The crash before the crash

How the Nicaraguan banking crisis (2000-2002) foreshadowed the American financial debacle

Next month will mark the third anniversary of the Wall Street crash that inaugurated what is now called the Great Recession. It was a time of rampant uncertainty, filled with images of defeated stockbrokers, glum press conferences by Treasury Secretary Hank Paulson and vitriolic debates in Capitol Hill over massive bailouts for failed corporations.

Like the 9/11 attacks, the 2008 crash caught the United States by surprise. In the words of former Federal Reserve Chairman Alan Greenspan, the credit crisis “turned out to be much broader than anything I could have imagined.”

Yet, a quick glance at recent economic history and a number of crises reveal themselves as precedents that should have reduced Mr. Greenspan’s faith on the invisible tentacles of the free market. From the 1997 “Asian Tigers” crisis to the financial and political upheaval of the Argentinian corralito, a number of tremors in “developed” and “developing” economies signaled a dangerous fault line in the neo-liberal paradigm.

In this respect the Nicaraguan financial crisis (2000-2002) is particularly illuminating. As a former socialist country ravaged during the Cold War, Nicaragua became a guinea pig of sorts for the free-market orthodoxy of the Washington Consensus.

During the buoyant 1990s, institutions like the IMF and the World Bank pressured Managua into adopting sweeping policies of privatization. Importantly, these international organizations advised privatizing all aspects of the banking and financial sectors. Regulation—always odious to neoliberal sensitivities—was to be curtailed whenever possible.

For a short time the recipe seemed to work. According to a study by the UN Economic Commission for Latin America and the Caribbean (ECLAC), the total assets in Nicaraguan banks grew more than 30 percent and no less than ten private banks were created during a relatively short period. In the sloganeering prose of former president (and current presidential candidate) Arnoldo Alemán, it was a time of “Obras, no palabras” (actions, not words).

Less than a year before the end of Alemán’s controversial tenure, the bonanza was revealed to be nothing less than a sham: a corrupt house of cards built on the rickety foundations of rampant liberalization.

On Aug. 8, 2000, the Banking Superintendent announced that it had taken over the assets of INTERBANK, the biggest bank in the country, accounting for more than 14 percent of the banking sector. Like Lehman Brothers in 2008, INTERBANK was the biggest institution of its kind in Nicaragua, and its bankruptcy was received with a giddy mixture of incredulousness and shock.

Either the Banking Superintendent had acted precipitously or there was a serious flaw in the entire financial system. As the days passed, it became clear that the intervention of INTERBANK was only the first rattle of a seismic shift. Nervous clients lined the sidewalks hoping to recuperate their humble savings while reports began to trickle down of exorbitant loans and mortgages paid for worthless or even non-existent properties.

Less than a month after INTERBANK’s massive bankruptcy, the rickety dominoes began to fall. Already suffering from insolvency issues as a result of a severe drop in the international price of coffee, the proverbially named Banco del Café became the second bank to collapse. By August 2001, two more banks—Banco Mercantil (BAMER) and Banco Nicaragüense (BANIC)—had followed suit.

Each Government intervention revealed a different version of the same underlying story: corrupt bank executives had authorized massive loans to shady investors under similarly shady circumstances. Often in collusion with political players in both the FSLN (left) and the PLC (right), these speculators had taken advantage of the lack of serious financial regulations.

The coffee bubble had fueled their speculative greed, but once the global demand began to drop the banks simply ran out of money. The government stepped in to fill the massive losses, buying the worthless debt and dividing the rest of the assets amongst the three remaining banks through cheap government bonds, or CENIs for short. All in all the Nicaraguan people paid the bulk of the debt incurred by the financial and political elites. It was a hefty bill: more than 16 percent of the national GDP.

Replace the coffee bubble with a “sub-prime mortgage” bubble, the Superintendencia with the Federal Reserve, the Liberals and Sandinistas for Republicans and Democrats, and “CENIs” for “TARP”, and you have the story of the American financial crisis of 2008.

In Nicaragua, the flamboyant Centeno Roque brothers and the CEO of Banco del Café, Francisco “Panchito” Mayorga, became the symbolic perpetrators of the enormous swindle. Similarly, in the U.S. execrable figures like Bernie Madoff, Allen Stanford and the recently convicted Raj Rajaratnam were singled out by the media as convenient scapegoats, while others, like the former CEOs of Lehman Brothers and Bear Stearns, were left in peace to enjoy their millions.

The Nicaraguan financial debacle was portrayed by the international media as another story of corruption in a sleepy banana republic. The traumatic experience of the Nicaraguan people was decidedly not applicable to the all-powerful American economy.

Alan Greenspan, the prophet of unfettered neo-liberalism, could not even fathom the possibility of a generalized debacle. His view crystallizes the hubris and arrogance of the entire American financial system. It would take several years for countries like Nicaragua and Argentina to recuperate from the ravages of unfettered de-regulation. But when the global crash came in 2008 they were better prepared and indeed fared much better than the severely disrupted economies of Europe and North America.

In a recent speech, current Federal Reserve Chairman Bernanke put it best when he said, “The pace of recovery in most emerging market economies from the global financial crisis has been impressive.”

He added, without a hint of irony that “advanced economies like the United States would do well to re-learn some of the lessons from the experiences of the emerging market economies.” His emphasis on the reflexive lessons to be drawn from emerging economies echo the prophetic words of that first critic of capitalism, Karl Marx: “The country that is more developed industrially only shows, to the less developed, the image of its own future.”

Invert Marx’s prognosis and you obtain the prophetic character of the Nicaraguan banking crisis: The country that is less developed only shows, to the more developed, the image of its own future.

Javier Padilla (Honduras-Nicaragua, 1987) is a doctoral candidate in the English department at Princeton University. He blogs and riffs about Nicaraguan literature, politics and culture at summacontra.com.
  • JC (Dila’s Awesomest Friend)

    Karl Marx was a moron…

  • http://none tree of life

    Interesting article and if you need further insight / perspectives on the crash of 2008 please see the documentary ” Inside Job”

    ‘Inside Job’ provides a comprehensive analysis of the global financial crisis of 2008, which at a cost over $20 trillion, caused millions of people to lose their jobs and homes in the worst recession since the Great Depression, and nearly resulted in a global financial collapse. Through exhaustive research and extensive interviews with key financial insiders, politicians, journalists, and academics, the film traces the rise of a rogue industry which has corrupted politics, regulation, and academia. It was made on location in the United States, Iceland, England, France, Singapore, and China.

    http://www.imdb.com/title/tt1645089/

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