Today in La Jornada, Leon Bendesky, one of the paper's regular columnists presented a brief summary of how the now-global economic catastrophe is affecting Mexico and what he thinks should be done. Bendesky is a well-known economic analyst who received his undergraduate degree at UNAM and his mas's and doctor's degrees at Cornell. He's the author of several books about the economic situation in Mexico and his a professor of the history of economic thought en the Department of Economics at UNAM. He is also a co-director of SIREM, a Mexican economic consulting firm.
I've translated his article below. I had more trouble than usual, and I have put sections I had problems with in brackets with the hope that those of you better in Spanish than I am will look at the original which can be found here and tell me how I can correct mistakes.
In recent days the government of Mexico has been releasing billions of dollars in the hopes of trying to hold it steady against the dollar, but this has not had the desired results. As you'll see, Bendesky recommends some other approaches. What caught my eye was his championing the need for new ways of looking at current problems, including keeping dollars to spend in Mexico rather than releasing them to try to maintain the peso vs. the dollar.
Here is the article in my somewhat clunky translation:
Since 1976 the government has had to defend the peso on several occasions. That is to say, it has tried to avoid the peso's loss of value vis-á- vis the dollar. Today we find ourselves in this defensive posture once again.
The most famous attempt, both peculiar and ineffective, was that of José López Portillo when he promised to defend the peso “like a dog [defending a bone].” He couldn't di it, and by the middle of February of 1982, the dollar had gone from being worth 22 pesos to being worth 70 pesos. Later, because of its famous shaky underpinnings,at the end of Carlos Salinas's government, the dollar which was 3.44 pesos in December, 1994 passed 7.2 pesos in March of 1995.
And it shouldn't be forgotten that already at that time there had been monetary reform which changed the denomination of the peso by dropping three zeros from it. [IN other words, 9000 pesos became 9 pesos] With this move, the notion of the peso's real loss of value due to inflation was obscured.
Today the pressures on the peso come from the financial crisis that began in the US and which has now spread throughout the world. Mexican financial stability has been gradually weakening in recent months.
Inflation here has been increasing as can be seen in the rise of prices of food of of products and administrative services, that is to say, those prices that the government sets (principally energy). The general rhythm of the growth of prices reflects, too, the low productivity of the economic system. The rates of interest also are climbing to avoid pressures on the peso. Thus the difference in value compared to the dollar has grown. This has made manifest the risk of the peso for investors.
The type of exchange, the basis of stability, has already given way and has been seen as unworthy. From the end of this past September, the peso has been devalued around 20 percent in its daily valuation (exchange rate ), so that now the dollar which sold at 10.95 pesos has already reached 13.50 pesos, that is to say an increase of 23 percent. Today the central bank [of Mexico] is actively intervening in the exchange rate market.
The primordial instinct of the Central Bank
is to defend the value of the peso vis-a-vis the dóllar. But that is happening now in an environment
completely different from earlier peso crises.
This financial crisis profoundly altars the very structure of the financial sector, unhinging lines of credit, violating causal relationships which define markets and having ever more serious repercussions on production conditions.
In the US, investment banks have disappeared and commercial banks continue to report big losses and weak balances. The conditions of weakness reverberate among businesses and in all parts of the economy. The intervention of the government is massive; it goes beyond oversight of market functioning to matters of property rights with the purchase of stock. This effectively converts the government into the proprietor of some businesses. In some cases, in the only proprietors, as occured with the insurance compainy AIG or the two biggest mortgage carries [Freddie Mac and Fanny Mae]. As a result, the most unhinged and extreme conservatives are screaming socialism.
The effects are already ruinous in money markets where the prices of stocks tumble further daily. Thus far government interventions haven't succeeded in restoring confidence. The New York Stock Exchange has lost 37 percent of its value this year. Figures of this magnitude and larger are occurring in Europe, Asia and Latin America.
In this context of crisis, in this period of great uncertainty, and with conditions of risk prevailing, the manner in which the daily narrative of events and their consequences are analyzed does not appear to be suitable.
The question is whether, in the current environment, the reserves which the Bank of Mexico holds should be exposed in an effort to defend the peso. At the time of a generalized run against the peso, the bank is not going to have sufficient reserves to succeed. Instead, we should look at what is happening in Korea. Businesses with a lot of reserves, especially banks, buy dollars and don't keep them here, but but take them back to Korea to support businesses there.
This is a strange moment. One can't defend the peso, but one can determine the dollars one can count on and dedicate the reserves to maintaining productivity and employment. The rest of the transactions are made at the price which the market sets and without benefit of [to] the society for whose members they [the transactions] are required.* Mexico is losing income from all sources:. petroleum , remittances, exportation of goods and services.
The only ones not scared are those who are allergic to controls, since they are already applying them everywhere in a different way. [ The market already is not a pure place on the fringe that regulates itself. ] The flow of money and credit now passes inevitably through the state.
We can't think today in the way we've been accustomed to, and the usual instincts of public policy makers aren't necessarily useful now, nor are the practices, nor the relationships of power in the market.
Today it's time to realize that conditions are extraordinary and demand unconventional ways of thinking. Among these ways is to set out a strategy which does not confuse the defense of the peso with a cheap nationalism in conditions of crisis.
Until now, the government's reaction has been slow and hesitant. Hacienda [Secretaria de Hacienda y Crédito Público or more or less the Treasury Department] should review the IETU[business tax] in order not to further constrain businesses’ liquidity and to consider other actions with which to confront the prevailing uncertainty. The central bank has to do more than simply achieving parity with the dollar and leading the inevitable examination of prevailing regulatory and supervision standards.