Out Foxed

In 1933 President Franklin Roosevelt appointed Joe Kennedy, patriarch of the Kennedy clan and father of the future President, to be the first head of the SEC (Securities and Exchange Commission). The odd, and subsequently effective rationale for this was only a fox could ‘out fox the foxes’. Kennedy was well known at the time as a speculator and to put it politely ‘entrepreneur’. When he left the SEC in 1935 (by which time his net worth was close to USD 4 billion in today’s terms) his work there was widely praised, and he even made the frontpage of Time magazine.

What is worrying today is that if Kennedy took the path from ‘rogue’ to regulator, the events of the past week suggest that the heads of many of the important institutions are taking the opposite path. Note that in the past week, two of the more experienced regional federal Reserve chiefs (Eric Rosengren in Boston and Robert Kaplan at Dallas) have ‘retired early’ following the revelation that they engaged in large security transactions in recent years.

I am surprised that this news has not received greater attention, especially when seen in the context of reports that Fed Chair Jerome Powell has a very large securities portfolio (reportedly over USD 50mn) and reports that senior American politicians like Nancy Pelosi actively trade securities and derivatives. More than any time in history, the Federal Reserve is the key to the path of the bond and stock market moves (at record high valuations by the way), and the fact that senior members of the Fed’s monetary policy committee have traded speaks less to complacency and more to weak standards and vastly diminished credibility.

Add to this the scandal embroiling the head of the IMF Kristalina Georgieva (whilst at the World Bank she allegedly manipulated the findings of a study to show China in a more favourable light) and the ongoing travails of WHO chief Tedros Adhanom, and a picture build of rudderless, increasingly corrupted world institutions of the twentieth century.

One might say that this has always been the case. Take the IMF for example – the three former heads have been involved in scandals – Christine Lagarde (the Bernard Tapie/French government), Rodrigo Rato (fraud and embezzlement) and of course Dominique Strauss Kahn.

Then in Europe, where few if any central bankers have any banking or markets experience and thus a penchant for trading (thankfully), senior ECB officials Philip Lane and Benoit Coeuré have ‘steered’ hedge funds and investment banks towards the ‘correct’ views of ECB policy in private meetings, thus helping those investors make large profits.

So, if the IMF has form in the area of corruption, it has not been the case for the Fed. I cannot think that recent Chairs (Yellen and Bernanke) would sanction securities trading by senior colleagues. In my view, and consistent with the overall ‘Levelling’ thesis, we are at a point in history where evidence of the degradation and obsolescence of the institutions of the 20th century is piling up. Within that thesis a number of things are increasingly clear.

First, as the world becomes multipolar, it is now nearly impossible for international institutions like the WHO, WTO and IMF to straddle the breakdown in relations between China and the US, and the competing demands that each country will place upon them. As a result we will likely see more regional institutions develop than international ones – the Asian Development Bank being an example.

Second, in a hyper financialized world it seems that the trade-off between good governance, probity and exemplary leadership on one hand, and large financial rewards is just too much for some.

Third and relatedly, one of the issues that is increasingly debated in the corporate and venture capital world is the need to attract and keep top talent. If world institutions are to attract people of experience and quality (which seems to have been a problem at the IMF for example) then they will likely have to change remuneration structures (Mark Carney’s tenure at the Bank of England is an example).

For the time being, these scandals raise doubts about the operational capability and credibility of the institutions I have mentioned. At a crucial point in the monetary cycle, when inflation is showing signs of a durable pickup, the strength in depth of the Fed is severely weakened, and in my view opens the risk of a monetary accident. Jerome Powell’s prospects of being reappointed Fed Chair have taken a knock, and Lael Brainard may well take his place.

With regard to other institutions – the IMF in particular, it has changed its policy view so many times in recent years and has repeatedly been shown to have adopted the wrong policies, that it is near defunct. I feel that there is too much policy time and energy spent on chattering about reform of bodies like the WTO (according to Bloomberg, the new WTO head has already threatened to resign), which at this stage are beyond reform in that they cannot be repurposed to address the challenges of the 21st century.

We should rather spend time thinking about the problems that lie ahead and think about the rules and institutions that can be crafted to tackle them, in the context of a world where the large nations at least, are unable to cooperate. It’s a job for game theorists, historians, systems experts and psychologists, but not central bankers. 

Have a great week ahead,


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