The Krugman Watch II
Jude Wanniski
March 4, 1999


Memo To: Michael Kinsley, Slate editor
From: Jude Wanniski
Re: Krugman and Soros

After reading that Paul Krugman had to get down on bended knee and apologize profusely for accusing George (The Tycoon) Soros of insider trading, I send him an e-mail in sympathy. Still, I do not think an apology was necessary, because almost all tycoons who play the currency markets trade on inside information. I've heard rumors for years of Soros handing out fabulous gratuities to people good enough to pass on something they heard inside one central bank or another. There is certainly nothing illegal about this, I don't think. In a way, Polyconomics tries as best it can to find out what Fed Chairman Alan Greenspan is up to, or what the Bank of England might do next month, or what evil the International Monetary Fund is planning.

Because most central banks meet in secret, including our own Federal Reserve, there is everywhere the potential for rampant corruption because of that secrecy. Imagine if someone knew how to tap into a meeting of the Federal Open Market Committee by offering a million-dollar "tip" to the lucky leaker. People who bet hundreds of millions or billions of dollars, a la Soros, would be stupid not to do so if they had a reliable source willing to take such small change in return. Such temptation is not open to me, because I don't have the small change, and I don't play the currency markets anyway. I have to make do the best I can reading the minutes of the FOMC that come out six weeks late, or paying close attention to every burp and nod of Greenspan when he testifies before Congress.

No matter how hard Greenspan might try to keep his shop from leaking, he cannot do so even if every employee seals his or her lips to everyone they know. The chairman and the top staff invariably discuss their thinking with other central bankers in other countries. The cat often gets out of the bag this way. In Germany, I believe, officers of the Bundesbank are allowed to serve as consultants to the private sector, in order to supplement their incomes. I would not be surprised to learn that Soros-class speculators have these folks on the payroll. If it is legal, why not? Former Fed governors, who have friends on the board of governors and also know staff people well enough to call and chew the fat, are also major sources of leaks. They shamelessly trade on their insider ties.

The Bank of Switzerland has no such secrecy in the deliberations of its parallel policy committee. People from the street can walk in and take seats to hear the monetary policy of their country being shaped. At least this is the way it was when last I checked, and I believe it remains this way. Would it be sufficient to open the FOMC to the press? I'd like to think so, and if I were a member of the Senate or House of Representatives, I would devote a good chunk of my discretionary time to legislation that would force the Fed to come into the sunshine.

Would this be enough to end the corruption? Michael, I'm afraid it would not. The only thing that would shut down the corruption that has caked up over the decades around Fed policymaking is a return to the kind of automaticity forced upon the Fed by the gold-exchange standard or the Bretton Woods dollar-exchange standard anchored by gold. Only when this is done will the Soros-class speculators be deterred from spending their energies in this kind of arbitrage. Which is what it is. I know Soros, having met him the first time in December of 1980, when I visited Morgan Stanley with David Stockman to talk about the upcoming Reagan administration. He's a serious man, but by no means a genius. He truly wishes to help the former Communist countries find a way to rebuild as capitalist systems, but he doesn't know nearly enough to get the job done. In many cases, he has been an impediment to the transition process, and I've tried to tell him so. But he is a billionaire, and I am not, which may mean that he does know better than I the way the world works.

As for Paul Krugman, your chief economic attraction at Slate, you of course must advise him to rein in his arrogance, or Soros or someone like him will sue Bill Gates for billions of dollars for defamation of character. And you should also make sure your editors keep a weather eye out for other boo-boos by your contributors.