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Policymakers roundtable
Journal of Banking & Finance 23 (1999) 1553±1555 www.elsevier.com/locate/econbase
Policymakers roundtable Robert D. McTeer, Jr
*
President, Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, TX 75201-2272, USA
The topic of the conference has to do with Tequila lessons, and I thought I would give you some of my own perspective. However, I must warn you that it does include references to bad luck, which I think Mexico did have. From my perspective, the Mexican peso crisis and its aftermath have been very humbling experiences. Having moved to Texas and into my current job in 1991 just as the NAFTA debate was beginning, my colleagues at the Dallas Fed and I, became very active advocates of NAFTA in our region. We made a lot of speeches; we held a lot of conferences. We published a lot of articles and various kinds of popular publications to reach the public, promoting NAFTA as an important step toward free trade. NAFTA provided the perfect topic for our economic education eorts. At the time, it was even a bipartisan issue. Therefore, the usual reticence that people at the Fed have about getting involved in issues outside of monetary policy did not seem to apply. It was a unique opportunity to talk about free trade and free markets. And NAFTA was pretty much just a vehicle for us to promote free trade and free markets. Luckily, it was consistent with the sel®sh interests of my district, which is primarily Texas. We have the long border with Mexico, and our trade with Mexico is about four times as important as US trade with Mexico. We had a friendly reception to our talks about the importance of free trade with Mexico. During the process of promoting NAFTA, I learned about Mexican economic reforms and Mexican macroeconomic policies. As I learned more, I became a big fan of those policies, and I think it is even fair to say that I became a cheerleader for those reforms and the things that were going on in the macroeconomic arena in Mexico. After all, they were doing all the right things. *
Tel.: +1-214 922 5055.
0378-4266/99/$ ± see front matter Ó 1999 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 - 4 2 6 6 ( 9 9 ) 0 0 0 3 4 - 5
1554
R.D. McTeer, Jr. / Journal of Banking & Finance 23 (1999) 1553±1555
They were privatizing. They were unilaterally opening their economy by dropping their taris before the free trade agreements. They joined General Agreement on Taris and Trade (GATT) in 1986. Mexico, not the US, initiated the NAFTA talks. They had both ®scal discipline and monetary discipline. The monetary policy based on the strong, crawling exchange rate had brought in¯ation down from triple digits to about 7% by 1994, and it was still declining. The prospects were excellent. Mexican policymakers were, in eect, doing what economists advise governments to do. Yes, they had a current account de®cit, but developing economies on the make are supposed to have current account de®cits, as I understand it. Miguel Mancera and the Bank of Mexico made a convincing case that the current account de®cit was primarily a by-product of the capital in¯ow. The Mexicans saw rapid growth in exports as evidence that the peso was not overvalued despite the current account de®cit, even though the crawling peg involved some gradual appreciation in real terms. Then, in 1994, Chiapas happened, and then presidential candidate Luis Donaldo Colossio was assassinated. There was the huge drop in reserves, and more political shocks followed. Under the circumstances at the time, it seemed reasonable to me that the monetary authorities in Mexico would expect things to settle down after the election. After all, these were all politically related shocks. It seemed reasonable to me then, and it still seems reasonable that they spent reserves holding on to the peso since that is what reserves were for. In retrospect, I suppose that the dollar-guaranteed tesobonos were a mistake, but they might have worked. Then they would have been seen as a stroke of genius, rather than a mistake. Hail Mary passes sometimes work ± they often do not. All the Mondaymorning quarterbacking following the devaluation reminded me of the story about how to make money buying and selling stocks. The basic rule is buy them, and when they go up, sell them. If they do not go up, do not buy them. Of course, it is always easier to make these calls on Monday morning. As we know, the reserves ran out, and in December Mexico had to devalue. The intended modest 15% devaluation eventually became a 50% devaluation ± accompanied by the depression and renewed in¯ation at very high levels. I must confess that I still do not understand why the 15% turned into 50%. The punishment seemed out of proportion to the crime. Countries have devalued before without getting out of control. It was not obvious to me, and still is not, why it got out of control. At the time, there was talk about a new element ± the mutual fund vigilantes, joined, I presume, by the bond vigilantes, and it seems the mutual fund vigilantes are a tougher bunch. Obviously, monetary policy during 1994 can be faulted in retrospect because it did fail to head o the devaluation and the crisis. But at the time, it did not seem that far out of line, even though the monetary base did grow faster. So, the main lesson from the tequila eect, for me as a policymaker, is how hard it
R.D. McTeer, Jr. / Journal of Banking & Finance 23 (1999) 1553±1555
1555
is for monetary policymakers to know how close they are to the edge of the cli and how high that cli is. How do you know in advance how tight is tight enough? I am sure had they known in advance they would have been tight enough to avoid what happened. I feel a great deal of sympathy for the Bank of Mexico ocials. Even given the political shocks and perhaps too-easy monetary policy of 1994, everything would still have been saved, in my opinion, had Mexico had more ¯exible exchange rates and been able to take some of the pressure out of the system during 1994. Fixed exchange rates work well only when they work well. Once ®xed exchange rates come into question, it is too late to get o the tiger. Mexico was eventually thrown o the tiger during the crisis. To summarize my main tequila lessons from a personal point of view: Policymakers cannot know in advance how close they are to the edge of the cli and how far the fall may be.
