Why Are the French So Determined To Run The IMF – And What Will It Cost You?

By Simon Johnson

Just a few years ago, eurozone countries were at the forefront of those saying that the International Monetary Fund had lost its relevance and should be downsized.  The organization was regarded by the French authorities as so marginal that President Nicolas Sarkozy was happy to put forward the name of a potential rival, Dominique Strauss-Kahn, to become managing director in fall 2007.

Today the French government is working overtime to make sure that a Sarkozy loyalist and the leader of his economic team – Finance Minister Christine Lagarde – becomes the next managing director.  Why do they and other eurozone countries now care so much about who runs the IMF?

The euro currency union has a serious problem, to be sure, with the likes of Greece, Ireland, and Portugal, but it is beyond bizarre that these countries now find themselves borrowing from the IMF.  The IMF typically lends hard currency to countries that have “balance of payments” crises – meaning that they have been importing more than they were exporting, and the previous private sector capital inflows (typically loans of some kind) that financed this current account deficit have now dried up. 

Greece has a current account deficit but its money, the euro, is one of the world’s hardest currency – it is a “reserve currency” meaning that central banks and private business keep their rainy day funds in euros (as well as dollars, yen, Swiss francs, and perhaps still British pounds.)  The eurozone as a whole does not have a current account deficit. 

I recall vividly discussions with eurozone authorities in 2007 – when I was chief economist at the IMF – in which they argued that current account imbalances within the eurozone had no meaning and were definitely not the business of the IMF.  Their argument was that the IMF was not concerned with payments imbalances between US states (all using the dollar), and we should likewise back away from discussing the fact that some eurozone countries, like Germany and the Netherlands, had large surpluses on their current account while others, like Greece and Spain, had big deficits.

Those eurozone treasury and central bank officials had a point.  After all, if one of the deficit countries got into trouble, it could be helped out by other members of the currency union.  As the euro is a reserve currency – and a highly regarded one, for example it remains strong relative to the dollar – the IMF is essentially now lending euros to the eurozone in its various bailout programs.

Why does this make sense?

It doesn’t – unless you understand that the goal of these various bailouts is to ensure that German and French taxpayers do not realize the full extent of their losses or the ways in which their banks have been completely mismanaged.

Take the most generous interpretation of IMF lending to Greece – it is like the U.S. Troubled Asset Relief Program, in the sense that there will be a great deal of outlay but all or most will be repaid in nominal terms.

Such lending could be made just as easily by other eurozone countries, either from current resources or by borrowing in the markets – for example, Germany has plenty of fiscal credibility and issues some of the lowest risk sovereign debt available.  But even if the money lent to Greece in this fashion were all paid back, this would look bad – to German voters (and to French voters, as France would have to lend also).

Such loans are much more risky than commonly supposed.  The IMF does eventually get its money back nominally, but not always in real terms (adjusted for inflation) and definitely not on a risk-adjusted basis (i.e., the interest rate charged does not include proper compensation for the risks being taken).  There is a very real possibility that some or all of the monies lent will not be paid back in the foreseeable future.

The International Monetary Fund is, in this regard, essentially a credit union owned by 187 countries – with voting based on ownership shares that reflect relative economic size.  The European Union “owns” about 30 percent of IMF, so 70 percent of any money at risk belongs to other countries: about 17 percent US, 7 percent Japan, 35 percent emerging markets, plus some more mixed sets of countries.

The managing director of the IMF is the impresario of any bailout.  The big decisions must be negotiated with all significant stakeholders but this still leaves enormous scope for discretion.

If Ms. Lagarde becomes managing director she can directly influence the terms of IMF involvement – and based on her negotiating position to date within the eurozone, we can presume she will lean towards more money, easier terms, and above all no losses for the banks that made foolish loans.

Increasingly it looks like the eurozone leadership, under French guidance, will go for the Full Bailout option, in which all Greek debt is bought up by the IMF, by the European Central Bank, and by other eurozone entities.  This debt will be held to maturity – and any creditor who did not yet sell will be made whole (those who already sold at a loss are out of luck).

This course of action will be expensive, in terms of nominal outlays and in real risk-adjusted terms, because whatever terms Greece gets must also be offered to Ireland and Portugal.  The IMF may need to raise more capital or – more likely – tap its credit lines from member governments.

To be clear, the Full Bailout is still painful for the debtor countries – their fiscal adjustments will involve spending cuts, tax increases and asset sales.  But the motivation is not generosity.

