US & K-W: fearing the worst?

Doug Henwood dhenwood at panix.com
Mon Mar 6 05:47:08 PST 2000


[This may be just pure speculation, or it may be based on good leaks. Who knows?]

WHY THE U.S. BLOCKS GERMANY'S IMF PLANS

By Rodney Smith British Broadcasting Co. Friday, March 3, 2000, 16:01 GMT

http://news2.thls.bbc.co.uk/hi/english/business/newsid%5F665000/665315.stm

Whether he stays or he goes, there is one very good reason why the United States is rejecting Caio Koch- Weser to head the International Monetary Fund.

There is some personal animosity. U.S. Treasury Secretary Larry Summers and World Bank boss James Wolfenson are said to have been less than overwhelmed by his intellectual and management abilities, and are apparently positively discouraged by his ability to sway with argument.

Caio Koch-Weser still insists that he is the right man for the job

However, after 26 years at the World Bank, Mr. Koch- Weser did achieve managing director level, and it takes more than languages and his allegedly suave manner to achieve that.

His World Bank experience may count both for him and against him: For, sensitivity to the developing world; against, it also means he's unlikely to make the changes many now feel are needed at the Fund.

Many of the IMF's critics believe this change of leadership offers an excellent opportunity to modify the Fund, get rid of the opaque practices and dictatorial habits that brought such opprobrium down upon it after the Asian crisis.

But that may not be the main thing in the minds of America's economic planners.

They may be looking farther ahead than their European counterparts -- and seeing very unpleasant storm clouds on the horizon.

Federal Reserve Chairman Alan Greenspan has made no secret of his considerable anxiety about the overheated high-tech stock market. This has to an extent deflected general attention away from that other nightmare-in- waiting, the mountainous derivatives market.

Mr. Greenspan indicates that the New Economic Paradigm is a fragile flower, and may be much more unstable than Europe's planners may be aware.

Conspiracy theories are flying

An example of the underlying tensions is the shenanigans in the bullion market. American congressmen are deluged daily with conspiracy-speak from gold lobbyists convinced that the Fed -- sorry, they changed their minds recently, now they think it's the U.S. Treasury -- has been depressing the gold price in collusion with other central banks.

The trouble with conspiracy theorists and paranoids is that their behaviour sometimes masks a real problem. The ridicule they invite often obscures the message.

So it may be with the bullion market. Rational gold miners who do not subscribe to conspiracy theories say they do see evidence that unseen forces are depressing the gold price every time it pops.

There may be good reason why this should be the case.

Many of the so-called bullion banks, the banks which bought gold miners' hedge positions in the days before last October's rude awakening, are sitting, like some of the miners, on huge, even destructive potential losses if the gold price rises strongly.

Some experts estimate they may be short 10,000 tonnes or more. You know the rule: If you owe the bank a dollar it will sue to get it back; if you owe a million it will lend you more because default would be too expensive.

The abyss

The Fed and other central banks are bound in the same way. When Long-Term Capital Management collapsed 18 months ago, the Fed organised a rescue. The consequences of not doing so could have been huge and widespread financial damage as the derivatives house of cards imploded.

The Fed looked into the abyss back in September 1998, and saw horrors other central bankers have been spared -- so far.

It's a theme never far from Alan Greenspan's musings these days.

He takes hefty criticism from Americans who believe he should be much tougher with monetary policy -- his only real tool -- to rein in the excesses which are the overhanging cloud of potential fallout from the huge derivatives market.

The end of Goldilocks

Maybe he should. By allowing America's so-called Goldilocks scenario of high growth, low inflation, and low unemployment to develop unchecked, he is allowing the tensions many see in the U.S. markets to reach critical proportions.

But he is well aware where the real danger lies. He and Larry Summers both know that if the storm does break in the United States, the tsunami, the tidal wave, will soon reach other shores.

That is when the world will need the help and guidance of the only international institution that may still be able to help -- the International Monetary Fund.

So it is hardly surprising that Washington is eager to have someone in the top job with experience of crisis. Someone with the outstanding qualities of leadership the future may require.



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