A fundamental principle that we all hold dear is: in industrialized countries, with relatively high income levels, the government can’t be completely out to lunch. After all, we reason, there are democratic processes, watchdogs of various kinds, and we can safely delegate monitoring of government official actions to others (e.g., the media).
This principle is, of course, now appropriately called into question both for government officials directly and increasingly for the media’s scrutiny of what the government (and business) is doing. As a result, the level of public attention to various domestic policies - bailouts and the like - is surely at or close to all-time highs; the current reaction time and seriousness in public discussions of various initiatives for banks must set some sort of record.
Yet there remains at least one completely murky and unaccountable area of government action: international economic diplomacy.
The G20 summit, broadly, is a leading example (as is the G20 process since the fall). No one can believe that this really achieved nothing because that would be, well, dumb. And we know our rulers are not stupid.
But smart people frequently produce unfortunate or even idiotic outcomes – it all depends on the incentives and the process. And, of course, of their ability to keep things covered up until they have moved on to another job. Check with your local subprime mortgage lender for details.
As a leading example of what you can get away with in the international economic diplomacy space, I would emphasize how key European governments (France and Germany, also the UK to a large degree; the EU and others tag along) are currently viewing the issue of resources for the IMF – and I would link this to how they and the previous U.S. Administration treated the IMF’s staff and capability more generally. From my op ed in The New Republic on-line this morning (I’ll post the link below when it goes live),
The only slight ray of hope [from the G20 process at present] is the American idea to increase funding dramatically for the International Monetary Fund. In addition to enabling the Fund to help emerging markets as they increasingly fall into the danger zone, it should provide a backstop for the eurozone–in case France and Germany fail to provide it themselves.
Yet even on this dimension, the news on Saturday was bad. Secretary Tim Geithner this week proposed an additional $500 billion for the IMF–this would constitute a bold and long overdue tripling of its loanable resources. But the West Europeans are, inexplicably, digging in around the idea that there should be only another $250 billion for the Fund (and they haven’t actually offered to pay anything themselves). Providing these resources has no budgetary implications and no other financial costs for the countries that choose to hold their reserves partly as a line of credit to the IMF. Without significant money for the IMF from European countries with deep pockets, though, there is no hope of attracting large-scale resources from emerging markets. And if the IMF is short of funds, it has no alternative but to negotiate tougher lending programs with countries that need external financial assistance. To you and me, the implications are simple and stark: a longer recession and a more difficult recovery. So why not do it?
It is, pure and simple, the kind of short-sighted and deluded European financial policy that prompted leading countries to demand that the IMF cut 20 percent of its most skilled and experienced personnel in early 2008–at the same time as Bear Stearns collapsed and major banks in almost all industrial countries started to unravel. It is hardly believable–but nevertheless true–that the G7 and now the G20 have refused to undo the IMF cuts and replace essential staff.
Yes, European leaders and the Bush Administration pushed hard for the IMF to cut back on skilled and experienced staff just as the global crisis broke – and as the IMF was emphasizing, politely in public and pointedly in private, that this was a major crisis likely affecting all countries. In fact, given that this emphasis was not welcome by governments, this apparently hardened the resolve of key players to push through senseless, unnecessary, and irresponsible cuts.
Egregious stupidity and borderline malpractice goes unnoticed in the international economic diplomacy space, or at least not picked up on by leading news sources or in the general public discussion. Why? To some (the media), it doesn’t quite meet the threshold for newsworthy – it’s a little too far from the interests of readers and a bit too hard to explain in a news program; nobody cares as much about international issues as they do about domestic bailout scandals - for which there is a much higher tolerance for compelling details. To others (much of the public), it seems too technical and surely something best left to experts. And – remarkably and mistakenly – those who follow the IMF closely (e.g., in the development community) think that this downsizing somehow fits with what they have been trying to achieve; they were completely snowed.
European policy towards the IMF is a masterpiece of misdirection and disinformation. The proportions and audacity should take your breath away. And of course the same principle applies to government officials dealing with international economic policy as it does to CEOs of failing banks: never admit responsibility and definitely never suggest there was the slightest mistake in the past (because that might actually be newsworthy to the mainstream or, even more scary, draw Jon Stewart’s attention).
Rearranging the deck chairs on the Titanic looks productive by comparison. The actions of the G7 with regard to the IMF in 2008 – and the attitudes of the Europeans still today – are more like burning lifeboats and throwing skilled pilots overboard. In this context, what are the odds that the upcoming G20 heads of government summit on April 2nd will truly be productive?