GAUCHO BANKING REDUX

Presentación "GAUCHO BANKING REDUX"
Fundación Pent
Marzo 2003

Argentina's economic crisis has strong similarities with previous crises stretching back to the nineteenth century. Regardless of the exchange-rate regime, a common thread runs through all these crises: the interaction of a weak, undisciplined, or corruptible banking sector, and some other group of conspirators from the public or private sector that hasten its collapse. This pampean propensity for crony capitalism was dubbed "gaucho banking" more than one hundred years ago. What happens when such a rotten structure interacts with a convertibility plan? We compare the 1929 crisis to the events of 2001-the two instances where rigid convertibility plans failed-and reach two main conclusions. First, a seemingly robust currency-board can be devastated by an ill-conceived approach to the problems of internal and external convertibility (or, to rephrase Gresham, "bad inside money drives out good outside money"). Second, when modern economic orthodoxy collides with caudillo-style institutional backwardness, a desperate regime with its hands tied in both monetary and fiscal domains will be sorely tempted by a "capital levy" on the financial sector (for, as Willie Sutton said when asked why he robbed banks, "because that's where the money is").