U.S., take a lesson from Mexico's '94 financial crisis

President Bush is spending much of his time these days consulting with European leaders on how to solve the global financial crisis. But he should get some advice from Mexico and other Latin American countries that bounced back from economic disasters.

Well-placed international economists say the United States could learn some lessons from Mexico's 1994 financial crisis, which shook world markets and resulted in a massive U.S. and International Monetary Fund bailout.

Claudio Loser, who was chief of the IMF's Latin American department during the Mexican crisis and is now a private consultant in Washington, wrote in the Latin America Advisor newsletter recently that a 2005 IMF report on Latin America's banking crises underscores how history repeats itself.

If - for fun's sake - you replace the word Mexico and the year 1994 with the United States and 2008 in that report, the similarities are striking.

"The wave of bank failures in Mexico in December 1994 followed a period of financial liberalization and rapidly expanding bank credit in the absence of proper bank regulation and supervision," the report said. "When the poor quality of Mexican banks' loan portfolios became evident, currency, stock and real-estate prices fell sharply, reducing overall values and imposing large losses on banks."

To halt Mexico's financial bleeding, Bill Clinton and the IMF rescued the Mexican economy with a $38 billion bailout, equal to about 10 percent of Mexico's gross domestic product at the time. In its proportion to the national economy, this was not too different from Congress' recent $700 billion rescue plan, plus other U.S. government stimulus packages, Loser says.

Once the U.S.-IMF money was disbursed, Mexico improved supervision of the financial sector with tough new regulations. That resulted in several banks' collapsing and in others' merging - much like what is happening in the United States today.

While Mexico's bank rescue was tainted by corruption charges, Mexico recovered and paid off its debts to the United States and the IMF in 1997, two years ahead of time, with a net profit to the U.S. Treasury. So what could we learn from Mexico's bailout?

"The main lesson is that financial bailouts and new regulations are not enough, if you don't adopt an austerity plan and cut public spending to put your house in order," Loser said. "Mexico did it, and the United States will have to do it."

Loser cautions that, while cutting spending or raising taxes immediately could worsen the current downturn, Washington will have to start doing so soon. Among other things, the United States will have to look into cutting tax holidays for big corporations, reducing entitlement programs, and raising taxes.

I agree. Washington needs to take the same medicine it prescribed for Latin American countries during their financial crises by adopting an austerity plan with cuts in government spending. (I would start with farm subsidies, which hurt everybody but a few rich farmers.) Barring an IMF-style austerity package, the current bailout will not stop the panic in the U.S. and world markets.

What troubled me while watching this week's presidential debate was that Barack Obama and John McCain kept making grandiose promises as if the world were not going through its worst economic crisis since 1929.

Does McCain really think he will be able to give families a $5,000 tax credit to cover health-care costs in the new environment? Does Obama really think he can ensure health coverage for 45 million uninsured Americans?

They are kidding themselves and the rest of us. Their third presidential debate should be canceled and replaced with a polygraph test in which they answer whether they sincerely believe they can meet their respective economic promises. They would probably fail.

In the meantime, the candidates should start thinking about a long-term austerity plan and should get on the phone with Mexico for tips on how to carry it out.