Putting the Banks in Charge
Jun 1, 2002
To save Argentina's decimated banking system, economist Steve Hanke proposes repealing the Central Bank's ability to issue pesos and giving solvent banks the ability to issue dollar-denominated notes.
Many eminent economists - Olivier Blanchard, Michael Bordo, Sebastian Edwards, Martin Feldstein, Ricardo Hausmann, Paul Krugman, Allan Meltzer, Michael Mussa, Joseph Stiglitz, Thomas Willett and John Williamson -- told us that dumping convertibility would work wonders in Argentina. Indeed, they trotted out every half-truth or non-truth under the sun to bolster their claims that the source of Argentina's problems was convertibility and that a floating peso, and pesofication of contracts and financial liabilities and assets were just what the doctor ordered.
Under the Convertibility Law, the peso and US dollar legally circulated at a one-to-one exchange rate. The owner of a peso had a property right to a dollar and could freely exercise that right by converting pesos into dollars. That redemption pledge was credible because the central bank was required by law to hold foreign reserves to cover fully its peso liabilities. It doesn't take a rocket scientist to...
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