Not All Crises Are Due to Unexpected Shocks

Por Nicolás Cachanosky. Publicado el 3/12/17 en:


Only a few weeks ago, a number of emerging economies suffered currency crises. Argentina stands as an outstanding case that was covered in several media outlets. For instance, in a recent piece at Project Syndicate, Martin Guzman and Joseph Stiglitz argue that the crisis there was a surprise.

In economics, in particular in the study of business cycles, the claim of unexpected shocks has become almost an excuse to defend any policy carried out by government institutions. These unexpected events, sometimes referred to as black swans, by their nature cannot be predicted. Therefore there is nothing a government entity such as a central bank could have done to avoid the costly shock. Crises are not the result of bad policies, they are just a matter of bad luck. Good luck is to have policy makers in place to minimize the damage from these unexpected shocks.

But not all crises are due to bad luck. Policy makers, even if rational, can also drive an economy to collapse. A long list of reasons can be found by perusing the public-choice literature from rational ignorance, to capture theory, to rent-seeking. In the case of Argentina, three particular problems call into question the “surprise” explanation of the currency crisis.

The first problem is the significant issuance of central bank short-term bonds (Lebacs, or Letras del Banco Central). Since the Argentine central bank does not have liquid assets on its balance sheet, it issues its own bonds to sterilize its expansionary monetary policy. It does so in the context of a decade of high inflation rates. The high inflation means there has been no demand to hold liquidity in the form of Argentine pesos. Therefore, the central bank needs to offer a yield on the bonds that beats the expected depreciation of the peso against the U.S. dollar (to incentivize a carry trade). Because of this policy, the investors that wish to close their position demand dollars, not pesos, which tends to depreciate the peso and have some pass-through effect on the domestic price level. When the currency crisis hit Argentina, there were roughly 1.3 Lebacs per peso in the monetary base, implying that if all Lebacs were canceled, the monetary base would more than double.

The second problem is the loss of central bank credibility. Since they took office, the new central bank authorities have consistently missed the government’s inflation targets. They even treat the inflation targets as optional. What matters, the official argument goes, is that there is a target, not that they hit the target. With already-weak central bank credibility, in an unexpected move last December, the president’s office announced a change in the inflation targets in a way that made the central bank president look like a pawn of the government. In particular, observers interpreted the change to mean the central bank, by reducing the interest rate, had to accept the political directive of letting inflation rise with the hope that economic activity will increase.

The third problem is a new law that taxes income non-residents of Argentina collect from Lebacs.

These three problems have occurred in the context of the Federal Reserve’s increasing the federal funds rate. An international scenario unfavorable to Argentina and other emerging economies was already taking place. It doesn’t look like an accident, much less a black swan, that the Argentine currency crisis started as the new tax law came into effect.

These three problems do not explain why there was a currency crisis in other countries, but they do help explain why the crisis was particularly severe in Argentina. Months ahead of the crisis, a number of Argentine economists noted that it was likely to occur. Since no one can predict a specific date for such an event, it doesn’t cut it to claim the crisis was a surprise. If someone plays with fire at a distillery, they cannot blame bad luck when their experiment goes awry.

It is true that some crises are due to unexpected shocks. It is no less true, however, that some are due to policy makers’ own doing.


Nicolás Cachanosky es Doctor en Economía, (Suffolk University), Lic. en Economía, (UCA), Master en Economía y Ciencias Políticas, (ESEADE). Fué profesor de Finanzas Públicas en UCA y es Assistant Professor of Economics en Metropolitan State University of Denver.

Winds Of Change In Argentina: New President Appoints Experienced Team

Por Alejandro Chafuen: Publicado el 2/12/15 en:


“Buenos Aires,” the name of the Argentine capital, translates into “Good Airs” or “Good Breezes.” The hot summer days that are approaching in this South American city are not particularly appealing, but the recent election of Mauricio Macri to the presidency, is making many feel that they are in a political spring. Some observers are forecasting that the election signals the end of populism. “XXIst Century Socialists,” on the other hand, argue that the election is a partial set back and a return to “neo-liberal” and crony capitalist days. The new cabinet, appointed with extreme speed, can give us a sense of what might follow.

