Immobility in Washington, old and new

by Chakravarthi Raghavan

GENEVA: "I believe that the great events of the last week may open a new chapter in the world's monetary history... they may break down barriers which have seemed impassable. We need now to take intimate and candid conference together as to the better ordering of our affairs for the future. The President of the United States turned in his sleep last June. Great issues deserve his attention. Yet the magic spell of immobility which has been cast over the White House seems still unbroken. Are the solutions offered us always to be too late? ..."

This is no reference to "the great events" in the third week of September and the double standards in the "globalized" financial and monetary "non-system" run by the US Treasury, Federal Reserve and the IMF - when the New York Federal Reserve intervened to orchestrate a "rescue" by US and European creditor banks of the US Long-Term Capital Management LP, a hedge fund with some prestigious and well-connected management and advisory names.

These aren't words either about the US political and media preoccupations with the Clinton-Lewinsky affair and the Starr Report; or the immobility inside the Washington belt-parkway (the White House, Congress, the Fund/Bank institutions and the "think tanks") that evolved and forced the "Washington Consensus" on the developing world, but are unable now to acknowledge the failure of those policies and change course; or about the "senior IMF official", hiding behind the "non- attributable" anonymity of a media briefing to blame "the mess" in the world economy on the "countries (who) brought upon themselves the financial ruin of last year....".

Still relevant after all these years

The words quoted in the opening paragraph are those of John Maynard Keynes (in "Essays on Persuasion") written in 1931 - two years after the Wall Street Crash began, as the world went off the gold standard and into the grip of the Great Depression, and as President Hoover preached the wisdom of a balanced budget and tight money (ala Camdessus and Fischer now).

But with some changes here and there, these well describe the situation today.

When last year, Malaysian Prime Minister Mahathir Mohamad raised his voice against hedge funds, naming the George Soros funds in particular for speculative attacks on the region's currencies, he was ridiculed. And the IMF soon came out with a study absolving the hedge funds, while tributes to Soros as an American patriot were voiced in Kuala Lumpur by the US Secretary of State.

And as the crisis raged, blame was laid on Asian "crony capitalism", lack of financial regulations and oversight and other ills. The Asian governments were advised, and forced, to send their fragile banking and financial institutions into bankruptcy, and hand over their business to foreign "investors", with prices of stocks driven down to enable the giant corporations to buy and close down competitive production - and all this in the name of market efficiency and global welfare.

But when, with a $5 billion capital the Long-Term Capital Management fund - borrowed money from prestigious banks in the US and Europe, bet on the direction of movements of bonds and currencies with a market exposure of $100 billion or 20 times its capital, and lost, the New York Federal Reserve stepped in to "persuade" the banks to convert their loans into investments and rescue the fund.

The argument for official intervention in the market to rescue LTCM has been that it was "too big" to fail, and its collapse would hit the financial markets.

But was it totally unrelated to the personalities connected to LTCM?

LTCM was founded and run by the former Wall Street arbitrage bond trader wizard, John Meriwether (who left Salomon Bros in the wake of controversies about its US Treasury bond bids), and had some prestigious names as advisors - a former Fed vice- chairman and two Nobel laureates in economics who helped design financial value-added products (derivatives) that enabled "swaps" previously traded between banks to be traded on the trading floor by traders.

The daily disclosures about LTCM show the big banks, as both investors and lenders, invested and lent money without too much scrutiny and questions about the fund's activities.

The banks, which made some hefty profits in the earlier years, clearly had been unwilling to ask of the fund managers the questions that they would have asked of any entrepreneur trying to raise loans for enterprises in the real economy.

The Wall Street Journal quoted on 28 September a UK affiliate of another New York hedge fund, Moore Capital Management, as saying: "This has distinct features of what's often labelled crony capitalism. You have a huge conflict of interest."

Regulating hedge funds and ensuring transparency may prove a difficult task. For US and European oversight authorities and legislators may not want to take on such funds and those behind them - given the political and other links and benefits that these off-shore financial operations bring to them. (Third World Economics No. 195, 16-31 October 1998)

Chakravarthi Raghavan is the Chief Editor of South-North Development Monitor (SUNS) from which the above article first appeared.