The IMF Matters
Originally posted at TNR.com
© New Republic
Global news editors' eyes glaze over when you pitch them on a story about the International Monetary Fund (IMF). Somehow, nothing sounds as deeply uninteresting as an international organization dealing with the intricacies of the global financial system. To make matters even less interesting, no employee of the IMF can be called to testify before Congress, so the organization hasn't had any high-tension TV moments that might familiarize people with the work it does.
But at this week's G-20 summit, at long last, the IMF will step out into the limelight. Indeed, what the member countries choose to do with the IMF is absolutely critical to the success of the summit, and, more broadly, to the chances of a global economic recovery.
The G-20 plot so far is as follows. When the financial crisis really hit home around the world, last October, leading European governments cast around for someone to blame, as well as a way to name and shame that person/country; they remain eager to hide the role of their own willful lack of preparation and pervasive regulatory failures. The obvious culprit was the United States, and the means was convening a first-ever G-20 heads of government meeting in Washington. In the words of the French delegation, "We put the bell on the American cat."
But where were the policies designed to lead us out of the crisis? These were not forthcoming from the European side or, back in November, from the outgoing American administration. Even today, the European position is that we should clamp down on regulations, ignoring the fact that the crisis was due not to a lack of regulation but rather the failure of regulators to stand up to powerful banks. And clamping down on credit today is a sure way to deepen the recession. Think about it: Will banks lend more or less if there is a government bank supervisor breathing down their necks?
The Obama administration has countered with an aggressive push toward more fiscal stimulus around the world. This is not a crazy idea under the circumstances, but, perhaps due to lack of time, the diplomatic ground work was not done, and the European response is a cacophony of "no" in a variety of accents.
All of this leaves us with just one major topic around which there can be agreement: the IMF. And the nature of this agreement comes down to how much money the IMF can lend out to countries that are under pressure or already in deep water. You may like or hate the IMF (full disclosure: I was its chief economist through August 2008), but remember this: When everything goes really bad, if you can't borrow from the IMF, then things get much worse. IMF lending capacity currently stands at a mere $250 billion (no typo), an insufficient amount in a world of trillion-dollar problems, and it can only be increased if member countries agree.
Japan already put $100 billion on the table, in the form of a loan to the IMF. Belatedly recognizing that the frontline in today's crisis is in Eastern Europe and, increasingly, in weaker Western European countries that would be expensive to bailout, the European Union last week pledged slightly more than $100 billion (again, as a line of credit).
But the Americans have suggested, forcefully and persuasively, that these contributions are not enough. Secretary Geithner argues that the world should put up $500 billion in total, and this is a task now taken on by President Obama. He should be able to bring Congress along for a US contribution of $50 billion, particularly as the funding would come as a line of credit to the IMF, for which the budget cost is (honestly) nearly zero.
But the rest of the world is a tougher nut. The president has strong international visibility and a lot of supporters around the world. But where can he get another $250 billion? Can he bring China on board? They want the IMF and the United States to get off their case about their (undervalued) exchange rate already, and this seems like a high price. Should Obama go back to Saudi Arabia for cash support, as US Presidents have been doing, awkwardly, since the 1970s? Perhaps, but the Saudis, like many emerging markets, don't like the overrepresentation of Europeans in the governance structure of the IMF and will drag their feet. Can he get more from Japan, which has vast dollar reserves but hates to take the lead?
I suggest that he stare down the Europeans. The major exacerbating factors for the global crisis are currently in Europe: an economic boom now completely bust in the East and property prices collapsing in Ireland, Spain, and the United Kingdom. And it's Europeans who have the most inappropriate economic policies, particularly interest rates that remain far too high for their impending realities. Europe, quite simply, has to give more than it has pledged.
At this point, $250 billion from the G-20 to the IMF is essentially a done deal (and not worth holding a meeting for), $300-$400 would be a limited victory, and $500 billion would be a triumph against the odds and for common sense, with most of the credit going to the American side and enhancing President Obama's prestige. The outcome will be on TV (and all over the blogosphere) on Thursday, April 2. Watch for it to see something about our futures.
Simon Johnson is a senior fellow at the Peterson Institute for International Economics and a professor at MIT.