Bankers and Beavers

Bankers and Beavers
Labor Day, September 6, 2009

Drive north on US Route 1 about 2 miles from Princeton, Maine and turn right on Telephone Road. Five miles of gravel takes you to the edge of Tomah Stream, a serene, magical place on the edge of the Passamaquoddy Indian reservation.

We turned onto Telephone Road. The BlackBerry still had one bar, and there was the report from the London meeting of the G-20 finance ministers. Banks had to raise more capital they said. Some form of compensation limit was being considered. All this would be implemented after the financial crisis eased. Then the world’s finance mavens would put in place just what was needed to prevent the last crisis. They didn’t say it this way – I am doing so.

In 1907 the banking panic and crisis led to the formation of the US central bank. The Federal Reserve became a legal entity in 1913. It was supposed to prevent another crisis. In the 1930s the Fed received new powers designed to address the Great Depression and to prevent another crisis in the future. In the last two years the Fed has used those powers to address the present crisis. The application of those powers has more than doubled the size of the Fed’s balance sheet. Did the G-20 tell us how a future crisis will be prevented, when our Fed and other central banks have expanded their balance sheets and have also taken interest rates nearly to zero? No. All they told us is that banks need to raise more capital and that bank executives are overpaid.

To be fair, they did mention the need to exit the stimulus at some point in the future. And they did suggest that some coordination is needed. But did they say how and when and who would take the lead? Did they remind the world that it took a coordinated and massive, globally integrated liquidity response to break the back of the present crisis last November and December? And did they remind us that if they do not execute a nearly perfectly coordinated exit, the risk of a currency crisis looms in the future?

No. We do not yet have the fully transparent definition of roles for the international effort the world desperately needs. The G-20’s own roles are not clearly defined.

Back to Telephone Road. “Last week the road was wide open” said Ray. Now we had to slow because of a large puddle. “Beavers have dammed up the culvert” he explained. “I’m going to have to take out the live traps and move them to the pond.” Ray is a ranger on the reservation and is also a friend and my fishing guide of many years. He uses live traps to relocate beavers without harming them.

The beaver family has learned that it is easier to block up a culvert and create a pond than it is to dam up a stream. Once the pond is there they quickly build a beaver house for the winter. We talked about beaver families.

The male and female mate and usually have 2 or 3 offspring per season. They keep last year’s offspring with them as well. So a beaver family is between 6 and 8. After two years the parents kick the older offspring out and the cycle repeats itself. The male is responsible for maintaining the dam. The female guards the children in the beaver house.

“What happens if you trap the male?” I asked.

Ray explained how the female will come looking for the male at the dam. If she doesn’t find him, she will take the dam apart in an effort to save him if he has been trapped or caught somewhere while trying to build the dam. The dam will be broken open by the female and the water level will fall so she can search for him. “That’s how I know I have trapped the dominant male,” said Ray.

We drove the rest of the way to the stream. Tomah’s wonderfully pristine dark waters yielded many hungry smallmouth bass. Sunshine bathed the day. Blue sky and red tinges on the swamp maples completed the kaleidoscope.

Too bad the G-20 isn’t meeting here, I thought. They could learn a lot about role definition from mama beaver. She knows what to do in a crisis when papa beaver hasn’t returned; he knows his role in maintaining the dam. Beavers do not know about culverts and roads that cover them. Beavers didn’t put them there. Humans did. Maybe they were built by former central bankers and finance ministers.

Happy Labor Day from Tomah Stream.

David R. Kotok, Chairman and Chief Investment Officer, email:

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