Thursday, March 30, 2006

Fox wants to guard chicken coop

Would you hire a fox to guard your chicken coop? Probably not. Given that foxes eat chickens, anyone who hired a fox to watch his chickens would probably lose all of his chickens in the process.

Would you re-hire a fund manager who had invested your current portfolio in such a way that exiting the trade would result in disaster? Probably not. Why would you believe that people who had created the problem could now fix the problem?

A more intriguing issue to me is, why would a fox think he could con his way into a chicken coop? Why would a fund manager who had created a booby trapped portfolio think he could con his way into fixing the problem? Perhaps the fox doesn't know he is a fox.

Yesterday I wrote about what I call the "hiding behind a universal" form of argument with respect to a statement from President Bush. Presidents, however, are not the only people who use this argument form. People of all stripes deny wrong doing by asserting they are a parent, spouse, friend or lover, to name a few, or always do this or never do that and thus are incapable, by definition, of doing whatever they were accused of.

Those who use this argument form exhibit symptoms of what I call an "out of body" state. The idealistic self image to which these people seem to cling, good parent, spouse, friend, President, USTreasurer or University President, will eventually bear little resemblance to the person they are. More troubling, these individuals may find that people, with a lag, react to the person they are, not who they claim to be, leaving them confused. Thus a fox, having convinced himself he is something else, can entertain hopes of guarding a chicken coop and be surprised when the job is not offered.

Larry Summers, it seems to me, is exhibiting signs of being in just such an out of body state both in an individual sense and a collective sense.

In a recent speech, the ex-US Treasury Secretary argues that the international financial architecture needs to be reformed, citing the likely unsustainable and even if not, undesirable build-up in emerging market nation reserves as evidence. He argues, by virtue of the substantial portion of the imbalance being outside the G7/G8, that the G7/G8 is now an obsolete forum for solving the problem. He goes on to argue that emerging market nations should "invest" their excess reserves, in what I can best describe as an IMF managed hedge fund.

In his words: Perhaps it is time for the IMF and World Bank to think about how they can contribute to deploying the funds of major emerging markets rather than lending to major emerging markets. More ambitious than simply providing surveillance and monitoring that would support most ambitious investments by emerging markets would be the creation of an international facility in which countries could invest their excess reserves without taking domestic political responsibility for the process of investment decision and ultimate result.

I'll leave for a later post this very strange idea that national leaders will be able to avoid political responsibility for the ultimate result of their build up in reserves. Suffice it to write that it won't matter which acronym gets the blame, when the money is gone, people will be pissed.

Curiously, to me at least, this build up in reserves, particularly in emerging market nations was a result of policies Mr. Summers was intimately involved in crafting. He was Chief Economist for the World Bank from 1991-93 and then working first as Deputy to Robert Rubin and then as Treasury Secretary himself, Mr. Summers was there when the "strong dollar" policy was implemented and "excess" reserve accumulation commenced. During his time at Treasury Japan's reserves climbed from just under US$100B to to US$355B, China's reserves climbed from US$22B to US$168B, Hong Kong's reserves climbed from US$43B to US$107B and S. Korea's reserves climbed from US$20B to US$96B, all without a word of complaint.

What are we going to see next, Dick Cheney setting up a school for hunting safety without the hint of even a small mea culpa?

At some point, if it hasn't already happened, the rest of world's leaders will begin to note that the west set up the international financial architecture they now claim is flawed and didn't follow the rules of the system. The current gang running the show, from both sides of the aisle, has yet to come forward with a realistic plan for solving the problem other than suggesting that the world should continue to trust their ability, despite evidence that they are incapable of doing just that.

The idea that, having strong armed many emerging market economies into buying US Treasuries as a form of protection, the same economies should now hand over a large chunk of these reserves to be managed by the very guys who have put the US in the financial straits it currently finds itself, seems absurd to me. It's kind of like a fox wanting to guard a chicken coop.

Perhaps the problem also reflects a bit of extended adolescence. When you are a teenager or young twenty something you have your life ahead of you. You can speak truthfully about the person you hope to be and might become without too much of your past intruding on the view. Young people and young institutions have little to no track records as adults and working institutions.

At some point, however, time catches up to you. While I hopefully have a few decades of life left, I have decades of track record behind me. Thus I often find myself, when suggesting a course of action to another, qualifying my opinion with a, " I didn't do this or did do that and now regret it." I find the need to temper the youthful language of idealism with references to my own experience failing to live up to those ideals.

The Bretton Woods institutions, the IMF and World Bank, are not new institutions nor are the current gang in charge young people. The Clinton team, which still seems to control part of the DLC and the Bush team have track records. The current mess is their track record. They might paint a nice picture of the future but given the past, I wonder how they plan to get there. They already had their turn at the wheel even though they seem to be reluctant to have anyone focus on it. In Buddhist terms, they are people forever trying to run away from their karma, which is about as easy as running away from your shadow.

William James wrote, Sow an action & you reap a habit; sow a habit & you reap a character; sow a character and you reap a destiny. Young people have yet to establish adult habits, their characters are unformed. Older people's characters are formed, change is difficult without a mea culpa, and even then destiny awaits. Yes, destiny awaits, even for such august institutions like the IMF and World Bank, who would now like to be thought of as hipster hedge funds.

It's worse than a fox wanting to guard a chicken coop, it's like your grandmother getting her belly button pierced and buying the clothing to show it off.