U.S. academic at center of economic storm over currency reforms

U.S. academic at center of economic storm over currency reforms

By Rob Lever

WASHINGTON (AFP): The economist tapped by Indonesia to map out
a currency stabilization plan is a former adviser to the White
House and to other governments, and ironically a manager of a
hedge fund that has profited from the turmoil in Asia.

Steve Hanke of Johns Hopkins University in Baltimore,
Maryland, has emerged as President Soeharto's chief economic guru
and defender of the idea of a currency board to stabilize the
rupiah, a plan opposed by the International Monetary Fund.

Hanke, 55, was a member of U.S. president Ronald Reagan's
council of economic advisers from 1980-81, and has advised
governments of Argentina, Lithuania, Kazakhstan and Estonia.
Hanke is also a portfolio manager for Toronto-based Friedberg
Commodity Management, which operates hedge funds that make
speculative bets on falling currencies.

The group said it earned strong profits last year from "short"
positions on the falling Malaysian ringgit and the yen, with
smaller amounts attributable to the Thai baht, Indonesian rupiah
and Czech koruna.

Hanke told the Washington Post last week he discussed his
trading with Soeharto, declining to give the president's
reaction, but saying, "We hit it off quite well."

Hanke recently described the currency board as a system where
"the monetary policy is literally on autopilot with the money
supply being determined by the balance of payments," saying this
has worked elsewhere.

He told a congressional hearing this month, "This tends to
also limit corruption because a currency board system can't issue
credit either to the banking system or to the fiscal authority."

Hanke is critical of the IMF, which is leading a US$43 billion
rescue package for Indonesia. In the congressional hearing, Hanke
said IMF officials "have done nothing but make mistakes" in Asia.

"They never warned us a crisis was coming. They diagnosed the
patient incorrectly. They've obviously given it the wrong
medicine," he said.

IMF officials have been equally critical of the currency board
plan, which is expected to peg the ailing rupiah to the dollar,
and some other economists are skeptical.

Larry Chimerine of the Washington-based Economic Strategy
Institute said he heard Hanke's congressional testimony and
noted, "I kept rolling my eyes because it sounded too simple to
me."

"It depends where you set the currency," Chimerine added. "If
they set it way above the market and the speculators rush in,
it's not clear they can defend it."

The IMF is threatening to halt aid to Jakarta if the currency
board is adopted.

Critics of the plan say it will result in soaring interest
rates and could rapidly deplete Indonesia's less than $19 billion
in foreign exchange reserves.

White House spokesman Michael McCurry said "a lot of
complexities and technical issues ... have to be addressed before
a currency board would be feasible."

But Kurt Schuler, a former colleague of Hanke's who co-
authored several reports on the subject, and now an independent
consultant, said currency boards work better than "politicized"
central banks.

A currency board would be required to have reserves equivalent
to the money supply, and make its records openly available to
ensure transparency, Schuler said. But it would not be a lender
of last resort -- a situation that tempts governments to make
risky loans, Schuler says.

Schuler said Hong Kong successfully stabilized its economy
with such a board in 1983 and that more recent success stories
are notably in Argentina, Estonia and Bulgaria.

"In all these cases, they've had a reversal from negative to
positive growth, inflation has come way down, currencies have
remained stable and in general they've had fewer problems than
other countries" in similar straits.

"The big thing in favor of a currency board is that it can't
print money for any government deficits or private companies ...
the government has to raise money by taxation or by borrowing."

Asked what would happen if the IMF pulled the plug on
Indonesia, Schuler declined to comment directly but said,
"Argentina didn't get any help from the IMF in 1991 ... that
indicates the currency board can be established without IMF
help."