THe IMF needs new thinking as well as a new leader

 

            I am fed up with hearing that the world will sadly miss Mr Strauss Kahn, and his economic genius.  His supporters in the IMF job say he was so good at brokering a deal to “save” Greece, and was  much needed to do the same for Portugal.

             The truth is the first Greek deal did not work. It had to be renegotiated six moths later, and now renegotiated again. It is not working for Greece, Euroland or the rest of the EU. The IMF needs to ask itself how it can help countries that are locked into a single currency at the wrong rate for them, with economies that are not working harmoniously with the larger economies at the centre of the currency zone. Mr Strauss Kahn’s policy isn’t working and cannot work. It does not take an economic genius to lend more of other people’s  money in the hope that the underlying problems will solve themselves.

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

44 Comments

  1. Mike Stallard
    Posted May 19, 2011 at 7:43 am | Permalink

    OK, so when he comes up for election, I simply won’t vote for him then.

  2. NickW
    Posted May 19, 2011 at 7:49 am | Permalink

    I thought the IMF were in favour of restructuring and that Timothy Geithner (The banker’s friend), vetoed it.

    It would be nice to know who is saying what to whom about the new leader. A non European leader might actually be in the best interests of the European people, although the politicos will be doing everything in their power to make sure that does not happen.

    • Liz
      Posted May 19, 2011 at 2:11 pm | Permalink

      Agree absolutely – the new IMF leader should certainly not be from a country in the Euro zone as they could not possibly be impartial and preferably not from Europe at all or any other country currently in a financial mess!

      • APL
        Posted May 20, 2011 at 12:44 am | Permalink

        Liz: “or any other country currently in a financial mess!”

        Icelandic or Norwegian then.

  3. Javelin
    Posted May 19, 2011 at 7:55 am | Permalink

    I think this all ties in with the Security and Exchanges public consultation on mew rules for credit rating agencies and their public consultation. Unlike corporates Government accounts are opaque. The fact I’ve seen between £1.2tr and £4.5tr estimates for UK Government debt is absurd. I’m left wondering how accurate McKinsey £2.1tr estimate really is – or whether it’s just a finger in the air figure. Politicians want votes for their performance but don’t want you to see their errors. I think those days need to come to an end with the IMF requiring internationally agreed definitions of debt and they insist all Government spending and current valuations of future liabilities are accounted for.

    Reply: There are various official statements of the the UK debt – State borrowing, indebtedness of state owned banks, state pension schemes and PFI/PPP. The size of the nunmber depends on how many of these elements you include. The quickest way of getting down the largest figure is to privatise the state banks.

    • Javelin
      Posted May 19, 2011 at 8:10 am | Permalink

      I just wanted to point something else out. Politicians may like to pretend they will help Greece to have a “soft restructuring” but financial markets do nOt work that way. Firstly cash flow schedules in all the databases will have to be reconfigured. All Greek Bonds and Derivatives will have to be found. Considerable man power will have to be paid for discovering, planning, testing, executing and reconciling counterparty payments. Trades will need to be amended, rebooked or made to hedge the cash flow restricting. For example in a product called Calypso used by many banks all this will need to be done and a decision yo send a “credit event” will be made. Credit events are not just bankruptcy. The international swap dealers association defines a number of different credit event types for each region (e.g. North American Coroprates have a chapter 11). European Bond definitions work off cash flow so any change in the payment schedule will change the yield and price and the loss making counterparty has 30 days to issue a credit event. I wrote the credit event code at the worlds largest bank so I know how these things work. There is no such thing as a softlanding for EU bonds – politicians can reframe as much as they want but when the schedules change the databases will change on the payment leg of a CDS and a credit event will happen.

      • Javelin
        Posted May 19, 2011 at 8:51 am | Permalink

        A further point the previous bond bail outs involved giving the IMF/Eu preferential status. As none of the PIGS contracts explicitly stated preferences then this did not technically amount to a restructuring. The ISDA issued a statement (google Isda restructuring credit event Ireland). This annoyed alot of bond holders and explicit sratement of preferences are now being demanded by the markets for future issues- making bailouts a one off. The IMF and EU cant reuse this option. However schedules are explicit and will result in a credit event. Lawyers may be studying how they can “trick” bond holders again – but this kind of sneakiness and underhanded behaviour will not be tolerated by the markets when these sums of money are involved.