Let’s start with the economy. The people chosen by President-elect Mauricio Macri, Alfonso Prat Gay, Pedro Lacoste, Rogelio Frigerio, and Federico Sturzenegger, to lead the ministries and agencies in charge of the Argentine economy are shrewd operators with ample experience in the public and private sectors. Their knowledge of how the Central Bank and other state-owned banks and agencies operate is an essential asset to this transition. During my lifetime, (I was born in 1954), not a single elected president who was not part of the Peronist party was able to finish his mandate. That’s not to say that they were all destabilized by the Peronists alone; one of them, Raúl Alfonsín (1983-1989), did it mostly to himself. His team implemented an easy money policy, which destabilized the economy, forcing him to call for early elections.

Argentina’s president-elect Mauricio Macri will take office as president of Argentina on December 10. (EITAN ABRAMOVICH/AFP/Getty Images)

The knowledge that Prat Gay, Lacoste, and Sturzenegger have of the web of interventionist regulations currently used to control most aspects of the Argentine economy will help the next administration to carefully assess any malfeasance conducted by the Kirchner government during these last weeks and until they take charge on December 10. Martin Lousteau, chosen to become ambassador to the U.S., belongs to the same club as the rest of the economic team. He also worked for the Kirchners and following his political instincts more than his economic understanding, greatly increased the dreaded export taxes, but was chosen due to his political clout.

Like good technocrats, the new team will be able to dazzle their audience and other policy players with numbers and figures. Yet having knowledge of data and economic statistics is not enough to avoid missing the goal of achieving financial stability and sounder monetary policies. The track record of Argentine “monetary experts” has not been good. In this case, pragmatism, of a non-dogmatic, Keynesian fashion, will be the norm. Prat Gay was head of the Central Bank in the early years of Nestor Kirchner’s administration (2002-2004), and Pedro Lacoste was his deputy. Lacoste’s consulting firm, Tilton Capital, is named after the estate of the late John Maynard Keynes. Only when compared with 21st century socialists can this team be considered “neo-liberal;” neo-Keynesian is more appropriate, but still much better than neo-Marxists like the departing Axel Kicillof.

What changes will we see first? I expect that soon most prices will be determined by the market process. There will be a gradual and uneven liberalization of the prices currently set and subsidized by the government (for instance, a train ticket costs 20 U.S. cents, which I estimate is 10 percent of its real value). I forecast that President Macri will respect his commitment to letting the price of the U.S. dollar and other foreign currencies be determined by the market, while asking his team of technocrats to try to smooth major fluctuations. But this will only be possible if the government puts its fiscal house in order and pursues a sound money policy.

To accomplish this goal, I expect that President-elect Mauricio Macri will seek major support from international financial institutions. He will show signs of responsibility by negotiating an agreement with Argentine creditors (the “holdouts”) and pushing for less politicized relations with most countries. Transparency in these first deals, divulging commissions and fees paid to financial brokers and legal advisors will indicate if there is a chance that positive change in Argentina is possible.

The new Minister of Energy, Juán José Aranguren, the recently retired head of Shell Oil Company, was one of the few in the business sector who, during this last decade, dared confront the Kirchner administration not only with words but also with lawsuits. In economics, he champions free markets moderated by social policy; his principled stances made him a darling of local free-market think tanks.

As Minister of Homeland Security, Patricia Bullrich will have a daunting task. But she does not lack the courage. As minister of labor in a previous administration under President De La Rua (1999-2001) she was the only one to really confront the Peronist labor unions. Originally from the “left,” Bullrich became a staunch defender of republican institutions both in Argentina and abroad (with Macri, she will fight for the freedom of Venezuelan political prisoners). Eugenio Burzaco is the new head of intelligence. Burzaco created the police of the city of Buenos Aires in order to counter the more politicized national (federal) police. Teamed with Bullrich, they will be a formidable team. They are committed to combatting narco-trafficking and the many criminal endeavors supported by its profits. Germán Garavano, who with Burzaco wrote “Mano Justa,” a book that received the Sir Antony Fisher Award from Atlas Network in 2005, is the new Minister of Justice. In no area does Argentina score so low as in respect for rule of law and justice. So these appointments are of immense importance.

