SYNOPSIS:

On Wednesday the Bush administration, which says that it is for free trade and against bailouts, once again put its money where its mouth isn't. Less than two weeks ago Treasury Secretary Paul O'Neill created a diplomatic incident and sent Brazil's currency into free fall with his remark about assistance ending up in "Swiss bank accounts." Now the International Monetary Fund, with Mr. O'Neill's blessing, has agreed to lend Brazil an unprecedented $30 billion.

I guess it's good news that our leadership finally woke up to two uncomfortable facts: A major threat to U.S. interests is developing in this hemisphere, and doing the opposite of what Bill Clinton did isn't always a wise policy. Indeed, if Brazil hadn't gotten a loan the South American financial crisis, already comparable to the one that struck Asia in 1997, might quickly have turned into something much bigger.

And yet I have a bad feeling about this. Let me make the case for the I.M.F. loan, then explain my misgivings.

The good news is that Brazil's current leadership is highly responsible. In the past, I.M.F. loans went to governments that didn't collect taxes (Russia) or were committed to an unsustainable exchange rate (Argentina). By comparison, Brazil is a model of upright behavior.

So why is there a crisis? With an election due in October, President Fernando Henrique Cardoso's chosen successor is running far behind two left-of-center candidates. Investors are nervous, and the result has been one of those downward spirals all too familiar from the history of currency crises. Fears that the government will default on its debt have caused the currency to plunge and interest rates to soar; since most of the debt is indexed either to the dollar or to short-term interest rates, this makes default seem even more likely.

Mr. O'Neill's remark was unforgivable because it reinforced this death spiral; the I.M.F. loan is an attempt to turn that spiral around. The end result of Mr. O'Neill's flub was probably to get Brazil an extra $10 billion.

So why am I feeling queasy? One reason is that there is some question about who, exactly, is being bailed out. Paul Erdman writes on cbsmarketwatch.com — in a column praising the administration! — that "The fact that the Brazilian bailout also gave a big boost to Citigroup and FleetBoston, which combined had close to $20 billion at risk in Brazil, will hardly go unnoticed when it comes time to raise campaign funds among the Wall Street elite."

More important, if you look beyond the question of short-term financial stabilization you have to wonder where all this is supposed to be leading. Asian economies were doing very well before their crisis, and you could think of bailouts as a way to get them back on track. But there is a reason the left is having a resurgence in Brazil and elsewhere in the region: We promised them a rose garden, but even before this latest crisis too many people got nothing but thorns.

A decade ago Washington confidently assured Latin American nations that if they opened themselves to foreign goods and capital and privatized their state enterprises they would experience a great surge of economic growth. But it hasn't happened. Argentina is a catastrophe. Both Mexico and Brazil were, a few months ago, regarded as success stories, but in both countries per capita income today is only slightly higher than it was in 1980. And because inequality has increased sharply, most people are probably worse off than they were 20 years ago. Is it any wonder that the public is weary of yet more calls for austerity and market discipline?

Why hasn't reform worked as promised? That's a difficult and disturbing question. I, too, bought into much though not all of the Washington consensus; but now it's time, as Berkeley's Brad DeLong puts it, to mark my beliefs to market. And my confidence that we've been giving good advice is way down. One has to sympathize with Latin political leaders who want to temper enthusiasm for free markets with more efforts to protect workers and the poor.

What that suggests to me is that the United States should be very cautious about what it expects for its money. Pulling Brazil back from the brink doesn't mean that we are once again in a position to demand that Latin Americans do things our way. The truth is that we've lost a lot of credibility with our southern neighbors. If we overplay our hand, we'll lose whatever is left.

Originally published in The New York Times, 8.9.02