        • Javelin
          Posted May 19, 2011 at 9:22 pm | Permalink

          I am hearing the last options to threaten bond holders considered today were to tax a CDS or offer future collateral as exchange. All this to sneak around the CDS contract and stop the ISDA from triggering a default. There have been furious phone calls this week and it is beginning to look like the ECB and IMF have no more sneaky cards left to play. The first bail out appeared to have been their last. I expect the ECB to rush a few harsh hollow tax threats toward banks in the next few weeks. A restructuring appears closer than ever.

        • Hugh
          Posted May 20, 2011 at 9:25 am | Permalink

          Lawyers can change the terms in ways that get round the rules, but what do the auditors say when assessing the realisable value of these bonds at period ends.

      • Gary
        Posted May 19, 2011 at 8:03 pm | Permalink

        I think this is a restatement at the micro level of what Mises was getting at when he said there was no way of avoiding a collapse of a credit bubble…..

  4. Brian Tomkinson
    Posted May 19, 2011 at 8:15 am | Permalink

    There was a time when the intervention of the IMF, although uncomfortable, gave a sense that a country’s economic problems were being addressed. Whether or not this was just perception it no longer applies. Things would be even worse if our failed former Chancellor and Prime Minister Brown were given the job.

    • FaustiesBlog
      Posted May 20, 2011 at 8:03 am | Permalink

      I doubt the people of Argentina would agree with you.

      The IMF turned that wealthy country into a basket case. I’m betting that the same thing is about to happen to Libya and perhaps other Arab nations.

  5. Richard1
    Posted May 19, 2011 at 8:24 am | Permalink

    There was an excellent excerpt of an interview with the Swedish Finance Minister, Anders Boos, on Sky last night. Mr Boos said that Gordon Brown would be a completely inappropriate choice as IMF MD as he bore such a responsibility for the mess in which the UK economy now is, with a budget deficit of c. 10% of GDP being among the worst in the world. The IMF should now be focused, Mr Boos said, on getting countries to avoid such policies. Of course this was not repeated or referred to on the BBC – where this morning Stephanie Flanders, economics correspondent, has just said she ‘fears’ Gordon Brown doesn’t have much chance of appointment as he doesn’t have the support of Mr Cameron.

    Reply: I think she was right about that.

    • lifelogic
      Posted May 21, 2011 at 6:08 am | Permalink

      So Cameron is right about one thing then.

  6. alan jutson
    Posted May 19, 2011 at 9:12 am | Permalink

    Mr Khan does not seem to be doing too well of late does he.

    Not only are his negotiations in Europe failing, but his recent negotiations in New York do not seem to be going too well either.

    Suggested allegations reported in todays Telegraph, that previous negotiations and and behaviour in New York were not up to scratch either.

    If we are to get a new man in post within the IMF, then surely it must be one who holds a degree of mathematical commonsense.

    The IMF is not just about one person, it is surely about a group of experienced people working together to try an resolve the Worlds financial problems, with bailouts as an absolute last resort. That is why Gordon Brown is an absolute No No for anything to do with the IMF as his first instinct is to throw money at any problem, thinking this helps.

    • EJT
      Posted May 19, 2011 at 11:07 am | Permalink

      “a degree of mathematical commonsense”.

      Arithmetical. Let’s not talk up the skill needed to understand that “it doesn’t add up”.

    • Conrad Jones (Cheam)
      Posted May 19, 2011 at 1:50 pm | Permalink

      “That is why Gordon Brown is an absolute No No for anything to do with the IMF as his first instinct is to throw money at any problem, thinking this helps.”

      I think you’ve just convinced the IMF Interview Panel of Gordon Brown’s suitability for the role.

  7. lifelogic
    Posted May 19, 2011 at 9:15 am | Permalink

    As you say “Strauss Kahn’s policy isn’t working and cannot work” A badly run country and a well run country cannot have the same currency for very long unless the well run one keeps tipping its money down the mouth of the badly run one. Thus encouraging it to continue on the same track. Some sanctions are needed either the appalling prospect of direct, undemocratic, control from EU or floating currencies and the usual borrowing difficulties interest rate adjustments that the market would normally give.

