How Much Power Did The G-20 Give The IMF?

The recently completed G-20 summit is being heralded as something of if not a triumph, a solid success. Some see increased global financial regulation as one of its achievements and most are touting the large increase in funding for the IMF as the singular achievement.

Honestly, I’ve read the report and analysis by some observers and I don’t see that all that much was accomplished with regard to regulation. The written statement reads like so much of what comes out of these meetings. A lot of conceptual support for some sort of undefined regulatory regime with no specifics. Designed to let those who wish claim victory while in reality committing no one to anything.

The decisions taken with regard to the IMF on the other hand are real with some fairly profound implications.

As I read the various reports it appears as if the IMF is going to get somewhere in the neighborhood of $1 trillion to spread around the world. The money is going to come as it always does from subscriptions to the fund by its members. I don’t want to get into the mechanisms by which the IMF lends money but if you have an interest here is a link to a recent WSJarticle that discusses it in detail. Suffice it to say that you may hear a great deal in the next few months about SDR’s and subscription rights. Don’t be fooled into thinking that there is no cost to the U.S. or any other country that subscribes.

But to the point or rather three.

The IMF Plan Does What Europe Won’t Do

Currently the IMF is bailing out Pakistan, Iceland, Latvia, Hungary, Ukraine, Belarus, Serbia, Bosina and Romania. With the possible exception of Pakistan, all of these countries have one thing in common. They owe a lot of money to European banks. In fact, they owe so much money to the Austrian banking system that most think that were they to default the entire Austrian banking system would be rendered insolvent. Some suggest that you could throw one or more Swiss banks into that mix. The various European countries are truly helpless in the face of this set of circumstances. Their banks are so large relative to the GDP’s of their home countries that the individual countries don’t have the resources to bail them out.

So, we get a derivation of the AIG model. Channel the money to one entity so they can turn around and repay their many bank loans. The private loan is socialized. The only difference is that instead of U.S. taxpayer funds being channelled we now have taxpayers from all over the world stepping up to repay bank loans.

Should IMF loans eventually start going to EU members like Ireland, Spain and Italy, then we will truly be in a strange world. A world in which members of what bills itself as the largest economic unit on earth have to turn to the rest of the world for assistance that its allies refuse to provide.

Internationalizing The IMF

Simon Johnson writes in the New York Times that the Obama administration “… engineered a breakthrough — not just in terms of how much money the fund can lend to countries, but also in terms of rebuilding its legitimacy and making it more effective as the world’s only global crisis-fighting organization.

How did they do this? They did it by breaking the hold the Europeans have on the IMF. No longer will the managing director of the fund automatically come from Europe. Now the selection process will be open and Johnson suggests the next managing director will come from an emerging market country. In addition, the Obama administration agreed to open up the selection process for the president of the World Bank. No longer will it automatically be an American and Johnson suggests that the next president will likely be Chinese.

Is this wise? To the extent that either one of these organizations has functioned well (some would contend that the World Bank has not) they have possibly done so because the management structures were not subject to an infinite number of political agendas. The “reforms” proposed by the G-20 will significantly alter that balance. If our experience with the U.N. and other large international agencies is any guide, policy is likely to be diffused in an attempt to placate interest groups. Likewise, loan decisions and conditions are less apt to be made on economic grounds and more on political considerations.

The SDR As The New Reserve Currency

Prior to the G-20 meeting the Chinese caused a minor stir with their call for a move toward a new world currency. It’s not a new story, the Russians have been flogging it for years and there are more than a few sympathizers within the European community.

Ambrose Evans-Pritchard fairly glows at the prospect in a post today.

In effect, the G20 leaders have activated the IMF’s power to create money and begin global “quantitative easing”. In doing so, they are putting a defacto world currency into play. It is outside the control of any sovereign body. Conspiracy theorists will love it.

The Russians had hoped their idea to develop SDRs as a full reserve currency to challenge the dollar would make its way on to the agenda, but at least they got a foot in the door.

There is now a world currency in waiting. In time, SDRs are likely evolve into a parking place for the foreign holdings of central banks, led by the People’s Bank of China. Beijing’s moves this week to offer $95bn in yuan currency swaps to developing economies show how fast China aims to break dollar dependence.

I know not whether this is wishful thinking or in fact an accurate reading of the manner in which things might proceed. I am pretty sure of one thing, however. The only way that this could come to pass is with the active participation and endorsement of the U.S. Without that commitment and the commitment of dollars to it, it means nothing.

If this crisis has taught us nothing else, it should have driven home forcefully the point that a strong dollar is an immense advantage. Being able to print our own money and issue debt which has been readily taken up by creditors has provided immense flexibility. You need only look to how hamstrung the EU has been throughout to appreciate our advantage.

If President Obama or any of his successors want to insure a place of infamy in history, all they need do is to throw in with the world currency movement. China and Russia have, no doubt, more than economics on their mind and hopefully we will have no part of it.

So, we shall see what becomes of all of this. No doubt there will be an increase in SDR’s in an attempt to solve a crisis of over leverage with more of the same. It may even do some good in terms of heading off explosive situations in strategically important countries. Though in the end it is only a game of kick the can and the fundamental problems remain.

Beyond that I suspect that we are not on the cusp of a new world economic order. Unless, of course, this country decides to cause it to happen.

more: here (This is a WSJ piece that examines the IMF in much more detail. Highly recommended if you have the time).

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