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Strauss-Kahn And The IMF – OpEd

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Those who hoped for serious reform of the International Monetary Fund have to be very disappointed by the allegations of sexual assault against its director, Dominique Strauss-Kahn. If the charges prove true, this will end Strauss-Kahn’s efforts at reforming an institution that is badly in need of reform.

Most people around the world do not realize the power that the IMF has in controlling their lives. In fact, in many countries the IMF’s actions probably have more impact on their well being than the decisions of their elected government.

Some countries are well acquainted with the IMF’s power. In the East Asian financial crisis the IMF, acting under the instructions of the Clinton Treasury Department, imposed very harsh terms on the countries of the region, insisting that debts be repaid in full. In effect, the IMF acted as the head of a creditors’ cartel, maximizing the amount of money that U.S. and European banks could collect on loans that otherwise would have been written down by large amounts.

The IMF played the same role in other countries that faced crises at the end of the decade, most notably Brazil, Russia, and Argentina. Russia’s economy faced severe recession until it finally broke with the IMF in the summer of 1998. This break, while originally painful, provided the basis for a decade of strong growth.

The battle with Argentina was even more striking. The austerity imposed on the country pushed its economy ever deeper into recession. Finally, in December of 2001, with civil unrest undermining the government’s authority, the country had no choice but to abandon the IMF program and default on its debt.

The IMF then did everything in its power to undermine Argentina’s economy. It even produced economic projections that consistently and hugely underestimated Argentina’s growth as part of an effort to destroy confidence in the country’s economy. Remarkably, the IMF’s sabotage efforts failed. After a quarter of free fall, Argentina’s economy stabilized and then began growing robustly in the second half of 2002. It continued to experience strong growth until the world recession brought its economy to a standstill in 2009.

It was not just the crisis countries that were affected by IMF policies. Countries throughout the developing world took away the lesson that they did not want to be in a position where they were forced to turn to the IMF for support. In order to protect themselves, they began to accumulate massive amounts of reserves.

This meant running huge trade surpluses. The result was that instead of capital flowing from rich countries to poor countries, which is the basic story in every economics textbook, capital flowed from poor countries to rich countries, most notably the United States.

Of course things didn’t turn out fine. The trade imbalances helped to support massive housing bubbles in the United States and several other wealthy countries. When these bubbles burst in 2007-2008 it threatened the survival of the world financial system and threw the economy into the worst downturn since the Great Depression.

Tens of millions of people remain unemployed as a result of this collapse. The lost output to the world as a whole is likely to exceed $10 trillion.

Remarkably, not a single person in the IMF’s leadership or bureaucracy was fired or even demoted for this enormous policy failure. The IMF’s own Independent Evaluation Office decried the groupthink that prevented the thousands of economists working for the institution from recognizing and warning of this imminent disaster. Of course as long as no one ever gets fired for agreeing with the boss no matter how wrong the boss is, it’s a safe bet that career-minded individuals will agree with the boss.

Dominique Strauss-Kahn tried to shake up this institution. He brought in Olivier Blanchard from MIT, one of the world’s most prominent macroeconomists, as the IMF’s chief economist. He gave Blanchard a free rein, which he quickly used to harshly criticize the orthodoxy within the IMF.

Last fall, the IMF published a study in its World Economic Outlook that showed that fiscal austerity in the wake of the economic crisis would further contract demand and raise unemployment. This reversed the institution’s historic role; the IMF officially became a voice for expansion and employment rather than contraction and austerity.

Of course the story at the country level was often quite different. The teams that imposed specific terms for IMF support are well entrenched. Their plans for “internal devaluations” (declining wages and prices) in countries like Estonia and Latvia pushed their unemployment rates to nearly 20 percent. Getting the country-level teams in line with any new thinking at the top was likely to be a long and difficult process even in the best of circumstances.

If the charges against Mr. Strauss-Kahn hold up, then he will not be around to carry this effort forward. As far as for what the future holds, his interim successor, John Lipsky, was a former vice president at J.P. Morgan. This could mean that the whole world will suffer for Mr. Strauss-Kahn’s criminal conduct.

This column was originally published by The Hankyoreh (South Korea) and is reprinted with the author’s permission.

