Clinton’s Solo Bailout Spells Disaster : Mexican crisis: His fateful mistake is in handcuffing our prosperity to Third World regimes that cannot swim.

President Clinton is determined to do whatever it takes to “save” Mexico. This includes defying the will of Congress and the vast majority of the American people who oppose throwing good money after bad to save those who speculated in the risky Mexican bubble economy.

The latest scheme is to raid the Exchange Stabilization Fund for up to $20 billion to restructure Mexico’s foreign debts. The fund was set up in 1934 to defend the value of the dollar after the United States abandoned the gold standard. Its use has evolved over time, but its function is still to make short-term adjustments in the currency markets. It is forbidden by statute from making loans or extending credits for longer than six months unless “the President gives Congress a written statement that unique and emergency circumstances require” such action. No President has invoked this “emergency” power before. But this President is desperate to get his hands on some large pot of money he can use without congressional interference. The entire capital of the stabilization fund is $29 billion, and Clinton wants access to 70% of this for Mexico.

The President’s claim that Mexico will provide oil as collateral is of little practical value. Annual oil revenues amount to only about $8.5 billion, and these are not idle funds. They are vital to Mexico’s finances. To divert this revenue to Washington, perhaps for several years, would collapse the Mexican economy and trigger massive political unrest. We can assume that if Mexico defaulted, today’s arguments would be trotted out again to support yet another bailout. If we accept the assumption that we can’t let Mexico “fail” today, we also can’t let Mexico fail in the future.

The President’s obsession with Mexico stems from a flawed view of America’s economic future: Clinton does not believe that America is capable of generating economic growth from internal sources. The greatest nation in the world is thus to become “interdependent” on small, poor and often corrupt countries for its prosperity. Incredible, but true.

The United States increased exports to Mexico in the early 1990s and ran a trade surplus with Mexico between 1991 and 1994. This boom was good for American exporters while it lasted, but it threw Mexico into its current crisis. It was during these years that Mexico’s current-account deficit exploded, to almost $30 billon in 1994. At the same time, Mexico’s external debt jumped from $91 billion to $160 billion. Mexico then exhausted its dollar reserves trying to support the peso in the face of this mounting deficit.

Arguing that without a bailout, Mexico can no longer afford increased U.S. exports misses the real point: Mexico has not been able to afford the level of exports sent south in recent years. It has been living on debt. This strategy cannot be sustained.

The limits of private-sector financing have been reached in support of a policy whose flaws have been revealed. Now we are asked to risk public funds in a vain attempt to keep the wheels spinning a few more years.

But it is already too late. The real threat to American interests is the devaluation of the peso, which the bailout will not reverse. Clinton’s turning to the International Monetary Fund for $17.8 billion in loans to Mexico confirms this. The IMF always counsels devaluation and austerity to turn around current-account imbalances.

The Mexican finance ministry has predicted that devaluation will reduce imports by 10% and increase exports by 16%. Many independent economists think that Mexican imports of U.S. goods could drop by 20%. Even the lower number will mean an $8-billion to $10-billion trade deficit with Mexico. The U.S. surplus with Mexico was shrinking even before the current crisis; last fall, it turned into a deficit.

The United States ran a worldwide trade deficit in 1994 of around $150 billion. Mexico is about to become part of this problem, not part of the solution. Apologists for Mexico will argue that the U.S. deficit is necessary to give Mexico the dollars needed to pay off its debts and avoid a default that would trigger the loan guarantees. Saving investors on Wall Street will be at the expense of jobs on Main Street.

The bailout also cannot stop the flow of illegal immigrants from Mexico. Mexico’s austerity policies and economic slowdown will drive Mexicans north in search of better opportunities. Earning dollars north of the border has become even more attractive as a result of the peso devaluation. If the United States wants to stem this flow, it will have to do so at the border.

The Clinton bailout is gambling tens of billions in American assets on a policy that fails to address the real problems. It is a vain attempt to salvage a defective trade strategy, one that throws the United States into deep and stormy waters, handcuffed to Third World regimes that cannot swim. We had better cut ourselves loose so we can resume building our future on the solid ground of our own national economy.