The Europeans greatly fear their own “Lehman moment” – in which any attempt to impose even moderate losses on creditors will cause chaos throughout the financial system.  The French and Germans fought hard against increasing capital requirements under Basel III and the results of various European banking “stress tests” have been completely noncredible – particularly as they did not take into account serious sovereign debt default scenarios.

The French want to sway decision-making at the IMF in order to use US, Japanese, and poorer countries’ money to conceal from their own electorate that the eurozone structure has led all its members into serious fiscal jeopardy – some borrowed heavily, while others let their banks lend irresponsibly and thus created a large contingent liability. 

The best way to hide the true cost is to have other people’s taxpayers foot the bill, preferably with the least possible transparency.  There is a lot at stake for eurozone politicians.  Ms. Lagarde will run the IMF.

An edited version of this post appeared yesterday on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

41 responses to “Why Are the French So Determined To Run The IMF – And What Will It Cost You?

  1. My understanding is that the IMF has a bunch of unwritten rules, like “the managing director is always a European” and “the outgoing managing director is permitted one grope of the incoming managing director”.

  2. I think there is a typo in your last sentence. don’t you mean to say ” Ms. Lagarde will ruin the IMF.”?

  3. Dear Simon,

    Thank you for a well-reasoned post without resorting to caricaturing either the French or Lagarde. And yes, it does make sense that the French might want to use the IMF to pay for the Eurozone’s woes.

    This is in sharp contrast to your colleague, James Kwak, whose last two posts are simply examples of partisan demonization. It’s unlikely with the substantial contributions and power of Wall Street that either U.S. party is clean. His admission and sense of nuance about dual party guilt is either missing or faint. (Maybe he wants to run for public office?)

    Anyone who writes a paper like yours, “Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth,” shows serious, sincere efforts at trying to understand complex issues and shed light for others.

    It’s too bad that your gravitas is glibly eroded by your juvenile understudy.

  4. “Ms. Lagarde will run the IMF?” Excellent! Just a few ingredients to add Simon:

    The French have an epithany, “Comme il`faut” as to “Cross the Rubicon”…their’s is the discreet bloodline of “E`minence grise”, be done?

  5. Temptation

    @earle, you poor confused, schlemiel. LOL You should try to read your own words out loud sometime. Yes, we get your allusions but the way you write simply italicizes your delusions. Type first, then drink. Rather than drink first, then type.

  6. It sounds like they are determined to replicate the mistakes of the USA.

    WtF?

  7. Stanley Fisher would make an interesting candidate. I confess that I don’t know as much about him as I’d like but were he to be seriously considered and get more press doubtless I’d learn more.

    Of course since he’s Israeli (born in once Rhodesia now Zimbabwe) he’d be a huge lightening rod and so his candidacy is probably a non-starter.

  8. Stanley FisCher.

  9. Born in North Rhodesia which is now Zambia. It’d be nice to have an edit button on one’s posts.

  10. Bayard Waterbury

    So, Simon, I assume that the American (multinational) banks are fully in favor of this, since they have a real stake in its result, and, therefore, the US is unlikely to raise any issues with it. After all, most of the world’s biggest banks, if not all, are linked lockstep in the largest economies. More and more, it appears that, not only is America a thriving plutocratic state (if you happen to be a part of the controlling oligarchy), but globally massive wealth is equally in control of most big decisions, such at bailing out Greece. But, then, who will object, other than Simon Johnson, who, as much as I love the guy, just doesn’t count when it comes to these things.

  11. Moses Herzog

    This comment directed mainly to menomnon

    I agree with you on Stanley Fischer. I think he is much better qualified than Lagarde, and I think Fischer wouldn’t only be concentrating his efforts and time on covering up all the lies by French banks, but would be considering the general interests of all the parties involved. And I think Stanley Fischer (as far as one can surmise from a public persona) is just a good human being in general.

    Unfortunately, Fischer’s home base now is Israel, and it’s a funny thing, when your country’s government a la Tzipi Livni and a la Binyamin Netanyahu act like they only think genocide of women and children is only horrible when committed against their own ethnicity, but they think genocide against women and children in Gaza in 2008 is an incredibly jolly and enjoyable thing, it doesn’t do much to improve international standings of those they currently employ.

    But I do want to congratulate the hard hard work of the Mossad in hunting down Ratko Mladic. And also the hard hard work of the Mossad hunting down Slobodan Milosevic. I know Israel’s Mossad dedicated a huge amount of man hours, time, and effort to catching these two war criminals, in order to show how much Israel hates any form of genocide, and prove Israel is not extremely hypocritical on this issue. Great work guys.

