Friday, September 11, 2009
TWO MEMORABLE SEPTEMBER 11ths James S. Henry
Many of us have our own strong private recollections of September 11, 2001. I happened to have been at Boston's Logan Airport that morning, boarding a prop plane for an American Eagle flight to Long Island's Islip Airport. It was leaving around 8 am from Gate 22, at roughly the same time that Mohammed Atta and four other reputed Saudi hijackers of Flight 11 were taking off from Gate 26 at the very same terminal, along with 86 other passengers and crew. We must have passed each other, but I didn't notice them. I do have a distinct recollection that security at the check-in that morning was very lax, but other than that, my own flight was uneventful -- until we landed in Islip and heard the shocking news that two planes had just hit the twin towers. So "death reached by and took another....."
My heart goes out to all who lost loved ones on that awful morning. May we redouble our efforts to establish a Truth Commission, and determine the full story, yet untold.
But it is important to put our 9/11 in context. This was not the only September 11th that is etched indelibly in my memory -- let alone the most important case of international terrorism.
I also distinctly recall the Chilean coup of September 11, 1973 very clearly. I was attending a graduate economics course at Harvard taught by a protégé of Chicago Professor Milton Friedman. One of my fellow students was Sebastian Pinera, a member of one of Chile's oldest families, the future owner of the airline LanChile, and right now the leading conservative candidate in Chile's upcoming December 2009 Presidential elections.
Sebastian had somehow gotten word halfway through the class that Allende had been ousted. He was absolutely jubilant -- “We won!,” he cheered.
The professor, a prominent econometrician from the University of Chicago, shared Sebastian's delight. Like many other American econo mists, he saw the overthrow as a victory for the neoliberal doctrines preached by leading Chicago economists like Friedman and Arnold Harberger, who both later consulted directly for Pinochet’s junta.
Over the next twenty years, these “Los Chicago Boys” came to exert a strong influence on Chilean economic policy. The label was perhaps a little unfair to Chicago -- there was certainly no shortage of Harvard disciples of brutilitarian free-market doctrines.
For example, Jose Pinera, my classmate’s brother, was also Harvard- trained. He eventually became one of the main architects of Pinochet's labor policies, which included a ban on strikes and closed shops, the privatization of all pension funds, and sharp cuts in real wages, jobs, and unemployment benefits.
In hindsight, Pinochet’s little laboratory conducted the first in a series of experiments by the New Right that culminated in the neoliberal programs of Margaret Thatcher and Ronald Reagan in the First World, and a lengthy list of Third World imitators. Among First World democracies, their programs were moderated somewhat by the need for popular support. But in countries like Chile, Brazil, Mexico, and Argentina, where the lines between rich and poor were starker and the political systems were basically rigged, much less time was wasted on democratic niceties.
To their credit, a few principled conservatives were bothered by the resulting dirty little alliance between dictatorship and liberal economic reform. But many others -- including Sebastian, who opposed holding plebiscites on Pinochet in 1980 and 1988 -- got lost in the thorny thicket of distinctions between “authoritarian” and “totalitarian” regimes.
In Chile’s case, the resulting repression produced at least 3197 murders, disappearances and extra-judicial killings (about the same number as 9/11 in this country). [i] There were also thousands of secret arrest s and tortures (including 35,000 identified victims of torture and abuse ). All told, Chile spent sixteen long years without free elections, in what had previously been one of Latin America’s most democratic countries.
Of course we now know that all this state terrorism was tolerated, supported and indeed encouraged by the Nixon Administration and its dictator friends elswhere in Latin America -- presumably on the cocka-mamie theory that othewise we'd have Fidel running Santiago. In fact the narrowly-elected Allende would have held elections when his term was up, and he probably would have lost.
However, these points are pretty general -- repression is very concrete. As Herr Friedman reportedly told General Pinochet at a Santiago audience in l975, “When you cut the tail off a dog you don't cut it off inch by inch. You cut it off at the root.” I remember a 1974 lecture by another Chilean economist, Orlando Letelier, who was killed in l976 by a car bomb planted by the DINA, Pinochet’s secret police, in Washington D.C. And I remember Victor Jara, a talented Chilean guitarist whose music I greatly admired. When the junta seized power he was arrested and transported to a soccer stadium in Santiago where “political” prisoners were held. The police took him out in front of the crowd and they cut off his hands.........