  8. Stuart Fairney
    Posted May 19, 2011 at 9:18 am | Permalink

    Speaking of new thinking, I note Singapore’s first quarter 2011 GDP growth was 23.5% (sic).

    When do you think we might achieve such figures? If the answer is “never, we won’t even get close to half that figure, we don’t even aspire to it” which it surely is, oughtn’t it at least be a target? If an advanced, developed country can do it, we should also be able to do it.

    Since we can’y why don’t we try to learn some lessons from our former colony, apply them and at least try for say 10-11% growth. This might cure the deficit and unemployment in no time at all.

    • James Matthews
      Posted May 19, 2011 at 4:04 pm | Permalink

      Why can’t we do it? Because we lack Singapore’s social and political cohesion, social discipline (both self and imposed), standard of education and work ethic. On the other hand we do have quite a lot more liberty. Any British politician who sought to make us follow Singapore’s example would have a very short career.

      • Stuart Fairney
        Posted May 19, 2011 at 4:57 pm | Permalink

        Really? a politician who delivered (or to be more accurate got out of the way) and saw 23.5% increases in GDP would be kicked out of office, really? A politician who made better education a reality, dealt with welfare and made a work ethic profitable again, one who cut crime massively, this would be bad?

        What freedom do we enjoy that is denied in Singapore? I ask because I honestly do not know the answer to this one

      • lifelogic
        Posted May 20, 2011 at 7:54 pm | Permalink

        We can have growth and more liberty. Indeed liberty helps growth. All we need to the government to reduce in size by half, a sensible cheap energy policy, low taxes and fewer and better regulation.

        In short the opposite of the big state Cameron/Clegg coalition – a government that actually wants growth.

  9. English Pensioner
    Posted May 19, 2011 at 9:20 am | Permalink

    DSK is a left winger, so is Gordon Brown who has (laughably) been suggested as a replacement. So, as far as I can ascertain, are most of the other candidates.
    Perhaps this is what is wrong with the IMF, like all socialist organisations it enjoys spending (other people’s) money and paying huge salaries and expenses to those doing so.
    Cameron should nominate a good right winger for the post.

    • Conrad Jones (Cheam)
      Posted May 19, 2011 at 11:34 am | Permalink

      It’s not totally accurate to say that they are spending other peoples money – at least – not money that exists in the present. It would be more accurate to say that it is spending money that hasn’t been earned yet by tax payers around the World. Future generations will be asked to pay this money off – or the interest payments to service the debt. Perhaps people who haven’t even been born yet.

      “So, in recent years the IMF has begun to
      circumvent the restrictions of its overall quota. By
      co-operating directly with commercial banks to organise more
      substantial loans than it can fund from its own quota
      resources, the IMF administers loan packages made up in part
      from its own quotas and in part from commercial sources.
      For example, of the $56 billion loan advanced under the IMF to
      South Korea in the wake of the Asian crisis, only $20 billion
      was contributed by the Fund; the remaining $36 billion was
      arranged by direct co-operation with international commercial
      banks, which created money for the purpose.”

      Therefore it is expanding the World pool of money through credit creation. Just like a high street Bank does. It uses the quotas gathered from Member nations as a Reserve, so effectively making IMF loans Fractional Reserve Banking.

      What will happen as this Reserve reduces ? Force more Nations to take out loans inorder to maintain the World money supply perhaps? Just like in the UK with the Housing Market.

    • EJT
      Posted May 19, 2011 at 1:58 pm | Permalink

      The system would marginalise and then eject a right winger. One word. Wolfowitz.

  10. oldtimer
    Posted May 19, 2011 at 9:36 am | Permalink

    It seems that Mr John Lipsky, DS-K`s stand in, believes it too, according to this speech:
    http://www.imf.org/external/np/speeches/2011/050211a.htm
    …not that he offers any solutions.

  11. EJT
    Posted May 19, 2011 at 10:00 am | Permalink

    The genius is in getting such idiocy implemented, finessing logic-based dissent. It must take real skill.

