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Volume 13, Number 7
How Nafta Caused the Mexican Bailout
In the Clinton administration's spin control on the Mexican meltdown, Nafta had nothing to
with it. Without the treaty, matters would have been worse, the White House says, and now Nafta
will help Mexico recover.
The Republican leadership, which shepherded Nafta to ratification, has no interest in
this argument. They fear being indicted as co-conspirators in the back-door bailout--which they
allowed to proceed without even a Congressional vote.
But an anonymous administration official finally spilled the beans to the Washington
Post. It was
Speaker Newt Gingrich's own Congressional office that first proposed emptying the Treasury's
Exchange Stabilization Fund into Mexican banks. Others involved included Republican Senators
Trent Lott and Robert Bennett, and Banking Committee Chairman Jim Leach.
The same crew is trying to obscure the direct link between Nafta and the bailout. But the
shows that Nafta included a provision for the North American Financial Group, a mechanism to
"stabilize" exchange rates between signatory countries.
Formed as a side agreement to Nafta in early 1994, the NAFG supported the peso's exchange
with a $6 billion line of credit. That kept the peso massively overvalued and enabled the Mexican
central bank to rapidly inflate the money supply. The purpose? To insure that Mexico's ruling
party would be victorious in the August 1994 presidential election, thereby maintaining its
corrupt system of corporate statism.
The White House sent Congress several supporting documents with the Nafta implementing
in 1993, which indicate it knew the history of Mexico's devaluations. In the "Statement
Concerning Exchange Rates," the Clinton administration recounted Mexico's disastrous debt
crisis of the 1980s. It promised to keep matters under control the next time. "The reform
process," the document swore, "includes stabilization of monetary and fiscal policies and
undertaking of major structural reforms."
This was a phony characterization, an attempt by the White House to downplay risk to
U.S. investors to place billions of dollars into Mexican stock and bond markets. The Federal
Reserve had also stimulated this trend by pumping up the U.S. money supply while keeping
interest rates low--driving U.S. investors into the riskier Mexican market in search of better
After Nafta was safely ratified, the Fed gradually raised interest rates, drawing capital back
U.S. in a flight to quality. Without abundant foreign investment capital, the Mexican central bank
was unable to service its foreign debt or finance its ballooning trade deficit.
Having depleted its dollar reserves, Mexico was forced to do what it should have done
"un-peg" the peso from the dollar. When the market was allowed to function, the peso's value
tumbled 50% from the level long dictated by Mexico City.
Wall Street's large institutions had reaped enormous profits from the false stimulation to their
investments. And it was these houses that helped bankroll the pro-Nafta lobby in Washington.
Eager to preserve its "profits," Wall Street and the New York banking industry shamefully
socialized their deep losses through a taxpayer bailout.
Nafta made the bailout inevitable. There was too much at stake--economically, politically,
financially--after the treaty's passage. Clinton implied as much when he said, "In the end there is
no choice..., the two economies are intertwined in trade, in commerce, in the movement of
But of course there was a choice whether these relations would be politicized and socialized,
remain purely economic, as they would have had Nafta failed. Nafta's politico-commercial nexus
is best symbolized by Treasury Secretary Robert Rubin, once the co-chairman of the largest
underwriter of Mexican financial deals, Goldman Sachs. He is also the government official
controlling the taxpayer funds being used to pay off his former and future clients and colleagues.
Economic relations with Mexico were once determined by informal relations among real
capitalists. Tariffs were low and going lower. Nafta interrupted this process, with its faulty
premise that voluntary exchange is not possible without government control of trade,
environment, labor, and monetary policies.
Thanks to Nafta, economic relations between the U.S. and Mexico are now governed by a
plan, which inevitably means political mismanagement. And, like every central plan, it is backed
by the socialization of losses and accompanied by a refusal to admit failure.
James Sheehan does policy work at the Competitive Enterprise Institute