I don't often think about horses, ex-cept, of course, when picking my way carefully around Central Park South to-ward the Plaza Hotel where the tourist carriages wait. But events in Asia have got me to thinking about horses, specifically about "The Deacon's Masterpiece, or the Wonderful One-Hoss-Shay; A Logical Story" by the American essayist and versifier Oliver Wendell Holmes.
It tells of an 18th-century deacon who had the brilliant insight that every carriage has a weakest point which, if el-iminated, would prolong its life. "And that's the reason, beyond a doubt, /A chaise breaks down, but doesn't wear out." This led him to build a shay where every part was exactly as strong as the others, the result being that when it fi-nally wore out, after 100 years of flawless service, its component parts collapsed simultaneously in a pile of debris.
Years ago, while working in the investment department of an American insurance company, I was told to assess the investment merits of shares in Japanese steel companies. In those days, in-formation about Japanese stocks was hard to come by if you didn't speak the language, but there were English translations of annual reports available about six months after the Japanese originals. Examining the numbers, I was astonished to see highly cyclical steel companies placidly operating with tiny equity ratios. How, I inquired, could companies so structured survive a down cycle? "Well", I was told, "their banks lend them more money until times get better". It was thus that I learned early in my career that there exists a model of corporate and political behaviour where no part is stronger or weaker than any other; when they finally wear out, they do it together, and the whole collapses in a pile of debris. So "Whether chaebol, zaibatsu, or bumiputra, If we all stick together we'll have a great future" seems to be the refrain. It all amounts to a wonderful, one-horse shay, where the fate of the system and that of its components are one and the same.
Holmes' poem was actually an allegory on the collapse of Calvinist orthodoxy in New England, where the insistence on complete logical consistency ultimately undermined the system . He had the shay built in 1755, the day of the Lisbon earthquake and it looked newly-made for the next 100 years. Then, at the end, as a parson was riding along pondering, the shay disappeared under him. How it went to pieces all at once - All at once, and nothing first,-Just as bubbles do when they burst." Holmes took this ending philosophically ("End of the wonderful one-hoss-shay, Logic is logic. That's all I say.")
Alas, if only the IMF could take the same right attitude. Deacon Fisher and Parson Camdessus seem unwilling to accept the fact that a large part of the world has been left without means of transportation. They say that defaults are unthinkable and the international community must not let them happen. Of course, ensuring payment on international obligations will be expensive. The 45% increase in the IMF's capital agreed to at the annual meeting last fall in Hong Kong is now inadequate, says Camdessus, who is now looking for around $160bn in fresh money, an in-crease of more than 70%. This seems to them like a small price to pay to keep international lenders, mainly banks and other financial institutions, whole. The IMF would lend this money to countries with liquidity problems, and these countries would presumably pay it back. But what if they can't, or won't? There's no problem, I am assured, since all countries that are members of the IMF are liable without limit for the obligations of the Fund. In effect, the G7 are the IMF's IMF.
Well, the G7 are no doubt good for these piddling sums, but one wonders if this programme might risk turning the global economy into one immense one-hoss-shay, with no part stronger or weaker than the rest, and the whole increasingly susceptible to systemic collapse. The IMF is, in fact, encouraging the type of behaviour that it is at-tempting to remedy, increasing what economists call 'moral hazard'. By sparing investors from the consequences of their imprudent lending, they are encouraged to take even great-er risks. If they know that the IMF will always be there to assure payment, as it has been in Bulgaria, Russia, Mexico, and now Southeast Asia, they will lend to whoever is willing to pay the most interest (i.e. the weakest credits) be-cause they know that they are really lending to the AAA (so far) IMF. "Have you heard of the wonderful one-hoss-shay/That was built in such a logical way/ That it ran 100 years to a day/ And then, of a sudden, it . . ." Economic progress depends more on the continuous operation of what Schrumpeter called "creative destruction" than on slow rot. "Logic is logic. That's all I say."
Lincoln Y Rathnam is president of Schooner Asset Management in Boston"