Dean Baker

Dean Baker

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

2 thoughts on “Strauss-Kahn And The IMF – OpEd

  • Avatar
    June 7, 2011 at 12:07 am
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    I agree the IMF appears benevolent, yet is the Pawn Broker in reality, concerned only about loan payments and profits.
    Its record so far appears to favour the wealthy nations, at the expense of the poorer economies who suffer austerity, unemployment, lost productive capacity, low exports, lack of business investment, a stagnating economy, low consumer spending, inflation and escalating debt and interest, while the IMF imposes a sell off, of all its viable assets.

    The IMF congratulated Britain’s austerity measures, agreeing it will be productive, well forgive me, but these basket cases have ruined every country they helped, its time that a reality check was carried out on these International Malicious Fraudsters, the experts, they just steal from the poor.
    Gordan Finch

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  • Avatar
    September 2, 2011 at 8:38 am
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    One of the most audacious frauds being perpetrated on the population of Europe was the bailout of Greece, and the expected default. Which will happen by other more significant countries like Italy and Spain. Germanys reluctant taxpayers support of these weaker countries is collapsing. The massive overvaluation of the Euro is a crisis fraud. It is an unconscionable theft of taxpayer’s money to avoid the inevitable default of a major country like Italy or Spain and a run on its banks.

    This time the situation is serious there is no bailout option unless the Euro is revalued or at least devalued in relation to PIIGS local fiscal conditions. This at least will give it a competitive advantage and limit contagion. But it’s unlikely; the last golden goose of manufactured austerity will die. Before the real cost of fuel tax and duty is realised as the culprit. This tax is destroying everything with inflation. But before the IMF fraudsters release their control all first world manufacturing will have ceased.

    We saw similar plays in the US a war of politicians and public who were asked to vote in tax increases on top of job losses just before the debt ceiling was reached? Now Europe’s future is in the hands of America and Germany.

    Germany’s Federal Court decides next week the questionable support of defaulting countries. See extracts from Money morning below.

    What’s at issue for the Constitutional Court is whether Berlin broke the EU’s Maastricht Treaty, which unequivocally stipulates that member states cannot assume each other’s debts. And, more germane to German citizens and the center-right coalition government, will be the Court’s ruling on whether German Chancellor Angela Merkel’s decision to fund the bailout facility circumvented constitutional requirements to put such fiscal matters before the German parliament.

    And while the court isn’t ruling directly on the EU’s currency – or Merkel’s support of it – the decisions rendered will have consequences for the euro’s future and by extension, the EU as a whole.
    Money Mornings report By Shah Gilani, Capital Waves Strategist, Money Morning.

    The clock may be ticking on the future of the European Union (EU).

    After being shaken to its core by the sovereign debt crisis, the entire Eurozone now runs the risk of blowing up within a week.

    Germany’s highest court, the German Federal Constitutional Court, on Sept. 7 rules on the legality of German participation in the euro rescue fund that was established to bail out Greece.

    If the court rules that Berlin’s commitment to the European Financial Stability Facility (EFSF) goes against EU law, or worse, against the German constitution, the entire Eurozone could collapse.

    Whilst my opinion is somewhat different in timescale than Money Mornings report, I agree the situation is serious.

    Look at the state of affairs with Ministers and Newscorp these meetings in the UK appear one sided with senior Government officials and questionable Newscorp board members. What we have is crooks in suits, payments to police, its fraud, but normal business. The banks are bust, the Government is corrupt, the Police take bribes, the Ministers are backhanded, the MPs are fraudsters, the Insurers are the vilest fraudsters and most dangerous financial predators on the planet, and certain media moguls are insane spies.

    We had gold, the only safe currency, but a creep from Scotland sold it for peanuts.
    Did anyone ask why it was sold, who bought it and. How much was sold and more importantly just how much remains in Britain now. Certainly a lot is now in Switzerland. You know, that bunch of criminals that are so secret they wont know who owns what, when asked. The BIS bank of international settlement springs to mind here and the IMF, its leaders, set free by money and friends in high places.

    Then we have the UN and the World Bank both manipulative gangsters and that guy in Europe rumstroff or something that nobody knew, heard of or had an opportunity to vote in.

    But today is another day, its fraud of cause but then who cares, its just the taxpayer who pays and nobody cares, well at least those in Government don’t, so its up to just you and me, to change things with the ballet box.

    Reply

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