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IMF: Influential and Manipulative Financing?

Posted by Larry Doyle on March 31, 2009 8:19 AM |

Could American banking regulators and the Federal Reserve itself work under the purview of the International Monetary Fund? With the G-20 getting ready to meet later this week in London, increased global financial regulation is a major topic on the agenda. French Prime Minister Sarkozy is leading the charge. The WSJ reports An Empowered IMF Faces Pivotal Test:

The IMF is about to gain more power. Thursday’s summit of leaders of the Group of 20 industrialized and developing nations is poised to elevate the IMF by promising to pump more than $250 billion into the fund, and asking it to issue “early warnings” about countries in peril.

“Everyone sees the need for a rejuvenated IMF,” says Egyptian Finance Minister Youssef Boutros-Ghali, who heads a policy-making group that oversees the IMF.

The IMF’s track record around the globe is decidedly mixed. In certain countries, such as Ukraine and Belarus, economic conditions worsened despite IMF aid.

The IMF last played a major role on the world stage in the late ’90s.

The 185-member IMF was last at center of the action a decade ago when it put together multibillion-dollar packages to stem a financial crisis that started in Asia in 1997 and spread to Russia and Brazil. The fund insisted on tough changes in domestic economic policy as the price for loans, provoking deep resentment, and in some cases, bloody riots. Still, the nations under IMF care rebounded fairly quickly. The IMF prescription — cut spending, devalue currencies, fix financial institutions, open markets — helped many countries export more to the U.S. and Europe.

Did that prescription actually play a major role in setting this stage for the crisis we are experiencing today? Many people believe so. Devalued currencies promoted massive exports and capital surpluses. That capital financed a large percentage of the undisciplined and imprudent lending here in America and around the world.

In its  wake, the IMF has not typically left a mountain of goodwill. A number of Asian nations repaid IMF loans ahead of schedule to compel the IMF to exit their economies.  Some nations have rejected the IMF’s overtures for more aid.

When South Korea said no to the IMF credit line, Lee Hyoung-ryoul, a Korean Finance Ministry official explained: “South Koreans tremble and financial markets turn sensitive whenever they hear the word ‘IMF.'”

The IMF knows that it needs to further engage China, which currently has limited voting power in the organization. While China is positioning itself for greater influence in the IMF, it also has some reluctance as the topic of its undervalued currency will be a major sticking point.

IMF officials are also wooing China, whose relations with the fund have been icy. Since 2007, China has blocked IMF reviews of its economy because it knows its exchange-rate policy is bound to come up.

Does the IMF have the manpower, capital, gravitas, and independence to be the world’s banker? Is it possible for one institution or authority to properly balance competing needs?  Should the IMF be both referee and commissioner?

Are President Obama, Fed chair Bernanke, Treasury Secretary Geithner, and Congressional leaders about to acquiesce to global economic pressures which are truly not in America’s interests? While the markets need strong referees, are we about to move too far in the other direction?

What do you think? For those with impressions or experience, please share them.

LD

  • Did you notice that China opened up swap lines with Argentin and the Ukraine last night? Not exactly traditional trading partners. More likely an effort to employ their usd reserves in expanding their sphere of influence. G20 on Thursday shaping up to be more political than economic. And if you want even more color on how inter-twined they are and the IMF’s role, check this out here.

  • Chiang…I did not notice that but thank you very much for sharing such interesting and important color.

    There is little doubt that China will look to widen its sphere of influence both economically and politically not only at the G-20 but beyond as well.

    I had written about how China negotiated a $10+ billion trade deal with the EU, primarily Germany, a month or so ago.

    You can read it here, Wie Geht’s? (German for “how are you?”)

    Thank you also for the link to the story highlighting the IMF’s role.

    I hope you like Sense on Cents. Please visit and comment often.

  • lizzy

    I am becoming more isolationist and protectionist by the second with the clowns we have running things. I was reading in your thought leaders section a few days ago and there was an article by George Souros promoting greater use of the SDR through the IMF. Did you see it; what did you think? It sems that many of the articles I have been seeing lately are by people formerly affiliated with the IMF.

  • Larry Doyle

    Lizzy…first off, I am glad you found that Thought Leaders link. I did not see that specific article but I do know that Soros is promoting policies that certainly would not be considered pro-dollar or pro-US. Regrettably, our economic policies and government actions have provided so much leverage for Soros and/or others to use against us.

    Ultimately we need to get our own fiscal house in order and the way we are going it is going to take a LONG time.

    While the G-20 will try to put a happy afce on things, I think the developments around the world are away from the U.S. and towards Asia.






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