Policymakers roundtable Robert D. McTeer, Jr
*
President, Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, TX 75201-2272, USA
The topic of the conference has to do with Tequila lessons, and I thought I would give you some of my own perspective. However, I must warn you that it does include references to bad luck, which I think Mexico did have. From my perspective, the Mexican peso crisis and its aftermath have been very humbling experiences. Having moved to Texas and into my current job in 1991 just as the NAFTA debate was beginning, my colleagues at the Dallas Fed and I, became very active advocates of NAFTA in our region. We made a lot of speeches; we held a lot of conferences. We published a lot of articles and various kinds of popular publications to reach the public, promoting NAFTA as an important step toward free trade. NAFTA provided the perfect topic for our economic education eorts. At the time, it was even a bipartisan issue. Therefore, the usual reticence that people at the Fed have about getting involved in issues outside of monetary policy did not seem to apply. It was a unique opportunity to talk about free trade and free markets. And NAFTA was pretty much just a vehicle for us to promote free trade and free markets. Luckily, it was consistent with the sel®sh interests of my district, which is primarily Texas. We have the long border with Mexico, and our trade with Mexico is about four times as important as US trade with Mexico. We had a friendly reception to our talks about the importance of free trade with Mexico. During the process of promoting NAFTA, I learned about Mexican economic reforms and Mexican macroeconomic policies. As I learned more, I became a big fan of those policies, and I think it is even fair to say that I became a cheerleader for those reforms and the things that were going on in the macroeconomic arena in Mexico. After all, they were doing all the right things. *
Tel.: +1-214 922 5055.
0378-4266/99/$ ± see front matter Ó 1999 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 - 4 2 6 6 ( 9 9 ) 0 0 0 3 4 - 5
1554
R.D. McTeer, Jr. / Journal of Banking & Finance 23 (1999) 1553±1555
They were privatizing. They were unilaterally opening their economy by dropping their taris before the free trade agreements. They joined General Agreement on Taris and Trade (GATT) in 1986. Mexico, not the US, initiated the NAFTA talks. They had both ®scal discipline and monetary discipline. The monetary policy based on the strong, crawling exchange rate had brought in¯ation down from triple digits to about 7% by 1994, and it was still declining. The prospects were excellent. Mexican policymakers were, in eect, doing what economists advise governments to do. Yes, they had a current account de®cit, but developing economies on the make are supposed to have current account de®cits, as I understand it. Miguel Mancera and the Bank of Mexico made a convincing case that the current account de®cit was primarily a by-product of the capital in¯ow. The Mexicans saw rapid growth in exports as evidence that the peso was not overvalued despite the current account de®cit, even though the crawling peg involved some gradual appreciation in real terms. Then, in 1994, Chiapas happened, and then presidential candidate Luis Donaldo Colossio was assassinated. There was the huge drop in reserves, and more political shocks followed. Under the circumstances at the time, it seemed reasonable to me that the monetary authorities in Mexico would expect things to settle down after the election. After all, these were all politically related shocks. It seemed reasonable to me then, and it still seems reasonable that they spent reserves holding on to the peso since that is what reserves were for. In retrospect, I suppose that the dollar-guaranteed tesobonos were a mistake, but they might have worked. Then they would have been seen as a stroke of genius, rather than a mistake. Hail Mary passes sometimes work ± they often do not. All the Mondaymorning quarterbacking following the devaluation reminded me of the story about how to make money buying and selling stocks. The basic rule is buy them, and when they go up, sell them. If they do not go up, do not buy them. Of course, it is always easier to make these calls on Monday morning. As we know, the reserves ran out, and in December Mexico had to devalue. The intended modest 15% devaluation eventually became a 50% devaluation ± accompanied by the depression and renewed in¯ation at very high levels. I must confess that I still do not understand why the 15% turned into 50%. The punishment seemed out of proportion to the crime. Countries have devalued before without getting out of control. It was not obvious to me, and still is not, why it got out of control. At the time, there was talk about a new element ± the mutual fund vigilantes, joined, I presume, by the bond vigilantes, and it seems the mutual fund vigilantes are a tougher bunch. Obviously, monetary policy during 1994 can be faulted in retrospect because it did fail to head o the devaluation and the crisis. But at the time, it did not seem that far out of line, even though the monetary base did grow faster. So, the main lesson from the tequila eect, for me as a policymaker, is how hard it
R.D. McTeer, Jr. / Journal of Banking & Finance 23 (1999) 1553±1555
1555
is for monetary policymakers to know how close they are to the edge of the cli and how high that cli is. How do you know in advance how tight is tight enough? I am sure had they known in advance they would have been tight enough to avoid what happened. I feel a great deal of sympathy for the Bank of Mexico ocials. Even given the political shocks and perhaps too-easy monetary policy of 1994, everything would still have been saved, in my opinion, had Mexico had more ¯exible exchange rates and been able to take some of the pressure out of the system during 1994. Fixed exchange rates work well only when they work well. Once ®xed exchange rates come into question, it is too late to get o the tiger. Mexico was eventually thrown o the tiger during the crisis. To summarize my main tequila lessons from a personal point of view: Policymakers cannot know in advance how close they are to the edge of the cli and how far the fall may be.