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The Problem with the Indonesian Currency Board

On Friday,

Professor Steve Hanke

hit the research conference call circuit. Hanke is the world's leading (and maybe only) currency board proponent. He has the ear of

President Suharto

. Suharto even appointed him to the post of special advisor. I listened to the call and got to ask a few questions.

Here is the bottom line on the big questions. Hanke says that

Indonesia

will in fact install a currency board. His

"IMF plus"

program is very much intact. This seems to be a direct refutation of the wire service report that the project would be delayed for at least three years. I asked but Hanke would not specify when the board would be installed. Nor would he comment on the level of the exact exchange rate peg -- although he did go out of his way to say the 5,000 level originated from an IMF economic blueprint for Indonesia.

I have always found it useful to hear from ministers and their advisers directly. My working premise is that a good read on a person's character, temperament and mood can be massively important -- at times much more important than any research report or regression analysis that Wall Street can turn out.

So here is what I think along those lines. Hanke is a sincere advocate of his currency board program. This campaign makes him look sort of like a Don Quixote-like character. And the currency board is his sacred Dulcenae -- no matter what the

TSC

vice squad (meaning me) says about her. He even scoffs at the idea that the Suharto family supports the board so that they can loot the

Central Bank

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. Dulcenae the pure.

Hanke honestly believes that the currency board is the silver bullet that can end the entire economic nightmare for Indonesia. Nobody else agrees with him.

The most striking thing about the call was Hanke's declaration that the IMF program has been a total failure. This assertion was made with no reservation, considerable dramatic gravity and a certain amount of bitterness. From the tone of his voice, Hanke really detests the IMF. So this is what Suharto has been hearing -- and no wonder he is balking at the IMF program. What the IMF has ordered is a long course of what amounts to occupational therapy for Indonesia. If Suharto has been convinced by Hanke that the IMF is going to wreck his country, then literally anything can happen next.

Trouble at the Bank of Japan

Is this true? Could the officials of the

Bank of Japan

have sold advance information on its money market operations to selective dealers in exchange for lavish entertaining? This scandal is growing, and it's all over the Japanese news wires. Now there are reports of a massive investigation of hundreds of BoJ staffers.

Of course, every trader I know has always suspected that the Japanese dealers got advance notice of important economic information, like the

Tankan

. It is just a part of trading in Japan -- and everybody loves a good conspiracy theory. But there never has been anything more than circumstantial evidence. Never any proof. Now, if this plays out against the BoJ, I think it has the potential of cementing forever the idea that Japan is not a fair game.

Now the question comes to mind: What will be the consequences if the officials did in fact sell out the Bank? What will happen to the BoJ? Anything more than a few symbolic high-place resignations? More importantly, what will happen to the firms that bought and traded on this illegal information? This case, in my opinion, would be magnitudes worse -- if it's all true -- than the

Salomon Brothers

government bond auction scandal. Salomon got its clock quite properly cleaned for that one. Shook the "Brothers" right down to its foundation.

Let's hope it isn't true. But, if it does turn out to be fact, then I hope they drop a ton of bricks on the guilty parties. This has to be addressed -- it's just too serious to be dropped.

David DeRosa heads a trading research firm and is an adjunct professor at the Yale School of Management. His column on international finance and trading appears Mondays, Wednesdays and Fridays. He welcomes your feedback at

derosa@derosa-research.com.