14 June 2011

IMF and Christine Lagarde

As expected, Christine Lagarde is shortlisted for the job of Managing Director of IMF.

The reason I did not mention the other person on that short list (Augustin Carstens) is because everyone expects her to get the nod and he is just the runner up. As he himself said "I'm not fooling myself. It's like starting a soccer game with a 5-0 score."

Since the beginning, the voting structures of the World Bank and the IMF enabled the US and Europe to have an unofficial arrangement to select an American to run the former and a European to manage the latter. In fact,  European might be an understatement as France has had four Managing Directors in the 35 out of its 65 years, which works out to be 54 percent of the time. Lagarde will be the fifth French Director of the Fund.

I like the idea of a woman finally running the IMF. From what I read she is a very bright and hard-working person and she would be a very good Director. My only issue with her candidacy is that she is representing a specific perspective regarding the Euro zone debt crisis.

There are two main schools of thought on this. One side, let's call this the Ireland option, says that while the banks and the banksters may have given risky loans to some Euro zone countries like Iceland, Ireland, Greece and Portugal, we should not penalize them and we should make the loans risk-free retroactively.  Instead,  partly because it was a sovereign debt and partly because we are told we cannot afford to let banks fail, according to this view, we should force these countries to socialize private risk and to find a way to pay back their creditors. As a carrot, this school says that if these countries follow its recommendations, they will be helped by ECB and IMF. As a stick, they enforce austerity measures and selling of public assets.

The other side, let's call that Iceland option (and interestingly their Prime Minister Jóhanna Sigurðardóttir is a woman and openly gay politician), says that the banks and banksters gave those high risk loans knowingly and in fact helped them hide the risks so they is no reason to socialize that private risk. It was their risk and this is how capitalism operates, you take risks, they pay off you win, they don't you lose. The threat (i.e. the stick) here is that they will never be able to borrow in the open markets ever again and their economy will be doomed forever and ever.

In other words, the debate is between the side that argues in favor of bailing out the banksters and those against it. Those who say that these are our Galtian overlords and we need to inflict pain on ourselves to save them from the consequences of their actions and those who say this is capitalism and a haircut every now and again is part of the system

Iceland voted no to a deal and rejected a proposed bailout. Ireland accepted the deal and socialized the bankster's debt. As a result they implemented austerity measures, their economy shrank and unemployment rose.

Guess what happened to the prediction that Iceland will never ever be in the open markets again.

The credit default swap (CDS) for the Icelandic state has now dropped to 200 points and has not been lower since many months before the banking collapse in October 2008. The CDS has been in constant decline since January and indicates growing faith in Iceland’s economy.
Meanwhile, the CDS spread for Ireland is 683 basis points.
Why, it’s almost as if defaulting on debts run up by runaway bankers and letting your currency depreciate works better — even from the point of view of investors — than socializing private-sector losses and grimly sticking with a fixed exchange rate.

If Christine Lagarde is selected (as she will be), she will look after the interests of Société Générale and Deutsche Bank, both of which are heavily exposed in the Euro zone saga. And she will use the clout of the Fund to make these countries comply with the Ireland option, use IMF funds to bailout those banks and make these countries suffer to pay back those loans.

I am always in favor of women running things, but I object to it when they run to do the dirty work of men. It is like Socialist or Social Democratic Parties implementing austerity measures to address the consequences of the conservatives' profligacy (remember W and his trillion dollar tax cuts and two expensive wars).

In this case, an emerging market economist would almost certainly be better than Lagarde. It is very telling that a very acceptable candidate (one they could sell both as a European, thus not changing the current arrangement and as an emerging market economist), Kemal Dervis was quickly put aside as rumors of a previously unknown affair surfaced immediately. He would not have been an acceptable Manager not because of past indiscretions (an affair he had when he was single) but because he is a good friend and adviser of Papandreu. He would have been more likely to advocate a haircut for the banksters. And we cannot allow that.

DSK might have been the Satyre de la République but at least he moved the Fund to the left and had the common sense to advocate Keynesian spending at the height of the crisis in 2008. With Lagarde, we are likely to have a defender of austerity for the people and a program of bail outs for the banksters.

And that offends me as a tax payer whose euros will go to cover the banksters' risk.

No comments:

Post a Comment