It is time to look carefully at the operations of the Hong Kong Monetary Authority and instead of shooting the messengers, the speculators, ask: 'What is motivating their speculative activity in Hong Kong?' To answer that question, we have to define the 'currency board system (CBS)'. An orthodox CBS is a monetary institution that issues notes and coins. These notes and coins are backed with a minimum of 100 per cent, up to a maximum of 110 per cent, of a foreign reserve currency, and they are fully convertible into the reserve currency at a fixed exchange rate on demand. The orthodox CBS has largely been immune from speculative hot money flows because of the high level of confidence in the maintenance of the fixed exchange rate. Incidentally, under the classical gold standard (1880-1914), which was a close cousin of the orthodox CBS, speculative hot money flows were also rare. Speculative hot money flows become increasingly likely when the features of an orthodox CBS are eroded. I witnessed and documented this in 1995, when I was operating as an adviser to Argentina, a country that employs a currency board-like system. The Argentina CBS can act as lender of last resort to solvent banks if the CBS has 'excess reserves'. During the crisis of 1995, the CBS exercised this capacity by issuing repurchase agreements to troubled banks. And when the level of repos increased, the speculators smelled blood and aggressively raised their short peso positions. Once this relationship was spotted, I recommended that the CBS abandon its repo operations. That counsel fell on deaf ears, and as a result the peso crisis in Argentina lasted for longer than it should have. Even though the monetary system set up in Hong Kong (post-October 15, 1983) has many of the trappings of a CBS, it has never been an orthodox CBS. Indeed, because of its deviations from orthodoxy, I have always referred to Hong Kong's monetary system as a currency board-like system. But that is not the end of the story. Hong Kong's system has changed significantly since 1983. Unfortunately, the Iron Law of Bureaucracy - which states: for whatever purpose established, a bureaucracy's primary objective will be the maintenance and expansion of its domain - has been at work. Recall that the HKMA did not even exist, in name, prior to April 1, 1993, when the Exchange Fund merged with the office of the Banking Commissioner. As a result of the HKMA's voracious bureaucratic appetite, Hong Kong's CBS-like operation has been corrupted. Today, the HKMA encompasses a hodgepodge of activities. Therein lies the Achilles heel of the monetary emission component of the HKMA. Indeed, speculators cannot tell whether the HKMA is a CBS or a pseudo-central bank, or for that matter, whether it is a fiscal authority. Consequently, the HKMA battles a speculative disease of its own creation. Hong Kong can only be snatched from the vice-like jaws of the speculators if the HKMA is unbundled. To save Hong Kong's CBS-like setup, it should be separated from the HKMA's other activities and made to stand on its own two feet. Furthermore, it should be reformed and transformed into an orthodox CBS, one that is governed by a strict monetary constitution. Under such an unbundled set up, the fiscal authorities could purchase equities, but such purchases would be transparent and would not contaminate the CBS. With an orthodox CBS, there would not be speculative hot money flows, and the fiscal authorities would have great difficulty justifying such equity purchases, particularly in Hong Kong, where the free market is supposed to rein. To save the peg and the good name of currency boards the world-over, the punch bowl must be pulled away from the speculators. Unbundle the HKMA, please.