  12. For the future of the world, Zhou Xiaochuan, governor of the People’s Bank of China would be ideal as the next IMF chief. He is truly qualified and has suggested using SDRs as a substitute reserve currency as well as suggesting that the yuan should float.

    With Zhou, the IMF would finally be an 21st century organization that could harness the realities of BRIC ascension.

  13. Better to have “Lehman moment” and kick away some semi-brainless imbeciles, then sacrifice whole generation and let same idiots pretend to “run” the circus. The mess afterwards will be manifold greater..

  14. Owen Owens

    At some point you can blame France and Germany for financing anything that they thought would bring them back easy money. I would say at this point they are not even prepaid to fight to get back lost principal. Remember, these people are rather old and set in their ways, they are all bark and no bite.

  15. “The Europeans greatly fear their own “Lehman moment” – in which any attempt to impose even moderate losses on creditors will cause chaos throughout the financial system.”

    How is this even remotely acceptable? Imagine if the oil industry threatened another Gulf spill if a particular subsidy were cut. Imagine if the nuclear industry threatened another Fukushima if they didn’t get their way on some minor regulatory or tax issue. Why does the financial industry get to hold the world hostage, and the general public not only does NOT get upset about it, they nod in agreement with the argument being made by the hostage takers?

  16. To the US, it doesn’t matter who leads the IMF and whom the credits are given, as long as it is all denominated in US dollars.

    In fact, the bigger the outside mess, the bigger the injection of dollars, the better for US, at least in relative terms. Greece is nothing, Spain is the target…

  17. @ Temptation

    Question: Is it not within reason that France finds it necessary to do something out of character, or for lack of a better word, drastic! Thus salvaging their destiny by any means possible through esoteric discretion? Sometimes temptation must be tempered with thought…that of age old inevitable consequences for lack of self restraint. :-))

    PS. I recommend that you focus more on the blank spaces between the lines of discourse, before passing judgment.

  18. The Euro bailouts are about bailing out TBTF European BANKS, FIRST and FOREMOST. These banks can’t afford sovereign DEFAULTS. Where are the austerity plans for the BANKS????

  19. How convenient for them to put the bill on the whole world in order to keep a continental problem non transparent. What more could expect from politicians?

  20. Lady in Red

    Regardless who gets the IMF appointment, this “old column” from 20 May is the most read article in today’s London Telegraph financial section. Pretty easy to follow:

    What happens when Greece defaults

    By Andrew Lilico Economics

    It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.

    What happens when Greece defaults. Here are a few things:

    – Every bank in Greece will instantly go insolvent.

    – The Greek government will nationalise every bank in Greece.

    – The Greek government will forbid withdrawals from Greek banks.

    – To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.

    – Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)

    – The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.

    – The Irish will, within a few days, walk away from the debts of its banking system.

    – The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.

    – A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.

    – The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.

    – The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)

    – They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.

    – There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.

    – This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.

    – Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.

    – Attention will turn to the British banks. Then we shall see…

  21. @ Lady in Red

    “The “PIGS” are fine? Greece and Portugal are very small economies with $60 Trillion Plus/Plus Dollars, Euro’s, and Yuan floating about. Thus it should, and can be handled with somewhat ease restructuring their debt (JMHO). Ireland was manhandled mostly by the English that certainly gained the most from their educated work force and low tax structure – held at arms-length from the “Empire’s Toehold”? These questionable British affiliates at stones-throw, period! As far as the Spanish are concerned, there situation can be easily fixed by the “Roman Catholic Church”, and the “Holy-See” who looks after the Trillions of dollars in their coffers if their trusted Rothschild’s Accountants below Basilica-Square see fit?

    Now where was I? Oh yes. It was an interesting site I happened onto today regarding Communism, Oligarchy, Fascism, Republic’s (Republican/Democratic), Dictatorships, Socialism, etc, etc.. All societal gifts (framework/ architecture/ foundations) of modern day evolved civilization. Ironically, its from the very Greeks we happen to be discussing, and passed onto the Roman’s. There is much to be gleaned from this site but it must be, GOOGLED!

