And the Money Kept Rolling in (And Out) Wall Street, the Imf, and the Bankrupting Of Argentina [Paperback]

In his previous book The Chastening, Paul Blustein went on a quest to understand what happened to the Asian economies hit by the currency and financial maelstrom that began with the collapse of the Thai baht in July 1997. Although he did not refrain to point out the costly mistakes that were made in responding to the crises, his purpose was not to distribute blame, but to understand what had happened and to share his sense of awe that such crises might unfold again.

Four years later, Paul Blustein is back at it, but his "indignation quotient", as he states in the introduction, is substantially higher. According to him, the Argentina debacle of 2001-2002 not only illustrates the risks inherent in modern international finance, but it also provides a damning case of personal hubris, unrestrained greed and institutional myopia in which the international community particularly "blew it". Charting the course that started with the adoption of a new currency tightly tied to the dollar in 1991 and with the subsequent growth episode that followed, he describes the mounting imbalances that resulted from the massive capital inflows led by international investors whose irrational exuberance went mostly unchecked by the IMF. This complicity of government officials, Wall Street investors and Washington money watchmen in creating a bubble was further aggravated by the incapacity of policy makers and their international advisers to provide an exit strategy to the convertibility regime and to secure a soft landing or at least minimize the impact of the financial meltdown for the population. Indeed, Blustein makes the case that the protracted rescue effort orchestrated by the IMF and the US Treasury only prolonged Argentina's agony and made the crash all the more devastating in the end.

Blustein bases his case on extensive interviews with all the most important players, including Argentine's Minister of Economy Domingo Cavallo and IMF Managing Director Horst Kohler. He also had access to a trove of documents, including internal memos, confidential reports and notes meetings, and seems to have read them all. At every juncture, he reconstructs the internal debates, spells out the policy choices, and weighs the pros and cons that were advanced by the main institutional actors at the time when the decisions were taken and in retrospect. But Blustein is not just a journalist who writes well, works hard, and knows how to get sources to talk. He also knows the professional literature on financial crises and clearly has a solid understanding of the fundamental debates on the subject. The accusations that he wields to the international financial community are therefore to be taken seriously.

Blustein makes amply clear that Argentina's woes were first and foremost the result of the country leaders' own wrongdoings: they spent more than they should have, taxed less than they should have, and borrowed more than they should have, all the while keeping a currency system that required much stricter fiscal discipline. They failed to see the writing on the wall and clung to the one on one dollar parity until the financial hemorrhage wreaked havoc with the banking system, wiped out people's life savings and inflicted massive damage on the economy.

But the international financial community, especially global investors and, to a lesser extend, IMF and Treasury officials, also share part of the blame. First, Blustein makes the by now familiar case that conflicts of interests and skewed incentives among investment managers propelled an excessive amount of short term capital toward Argentina without due consideration for the risks involved. Particularly infamous is the megaswap deal that Wall Street peddled to the government in June 2001 and that further aggravated the country's debt burden while generating hefty fees for the banks involved.

The IMF, for its part, demonstrated "a failure of intellectual courage," in the words of its former chief economist Michael Mussa. It used Argentina as a poster child when it should have begun to send warning signals to the authorities, based its growth projections on rosy assumptions, clung to a voluntary approach of debt restructuring when it should have facilitated an orderly workout, doubled a losing bet when it extended a second loan package which conditions were clearly not sustainable, failed to provide contingency planning and delayed the day of reckoning when the dollar parity had to be abandoned. At nearly steps of the way, claims Blustein, the crisis could have been mitigated even if it could not have been prevented.

To the credit of the IMF, one must nonetheless recognize that each decision was hotly debated at the time, that all the moves were endorsed if not sometimes dictated by the US and the other G7 countries, and that the institution took the blame and repented openly in a series of evaluation reports.

Especially troubling is Blustein's contention that the rules of the globalization game are rigged and that countries like Argentina are given false hopes that they can join the league of rich industrialized countries only to be denied access at the last moment and be cast back into poverty in a most cruel and painful way. If such a bias exists, then the system is in urgent need of fixing.

I ran a Latin American capital markets desk in NYC during this crazy time in Argentina, so I am intimately familiar with what Paul Blustein has written about. His book is a very fair and balanced account of what, why and how it happened without resorting to sensationalized story telling.

I highly recommend it for anyone who wants to understand what happened in Argentina or the IMF.

After finishing And The Money Rolled In, I recalled the observation that, despite appearances, catastrophes don't happen spontaneously. Instead, they are usually the result of a series of small mistakes that compound to become memorably devastating events. Blustein must have recalled the same observation, because he spends critical time and effort documenting the "small" mistakes behind the Argentine default. In doing so, he exposes the greed, stubbornness, and political cowardice that combined to make this maelstrom as devastating as it was. Blustein also takes great lengths to point out that these emotions are still prevalent in both financial markets and seats of government, thereby making another Argentina-like financial collapse more of an inevitability than a fluke.

This book works on all levels. It's a thorough analysis of (arguably) the largest financial crisis in recent history; a cautionary tale with solutions to avoid a repeat of the crisis; and an accessible, entertaining read. Given these qualities, it's very likely that And The Money Rolled In will join Secrets Of The Temple by William Greider as one of the definitive texts to shed light on the integration between financial markets and government fiscal policy.

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