The overthrow of Salvador Allende's elected Popular Unity government in September 1973 was greeted with jubilation by Chile's propertied classes. He’d been elected with a 36 percent plurality in l970, and the Popular Unity coalition’s support increased to 44 percent in the March 1973 Congressional elections. But the elite was eager for a change by any means. From l968 to l973, at first under the Christian Democrat Eduardo Frei Montalva and then Salvador Allende, government spending as a share of GNP had increased from fifteen to forty percent. A third of large farms and many private companies had been nationalized at low prices; there was 700 percent inflation and frequent shortages of consumer goods; Chile’s foreign debt had reached the unprecedented level of $2.5 billion. Foreign investment dried up and flight capital was pouring into accounts at Bankers Trust, Chase and JPMorgan, Chile’s leading creditors.
The good old CIA, multinationals like ITT, and the USG certainly played a prominent role in 1970-73 coup activity that followed -- with a hefty dose of financial chicanery, in order to, in Nixon’s words’ “make the economy scream.” But intervention had not started there.
For example, according to former CIA agent Philip Agee, who had been stationed in Uruguay in the early 1960s, future Bush Pioneer and Presidential Library trustee John M. Hennessy, Chairman of Credit Suisse First Boston (CSFB) from 1989 to 1996, had been the Assistant Manager at Citibank’s Montevideo branch in 1964, and reportedly helped to transfer substantial funding to the campaign of Eduardo Frei Montalva, who was running for President against Allende that year. Frei won the election, and served as President from 1964 to 1970. In the early 1970s, Hennessy later became Assistant Secretary of the Treasury for International Affairs in the Nixon Administration, reportedly coordinating economic pressures against Allende’s government.[ii] In 1974, having succeeded at that Hennessy returned to Wall Street, where he became Managing Director of First Boston Corp., which was later acquired by Credit Suisse.
In any case, despite the CIA’s involvement, the sufficient conditions for the 1973 coup against Allende were provided by a “Francoist” alliance of military officers, the Catholic Church’s hierarchy, the top ten percent of landowners and industrialists, and the next twenty percent of the income distribution, the so-called “middle class.” Immediately after the coup these folks began to get what they thought they wanted.
LOS CHICAGO BOYS
The junta turned to a small band of inexperienced but supremely self-righteous economists, “los Chicago boys,” so named because their mentors University of Chicago economist and future Nobel laureate Professors Milton Friedman and Arnold Harberger.
After Pinochet took power, there was actually a prolonged period when several different economic camps competed for the junta’s favor. But Friedman and Harberger, who was Dean of the Chicago Economics Faculty, seem to have tipped the balance when they visited Chile in March 1975. Since the 1950s, with the support of the Rockefeller and Ford Foundations, Harberger had developed a close relationship between the University of Chicago and Chile’s Catholic University, where he had taught as a Visiting Professor. With support from the Rockefeller and Ford Foundations, scholarships were provided for bright young Chileans who wanted to study economics. Many of these Chicago-trained economists returned to Catholic University to teach, and later served in Pinochet’s government.
Their trip was sponsored by the Chilean businessman Javier Vial, head of the business group BHC, one of the country’s largest conglomerates, the eventual owner of Banco de Chile, the country’s largest private bank at that time, and 60 other companies. He was also a very strong supporter of Pinochet’s dictatorship, on personal terms with the General.[iii] Friedman reportedly got $30,000 for the three-day trip. His wife Rose reportedly objected to the visit because Pinochet’s hard right regime and the goose-stepping Chilean military reminded her of Nazi Germany. But Professor Friedman tried to assuage her guilt by requesting the release of two Jewish political prisoners who were supposed in the custody of Pinochet’s police.
Just one month after the visit, in April 1975, the junta introduced an orthodox monetarist “shock plan,” along the lines that Friedman and Harberger had recommended. And Professor Friedman’s Chicago-trained protégé Sergio de Castro replaced Fernando Leniz as Minister of the Economy. Other key neoliberals on Pinochet’s economic team included Pablo Baraona, President of the Central Bank, Alvaro Bardon and Jorge Cauas Lama at Treasury, Rolf Lüders as Treasury Minister and Minister of the Economy, and Juan Carlos Mendez as Director of the Budget. Unfortunately the two Jewish prisoners were never located.
This tiny band’s shared vision of Chile’s future was one that later became common among neoliberal Third World governments -- sort of a low-wage, export-oriented Asian tiger, complete with weak unions, low inflation, privatized pension funds, and a minimal state -- apart from the police, the military, and the national copper company, of course, whose income went to the military.
