August 02, 2002

I Can't Stand It...

Minimal, minimal competence and consistency. Is that too much to ask? Apparently yes... - Major Business News

The Bush administration signaled it would support a financial rescue package for embattled Brazil, a fast retreat from its anti-bailout policy. Just days after he irked Brazilian President Fernando Henrique Cardoso by suggesting new aid might be siphoned off to Swiss bank accounts, and just days before his first official visit to the trouble spots of South America, Treasury Secretary Paul O'Neill indicated the U.S. would back an agreement now being negotiated between Brasilia and the International Monetary Fund.

"The economic team in Brazil has done a remarkable job of maintaining sound fiscal and monetary policies," Mr. O'Neill said Thursday. "I continue to favor support for Brazil and other nations that take appropriate policy steps to build sound, sustainable and growing economies."...

Posted by DeLong at August 2, 2002 08:15 AM | TrackBack


Here's an interesting point, though, Brad; the proposal that "We need the proper policies in place, to make sure that the money doesn't just end up in Swiss accounts", is, broadly, true in the case of Brazil.

My argument would be this; in lending foreign exchange to Brazil, because money is fungible, one is effectively financing the current account of the entire economy. Particularly, if market sentiment continues to be so bad, one is probably providing the liquidity for wealthy Brazilian individuals to convert their local assets into dollars and move them offshore. And the number one destination for flight capital is Switzerland. Given the current conditions in Brazil-related markets, it is really very likely that any monster IMF facility announced over the next couple of weeks will end up financing capital flight.

I am pretty sure that by "the proper policies", O'Neill was unlikely to be referring to Malaysian-style capital controls, but it amuses me that his gaffe actually encapsulates the core argument of an important critique of the good old NeoLiberal Policy Mix.

Posted by: Daniel Davies on August 2, 2002 08:55 AM

There have also been recent examples of successful bailouts. When these work, they don't cost a dime to the American tax payers, and it is good to save a trade partner from prolonged recession and political upheaval. What you don't necesseraly want to do is have these countries swallow too recessionary a medecine.

On the other hand, the prospect of a spell of regional bankrupcy in Latin America with the specter of bank failures on our side is not a very plesant one to me...

Posted by: Jean-Philippe Stijns on August 2, 2002 10:34 AM

wealthy brazilians have long kept quite an ample capital in foreign currencies and accounts - middle class and poorer brazilians may have to be protected

the treasury secretary needs to understand that the fawning acceptance of foolish remarks that may well have been part of being a ceo are not part of being treasury secretary

Posted by: on August 2, 2002 10:40 AM

I do not see how the IMF can ask for austerity as it did in Argentina. The middle class and poor should not be asked to sacrifice themselves when marco policy falters for time. Brazil should be protected from or helped out of crisis without harsh austerity terms dictated.

Posted by: Anne on August 2, 2002 10:54 AM


Has the July 31 new estimation of national economic statistics changed your optimism on continued productivity advances? For the time at least productivity growth has been dampened. Aso, Roach and Krugman appear so far to have read the economic weakness correctly.

Posted by: JD on August 2, 2002 11:02 AM

"I do not see how the IMF can ask for austerity as it did in Argentina. The middle class and poor should not be asked to sacrifice themselves when marco policy falters for time. Brazil should be protected from or helped out of crisis without harsh austerity terms dictated."

Posted by Anne at August 2, 2002 10:54 AM

That's easy - the IMF says 'do it, or you don't get the money'. The upper class does it, and does their best to transfer the hit to the middle class and poor.

And yes, I agree with you - it shouldn't be that way.


Posted by: Barry on August 2, 2002 12:26 PM

The successful bailouts (Mexico, Korea, perhaps Russia) all followed Bagehot's classic principle of lender-of-last-resort lending; to go in and extend credit "without limit" to a solvent borrower. Bagehot clearly warns against putting up only a little bit of money, and the IMF cash in Argentina, etc, has been a day late and about thirty billion dollars short. Which is why Brad is right about the need to extend the NAB.

