The EconomistNovember 2nd 2019 Leaders 131M
ost peoplehave—mercifully—not had to think about the
money markets since the financial crisis, when obscurities
such as liborbriefly became part of the discussion. It is time
once again to pay a bit more attention because New York’s “repo”
market is not working as it should. Every day more than $1trn is
borrowed and lent by financial firms through repos, which in-
volve posting Treasury securities as collateral. The interest rate
that borrowers pay ripples through the global financial system.
Hence, if the repo market malfunctions, it matters.
That is what happened in September, when rates briefly
spiked as high as 10%; they should be much closer to the FederalReserve’s target interest rate, which this week was cut to 1.5-1.75%
(see United States section). The surge indicated that some finan-
cial firms did not have enough cash and were scrambling to get
hold of more. Although repo rates have eased back since then,
the underlying problem has still not gone away.
The cash shortage has three causes (see Finance section). As
the Fed has reversed its policy of buying long-term bonds,
known as quantitative easing (qe), cash has been sucked out of
the system. Also, the underlying demand for cash from financial
firms and their clients is rising. That reflects a growing economy
and lumpy factors such as a cluster of large tax bills. Higher de-Do the right thing
The Fed must fix the jittery repo market—but not by cutting cornersThe money marketsF
or defendersof free marketsinLatinAmerica,Octoberwas
a dismal month. In Chile, free-marketeers’ favourite econ-
omy in the region, protests against a rise in fares on the Santiago
metro descended into rioting and then became a 1.2m-person
march against inequality and inadequate public services. Sebas-
tián Piñera, the centre-right president, sacked some officials and
promised reforms. In Argentina voters booted out the pro-busi-
ness president, Mauricio Macri, after one term. Instead, they
elected Alberto Fernández, whose Peronist movement prefers a
muscular state to vigorous markets (see Americas section).
Both countries are rising up against “neoliberal” govern-
ments, claimed politicians and pundits. Nicolás Maduro, Vene-
zuela’s socialist dictator, tweeted praise for Argentina’s “heroic”
people and for Chile’s “noble” ones. In this, he
speaks for much of the left.
His glee is misplaced—because the assump-
tions behind it are wrong. Despite its flaws,
Chile is a success story. Its income per person is
the second-highest in Latin America and close
to that of Portugal and Greece. Since the end of a
brutal dictatorship in 1990 Chile’s poverty rate
has dropped from 40% to less than 10%. Infla-
tion is consistently low and public finances are well managed.
Argentina is a failure, but not for the reasons Mr Maduro ima-
gines. Its economy is in recession, inflation is over 50% and the
poverty rate is over 35%. This was not caused by Mr Macri’s “neo-
liberalism”. Inheriting an economic mess in 2015, he made mis-
takes of tactics and timing, among them hesitation in cutting the
fiscal deficit. But the underlying problems stem from decades of
mismanagement, largely by Peronist governments, which have
led to repeated defaults, currency crises and high inflation. Al-
most twice as rich as Chile in the 1970s, Argentina is now poorer.
It would benefit from becoming more like its liberal neighbour.
This is no argument for complacency in Chile. The Chilean
model, drawn up in the 1970s by economists trained at the Uni-versityofChicago,calledfora small state and a big role for citi-
zens in providing for their own education and welfare. It has
evolved—there is, say, more money for poor pupils; but Chileans
still feel underserved by the state. They save for their own pen-
sions, but many have not contributed long enough to provide for
a tolerable retirement. Waiting times in the public health service
are long. So people pay extra for care. Access to university has ex-
panded, but students graduate with high debts, only to discover
that the best jobs go to people with family connections.
Chile undertaxes the rich. Oligopolies have colluded to fix
prices in industries from drugs to poultry. Income inequality is
lower than the regional average, but it is high by rich-country
standards. More than a quarter of workers are in informal jobs.
Even middle-class Chileans live in cramped
housing. Behind the fare-rise rebellion lies a
pervasive sense of unfairness.
With healthy public finances, Chile can af-
ford to deal with these grievances. Mr Piñera
plans to spend more on pensions. He seeks to
speed up the passage of a scheme to cover cata-
strophic illness. He will create a new top in-
come-tax bracket of 40%, five points higher
than the current rate. Reform needs to go further. Trust-busters
need to crack down on oligopolies. Chileans need cheaper, swift-
er health care and better schools. The tax system relies on vatfor
nearly half of revenues—and vat, though efficient, is regressive,
so the state should take less or redistribute more.
Mr Fernández, facing an economic crisis in Argentina, has a
tougher task. He will have to renegotiate debt (yet again), main-
tain a tight fiscal policy and restore confidence in the peso. He
cannot ease the pain by ramping up public spending. It is already
more than 40% of gdp, compared with 25% in Chile. In the long
run, Argentina will need a smaller state and a more competitive
private sector. While Mr Piñera fixes the Chilean model, Mr Fer-
nández would do well to emulate it. 7Schadenfreude in the south
Economic liberalism is not the cause of the region’s discontentLatin America