To pursue this anti-Marxist utopia they started out with a sharp recessionary shock. They banned strikes, abolished price controls for food and housing, and slashed tariffs from 100 percent to 10 percent in just two years. The junta also introduced Latin America’s most radical privatization program ever. In l973-74, more than 250 nationalized companies were returned to their former owners and 200 more were sold off at bargain prices. These were not the middle-class privatizations of France, Japan, or the UK, where the buyers included millions of small investors. Like other developing countries, Chile had a very thin capital market, and hard times had made it even thinner. So the big buyers at this fire sale were a handful of closely-held grupos like Javier Vial and Cruzat-Larrain, which owned most of the local banks, and also had very strong ties to foreign banks.[iv]
All these changes set the stage for the dictatorship’s 1977-81 phase, which was described at the time by the Wall Street Journal’s neoconservative editorial page in even more glowing terms than it reserved for the Argentine junta -- as “the Chilean economic miracle.” Indeed, during this brief period, when the economy was recovering from the sharp recession that los Chicago Boys had engineered, growth averaged 5-8 percent a year.
But what was perhaps most miraculous was the regime’s inability to foresee that its economic policies -- in addition to increasing poverty and inequality -- were about to cave in on each other, completely bankrupting the country and forcing the nationalization of the entire private sector.
THE CHICAGO ROAD TO SOCIALISM -- AND BACK
By l977, the junta had wiped out any organized political opposition and achieved most of its early economic goals. But the neoliberal ideologues pushed it on to new extremes. Under José Pinera’s 1979 radical right “Plan Laboral,” the government abolished closed shops for unions and tried to privatize everything from health care and pensions to education. The 1980-81 pension fund privatization, which substituted a “fully funded” system administered by privately-managed pension funds – managed by institutions like Citigroup and Aetna, which came to dominate the highly-concentrated private system - for the old “pay-as-you-go” government system, was probably the most successful of these reforms. [v] Many others succeeded only in cutting social spending, while sacred cows like military spending and the nationalized copper company were spared.
The copper company was famous because of the uproar provoked when Allende seized it from Anaconda in 1971. But Pinochet kept it nationalized -- a secret law gave the military ten percent of its profits. So even under the junta, Chile’s largest enterprise and exporter remained “socialist.”
In any case, the junta’s most important neoliberal experiments -- and worst mistakes -- concerned macroeconomic policy. Here the point man was Sergio de Castro, the los Chicago Boy who became Pinochet’s second Finance Minister in l979. Like Argentina’s “Wizard” de Hoz, De Castro was a strict believer in the monetarist view that the best way to fight inflation in “small” economies like Chile was by eliminating tariffs, deregulating capital and trade, and maintaining a fixed exchange rate.[vi] So he fixed Chile’s peso at 39 pesos to the dollar and held it there from July l979 until June l982. With copper prices in a slump and the size of the state sector shrinking, this was only possible because foreign banks were willing to lend money hand-over-fist to Chile’s private sector. Foreign banks were sympathetic to Pinochet’s conservative economists, much as they had been to the Argentine junta’s de Hoz; they were also flush with cash and very competitive, given Chile’s high real domestic interest rates.
So, just as in Argentina, many domestic borrowers took advantage of fixed exchange rates and the temporary generosity of their foreign bankers to make lucrative back-to-back deals. For example, Javier Vial, the sponsor of Friedman’s 1975 visit, and Chile’s richest man by 1978, acquired control over Banco de Chile in the late l970s and used it as a front to borrow heavily from foreign banks like Bankers Trust and Chase. When he was its President, Banco de Chile, in turn, reloaned the dollars to Vial’s many other private companies, including several that were based in Panama, like Banco Andino. All these shenanigans became public after Vial’s empire cracked in 1983. In 1997, after a 14 year investigation, he was sentenced to 4.5 years in jail for bank fraud, and former Economy and Treasury Minister Rolf Lüders, who’d owed 10 percent of BHC, was sentenced to four years.[vii] Chile had gotten stuck with his debts when the bank failed and was nationalized. All this was no surprise to his foreign bankers -- as one former Bankers Trust officer who had personally handled Vial’s Panama accounts told me, “We knew he was lending to himself, but no one wanted to pull the plug.” [viii]
As a result of de Castro’s policies, Chile’s private foreign debt boomed during the “miracle” years. In l981 alone, $6 billion of new credits were issued by foreign banks, a huge amount for this small economy, mainly to the leading domestic private banks like Banco de Chile, Banco de Santiago, Banco Internacional, and Banco Colocadora, whose grupos, in turn, owned a huge equity stake in Chile’s private sector. From l980 to l982, private foreign debt doubled; by l982 the total foreign debt had approached $20 billion, two-thirds of it private. The Central Bank repeatedly warned that it was not responsible for the private debt, but it allowed the spree to continue. Given all the “cheap” dollars and low tariffs, imports also soared -- luxury imports became Chile’s equivalent of flight capital.
