The Interests Behind the Interest Rates

Two weeks ago, in the face of a slumping economy, declining remittances from the United States, and a spate of regressive tax increases that are destined to further dampen consumer spending, the Stamford-educated President of the Bank of Mexico Willy Ortíz did the only logical thing to be done under such dire circumstances: he raised interest rates a quarter point to 7.75%. The ostensible reasoning for such an ass-backwards maneuver was to fight inflation; the underlying realities of such a decision, however, tell us a good deal more about both Mexico’s incestuous political-economic system and the equally-incestuous global system it has become so openly a part of.

Without going into too much detail of the finer points of economics, high interest rates tend to help creditors, who have money to lend, as well as people who live off investment incomes, both of which categories in Mexico are restricted to an elite, wealthy strata. Conversely, lower interest rates help debtors, who pay lower interest on money they owe, and entrepreneurs who seek to borrow money to start or expand businesses. When the economy is sluggish, lowering interest rates is one way to stimulate people to borrow and spend, and thus stimulate the economy; when it is “growing too fast” and the inflation monster appears again on the horizon, raising interest rates can tamp down excessive borrowing and spending. But here, all signs point to a substantial economic slowdown in Mexico, yet interest rates go even higher. Who gains, who loses?

For a generation now, governments the world over have held the Damocles sword of inflation over workers’ heads in order to force them to accept minimal pay raises that have essentially amounted to zero in real terms. Such a threat has been particularly effective in Mexico, where the painful memories of the devaluations of 1982 and 1994 are still fresh in people’s minds, and where unions have historically acted in collusion with the government in turn, often in direct opposition to the interests of their own members. One would at least expect that the reward for all this “good behavior” on the part of the working class would be lower interest rates in order to make it easier to borrow money and get credit. In fact, the only place in Mexico where interest is low (read: non-existent) is in bank accounts; everywhere else, interest rates are, and have remained, stratospherically high, enough to make the most die-hard usurer blush with embarrassment. The great unsung tragedy of this country, in fact, is the inability of the average person to get credit on anything resembling reasonable terms. Mortgage rates routinely run three to four times what they are in the States, with mountains of up-front costs loaded on, so practically no one ever gets one and houses remain half-finished until someone in the family can scoot back across the border and send some cash back down. Credit card rates shamelessly shoot up to sixty percent or more, and now that banks are peddling credit cards like water, ever more Mexicans are going to get the chance to get caught in sickening, American-style debt spirals at several times the interest rate. Feasbile small-business and first-time-homebuyer loans are practically non-existent. What you get back, however, pales in comparison: interest on “inversiones” (COD-like investments) often runs less than a half-percent a month, even on large sums; interest on “Afores” – the individual pension accounts Bush didn’t manage to turn Social Security into but Mexico has already been experimenting with for a decade – were running around 9% annual last time I checked mine, with more than 3% of that taken out for commissions; in six years of working at a job with benefits, I’d saved up the equivalent of about six months of salary. And who’s administering my Afore? Citibank, eh, Banamex, the National Bank of Mexico.

And therein lies the rub: the American and European banks who dominate Mexico’s banking system charge high commissions on everything and lend out money at usurious rates, not because Mexicans are such a credit risk, but simply because they no one is stopping them from doing so. This makes running a bank here extremely profitable, more so than in the bank owner’s home country – look at Bancomer’s surge in profits in Mexico profits in 2007 (http://www.elperiodicodemexico.com/nota.php?sec=Nacional-Finanzas&id=165586) or Santander’s 208% leap in profits in the first trimester of 2008 (http://noticias.mx.yahoo.com/s/28042008/7/negocios-logra-santander-utilidad-neta-cuatro-mil-742-mdp-enero.html). Why else would Mexico’s banks have so quickly been gobbled up after being cleaned up at taxpayer expense (to the tune of 6,000 pesos per Mexican as of 2004, and growing) by the Fobaproa bank bailout? And the revolving door between government and bank board – witness Fox’s finance minister Gil Diaz’s quick leap to HSBC – ensures that government regulators will never lean very hard on what these banks do. Let’s face it: Citigroup, Santander, Bancomer Bilbao and HSBC are simply not interested in making sure Juan Pérez gets a home mortgage or a micro-credit to start a shoe store; as multi-national conglomerates, they’ve got much bigger fish to fry, like speculating in Asian futures and then crying to their governments of origin when they get burned. Giant, multi-national banks are not interested in making relationships with local (poor) clients or in becoming part of a (poor) community; they are much more like vultures, swooping down to suck in commissions, reap large profits and invest the money elsewhere. Meanwhile, Willy Ortiz at the B of M raises interest rates in the midst of imminent recession in order to fight the inflation caused by the government’s increasing, NAFTA-ized dependence on food imports and the rising prices for its own oil which, instead of using to its own advantage, said government is trying to sell off as fast as possible.

As for me, I’m pulling my money out of my local multi-national bank and opening an account at the Caja Popular Mexicana. The Caja Popular is a cooperative, and by opening an account you become a member of that cooperative, not just a client, with a right to participate in the cooperative’s decision-making. Plus, the Caja Popular offers – gasp! – savings accounts that pay interest, investment opportunities, loans for people who wouldn’t otherwise get them from banks, deposit protection, and – gasp again! – no commissions. To paraphrase Hemingway, what if the big banks were still there, but nobody went to them anymore?