In addition to justice and security, Argentina faces major challenges in the educational arena. Esteban Bullrich, the new Minister of Education, will bring his knowledge, innovative spirit, and integrity to the national scene. He developed and tested his skills as secretary of education in the city of Buenos Aires. He understands the theory and practice of education.

In Labor, Jorge Triaca (Jr), the son of one of the few moderate labor union leaders in Peronist history, played important roles in Fundacion Pensar. Pensar is a think tank that started as a state policy network, collaborating with think tanks across Argentina and Spain. It later became the official public policy ideas generator for the Macri-led political organization (PRO). Jorge Triaca left Pensar when elected to Congress. Due to his knowledge, big tent approach, and demeanor, he is one of the most admired politicians in Argentina today.

Argentina confronts major problems in economics, rule of law, security, and education. The team assembled by Macri is outstanding on many fronts. In my area of expertise, economics, I anticipate that interventionism will continue. This interventionism will be less political but, as it always favors some at the expense of others, it will not be less risky. In international affairs and global positioning, Argentina will show a very different face, much more civilized, respectful, and modern. All in all, a much welcome change for Argentina, the region, and the world.


Alejandro A. Chafuén es Dr. En Economía por el International College de California. Licenciado en Economía, (UCA), es miembro del comité de consejeros para The Center for Vision & Values, fideicomisario del Grove City College, y presidente de la Atlas Economic Research Foundation. Se ha desempeñado como fideicomisario del Fraser Institute desde 1991. Fue profesor de ESEADE.

Why free-banking?

Por Nicolás Cachanosky. Publicado el 29/6/15 en:


The need for and convenience of a central bank are usually taken for granted. To say that a central bank is a good institution and, therefore, needed, is not enough. Unfortunately, the assumption that central banks are necessary seems to weigh more heavily than the facts that suggest otherwise.

Good and bad are relative terms. With respect to what then is a central bank good? Some might say to the absence of a central bank- or more specifically, to the presence of a free banking regime.

Historical records, however, show that free banking outperforms central banks in most, if not all, of the cases.

A free banking regime is such where the market for money and banking is free of specific regulation (save, of course, illegal activities such as the violation of third party property rights.) Let me be clear. The absence of a central bank is not equivalent to free banking. The absence of regulation is equivalent to free banking. This is why to think of the pre-Fed era in the United States as a case of free banking shows a superficial understanding of what an unregulated –free– market is.

The literature on free banking is vast. Let me just give a brief description and comment on a couple of illustrative historical cases. First, under free banking, each bank is free to issue their own convertible banknotes. Convertible to what? To whatever functions as base money in the economy. Historically, this has been gold, but this does not need to be the case. It could be, like Selgin describes in his Theory of Free Banking, that the Federal Reserve shuts down the FOMC and that the USD becomes the base money to which private convertible banknotes are convertible. Whether or not the USD will eventually be replaced by gold, silver, or any other asset is up to the market process to sort out.

Second, because all banknotes are convertible to the same base money, there is no multiplicity of units of account. Under this regime, there should be no fear of confusion about the multiplicity of prices. If today you travel to Hong Kong, Ireland, or Scotland, you’ll see a strong presence of private money in circulation, but you won’t see multiplicity of units of account. It could be said that the US banking system is not the most developed and flexible of the developed world. On the contrary, the heavy regulation imposed on this market suggests that lot of improvement is possible and needed.

Third, the stability of the system comes from banks competing with each other for deposits and therefore for base money. Surely, mathematical models showing how banking without central banks are instable can be developed. With the right assumptions, it is possible to shows anything in a mathematical model. Free banking shows a remarkably good performance, despite the claims that many academic models try to make.

Let me now comment on two examples that show that bank failures are not the same as bank runs. This would likely be the case under a fiat currency regime managed by central banks, but free banking works under a different regime and therefore with different incentives. The outcome is a different performance.

