Next to Paul Krugman my favorite target for ridicule is Argentina, specifically the government headed by Mrs. Cristina de Kirchner. Like Krugman they are easy targets because they pursue worn out ideas that have never, ever worked in history. One must admire their persistence at some level but for the fact that their policies usually achieve the opposite of what they intended.
Argentina always seems to take the route of other Latino populist-socialists. As I said in a previous post:
… they vote in some socialist-populist, he/she spends too much money, they increase taxes, they print money, inflation takes off, they impose price and wage controls, shortages develop, they seize assets in order to grab cash, the currency plummets, their bonds sink, they default on their debt, the banks get all upset, the IMF comes in with a bailout-austerity package, riots in the street, a new more financially responsible government, the banks cry but take a big hit, people are left dirt poor.
At this point, Mrs. Kirchner is running the country into la tierra because she and her fellow looters have spent most of the wealth that they have confiscated or have inflated into nothing. With the economy heading south her administration is desperate to get the economy going again. So she and her brilliant finance minister, Yale graduate Mercedes Marco del Pont, have come up with a plan to force banks to lend.
It may ring a bell to you when you hear the phrase “credit crunch” because we have been experiencing one here. A bit different here in that banks have a hard time finding borrowers whereas Argentine banks are afraid to lend and lose their investment. They haven’t released the details yet, but the idea is to require banks to lend a certain percentage of their deposits. The interest rate on these loans would be about 15% based on current deposit rates. Here’s the problem: the real rate of inflation is >25%, yet the “official” rate is about 9.7%. Of course if economists actually say what the real rate is, the government threatens them. The bottom line, with these interest rate controls (a price control by another name) banks will either go broke or lend only to cronies who won’t lose the money. If they can’t get around it, banks will face large losses and credit will dry up.
Maybe they should replace del Pont with Paul Krugman who believes that wealth can be generated by government borrowing and spending and if the central bank monetizes the debt because no one else will lend to the government, well, Argentina will be just fine.