Monday, August 18, 2008

Nouriel Roubini's Economic Predictions, or, Why Fernando Henrique Cardoso Was a Terrible, Terrible President

This weekend, the New York Times ran an absolutely outstanding article on Nouriel Roubini, the man who accurately predicted the current financial crises facing the United States in startling detail and an economics professor at NYU. The whole article is really worth reading, and contains many nuggets, both from Roubini and from author Stephen Mihm, (including the fact that Roubini actually analyzes markets and their future not just on sterilized models that have nothing to do with reality but that actually draw on real economic events of the past). Again, read the whole article, both for Roubini's ideas and Mihm's.

Still, there is one small part that pertains to Latin America that is secondary but important. In discussing how Roubini could have predicted the current financial crises in the US, Mihm writes:

The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.

This is absolutely true, and really gets at why I think Fernando Henrique Cardoso was such a terrible president. To be up front, yes, Cardoso did institute the Plano Real, which, after no fewer than 5 other failed plans, finally pulled Brazil out of years of inflation in the 100s and 1000s of percent. However, Cardoso actually did that as the financial minister during Itamar Franco's administration, and not while president himself (the Plano Real was what basically got Cardoso elected in 1994). Once he was president, however, he did exactly what Mihm describes: spent more than the goverment made, taking out enormous loans from the IMF and World Bank; selling off to private companies many state industries that, while inefficiently run at the time, could have been improved had a president cracked down on inefficiency and bureaucracy; dangerously deregulating the banking system, leading to more and more financial speculation in Brazil; and not only failing to crack down on the corruption and cronyism that had dominated politics, but actively participating in it.

Eventually, these things did catch up to Cardoso, and the economy plummeted in 1998, only recently recovering under the (radically different) Lula administration; the only reason Brazil's late-90s collapse isn't mentioned as much is because Argentina's made Brazil's look less significant. And just to top off the despicable nature of his administration, Cardoso hid all of the indicators of economic weakening when he ran for reelection in 1998. He campaigned on a platform of how much he'd done for Brazil's economy and how strong it was. Yet the moment he was reelected, he announced that the economy had taken a "sudden" downturn, and devalued Brazil's currency by half. The economy under Cardoso never really recovered, and the ever-cynical Brazilian electorate saw Cardoso's ploy for what it was: a whitewashing of the facts to get re-elected, followed by a shift in the economy that negatively effected almost all but the richest individuals and (now-foreign-owned) private companies. It's for these reasons that the frequent defenses of FHC that I encountered in Brazil among middle-class baby-boomers, based as they were in his creation of the Plano Real, were insufficient and indefensible. Yes, he did the Plano Real, but it had nothing to do with his presidency beyond getting him elected to his first term. From there, he participated in the worst economic models available, doing everything he could to re-screw the very economy he'd actually salvaged in 1994. These are the issues that Roubini in this article used to accurately predict what the U.S. is going through, and these issues are why I will never be able to defend Cardoso, a president who acted like the nation's economic savior even while he undid so much.