Posted by: dsquared on August 2, 2002 12:47 PM

I think I agree with you but what's NAB? (gotta learn a little thing or two everyday even at the cost of sounding illiterate ;))

Posted by: Jean-Philippe Stijns on August 2, 2002 12:52 PM

>>Here's an interesting point, though, Brad; the proposal that "We need the proper policies in place, to make sure that the money doesn't just end up in Swiss accounts", is, broadly, true in the case of Brazil<<

Well, yes. But either they have the proper policies in place--in which case O'Neill was poisoning the information flow last week--or they don't--in which case O'Neill is poisoning the information flow now. It's the inconsistency--the fact that O'Neill flunks the Turing test, the fact that there's no clue there is a mind back there--that I can't stand.

Brad DeLong

Posted by: Brad DeLong on August 2, 2002 02:49 PM

>> ... minimal competence and consistency. Is that too much to ask ... <<

Reminds one of the first couple years of a prior Admiminstration, "to btu tax or not to btu tax ...?", etc.

Let's just hope the learning curve for this one goes up rather than down.

Posted by: Jim Glass on August 2, 2002 03:53 PM

How ever true the case for better economic policy in Brazil is, what kind of good was the original statement supposed to do Brazil anyway?

A. It sent the real in a tailspin as expected. Isn't O'Neil supposed to be in the stabilization business?

B. It upset Brazilians by assimilating them with a banana republic (the term itself is politically inacceptable but I think it translates O'Neil's thinking pretty well.) And that is particularly inconsiderate in the current political context of Brazil.

The inconsistency is indeed further upsetting in that it shows this Treasury doesn't even have a plan or a line of thinking. It just says stuff that sounds politically cool in the moment.

How many brilliant economists capable of running decently a Treasury are there in this country? 10, a 100, maybe even a 1000? When a developing country gets this kind of incompetent top official, the World Bank usually lectures it with the "Quality of Governence" mantra... :)

Posted by: Jean-Philippe Stijns on August 3, 2002 12:06 AM

brazil has an extremely enlightened health care program - especially so for hiv/aids sufferers - the government has repeatedly challenged the major drug to cheapen prices or allow generic clones for treatment in poorer countries - simply for the concern brazil shows for the health of its own and the world's poor we need to support it in a time of undue stress

brazil's treatment of hiv/aids sufferers should be held a model in every developing country - remember how far brazil has come since military rule - more must be done but a severe economic shock would be a tragedy


Posted by: randall on August 3, 2002 01:55 PM

Agreed. The need is for this country to firmly support development in countries such as Brazil. Brazil is a friend, a country that should anchor South America economically and politically. A setback such as was allowed in Argentina would seriously harm our standing in South America. Do we really support our friends? The way is which we supported Mexico should be a model in the case of Brazil. Here is a wonderful people who will long need and wish our concern.

Posted by: Anne on August 3, 2002 02:30 PM

Jean-Philippe: the NAB is the New Agreement to Borrow, a somewhat controversial augmentation to the IMF's firepower.

Posted by: dsquared on August 3, 2002 05:28 PM

Capital flight by the wealthy in Brazil took place long ago. Who among the wealthy would not have important assets in dollars or euros? The need is to encourage economic policy that fosters development and greater opportunity in Brazil, while America and the IMF help to stabilize the currency during a crisis. Brazil deserves our help and we need foreign policy support from Brazil. There is turmoil in Argentina, Uraguay, Venezuela and other countries in South America. We must work for stability and encourage policies that add to economic inclusion through the continent. Brazil is of course central to such purposes.

Posted by: on August 4, 2002 07:43 AM

Actually, all the statistics I've seen suggest that capital flight has been negative in the case of Brazil up until 2001. If the IMF were prepared to think out of the box and recommend some measures in the direction of capital controls, my personal opinion is that this would help greatly.

I'd also note that, with the advent of online brokerage accounts and the like, capital flight is no longer a rich man's game; the domestic middle class have to be taken into account to.

Posted by: dsquared on August 4, 2002 08:07 AM

dd - no matter how socially conscious a wealthy Brazilian family may be they have liquid assets abroad - Brazil is not Switzerland - however, i agree with you that middle class capital flight must be considered - that intervention would have to be massive enough to limit capital flight as in the past case of Mexico is critical - would there need to be a period of capital controls - tough question

Posted by: on August 4, 2002 12:21 PM

dd - was Malaysia sussessful in use of capital controls - i can argue both ways - Singapore had reserves enough - Hong Kong had the reserves of China and still intevened in its own stock market - Korea was partly closed and accepted austerity - Taiwan was partly closed - Tailand is still questionable

Posted by: on August 4, 2002 12:29 PM
Post a comment