Then I challenged the Republicans on several fronts. If they were going to vote for a balanced budget amendment, they should say
I finished the speech with an outreach to the Republicans, pushing my middle-class tax cuts but saying I would work with them on the issue, admitting that on health care, “We bit off more than we could chew,” but asking them to work with me step by step, and to start by making sure people didn’t lose their health insurance when they changed jobs or a family member was sick; and seeking their support for a bipartisan foreign policy agenda.
The State of the Union is not only the President’s chance to speak for an unfiltered hour to the American people each year; it is also one of the most important rituals in American politics. How many times the President is interrupted by applause, especially standing ovations; what provokes the Democrats or Republicans to clap, and what they seem to agree on; the reactions of important senators and representatives; and the symbolic significance of the people chosen to sit in the First Lady’s box are all noted by the press and witnessed by the American people on television. For this State of the Union, I had a speech designed to last fifty minutes, allowing ten minutes for applause. Because there was so much conciliation, as well as some meaty confrontation, the applause interruptions, more than ninety of them, took the speech to eighty-one minutes.
By the time of the State of the Union, we were two weeks into one of the biggest crises of my first term. On the evening of January 10, after Bob Rubin was sworn in as secretary of Treasury in the Oval Office, he and Larry Summers stayed to meet with me and a few of my advisors about the financial crisis in Mexico. The value of the peso had been declining precipitously, undermining Mexico’s ability to borrow money or to repay existing debts. The problem was exacerbated because, as Mexico’s condition deteriorated, in order to raise money it had issued short- term debt instruments called
As Rubin and Summers explained, the economic collapse of Mexico could have severe consequences for the United States. First, Mexico was our third-largest trading partner. If it couldn’t buy our products, American companies and employees would be hurt. Second, economic dislocation in Mexico could lead to a 30 percent increase in illegal immigration, or half a million more people each year. Third, an impoverished Mexico would almost certainly become more vulnerable to increased activity by illegal drug cartels, which were already sending large quantities of narcotics across the border into the United States. Finally, a default by Mexico could have a damaging impact on other countries, by shaking investors’ confidence in emerging markets in the rest of Latin America, Central Europe, Russia, South Africa, and other countries we were trying to help modernize and prosper. Since about 40 percent of American exports went to developing countries, our economy could be hurt badly. Rubin and Summers recommended that we ask the Congress to approve $25 billion in loans to allow Mexico to pay its debt on schedule and retain the confidence of creditors and investors, in return for Mexico’s commitment to financial reforms and more timely reporting on its financial condition, in order to prevent this from happening again. They warned, however, that risks were attached to their recommendation. Mexico might fail anyway and we could lose whatever money we had extended. If the policy succeeded, it could create the problem economists call “moral hazard.” Mexico was on the brink of collapse not only because of flawed government policies and weak institutions, but also because investors had continued to finance its operations long past the point of prudence. By giving the money to Mexico to repay wealthy investors for unwise decisions, we might create an expectation that such decisions were risk free.
The risks were compounded by the fact that most Americans didn’t understand the consequences to the American economy of a Mexican default. Most congressional Democrats would think the bailout proved that NAFTA was ill advised in the first place. And many of the newly elected Republicans, especially in the House, didn’t share the Speaker’s enthusiasm for international affairs. A surprising number of them didn’t even have passports. They wanted to restrict immigration from Mexico, not send billions of dollars there.
After I listened to the presentation, I asked a couple of questions, then said we had to go forward with the loan. I thought the decision was clear-cut, but not all my advisors agreed. Those who wanted to speed my political recovery after the crushing midterm defeat thought I was nuts, or, as we say in Arkansas, “three bricks shy of a full load.” When George Stephanopoulos heard Treasury’s $25 billion figure for the loan, he thought Rubin and Summers must have meant $25
The risks were considerable, but I had confidence in Mexico’s new president, Ernesto Zedillo, an economist with a doctorate from Yale who had stepped into the breach when his party’s original candidate for president, Luis Colosio, was assassinated. If anybody could bring Mexico back, Zedillo could.
Besides, we simply couldn’t stand aside and let Mexico fail without trying to help. In addition to the economic problems it would cause both for us and for the Mexicans, we would be sending a terrible signal of selfishness and shortsightedness throughout Latin America. There was a long history of Latin American resentment of America as arrogant and insensitive to their interests and problems. Whenever America reached out in genuine friendship—with FDR’s Good Neighbor Policy, JFK’s Alliance for Progress, and President Carter’s return of the Panama Canal—we did better. During the Cold War, when we supported the overthrow of democratically elected leaders, backed dictators, and tolerated their human rights abuses, we got the reaction we deserved.
I called the congressional leaders to the White House, explained the situation, and asked for their support. All of them pledged it, including Bob Dole and Newt Gingrich, who aptly described the Mexico problem as “the first crisis of the twenty-first century.” As Rubin and Summers made the rounds on Capitol Hill, we picked up support from Senator Paul Sarbanes of Maryland, Senator Chris Dodd, and Republican senator Bob Bennett of Utah, a highly intelligent, old-fashioned conservative who quickly grasped the consequences of inaction and would stick with us throughout the crisis. Several governors were also supportive, including Bill Weld of Massachusetts, who had a great interest in Mexico, and George W. Bush of Texas, whose state, along with California, would be hardest hit if the Mexican economy collapsed.
Despite the merits of the case and the support of Alan Greenspan, it became obvious by the end of the month that we weren’t doing well in Congress. Anti-NAFTA Democrats were sure the aid package was a step too far, and the new Republican members were in open revolt.
By the end of the month, Rubin and Summers had begun to con-sider acting unilaterally, by providing the money to Mexico out of the Exchange Stabilization Fund. The fund was created in 1934, when America took the dollar off the gold standard, and was used to minimize currency fluctuations; it had about $35 billion and could be used by the Treasury secretary with the President’s approval. On the twenty-eighth, the need for American action took on even greater urgency when the Mexican finance minister called Rubin and told him default was imminent, with more than a billion dollars’ worth of
The matter came to a head on Monday night, January 30. Mexico’s reserves were down to $2 billion, and the value of the peso had dropped another 10 percent during the day. That evening, Rubin and Summers came to the White House to see Leon Panetta and Sandy Berger, who was handling the issue for the National Security Council. In blunt terms, Rubin told them, “Mexico has about forty-eight hours to live.” Gingrich called to say he couldn’t pass the aid package for another two weeks, if at all. Dole had already said the same thing. They had tried, as had Tom Daschle and Dick Gephardt, but the opposition was too strong.
I returned to the White House from a fund-raiser at about 11 p.m. and went to Leon’s office to hear the grim message. Rubin and Summers briefly restated the consequences of a Mexican default, then said we needed “only” $20 billion in loan guarantees, not $25 billion, because International Monetary Fund director Michel Camdessus had put together almost $18 billion in aid that the IMF would extend if the United States acted; combined with smaller