Consider first free banking in Scotland (1716 – 1844). In 1772 the “Ayr” bank collapsed, bringing other smaller banks down with it. As spectacular as the Ayr Bank failure might have been, the Scottish free banking system did not suffer a bank run. What happened? The Ayr Bank was doing what any efficient bank would not do: aggressively increasing the issue of their convertible banknotes. With the increase in circulation of convertible banknotes, the Ayr Bank started to lose reserves until it went bankrupt. What about the other small banks? These smaller banks were also doing what an efficient bank should not do. These small banks invested their reserves in the Ayr Bank. Why was there no bank run? Succinctly, because the reserves that the Ayr Bank was losing were being transferred to other more efficiently managed banks. This is the market outcome of over-expanding credit- no central authority is needed for this to take place. The result is an increase in the market share of efficient banks at the expense of inefficient banks. Isn’t that the outcome we want for any market- for efficient firms to displace inefficient firms?

The second case I want to mention is the economic crisis in Australia in 1890 under a free banking regime. Australia was under free banking between 1830 and 1959. The first thing to keep in mind is that the 1890 crisis in Australia was the result of Bank of England credit expansion being channeled to Australia. The result was a bubble in land prices (sound familiar?.) When this process of credit expansion is reverted (in part to the Baring Crisis that was born from Argentina’s default) some banks experience solvency problems, other did not. Those banks that saw the bubble and adjusted their portfolios where ready to buy the portfolio of the failing banks that did not see the crisis coming (again, sound familiar?)

Namely, the crisis was ready to be reverted. But the U.K. government thought it knew better and made things worse (I can keep asking if it sounds familiar, but at this point the parallelism is quite obvious.) The government committed two important mistakes. First, it forced a bank holiday on banks that were in good standing and wanted to keep their doors open to their customers. The result? The market could not sort out which banks were solvent and which were not. Second, it allowed failed banks to re-open their doors free of their previous liabilities, but this generosity was not extended to efficient banks. The result was a bank run against efficient banks towards inefficient banks. It should be patent that this was not a free banking failure, but just another case of regulation failure in one of the more complex and delicate markets.

If one looks at historical facts, rather than just let be guided by pre-conceived ideas, the need and superiority of central banking next to alternative monetary regimes is thrown into serious doubt. Surely, free banking is long gone and gold, which was used as base money under these cases, is not money anymore.

Why then look at free banking? I can mention at least two reasons: (1) To do away with the almost ideological position that a central bank is needed. This position, or assumption, needs to be questioned rather than taken as fact if we want to come up with innovative alternatives to our monetary regime. (2) Even if the old free banking system based on gold standard is not feasible, it certainly helps us to come up with reform that can improve the status-quo.


Nicolás Cachanosky es Doctor en Economía, (Suffolk University), Lic. en Economía, (UCA), Master en Economía y Ciencias Políticas, (ESEADE). Fué profesor de Finanzas Públicas en UCA y es Assistant Professor of Economics en Metropolitan State University of Denver.

Why Argentina Must Learn the Virtues of Economic Orthodoxy:

Por Adrián Ravier: Publicado el 8/12/14 en:


Orthodoxy is, according to the first definition of the Royal Spanish Academy, “conformity with generally accepted doctrines or practices.” Those in the economics profession and academic discipline have reached a broad consensus about the importance of fiscal balance (in public finances), monetary stability (in macroeconomics, and in the sub-discipline of monetary theory), and open economies (in international economics).

However, Argentinean economic policymakers have struggled with these three areas historically, instead embracing a heterodox approach.

On the fiscal front, the recent economic history of Argentina has seen successive deficits. The sole exception came in the 2003-2008 period, which was entirely due to an enormous currency devaluation after the policy of convertibility — whereby the exchange rate between the Argentinean peso and the US dollar was fixed at 1 to 1 — and the consequent dilution of public sector salaries. When pay levels recovered after six years, Argentina returned to registering successive fiscal deficits up until today.

The reader might ask what precisely is problematic with maintaining such fiscal deficits. First, it must be observed that servicing a deficit has consequences. On several occasions in recent history, the associated debts have been paid for with new taxes, which have now left us struggling under the greatest tax burden in our history, and the highest in all the American continent. This reduces the efficiency of the productive sector, impeding its ability to generate jobs and wealth.

When society at large begins to refuse to accept ever greater taxes, governments instead turn to internal and external public debt. This was the case during Argentina’s military dictatorships, which saw the first great leaps in our public debt, and was duplicated in the 1990s. Fiscal imbalances may also be financed by printing money, as done during the return to democracy under President Raúl Alfonsín (1983-9), which left us with the worst hyperinflation of our history.