    Google @ http://www.en.com/Communism_Explained
    Right-Hand sidebar (Video’s #1 – #14) #3 Video___”Types of Governments”

    PS. Don’t let the “Communism Explained” scare ya. It’s certainly worth a look:-)) Thanks

  22. Apologize…watching baseball, rushing…
    Google @ http://www.wn.com/Communism_Explained

    Must be typed-in

  23. DakotabornKansan

    Joseph Stiglitz comments on choosing the next IMF leader.

    http://www.project-syndicate.org/commentary/stiglitz139/English

    “Much as I would like to see someone from the emerging markets and the developing world head the IMF, the first priority is to choose a leader with the requisite skills, commitments, and understandings in an open and transparent process, someone who will continue along the reform path on which the Fund has embarked…

    “What we are seeing now – open campaigning, as opposed to selection behind closed doors – seems to be a move in the right direction…One of the leading candidates to be the IMF’s next managing director has turned out to be a Frenchwoman, Christine Lagarde, who, as France’s finance minister, helped lead her country through the Great Recession. She has been an outspoken advocate of financial-sector reforms, and has won the respect of all of those with whom she has worked.

    “Politics is not always kind to good candidates. The world should be thankful that there is at least one. Where she was born should not be an impediment to her prospects.”

    So, will Ms. Lagarde will “run the IMF,” or “ruin the IMF?” Joseph Stiglitz or Simon Johnson?

  24. @Wonderful Health: EXACTLY.

    “At issue is whether Greece, Ireland, Spain, Portugal and the rest of Europe will roll back democratic reform and move toward financial oligarchy. The financial objective is to bypass parliament by demanding a “consensus” to put foreign creditors first, above the economy at large. Parliaments are being asked to relinquish their policy-making power. The very definition of a “free market” has now become centralized planning – in the hands of central bankers. This is the new road to serfdom that financialized “free markets” are leading to: markets free for privatizers to charge monopoly prices for basic services “free” of price regulation and anti-trust regulation, “free” of limits on credit to protect debtors, and above all free of interference from elected parliaments. Prying natural monopolies in transportation, communications, lotteries and the land itself away from the public domain is called the alternative to serfdom, not the road to debt peonage and a financialized neofeudalism that looms as the new future reality. Such is the upside-down economic philosophy of our age.”

    FROM:

    http://michael-hudson.com/2011/06/eu-class-war-declared/

  25. Here is a great radio interview on the EU debt crisis. Radio Open Source’s Christopher Lyndon interviewing Mark Blyth (a political-economist at Brown University.)

  26. @ The Raven: WTF INDEED, and Americans are also getting stiffed:

    ” The French want to sway decision-making at the I.M.F. in order to use money from the United States, Japan and poorer countries to conceal from their own electorate that the euro-zone structure has led all its members into fiscal jeopardy: some borrowed heavily; others let their banks lend irresponsibly and thus created a large contingent liability.

    The best way to hide the true cost is to have other people’s taxpayers foot the bill, preferably with the least possible transparency. Thus, euro-zone politicians have a lot at stake, and look for Ms. Lagarde to run the I.M.F.

    And, since the U.S. has no surplus from which to make payments to the IMF, any money going to the IMF from the U.S. will have to come via taxation, or via borrowing which is likely to be propped up by Fed purchases of most of such Treasury borrowing and, thus, highly inflationary.”

    FROM:

    http://www.economicpolicyjournal.com/2011/06/why-christine-lagarde-as-head-of-imf.html

  27. @ Tenness
    __________commenting on Michael Hudson’s – “eu-class-war-declared”

    This is a remarkable summary (paragraph) from Prof. William (Bill) Black via Prof. Michael Hudson, which needs repeating.(JMHO)
    Thanks for the link, Tenness :-))

    “My UMKC colleague, Prof. Bill Black commented recently in the UMKC economic blog: “One of the great paradoxes is that the periphery’s generally left-wing governments adopted so enthusiastically the ECB’s ultra right-wing economic nostrums – austerity is an appropriate response to a great recession. …Why left-wing parties embrace the advise of the ultra right-wing economists whose anti-regulatory dogmas helped cause the crises is one of the great mysteries of life. Their policies are self-destructive to the economy and suicidal politically.”

    *Greece’s problems stem from lack of tax revenue and unrealistic social-economic oversite – caused solely by a corrupt, and somewhat complacent-by-design bureaucracy via government (a mirror image of America?), that thought they could ride the coattails of others while shirking their fiscal responsibilities, period! It’s time they paid the piper?
    Ireland is a totally different situation. Whereas it was the bankers that took the country down…therefore it is the banksters and bondholders that should be held liable. Thus carrying the bulk-of-burden themselves – to put it bluntly…theirs should be the “Lion’s Share” of the loss! (This was demonstrated in Iceland!)
    Finally. We have the Portuguese who have tried! But it is Spain’s…seemingly wanting to kill-off its weak-offspring in self-preservation, with, or for actually, no apparent reason…that baffles my mind? A “Kafkaesque Situation” which can only lead to the excremental trail of a subtle “Machiavellian Coup`d`etat”!

