, the only one to have joined the 15-member OECD. 
That this should happen to an OECD country would have been unthinkable 
just a few months ago.
  Second, Mexico has been held up as a model for other developing 
countries with its privatization, democratization, deregulation, and 
free-trade orientation. The United States, the OECD, and the IMF have 
been very public in urging other countries to follow this model. So 
Mexico's problems become the problems for everyone else.
  Finally, let me just speak about the legality of the action. There is 
no doubt in my mind that the President's actions were within his 
authority under the law governing the use of the economic stabilization 
fund.
  Mr. Speaker, the President acted when he had to act. The leadership 
of this body was correct in supporting that action.
  It is important, not only the legal correctness of the President's 
action, but its policy sensibility.


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