by Nomi Prins
As a nod to Mexico, Ortiz was promoted from board member to chairman of the BIS on January 12, 2009, succeeding Jean-Pierre Roth.114 Ortiz had joined the board in 2006 along with top central bankers the world over, including the People’s Bank of China governor Zhou Xiaochuan and ECB president Jean-Claude Trichet. In keeping with BIS protocol, directors were elected based on relationships. Ortiz and Carstens were governors of central banks the BIS had close relationships with through its representative offices in Mexico City and Hong Kong. Ortiz’s three-year term as chairman began March 1, 2009.115
Bernanke sharpened his tack of blaming the world for US bank–instigated economic weakness. As he told a US Senate subcommittee on February 24, 2009, “In contrast to the first half of last year, when robust foreign demand for US goods and services provided some offset to weakness in domestic spending, exports slumped in the second half as our major trading partners fell into recession and some measures of global growth turned negative for the first time in more than 25 years.”116 In addition to his skills at conjuring money, he proved adept at conjuring denial.
Complementing the Fed’s money-fabrication strategies, from October 2008 to February 2009, Banco de México pumped $28 billion into the markets.117 The central bank supported the Mexican peso by selling $17.9 billion US dollars of its reserves.118 In February 2009 alone, it initiated six interventions, pumping a total of $1.83 billion into the market through direct sales to market participants to reduce foreign speculation.119
However, those actions didn’t halt its declining economy. Exports fell in the first quarter of 2009 by 26 percent owing to the US economic downturn.120 The peso was imperiled. Mexico was considered a risky bet compared to the United States. The peso hit its then-lowest point since 1990 of 15.45 pesos per dollar.121 Mexican banks were losing the confidence of international investors, and markets were bleeding foreign capital. Yet, cheap-money collusion by the Fed, reluctantly replicated by Ortiz, could only go so far.
As the Wall Street Journal observed in March 2009, “Seeking a port in the global storm, investors have piled out of historically less reliable IOUs issued by national treasuries around the globe and into US Treasury bonds.” The Journal lamented, “Mexico is numero uno on the victim list.”122
In May 2009, at the Reuters Latin American Investment Summit in Mexico City, Ortiz noted, “There is a sensation that we have probably touched bottom in this crisis.… I think that we have firm signs that we will see a better second half compared to what we saw in the first half.”123 His central bank had already loaned $3.22 billion of the $4 billion it auctioned the prior month and activated a $30 billion swap line with the Fed. Ortiz needed that bottom to be secured in order to save face domestically.
Smack in the middle of the economic crisis, on July 5, 2009, Mexico held midterm congressional elections. Results reflected economic fears. The Institutional Revolutionary Party (PRI) won 241 of the 500 seats in play, up from 106. President Calderón’s National Action Party (PAN) placed second with 147 seats, losing 59 seats.124 The PAN became the minority party, receiving less than 30 percent of the vote. In 2006, an estimated 42 million people lived in poverty in Mexico. Toward the end of Calderón’s term, that number had leapt to 53 million (of a population of 114 million).125 It wasn’t the result he had bargained for before the US financial crisis.
To combat the brewing credit crunch in Mexico, Ortiz tapped his international connections.126 He had served on the IMF Committee on Governance Reform from September 2008 to 2009, the only Latin American leader on the nine-person committee.127 He now turned to the IMF for help. It offered an investor and geopolitical confidence boost, approving a $47 billion line of credit to Mexico on April 17, 2009.128
Internally, the Mexican economy remained in jeopardy. Money was flowing out. Mexico’s unemployment shot to a fourteen-year high of 6.4 percent in August 2009 before dipping back to 5.9 percent in October 2009. The figure belied a severe job problem in the manufacturing industry, mostly located along the US-Mexico border.129
The idea of austerity or spending cuts reared its head. In tandem with its US and EU counterparts, Mexico’s elite decided the working class should contribute its fair share to the local economy. Like other financial alchemists before him, Ortiz now supported this fiscal position. At a press conference at the Mexican senate in September 2009, he remarked, “It obviously has costs, but the greatest cost for a country would be not doing anything.” The package combined tax increases and government spending cuts.130 If central bankers were subsidizing the banks that crashed the economy, the working class would pay the price to rebuild it.
