Asymmetrical Information

Outstanding editorial from the WSJ

Outstanding editorial from the WSJ asks where the hell are all the economists who were lauding Argentina's de-pegging the peso, now that it looks like this may have singlehandedly destoryed both the peso, and the Argentinian economy?

When Argentina dumped its law linking the peso to the dollar late last year, international conventional wisdom hailed the move. Funny, but those same global wise men aren't taking credit for their handiwork now that all hell is breaking loose in Buenos Aires.

They suddenly have the same profile as the Argentine peso, which is to say almost no profile at all. Back before it was "floated" in December, the peso traded with the greenback one to one. Now it's worth about 33 cents, assuming anyone is still willing to hold pesos at all. Despite bank holidays and partially frozen bank accounts, Argentines are standing in lines stretching for half a mile to buy dollars rather than hold their own currency.

The police have been arresting currency traders on the street, banana republic style. . . Forty-three percent of the population now lives below the poverty line, Equis says, and with inflation set to rise so will the number of poor. El Clarin reported on Tuesday that the "middle class basket of goods and services" has risen 27% post-devaluation. Yesterday's La Nacion told of Buenos Aires bakeries threatening to close if the price of flour doesn't fall. As for the trade "competitiveness" that devaluation was supposed to bring, Uruguay says it plans to raise tariffs on 300 Argentine products.

All of this is a tragedy, but it was hardly an accident. The devaluation was the product of years of intellectual attack on the peso's dollar anchor; we know because we were on the other side of that debate. We're still waiting for the architects of the Argentine "float" to explain how all of their splendid schemes went awry.

One such would be Ricardo Hausmann, the former chief economist at the InterAmerican Development Bank. Writing in the Financial Times last October, Mr. Hausmann opined that "the government has to find creative ways to reduce the debt burden and gradually gain competitiveness." His "workable" solution to this was to convert the country's dollar debt to pesos and to float the exchange rate. . . There was another way out, as some of us argued at the time. That path was to remove all doubt about the peso's future value by dollarizing the economy. Yes, the country would still have to reschedule its suffocating debt. But it would have avoided the catastrophic loss of Argentine faith in the value of its own currency, which is the bedrock of any decision to invest or start a business. Even now the country might be able to stop the peso hemorrhage if it decided to dollarize, as Ecuador did to emerge from its death spiral in 2000."