A NEOLIBERAL CRISIS
The whole situation finally began to unravel in May 1981 when Crav, a leading sugar company, failed. The real crunch came in the summer of l982 when the Latin American debt panic dried up new loans, forcing Chile to devalue and tighten interest rates, a lethal combination. By January 1983 unemployment was thirty percent, and the six top private banks and the country's two largest private “grupos,” Vial and Cruzat-Larrain, had also both folded.
At this point Finance Minister de Castro began to get intense pressure from foreign banks like Chase and Bankers Trust to “nationalize” the private foreign debt. For a while he stuck to his free-market principles, reminding them of his earlier warnings -- that such a move would be no more justified than Allende’s nationalizations, and that this was, after all, private foreign debt, freely contracted, presumably with compensation for the risks of default built into the interest rates.
But the great big banks were not concerned with such abstract principles -- any more than they are today. In January 1983, they quietly cut off all Chile’s foreign trade credit lines – to the point where oil tankers en route to Santiago started to turn around and head home. De Castro was forced to resign, and his replacement quickly declared that, indeed, the junta would assume responsibility for the private foreign debt (though not its offshore flight assets!) after all. In the words of one Chilean banker, “Pinochet achieved what Allende only dreamed of -- the complete socialization of our private sector.”[ix]
Nor was this the end of the story. When Pinochet’s fourth Finance Minister, a de Castro protégé named Hernan Buchi, took office in l985, he had to embark on yet another, even larger round of privatizations, simply to rid the government of all the debt-ridden companies that the government had just acquired through the forced nationalization.
(To his credit, General Pinochet did support the compulsory nationalization of Chile's largest banks -- as compared with the far more generous, CEO-friendly bailouts that the US Treasury has recently employed.)
Subsequently, foreign bankers, the World Bank, Wall Street, and the IMF all gave Buchi and the Pinochet regime rave reviews for their brilliant privatization strategy, designed to attract foreign investment, boost savings, and downsize Chile’s state. But they never seemed to acknowledge why his privatization program had been necessary and possible in the first place -- because in 1983, neoliberal policies had produced a disaster, and the junta and Chilean taxpayers had been forced by its foreign creditors to take the fall for so many bad debts.
Finally, capping it all, whom do you suppose were the main beneficiaries of Chile’s latest round of privatizations? To avoid the insider-trading outrages that had characterized many of the 1970s privatizations – helping groups like Vial and Cruzat to grow quickly -- Buchi did offer low-cost loans to workers and pension funds to help them buy stock. By l988 worker-owned funds owned 14 percent of the privatized shares, not a bad achievement in worker control for an ostensibly right-wing regime.
But two other kinds of investors became even more important. The first were foreign investors, especially Sergio de Castro’s old friends, the foreign banks. In l986, under the Central Bank’s “Chapter 19” program, they were allowed to swap their (dubious) nationalized loans for equity in state-owned companies that were privatized on very favorable terms.
As a result, Bankers Trust obtained forty percent of Provida, the country’s largest pension fund, plus Pilmaiquen, a power plant, for half its book value; Aetna Insurance bought the country’s second largest pension fund; Chase, MHT, and Citibank also acquired major local interests. Already by 1990, a handful of foreign-managed pension funds controlled seventy percent of Chile’s pension system, its largest pool of capital. Alan Bond, the erratic Australian investor whose financial empire later collapsed, was even permitted to buy the famous telephone company that ITT had fought Allende so hard for. COPEC, Chile’s oil company, which had been privatized for a song to Grupo Cruzat-Larrain in 1976, had since turned into a debt-ridden conglomeration of fishing, mining, forestry, and finance companies, including half of Banco de Santiago. When Cruzat cratered in 1983, Chile’s government re-acquired ownership of the now-heavily indebted COPEC, which was also by then Chile’s largest private enterprise. Four years later, it reprivatized COPEC to Grupo Angelini, another leading Chilean private conglomerate, again at fire-sale prices. And so the cycle continued.....[x]
All told, this “Chapter 19” debt-equity swap program was credited by its supporters -- especially the banks -- with reducing Chile’s debt by more than $2 billion. Of course it was a little ironic for the banks to be praising this achievement. Many others saw the program as a dead give-away. By assuming all the private foreign debt in the first place, Chile had rewarded bad lending. And after a decade of tight-fisted government many of the privatized assets had actually been in pretty good shape. Except for the copper company and a few military suppliers, the only ones the government retained were “dogs” no one else wanted. It made little sense to let foreigners trade dubious loans for valuable equity at rock-bottom prices -- maybe even less sense than Allende’s nationalizations. It seems that Chile hadn’t really eliminated state intervention; it had merely inverted its class bias.