The Fed, determined to disperse culpability for the crisis, did Mexico no favors. Instead, in its 2009 third-quarter statement, the Fed poured salt on Mexico’s wounds: “Reminiscent of pre-Tequila tensions is the vast amount of foreign reserves the central bank is spending trying to contain peso pressures. Since the peso weakness began in October, the central bank has provided almost $20 billion in liquidity to ease peso volatility. Evidence of capital flight also materialized in the cost of the country’s debt. The premium Mexico pays relative to comparable US instruments more than tripled last fall.”131
ORTIZ’S DAYS WERE NUMBERED
Ortiz’s ongoing public criticism of inadequate US banking regulation was a thorn in Calderón’s side—the president preferred to maintain the country’s relationship with the United States free of accusatory language. Yet, he wasn’t stopping but increasing his call to normalcy.
At a Stanford University roundtable on October 24, 2009, moderated by veteran US TV host Charlie Rose, Ortiz urged more transparency in banking, given that “the amounts of money involved are so huge.” When the financial sector “becomes disconnected from the real world,” he said, the economy “turns into a betting game.… If we have to use taxpayers’ money to make these bets, there’s something very wrong.”132 That was exactly the case.
Four days later, in its quarterly inflation report released October 28, Banco de México cited the combination of decreased consumer spending and a dry spell in tourism as having cost Mexico $2.3 billion in 2009.133 GDP contracted by 7 percent for 2009.134 Capital outflows and bank losses were exacerbated by Mexico’s high degree of foreign bank ownership (the highest of any country in the world) and the Fed’s turning the screws.
Ortiz sounded the alarm across the most prestigious of academic networks. In a Yale University speech in November 2009, Ortiz was adamant. Complex securities and derivatives were too much for current regulators to handle. He explained to the audience that “OTC [over-the-counter] derivatives were also used in what turned out to be mere speculative trades.”135 The main banking regulator was the US Fed. It was also the central bank that subsequently called the shots for Mexico, and ultimately the world.
A year after the developing nations subcomponent of the G20 had issued their statement stressing the need for a different post–Bretton Woods monetary system, Ortiz was on a roll. He urged a new financial order, one in which developing countries had more of a say in their own destinies than developing ones. He said, “One of the outcomes of the current crisis has been the recognition that the G10 economies have lost some of their clout in favor of other countries and regions.” He wanted it back.
“This, together with the failure of some of these countries to regulate and supervise their own financial institutions,” he said, “has raised the question of their ability to continue leading international policy coordination and to establish principles and standards for best practices and regulations. The result has been the acceptance of the idea that international efforts should be led and coordinated by a wider and more representative set of countries, the G20.”136
This recognition was one of the most momentous shifts in the expansion of power beyond the core G20 in the early days after the crisis. The United States was responsible for paving the way to a rejection of the old monetary system. Through its irresponsible regulatory and subsequent monetary policy behavior, oth
er countries had put the United States on notice. An elite outsider, Ortiz called the elite insiders out on their right to run international policy.
But it was official: Ortiz had gone too far for Mexico’s president.
THE ASCENSION OF AGUSTÍN CARSTENS
Ortiz’s six-year term was up at the end of 2009. On December 9 of that year, Calderón nominated Agustín Guillermo Carstens to take his spot.137
Carstens began serving on January 1, 2010. He brought with him an arsenal of US alliances and stellar connections.138 He had received his MA and PhD from the University of Chicago, with its free market doctrine. From 2003 to 2006, Carstens served as deputy manager of the IMF.139 He had chaired the IMF and World Bank Joint Development Committee from March 2007 to October 2009. He even had personal ties to the main US-Mexico bank, Citigroup-Banamex (Banamex Financial Group was purchased by Citigroup in August 2001 for $12.5 billion). His wife, Catherine, had been chief economist for the Futures and Options division of Euro American Capital Corp., an offshore subsidiary of Banamex, the first Mexican bank to offer and trade derivatives.
