The MT Diary

Muddling the Mauritians; Chinese conspiracy theory; and why the Fed hugged the Bear.

by Howard Davies
Last Updated: 31 Aug 2010

If you tell people you are going to Mauritius for a few days, no-one believes it is for work. So I spent three heavy days in Port-Louis giving serious seminars on the credit crunch, public-sector reform, management education and the future of financial regulation, and no-one, not even my wife and dog, believes it.

In a spirit of full disclosure, I have to confess that, between speeches, I retreated to a beach bungalow on the Indian Ocean - but only to seek out a peaceful spot to prepare the next slide-pack. Oddly, the beach itself was largely occupied by gay Italians (of both sexes) engaged in animated debate about the outcome of their elections. From the tone of voice, I would judge that Berlusconi's appeal to the Indian Ocean gay crowd fell on a stony beach.

The Mauritian economy is doing pretty well, in spite of the disappearance of the special deals on sugar and textiles it had with the EU. The Key Success Factor is that the prime minister, deputy prime minister and financial secretary are all LSE alumni. It is surprising that more countries do not grasp this simple reality, though Argentina and Poland have recently appointed finance ministers from the same source. We'll soon see what good that does them.

What our old boys (all boys, it's true) have not done here, though, is promote the English language. Mauritius is the only country in which French is making headway at the expense of English. Mauritians are obsessed with the Premier League, but the games are retransmitted from Paris, with a French commentary. You are left with the impression that Manchester United consists of Patrice Evra and 10 makeweights.

So I spoke partly in French. And at one point, having made a polite reference to the 40th anniversary of Mauritian independence I noted, as an aside, that 1968 was the last time a team from Manchester had won the League.

Consternation in the assembled ranks, as 70% of the population of Port-Louis are Man United fans, blissfully unaware that Old Trafford is in Stretford. This generated a five-minute item on the evening TV news (which goes out only in French), as the finer points of football alle- giances in the North West were debated.

As a long-suffering City supporter, you have to get your revenge in ever more ingenious ways, in ever more remote locations. Pathetic, really.

The Singaporeans are nuts about football, too, but even more preoccupied by the global economic prospect and its impact on China, and thereby on them. They are also edgy about Tibet and how the Chinese may react to Western critics and demonstrators. Though the Singaporeans generally speak better English than we do, they can also monitor Chinese websites and chatrooms and see ugly xenophobia on the rise. One of the most popular books in China these days is apparently a kind of latter-day Protocols of the Elders of Zion, explaining the alleged Jewish conspiracy behind attempts to sabotage the Olympics.

The Chinese leadership wants nothing to do with this stuff. But there are rather a lot of Chinese (you heard it here first) and many of them are prey to strange rumours and theories. Most do not have the benefit of to keep them on the straight and narrow. Imagine if you only had the Central Office of Information and Facebook to give you your news.

On second thoughts, don't try to imagine that. I don't want to be held responsible for the consequences.

On to New York, where the mood is a little calmer after the market's near-death experience in mid-March. Controversy still rages, though, about the Fed's intervention to 'save' Bear Stearns for the nation, or at least for JP Morgan's shareholders. Some assert that the two groups are not one and the same, and that the Fed's underwriting of the deal gave JP Morgan an uncovenanted benefit at the expense of ... well, of John Doe, I suppose. Why was no-one else given a chance to join the party?

US treasury secretary Larry Summers argues that the alternative the Fed faced was 'to conduct the experiment of seeing what would happen to the financial system if a major institution fell apart', and that 'it made the right decision'.

Those of us not privy to the knowledge the Fed had of Bear Stearns' positions, and of the vulnerability of the next domino, Lehman Brothers, may find it hard to call this one. My own money is on the Fed, especially as it ensured the Bear's shareholders took a savage haircut.

The big imponderable now is what price the Fed will exact for the underpinning it has given to the investment banks by opening the discount window to them. For the moment, everyone is de-leveraging away, but it seems unlikely that the Fed would just sit back and watch leverage rise again once normal service in the markets resumes, as it surely one day will.

The US Treasury's paper on the regulatory system's future gave nothing away, merely noting that continued access to the window could not be guaranteed. But withdrawing the facility could be risky: before the Fed knew it, it might find itself conducting Summers' experiment.

At the FSA, I used to say - if called on to entertain after a City dinner - that it was a tough job to make regulation interesting. It is not, I'd say, the most exciting thing you can do with your clothes on. These days, I'm not so sure.

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