The other key investor in Buchi’s privatizations was the good old Chilean elite -- like Sebastian and his brother. As we’ve seen, while the government nationalized private debts, it didn’t touch private foreign assets. And Buchi now offered flight capitalists a generous tax amnesty if they brought their money home. His “Chapter 18” program allowed them to buy debt from the banks and swap it for government bonds or equity in state companies at very favorable prices. By l990, this program had brought in another $2 billion. Again, the banks and their clients naturally sang Chapter 18’s praises. However, it rewarded tax evasion and effectively swapped foreign for domestic debt that may well prove more costly to service in the long run. Such criticisms meant little to the officials in charge of the program, however -- some of them even benefited from it personally. Soon after he left government, for example, Jose Pinera became president of an electric utility that had been privatized. And his brother ended up owning the privatized national airline – which he proceeded to turn into quite a profitable enterprise, even while serving in Chile’s Senate.
So the circle was complete: having been bailed out of their foreign debts by the government, Chile’s elite and the foreign banks now bought back their assets at less than fifty- sixty cents on the dollar, often with the very same flight dollars that the original loans had financed!
Here we have one of the purest cases of abusive banking, one that poses the question of the foreign banks’ responsibility very clearly. For Chile’s 1983 debt crisis obviously had little to do with inefficient public enterprises, excessive public debts, godless Marxists, welfare-state liberals, or all the other usual suspects blamed by neoliberals. At that point, fully two-thirds of its foreign debt was private, and Pinochet and Co. had long since eliminated much of the state’s inefficiency, not to mention the political opposition. Yet by the end of l983, Chile had ended up with one of the highest per capita foreign debts in the world, as well as one of the developing world’s largest state sectors.
And this “Chicago road to socialism,” it seems, was taken in part because there was no political opposition, no accountability – no one to say “enough” to the foreign banks, the domestic elites, their unregulated domestic banks, and the generals. So perhaps democracy had its uses, after all; perhaps “free markets” alone were not sufficient.
One could almost imagine the righteous tail-cutters in Chicago, taking a break for a micro-second from their round-the-clock crusade for more-perfect markets, experiencing perhaps just a momentary tremor of self-doubt.
[i] As of 2001, Chile officially recognized the existence of 3197 disappearances and extrajudicial killings between September 11, 1973 and March 11, 1990, when the elected government of Patricio Aylwyn assumed power. See “Korean Panel To Cooperate with Chile To Reveal Truth over Mysterious Deaths,” Korean Herald, February 7, 2001.
[ii] See Morton Halperin, Jerry Berman, Robert Borosage, and Christine Marwick, The Lawless State. The crimes of the U.S. Intelligence Agencies. (New York: Penguin Books, 1976), 16.
[iii] For more about Vial, see “La Nueva Derrota,” Que Pasa, November 10, 1997; S. Rosenfed and J.L. Marre, “Chile’s Rich,” NACLA Report on the Americas, May/June 1997.
[iv] See “Milton Friedman: Gurú a regañadientes, “ Revista Qué Pasa, February 28, 1998.
This account of the l973-78 period benefited greatly from an excellent paper by Paul E. Sigmund, “Chile: Privatization, Reprivatization, Hyperprivatization.” (Princeton University, unpublished, July 1989).
[v] See, for example, Rodrigo Acuña R. and Augusto Iglesias P., “Chile's Pension Reform After 20 Years,” The World Bank - Social Protection Discussion Paper No. 0129, December 2001. Chile’s pension reform, which substituted a privately-funded system for the traditional “pay as you go” government system, was enabled by the fact that its military government could simply mandate the substitution. Subsequent attempts at privatization in more democratic countries like Argentina and Uruguay proved much less successful.
[vi] This theory, espoused by arch-monetarists like Colombia University’s Robert Mundell, argued that this policy would constrain inflation to the world rate by making a large share of the money supply endogenous. It basically ignored exchange rate speculation and capital flight.
[vii] For Vial’s and Lüder’s October 28, 1997 sentences, see “La Nueva Derrota,” Que Pasa, November 10, 1997, available at www. quepasa.cl/revista/1386/18.html..
[viii] "Chile Military Analyst," Sao Paulo, 2.21.89; “Miami Banker,” 5.91.
[ix] Raul Fernandez, former Director of Public Credit for Costa Rica, International Bank of Miami, 4.22.88.
[x] See the account of COPEC in S. Rosenfed and J.L. Marre, “Chile’s Rich,” NACLA Report on the Americas, May/June 1997.