  12. Brigham
    Posted May 19, 2011 at 10:40 am | Permalink

    Don’t worry! This is an opportunity to appoint the enormous intellect, on fiscal matters, of Gordon Brown. With his magnificent record he would bring about the demise of the euro in very short order, and we would have no more bail outs. Gordon will have saved the day once again.

  13. electro-kevin
    Posted May 19, 2011 at 10:57 am | Permalink

    You may not think much of him but for heaven’s sake remember to pronounce his name properly. According to the BBC it’s “Strrrosss Cghaaan” He was tipped to take over from “Sarrr-cghhhhkoh-zeee” don’t you know.

    Do you think these broadcasters speak the same way down the pub ?

  14. forthurst
    Posted May 19, 2011 at 11:02 am | Permalink

    Members of Kahn’s mutual admiration society do not necessarily deserve the good press they receive, nor that those that dont, the bad press they can so easily acquire.

  15. Conrad Jones (Cheam)
    Posted May 19, 2011 at 11:04 am | Permalink

    “The IMF needs to ask itself how it can help countries that are locked into a single currency at the wrong rate for them, with economies that are not working harmoniously with the larger economies at the centre of the currency zone. ”

    I think we need to ask ourselves whether we can allow such an institution continue to make debt ridden countries worse by loaning them more “money” or SDRs when the conditions that they enforce on these loans merely strip a country of it’s assets and sovereignty. Is it true that in some IMF Loan conditions, multinationals who enter an indebted Country are protected against being forced to employ locals in anything other than medial, low paid tasks?

    The IMF is heavily biased in it’s World Economic views. Although they say they are “helping” impoverished nations, actions speak louder than words. A focus on Exports – whether agricultural or electronic – is forced upon borrowing nations inorder that the IMF can get it’s interest payments. Where all nations are forced in Export Markets at the destruction of there own local markets, many – if not all Nations lose as it is a model which requires some nations to be net importers of goods and services which force trade imbalances. Balanced Trade between sovereign states seems to be a model that economists ignore, even for the wealthier Nations.

    A constant and relentless striving for growth is constantly demanded, and the reason being that the economic conditions of debt cannot be sustained with a balanced equilibrium of world trade as not enough money is created to pay back all the interest payments.

    The increase in “money” supply and the consequential reduction in purchasing power and increase in debt is what drives desperate Countries to export as much as they can to keep up with the interest payments, never mind the principal of the loan. The IMF appears to install a perpetual debt in a Nation that lays the foundation of remote economic control which opens the door to wide spread localised unemployment, social instability and an influx of Private Banks to “help” manage the local economy.

    Although Mr Strauss Kahn has not been convicted of his alleged private crimes, there is surely enough evidence to prove that he has failed in achieving the reported aims of the IMF.

  16. Winston Smith
    Posted May 19, 2011 at 11:32 am | Permalink

    Where are you hearing the support for Mr SK? Who are the LDs pandering to when they make duplicitous statements about the bad Tories? You complain about the anti-cuts message in the media. Who is propogating this mesage?

    We all know the answer. They control over half of all broadcasting. Their website is the most powerful news site on the internet. They are institutionally left-wing. They bias is now so clear, they blatantly believe they are untouchable.

    You are in Government. What are you going to do about the BBC?

    • Conrad Jones (Cheam)
      Posted May 19, 2011 at 1:56 pm | Permalink

      The BBC is nothing more than controlled opposition.

      If I want to know whats going on in the World, I glance at the BBC to get a rough outline of News, then look at other sources for accuracy and more detail.

      They are nothing more than a form of Government PR.

      Where does their pay cheque come from?

      Since Hutton and David Kelly – the BBC has been an extension of the Governmental Media Office.

      It is never a good idea to expect a balanced view from one Media source, everyone has it’s own biased – or controlled opinions.

  17. alan jutson
    Posted May 19, 2011 at 12:23 pm | Permalink

    Understand from news casts that Mr Kahn has now resigned from the IMF, in order to spend his time to try and defend himself against recent personal accusations made.