Ortiz’s perceived ousting was publicly controversial because many believed that Mexico needed continuity during the financial chaos. By that time, the crisis looked to be receding, but Ortiz had become too much of a wildcard in the artisanal money stakes. Carstens was likely to be more of a yes man—under Calderón’s lead. With his establishment background, he would be a point person of the Fed and offer a gateway to Washington Beltway economic leaders. Carstens was also considered more of a “rank-and-file” Wall Street guy. Ortiz, on the other hand, chose to believe in the “autonomy” of Banco de México from the government, which was supposed to be its mandate. Like Ortiz, Carstens came from the minister of finance position, a sign that true independence between the central bank and government wasn’t going to happen.
As for Ortiz, he moved to the private sector. He served as chairman of the board of Grupo Financiero Banorte from March 2010 to December 2014 and chairman of its advisory board from 2015. In October 2015, he became chairman of the Brazilian bank BTG Pactual Casa de Bolsa Mexico. Where he once straddled the reform gap between the BIS and IMF, he now served to bridge the gap between two of the largest banks in Latin America.
That revolving door was as normal in Mexico as it was in the United States. Ortiz would continue a tradition of Latin American leaders transitioning into private banking, prestigious academic institutions, and intergovernmental arenas that offered them huge sums of money.
FOREIGN MONEY FLOWS AND CURRENCY WARS
The Mexican economy stabilized, growing by 5.5 percent in 2010, its fastest annual growth rate in ten years140 and one of the highest in the OECD.141
Carstens guided Banco de México through a low-rate policy, as expected. The by-product of Mexico clawing back from its worst recession since 1932 was peso appreciation. Yet, that currency strength opened up another can of worms: fear that too much of a rise in the peso could have an undesirable impact on Mexican exports, rendering them too expensive and cutting into demand.142
By the evening of October 24, 2010, Ortiz, now on the outside looking in—warned of a currency war that for Mexico arrived in the form of the peso overheating, not devaluing. In the game of global currencies, through a mix of monetary policy, economic strength, and speculative bets, there are always winners and losers. As Financial Times reporter Adam Thompson noted, “While most people in Mexico were using their Sunday to unwind, Ortiz was telling an audience at the Mexico Business Summit in Toluca, just outside the capital, that the ease of investing in Mexico was increasing the risk of an overvalued currency.”143
Attracting foreign capital, which could increase the currency’s value, was both a badge of honor and a competitive sport in Latin America. Mexico’s main rival for foreign money, Brazil, boasted a much higher benchmark rate of 10.75 percent compared to Mexico’s rate of 4.5 percent. Both levels had the capacity to lure foreign investors seeking higher returns than the zero rates offered in the United States and Europe. This cheap money was easy to come by—and even easier to lose. That fear complicated the game of attracting foreign capital but didn’t end it, by any means.
Still, a headstrong Carstens took an opposite tack from developing countries such as Brazil and Colombia. They began imposing levies and ending tax exemptions on foreign capital in a bid to temper hot money speculation. He, in contrast, following University of Chicago theories of free market capitalism, openly criticized such seemingly isolationist moves.
In an October 27, 2010, interview, Carstens told Mexico’s Radio Formula that currency wars are “very destructive.”144 At a press conference in Mexico City that day, he reported that employment exceeded pre-crisis levels.145 Yet he signaled there might be more rate cuts to attempt to help the peso decline to a more comfortable level. In practice, it was a monetary policy head fake; he would impose no cuts until December 2015.
Meanwhile, the Fed and ECB had slashed rates. The Fed was planning to pump hundreds of billions of dollars into the markets (or, as it said, “the economy”). The move bothered Carstens for the same reasons it had Ortiz. He told reporters on November 17, 2010, “This could generate the risk of generating bubbles in emerging economies. When these burst they generally cause a lot of volatility.”146 Carstens was well aware that in the new interconnected world of central banking, what the Fed did would soon affect his policymaking ability. It would also significantly impact the Mexican economy and people.
In November 2010, China chimed in and criticized the Fed’s second round of QE as it threatened to “shock” emerging markets with “hot money.” Brazilian finance minister Guido Mantega compared it to “throwing money from a helicopter.”147 Hence, “Helicopter Ben” became Ben Bernanke’s money-conjuring nickname.