    PS. They should flush Basel I, II,and III down the toilet and force all Lending Institutions to demand “Higher Capital Requirements” as Simon has said from the very beginning, period!

  28. Greece, Portgual, Spain, Ireland, and other parties: stop paying, call a debt moratorium, and let the shyster bankers figure it out.

    Screwing your citizens with AUSTERITY while FAT CATS in the City of London and elsewhere keep on with their credit default swaps, and all their other worthless inventions is definitely not the way to go.

  29. Definitely running IMF is instrumental to saving French and German banks from having another “Lehman moment”. Banks bailed governments out lending them money. Governments bailed banks out lending them money. Nobody wants to stop this Ponzi scheme and creation of money out of thin air. So they want IMF to be into the loop to lend more money. Instead of breaking the vicious circle they want to continue…

  30. naked short selling

    Stacy Herbert says George Papandreou sold $1.3 billion in credit default swaps —insurance against Greek bonds defaulting — to “friends” while at the same time Papandreou went to IMF asking for a 110 billion euro bailout because Greece was about to default. Papandreou made $40 million from selling the CDS’s. The private investors paid $1.3 billion for the CDS’s now worth $27 billion.

  31. naked short selling

    Actually, Stacy is saying Greece made the $40 million (not Papandreou)?

  32. @ naked short selling

    “Eurozone on the brink as usual” posted today by Simon Johnson – this would be an excellent, and opportunistic moment in time to show your link (et.el. regarding the malfeasance of the Greek Government) – Max Keiser’s revetting interview with Stacy Herbert on the Simon’s latest post.

    The people of Greece would rise up and police themselves…something they’ve been incapable of in the past. Their is a great deal of chicanery, malfeasance, and outright leger`demain fiduciary underhandedness about in Greece! Borderline thief or borderline criminality! International Laws seem to have been breached or broken (thusly for a more knowledgeable persons understanding **[lay person here, but this certainly doesn’t pass my/the smell test] and please don’t say asleep at the switch?) regarding a sovereign’s right to a full-fledged investigation by the European Commission on its merit…if true!
    Were talking $27 Billion Euro’s to mark down debt by the IMF and EU for Greece. The people of Greece should be made aware if this, lese`majeste` is true, and act upon it swiftly. Thus forming a legate legality advocate panel sponsored solely on their behalf!
    It’s your call…”naked short selling”?
    Great post and Link :-)) Thanks

  33. Awesome. Stanley Fischer has stepped up to the plate (baseball metaphor for non-American, non-baseball people):

    http://finance.yahoo.com/news/Israels-central-bank-chief-apf-192496853.html?x=0&sec=topStories&pos=main&asset=&ccode=

  34. “The role of the ECB, IMF … has been to make sure that bankers got paid. …Bankers and speculators made fortunes jacking up the interest rate that Greece had to pay for its increasing risk of default. To make sure they did not lose, bankers shifted the risk onto the European “troika” empowered to demand payment from Greek taxpayers.”
    “Financial politics are now dominated by the drive to replace debt defaults by running a fiscal surplus to pay bankers and bondholders. The financial system wants to be paid. But mathematically this is impossible,…unless central banks flood asset markets with new bubble credit, as U.S. policy has done since 2008. When debtors cannot pay, and when the banks in turn cannot pay their depositors and other counterparties, the financial system turns to the government to extract the revenue from “taxpayers”…The policy bails out insolvent banks by …making taxpayers bear the cost of banks gone bad.”

    From:

    http://www.counterpunch.com/hudson06062011.html

  35. “It is time for European leaders to wake up to the painful reality we have been suppressing all along. Europe is not facing a sovereign debt crisis, as Ackermann and Trichet have made us believe. In reality, Europe is facing a financial crisis in its own banking sector. Not just Greece, Portugal and Ireland, but the vast majority of Europe’s largest banks is insolvent.”

    “Throughout the crisis, the much-touted myths about Greek laziness and Mediterranean values merely served as a ploy to distract German taxpayers from the incontrovertible truth that they were bailing out their own ailing banks.”

    “Ever since Greece sank into the abyss of global capital markets early last year, Jean-Claude Trichet has narrowly toadied to the interests of the large European banks, calling a restructuring simply “too risky.”