Our Ministry of Finance is now the proud owner of relatively low levels of public debt in relation to GDP, following a decade of economic recovery after the 2001 crisis, while external debt was largely kept low. However, this isn’t the result of a conservative or orthodox economic policy. Rather, it is due to the fact that Argentina has deployed other tools — taking on internal debt with the Central Bank and Social Security Administration (ANSES), and the monetization of her public debts. An enormous proportion of current Central Bank assetsare made up of government bonds, which leaves the nation’s future financial viability in an extremely precarious situation.

Elaborado a partir de “Sector Público No Financiero, Cuenta Ahorro-Inversión-Financiamiento”, Secretaría de Hacienda, Ministerio de Economía. (Consultora Macroeconómica Espert)

Second, we should remember that historically Argentina has struggled to keep public spending down and to control the deficit. The above chart shows the 1975 deficit at 12.1 percent of GDP, which ended in a hyperinflationary episode, dubbed the Rodrigazo after then-Economic Minister Celestino Rodrigo. Currency devaluation managed to deflate spending and bring it to less than 4 percent of GDP, only for the problem to return six years later — following a series of policies, involving pegging the peso to the US dollar, known as the Tablita — to a fiscal deficit of 11.3 percent.

The return to democracy was also characterized by successive fiscal deficits financed by printing money, as well as repeated currency devaluations. The result was the same as before: when the fiscal deficit reached 6.5 percent of GDP in 1988, its monetization brought us to hyperinflation.

The policy of convertibility during the 1990s was accompanied by several orthodox policies, including the privatization of public services, which allowed the government to at least reduce the deficits then being registered by state-owned companies. However, the above chart clearly shows that, aside from 1993, when the government received the profits of the sale of public companies, the government failed to achieve fiscal balance throughout the entire decade.

In this case, following the Brady Plan, public deficit financing came from legitimate public debt, although that clearly risked the sustainability of the government’s economic model. It was only through the support of external creditors who were prepared to finance this imbalance that Argentina was able to maintain economic growth. However, beginning with the Asian financial crisis of 1997, the Russian default in 1998, and Brazil’s devaluation of its currency in 1999, creditors decided to cut off their loans, and pressure grew on the government to abandon convertibility.

Far from the “zero deficit” envisioned in orthodoxy, Argentina registered still further growing imbalances, reaching 7 percent of GDP in 2001, marking the end of convertibility with a monstrous devaluation.

When Néstor Kirchner came to power in 2003, he was met with a strangely favorable situation. As Argentina was barely climbing out of the hole, the 2004 fiscal surplus was some 3.8 percent of GDP. It wasn’t that Kirchnerism involved orthodox, prudent, or conservative policies to reduce the fiscal deficit, but that the hyper-devaluation required to end convertibility significantly reduced the real value of public-sector salaries.

From 2004 onwards, these same employees began to recover their purchasing power, which added to successive social spending plans and led us to new fiscal deficit of 0.3 percent in 2007. Since then, Argentina has continued to widen the gulf between tax receipts and spending, nationalizing the system of pensions, appropriating ANSES funds worth more than US$30 billion, and making heavy use of the money-printing machines of the Central Bank. 2014 is set to close with a fiscal deficit of an estimated 5.9 percent, which is certain to force the government to turn to external debt.

The outcome of this model is still unclear, but it’s unlikely to be very different to our previous economic history throughout the greater part of the 20th century. Argentina’s rulers have systematically ignored basic economic lessons, broken from orthodox fiscal policy, and systematically impoverished their citizens.

Even the limited successes of the military model, or that of the 1990s, weren’t due to the adoption of orthodox policies. Both periods remained extremely far from this line of thinking.

Argentina needs orthodoxy, and has always needed it — although this word has been wrongly interpreted and maligned from almost every quarter within our society.


Adrián Ravier es Doctor en Economía Aplicada por la Universidad Rey Juan Carlos de Madrid, Master en Economía y Administración de Empresas por ESEADE y profesor de Macroeconomía en la Universidad Francisco Marroquín.