For a Normal U.S. Government to Shoulder "Credit Risk" Can Be Fine. But This Is Not a Normal U.S. Government, Is It?

Chaos monkeys promising unconditional U.S. financial support for unsustainable Argentinian economic policies is a royal road to disaster. Failing to make that transparently clear at the start of...

Chaos monkeys promising unconditional U.S. financial support for unsustainable Argentinian economic policies is a royal road to disaster. Failing to make that transparently clear at the start of the piece is doing a disservice to your readers. So why are you doing this, Matt Klein?…

Et tu Matthew? Normalizing chaos monkeys is not a good look:

Matthew Klein: What Should the U.S. Try to Achieve in Argentina? <https://theovershoot.co/p/what-should-the-us-try-to-achieve>: ‘Argentina’s longstanding vulnerabilities to capital flight and inflation have reasserted themselves with a vengeance…. The U.S. Treasury is preparing to commit tens of billions of dollars to Argentina…. The IMF is apparently “coordinating support”, which could involve loans from the ~$175 billion of Special Drawing Rights (SDRs) held by the Treasury. According to Treasury Secretary Scott Bessent, the goal is to give Argentina “the tools to defeat speculators, including those who seek to destabilize Argentina’s markets for political objectives.” At one level, this is incredibly stupid, because the Argentine government will almost certainly fail to repay the Treasury without doing something rash. At another level, however, I think that there is a germ of a good idea in Bessent’s proposal. The U.S. government should be more willing to take credit risk for the sake of mitigating balance of payments crises. The question is whether Argentina is the best case for doing this…

The next to last sentence is a genuine point. Indeed: the U.S. government should be more willing than it has been to take credit risk for the sake of mitigating balance of payments crises. The sentence before it and the sentence after it, however, are embarrassing. Because it is Trumpist Bessent’s proposal, it is not a good idea at all—not even a “germ”. And because it is the Trump chaos-monkey administration doing it, Argentina is not the best case.

As I said a week ago:

Dan Drezner said last week that one good thing that could be said about Scott Bessent was that he was 10% less crazy than the other Trumpist chaos monkeys. Scott Bessent’s response?: “Hold my beer!” Stating that the U.S. will pay the piper but that Javier Milei will call the tune and that U.S. financial support for Argentina is “unconditional” may well be the most unprofessional thing I have ever heard a Treasury Secretary say… <https://braddelong.substack.com/p/no-there-are-no-even-half-competent>

Lender-of-last resort operations involve (a) lending freely (b) at a penalty rate (c) on collateral good in normal times. In the international context:

• “on collateral good in normal times” means that repayment financial flows need to be earmarked.

• "at a penalty rate” means that one does not say that the support is “unconditional”: rather, one says that support is conditional on policy changes—and that those are already in train, and unless they happen the support will not go forward.

• absent those two, claims that one is lending freely are simply not credible.

This is smelling like the British Tories’ defense of the pound back in 1992, the thing that made George Soros’s career as he took ten figures of pounds sterling away from the British government. And since that story has been told and retold everywhere in the Soros affinity all the time since, Bessent knows it very well.

So what does Bessent think he is doing? And what does Klein—smart, honorable, well-intentioned—think he is doing in providing even half-hearted praise for the “germ of a good idea”, and stating that it is just a question of whether here and now?

Maybe Klein thinks, rhetorically, that if he starts his piece sympathetically he will bring more people along to his ultimately negative conclusion. But that is not how this works: that may be what he wants Trumpist and Trumpist-curious readers to hear. That is not what they will hear.

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#for-a-normal-us-government