The Tentacles of the IMF

The highly publicized arrest and later resignation of International Monetary Fund Managing Director Dominique Strauss-Kahn raised more questions than it answered...

After IMF’s Dominique Strauss-Kahn’s resignation, financial analysts immediately began discussing the im-pact of his sudden departure on the continuing Euro-zone sovereign debt crisis as well as the IMF’s internal structure. To quote R. Emmett Tyrrell, Jr. in his article “The Facts Keep Changing”:

In a matter of hours he is a fallen man. He got up Saturday morning the head of the respected Inter-national Monetary Fund. He goes to sleep that night convicted in the eyes of the vast majority of the public as a sex offender.¹

The looming question, “Why now?” sparked rumors of a set up.

The IMF

The International Monetary Fund (IMF), also known as the “Fund,” was one of the spawn created at a United Nations conference organized in Bretton Woods, New Hampshire in July 1944.

Forty-four governments were represented at the conference with a mandate to build a framework for economic cooperation that would “avoid a repetition of the vicious circle of competitive devaluations that had contributed to the Great Depression of the 1930s.” Also created at the conference was the World Bank. The IMF has grown to a membership of 187 countries with an Executive Board consisting of 24 Directors representing countries, or groups of countries, depending upon size. It currently has a staff of approximately 2,500 people from 160 countries.² 
 

Within this structure, it is ironic that the IMF works to “maintain stability and prevent crisis in the international monetary system,” since it enabled a sort of “shell game” for avoiding accountability in warning of the impending financial crisis in 2008. They are, however, a lender of last resort to come into the financially hard hit countries and provide loans to aid recovery.

In response to the global financial crisis, the IMF strengthened its lending capacity throughout 2009 and 2010 and enacted a series of reforms to provide improved “flexible crisis prevention tools.” In low-income countries, the IMF doubled loan access limits to provide funding with zero percent interest rates until 2012.

This is not financial “aid”; it is a “loan.” Once an agreement is reached, the IMF offers “technical” assistance to the national leadership of the country in areas of tax policy and administration, expenditure management, monetary and exchange rate policies, banking and financial system supervision and regulation, legislative frameworks, and statistics.

In other words, the IMF provides loans to the national leaders of countries to aid in political power—essentially establishing an “elite” class and a “poorer” class. It is the worst side of the reallocation of wealth equation, essentially taking the resources of a country off the backs of the people.

Within the IMF, the monitoring process of member countries is known as “surveillance” and gives the phrase “Big Brother is watching” new meaning. According to their website, “under the surveillance frame-work, the IMF provides advice to its 187 member countries, encouraging policies that foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards.”

Special Drawing Rights (SDRs)

As an international monetary institution, the IMF is-sues “money” in the form of Special Drawing Rights, known as SDRs. Funding of the IMF is accomplished through a quota subscription process. A member country’s quota subscription essentially determines the maximum amount of financial resources “the member is obliged to provide to the IMF.” A country must pay up to one-quarter of its quota in the form of accepted foreign currency (such as the U.S. dollar, euro, yen, or pound sterling) or SDRs.

Following the global financial crisis, the outstanding stock of SDRs increased almost ten-fold in September 2009 to 204 billion (US $308 billion). It was during this time that outside pressure began to be applied to the dollar as the world’s reserve currency, prompting IMF staff to explore the options of enhancing the role of the SDR in promoting international monetary stability.

It was also during this time that pressure for increased voting shares be given to emerging economies. Following the reforms, the ten IMF members with the largest voting shares are the United States, Japan, the BRIC countries (Brazil, Russia, India, and China), and the four largest European countries (United Kingdom, Ger-many, France, and Italy).

The quota largely determines the member’s voting power in IMF decisions. The purpose of this major re-alignment in the ranking of quota shares within the IMF is to “better reflect global realities.”³

Dominique Strauss-Kahn

Dominique Strauss-Kahn’s term as the IMF chief coincided with the greatest economic catastrophe in the organization’s history and he was a particularly unique person within the IMF. He oversaw more “first world” nation bailouts than anyone ever predicted would be necessary.

Under his watch, the most far-reaching reforms were implemented. He was credited with being able to coordinate the Eurozone countries through the financial crisis and provide for the bailouts of peripheral countries such as Greece. All reports indicate this is the worst of timing for the fall of Strauss-Kahn. It has not gone unnoticed that the timing of the incident ending in his arrest is suspicious. It is not that he is a man incapable of such behavior, as several stories have been released regarding the working environment within the IMF.

However, it is interesting to note that even in so-called “liberal” organizations and countries, morals can be applied as a necessary means to a predetermined end. Political intrigue abounds in Strauss-Kahn’s absence.

Europe

Dominique Strauss-Kahn had previously served as the French minister of economy and finance and he was the leading candidate for France’s 2012 presidential election.

French President Nicolas Sarkozy may also benefit from Strauss-Kahn’s fall. The strength of Strauss-Kahn’s campaign was how he united the Socialist voters with the disgruntled center voters who are weary of Sarkozy. While the election is still eleven months away, there is a possibility now that Sarkozy will emerge from the varietal field of candidates and defeat his likely opponents.

In a greater European context, the overwhelming impact of Strauss-Kahn’s arrest is its impact on European politics and the rise of “euroskepticism” among the populace. Stress fractures are beginning to show within the unity of the European Union.

As memories of the World War II devastation and the Cold War diminish, the people see the European Un-ion experiment as nothing more than an economic project—the rationale for which is lost in the protracted economic crisis. The rise of euroskeptic rhetoric has far greater implications for the European and global economy. In a Bloomberg interview, Pacific Investment Management Co. CEO Mohamed El-Erian said that “Strauss-Kahn’s downfall could lead to a Greek sovereign default since without him it will be much more difficult to coordinate European governments.” When El-Erian, who spent 15 years at the IMF, was asked if he had set his sights on the chief position of the IMF, he replied that he liked his job in California.

Moving Forward

While it appears the reactions of the IMF Executive Board are simply to address the replacement of their morally errant Managing Director, the implications are far greater. The fact that the position was not auto-matically filled by a European means one of two things.

Opening the nominations to the entire membership may be a minimal attempt to placate the growing de-sire of the BRIC countries for more than voting shares. On the other hand, it may be a signal to Europe that the problem of growing euroskepticism extends beyond the populace to the halls of leadership.

The timing of the fall of Dominique Strauss-Kahn may simply indicate his lifestyle finally caught up to him and he was therefore “caught.” Or it may mean he was trapped in his own weaknesses and his downfall enabled new policy changes within the IMF to have an international face as well.

 In March 2011, the IMF hosted a high-profile conference to address key policy questions and promote a discussion about the future of macroeconomic policy.

The agenda listed six key areas of discussion: monetary policy; fiscal policy; financial intermediation and regulation; capital account management; growth strategies; and the international monetary system.

It is interesting to note that shortly after this meeting, Ben Bernanke, Chairman of the Federal Reserve, said he “expected banks to demonstrate they possessed robust risk-management systems, as well as capital plans allowing them to manage potential losses in stress scenarios and comfortably meet newly agreed international capital standards.”⁴

As seen in the angry uprisings across the globe, leaders are toppling and governmental frameworks are cracking. 
 

A stage for major change is being set, and pieces of the global support structure are coming into focus through the tentacles of the IMF.