In the end, though, Carstens’s US allegiance won. He concluded Mexico would benefit if the Fed’s monetary stimulus boosted US economic growth. “It’s an understandable measure, and up to some point even desirable,” he said. “If I were in Ben Bernanke’s shoes, I would do the same.”148 Carstens had made his decision. He was all in with the Fed.
ZOOMING HOT MONEY
By 2011, foreign inflows to Mexico had almost doubled over the prior year to Mex$70.4 billion (US$5.78 billion) as international investors anticipated the Fed would pump more liquidity into the US economy (read: its banking system) and continue zero interest rate policies. That meant US rates would stay low. Investors sought greater returns elsewhere.
Meanwhile, Mexico’s central bank head’s status was elevated globally. On January 10, 2011, the board of directors of the BIS elected Carstens as a board member.149 Carstens saw this as an opportunity. He had climbed the ranks of the IMF. The BIS served as the next step in a career that extended beyond the Mexican central bank. And in that role, he would likely seek to render the BIS an even more powerful global entity.
A few months later, at the G20 and IMF assembly of finance ministers and central bank governors in Washington on April 14–15, 2011, Carstens touted Mexico’s recovery: “There have been some mixed figures about the US economy, we still are optimistic about the evolution of the Mexican economy.”150
Yet, despite it being a foreign capital magnet, the Mexican economy itself grew only 3.9 percent in 2011, the weakest pace in two and a half years. The services sector dipped, and a renewed global slowdown emanating from Europe dampened exports.151 Indeed, Mexico looked like a beacon of financial light compared to what was going on across the Atlantic. Portugal had to cut a €78 billion bailout deal with the EU/IMF.152 Greece received notice for a second bailout of $155 billion (€109 billion) in order to prevent contagion in Europe.153
Similar to the leader before him, Carstens’s star power was ascending. In May 2011, he was rumored to be in the running to replace a scandal-plagued Dominique Strauss-Kahn as managing director of the IMF. “It would be appropriate to have a non-European because a pair of fresh eyes could see European problems with greater objectivity,” Car
stens told El País on a visit to Spain as part of his strategic international lobbying campaign for the exclusive position.
“I think emerging countries have been faithful partners in the international economy in recent years and we should be recognized,” Carstens said.154 It was a subtler attempt to enter the world’s higher echelons than Ortiz had executed. From there, Carstens could navigate a tighter Latin America–emerging market partnership but remain on par with the Fed and its global allies.
In May 2011, at the United States–Mexico Chamber of Commerce Annual Gala in Washington, DC, Ben Bernanke and Carstens were both awarded the Good Neighbor Award. Carstens pressed Mexico’s case (and his own), beaming, “For the first time in several years the Mexican economy in 2011 will grow at a faster rate than Brazil’s.”155
On June 13, 2011, the IMF released its official statement of consideration for the nominations of Agustín Carstens and Christine Lagarde for the post of IMF managing director.156 Battle lines were drawn. Carstens met with Tim Geithner—if he could get US financial leadership to back him, he had a far greater probability of gaining the position.
The United States, with nearly 17 percent of the voting power, didn’t need Carstens in that position enough, though, and supported Lagarde. Venezuela, Bolivia, Peru, Panama, Uruguay, Mexico, Paraguay, Belize, Honduras, Guatemala, the Dominican Republic, Nicaragua, and Colombia backed Carstens’s bid for the IMF helm. So did Australia and Canada. But Brazil broke ranks, backing Lagarde.157
About two weeks later, Carstens was named runner-up for the IMF post. Even though Mexico was a top three trading partner, the United States was not about to step in the way of France’s Christine Lagarde and the institution’s sixty-five-year history. China, India, Brazil—all emerging powers—voted against Mexico’s bid for the IMF. The Wall Street Journal observed that Carstens, the Chicago Cubs fan, knew the odds had him as a long shot.158 “I think also someone coming from the outside would speak their mind more frankly and I think that would be an advantage,” Carstens had said. But Europe was facing a sovereign debt crisis and it wanted a European at the helm of the IMF in case it needed help.