  18. grahams
    Posted May 19, 2011 at 1:22 pm | Permalink

    Time for a change? The IMF has been led by French officials (often with distinction) for 36 years against 29 years for people from all other countries combined.
    Time for an Indian? Mantek Singh Ahluwala is a former Oxford Union president who knows the IMF like the back of his hand, although he is a bit old by Euro-American standards.
    If it has to be a “European”, how about Turkey’s Kemal Dervis, who as finance minister used decades of World Bank experience to mastermind Turkey’s economic and financial recovery from the post-1998 crash? He also has strong credentials with developing countries and strong US links.
    Either would bring a new perspective to IMF policies for today’s global eonomy. If the non-Nato countries are frozen out, they might back Gordon Brown, who would not.

  19. Scottspeig
    Posted May 19, 2011 at 4:50 pm | Permalink

    John, what would be the consequences of refusing to pay any debt owed by the country, and introducing tarriffs on imports in order to be neutral trading. Any consequences can be managed by producing a free trade agreement with say the African Nations for raw materials?

  20. Acorn
    Posted May 19, 2011 at 4:53 pm | Permalink

    Greece is going down, regardless of who gets to boss the IMF. Put a fiver on Christine Lagarde. Start praying that Spain can hold on, looking doubtful. If Spain goes, it will take the majority of European banks with it.

    Anyone fancy a share in a Greek Island, if so, hold onto your cash till Christmas. Should be some bargains knocking around by then. Mind you, global GDP growth is forecast to crash by next winter.

  21. Stephen Gash
    Posted May 19, 2011 at 6:50 pm | Permalink

    Maybe John Major’s and Norman Lamont’s idea of “hard” and “soft” Euros wasn’t such a bad idea afterall, for those who wanted to sign up to it.

    A friend of mine who has just returned from Germany says the German folk reckon the Euro is finished.

  22. David Menashy
    Posted May 19, 2011 at 7:01 pm | Permalink

    Most readers of this blog know the perfect candidate…

  23. Gary
    Posted May 19, 2011 at 7:55 pm | Permalink

    “It does not take an economic genius
    to lend more of other people’s money
    in the hope that the underlying
    problems will solve themselves.”

    Agreed. Now someone needs to tell the FED, ECB and the Bank of England.

  24. BobE
    Posted May 19, 2011 at 10:23 pm | Permalink

    Do you think that Mr Strauss Kahn may have been deliberatly hit by an attack to stop him contesting the presidency of France? I just wonder if we are watching a set up.

  25. lojolondon
    Posted May 20, 2011 at 7:53 am | Permalink

    I have a suggestion – as a pre-requisite, the person should be from a country that was unaffected by the crisis, ie. definitely not the EUSSR or USA.

  26. Robert K
    Posted May 20, 2011 at 9:40 am | Permalink

    The Greek bailout was, indeed, a moth-eaten policy. (Sorry, couldn’t resist that one 🙂

  27. Javelin
    Posted May 20, 2011 at 12:30 pm | Permalink

    The European Financial Stability Facility (EFSF) are going for a E5bn bond issue (its 3rd). It’s looking like a new EU Government by the back door – where the PIGs can’t sell their own bonds but need to issue them via the EU central bank. The risk of default of the EFSF is shouldered by the EU – so all EU tax payers are on the hook.

    So far so good for the EU integrationists – they are not raising taxes for soverign spending – but they are raising borrowing for sovereign overspending. So it doesnt look like its in the integrationists interests to see the deficits reduced any time soon by the PIGs.

    So the question for the integrationists is (1) how they pull more PIGs into the pen and (2) how they move from bonds for overspending to bonds for spending?

    I would suggest pulling more PIGs into the pen would involved deepening of the crisis – a default by Greece would end the crisis – so this would not be in their interest. (when Greece eliminates its deficit I think it should default because it doesnt need to borrow for 10 years). They must be hoping to pull Spain into the termoil next.

    Moving to bonds in general would involve replacing general taxation for EU taxation. The obvious move here would be to say to the PIGs if you pay such-and-such tax to us they we will give you such-and-such slightly more secure bonds in return, but these are 25 year bonds so you will have to make the commitment. Over time the PIGs will be sucked into the EU – with the stronger EU countries paying “bribes” to become more integrated – and the strong EU countries will be threatened with a banking collapse if they dont agree.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page