The Best Central Banker in the World Today

Thursday, August 28, 2008 | 07:15 AM

Today's guest post comes from Eddy Elfenbein of Crossing Wall Street fame. Eddy is classic Graham & Dodd investor. He is an independent consultant and advisor based in Washington, DC. His background is in financial newsletter publishing, and prior to that he was a retail stock stock broker. He currently blogs at

For today's guest post, Eddy discusses Mexico’s Guillermo Ortiz, who he describes as "Best Central Banker in the World Today."


Imagine a country whose central bank responded to growing inflation by raising interest rates, strengthening the currency and trying to win investor confidence. This may be shocking to some U.S. investors, but proper monetary policy is still being practiced. Just not here in the United States. I’d give the award for Best Central Banker in the World Today to Mexico’s Guillermo Ortiz.

This is a story that truly ought to be better known. Mr. Ortiz has now been at the helm of the Mexican central bank for over ten years and despite many obstacles (consider that 70% of Mexicans don’t even use banks), he’s emerged as the anti-Greenspan. Mr. Ortiz previously served Finance Minister where he helped clean up the mess surrounding the peso devaluation in 1994.

What impresses me about Oritz, who earned has a Ph.D. from Stanford, is that he’s made it unequivocally clear that the Banco de Mexico (or Banxico) intends to fight inflation until its wins. In the last three months, the bank has raised rates three times. Interest rates now stand at 8.25%, an amazing 625 basis points higher than in the U.S. even though inflation rates are roughly similar.

Make no mistake; the Mexican economy has its share of problems. Growth is slowing and inflation is on the rise. Of course, much of this is understandable considering their raucous, hung-over neighbors to the north—nearly 80% of Mexico’s exports go to the U.S. Still, my money’s on Ortiz. He’s even had the chutzpah to criticize our monetary policy as being “very lax.” Don’t expect to hear anything like that from Senators McCain or Obama.

And what about that hopeless currency, the peso? Well, it’s on a roll this year. The peso is already up 7.5% for the year and earlier this month, it reached a six-year high. In my opinion, the rate gap between the U.S. and Mexico will only grow. The futures market seems certain that the Fed will hold steady for the rest of the year, but I think Banxico could very well raise rates again. Their next meeting is on September 19.


The most recent report for Mexican GDP showed that Q2 growth came in at 2.8%, which isn’t horrible but it was below expectations. The economy isn’t so fragile as to ward off monetary tightening. Retail sales are weak and the stock market is still hurting—the Bolsa is at a seven-month low. Of course, that comes on the heels of an enormous rally so some consolidation would be expected. Consider that shares of EWW, the Mexican ETF, more than quadrupled in five years.


What’s really hurting the economy is that less money is being sent home from workers living abroad. And by abroad, you can probably guess what country I mean. Speaking of which, Ortiz also favors, sit down for this one, stricter immigration controls in the U.S. so Mexico can hold on to its workers. Ortiz said, “I think Mexico needs its people. It would be best to keep its people in Mexico, and it would give incentives for Mexico to create the jobs that are needed.” Increíble!

I’m guessing Ortiz has some sympathy for Hank Paulson. When the Mexican financial system imploded, Ortiz was called into to clean up the mess. Paulson certainly has a tough task, but look at what Ortiz was facing—inflation reached 52% and investment fell by one-fourth. Thing got so bad that the former president basically can’t show his face Mexico and he’s been exiled to Ireland. By contrast, Senor Greenspan now works at Pimco! Thanks to Ortiz, Mexico righted itself and paid back its bailout money to the United States. In fact, Uncle Sam made a half-billion dollar profit.

The thing about finance, public or private, is that it’s really an issue of establishing confidence. If investors think you’re serious, then they’ll invest with you. So far, Ortiz seems to winning the battle of establishing credibility. The yield on Mexico’s long-term benchmark bond recently fell to its lowest level since June 6.

Mexico is a country with many deep rooted economic problems, however, the country has taken many steps in the right direction. For example, the election of the pro-market government of Felipe Calderon (cue Larry Kudlow) is helping to bring long-overdue economic reforms like privatizing the oil industry. Unfortunately, Calderon supports some poorly considered ideas like price controls. Unlike the United States, the Mexican government seems to be serious about fiscal discipline. Their, not so much. One issue in particular that Ortiz wants addressed is reducing the government’s fuel subsidies. Good luck with that one, but at least he’s trying. (Incidentally, Ortiz wants to reduce the subsidies even though he thinks that will increase inflation in the near-term.)

The government recently announced that its current account deficit widen to over $2 billion which came as a shock to economists who were expecting a shortfall of $750 million. The trade deficit declined but that was helped by the increase in oil prices. The Mexican economy faces several significant challenges ahead. Most importantly, inflation is simply too high. But I think Ortiz realizes the difficulties and his current policies will help Mexico be well-prepared for the future.


Good stuff -- thanks Eddy

Thursday, August 28, 2008 | 07:15 AM | Permalink | Comments (5) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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most depressing post I'll read today.

Posted by: MarkD | Aug 28, 2008 9:37:24 AM

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