    FROM:

    http://roarmag.org/2011/06/deutsche-bank-ecb-greek-debt-crisis/

  36. “Financial street gangs (oh, sorry, I of course meant the ECB and leaders of nations) are attacking each other in Europe on whether to continue bailouts to the debtor nations and who should take a haircut on the bonds. Maybe if we’re lucky, they’ll destroy each other.”

    “The ECB wants everyone else to take haircuts, presumably because if the ECB also did, it would be obvious they are insolvent. They took enormous amounts of garbage bonds as collateral for the onerous loans they forced upon countries like Greece. They are pretending the bonds are worth face value, which of course they aren’t. But taking a haircut on them would mean they would have to write down their portfolio.”

    “None of this has anything to do with the financial health of nations. …”

    Excerpts from:

    http://polizeros.com/2011/06/12/bankster-vs-bankster-in-europe-debt-crisis-going-nuclear/

  37. “Courtesy of the recently declassified [1]Fed discount window documents, we now know that the biggest beneficiaries of the Fed’s generosity during the peak of the credit crisis were foreign banks, among which Belgium’s Dexia was the most troubled [2], and thus most lent to, bank. Having been thus exposed, many speculated that going forward the US central bank would primarily focus its “rescue” efforts on US banks, not US-based (or local branches) of foreign (read European) banks: after all that’s what the ECB is for, while the Fed’s role is to stimulate US employment and to keep US inflation modest. And furthermore, should the ECB need to bail out its banks, it could simply do what the Fed does, and monetize debt, thus boosting its assets, while concurrently expanding its excess reserves thus generating fungible capital which would go to European banks. Wrong. Below we present that not only has the Fed’s bailout of foreign banks not terminated with the drop in discount window borrowings or the unwind of the Primary Dealer Credit Facility, but that the only beneficiary of the reserves generated were US-based branches of foreign banks (which in turn turned around and funnelled the cash back to their domestic branches), a shocking finding which explains not only why US banks have been unwilling and, far more importantly, unable to lend out these reserves, but that anyone retaining hopes that with the end of QE2 the reserves that hypothetically had been accumulated at US banks would be flipped to purchase Treasurys, has been dead wrong, therefore making the case for QE3 a done deal. In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to US borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months. QE2 was nothing more (or less) than another European bank rescue operation!”

    FROM:

    http://www.zerohedge.com/print/404527

  38. @ Anonymous

    Thank you so much for your enlightening links:-)

    Here’s another link relevant to Bill Gross speaking yesterday, or today about US Debt (if I’m not mistaken…it was Bill that said, “Never-Fight-the-Fed”). – Ref: “A Candid Appraisal of the Recovery” 9/28/10

    http://www.seekingalpha.com/article/227343-a-candid-appraisal-of-the-recovery

    I myself, thank you for your due diligence,…

  39. @sheilamannnix

    Thank you for your kind words, and your interesting link; it is nice to know someone is still reading Simon’s earlier pieces. The situation we have today is exasperating. It seems there’s no way out for the global economy, short of chaos and collapse. Here’s a link to an article that sums up European angst:

    http://www.spiegel.de/international/europe/0,1518,766518,00.html

    excerpt:

    “This is what is so disturbing about the current situation: the fact that politicians seem so helpless and powerless. They have been given a new master, and it’s not us, the people, who tend to intervene in milder ways. Rather, it’s the ruthless financial markets. The markets drive politicians even further into anxiety, weakness, incapacity and lies. Those who govern us are now being governed by the banks. That’s the situation.”

  40. “Now that nations are not raising money for war but to subsidize reckless predatory bankers, Jean-Claude Trichet of the ECB recently suggested taking financial policy out of the hands of democracy:

    “But if a country is still not delivering, I think all would agree that the second stage has to be different. Would it go too far if we envisaged, at this second stage, giving euro area authorities a much deeper and authoritative say in the formation of the country’s economic policies if these go harmfully astray? A direct influence, well over and above the reinforced surveillance that is presently envisaged? …”

    “At issue is sovereignty itself. In this respect, the war being waged against Greece by the European Central Bank (ECB) may best be seen as a dress rehearsal not only for the rest of Europe, but for what financial lobbyists would like to bring about globally.”

    Excerpts from:

    http://michael-hudson.com/2011/06/rolling-back-the-progressive-era/

  41. “But here’s the kicker; the dollar is not only being weakened to prop up our own failing system, it is also being weakened to prop up the EU!”

    “After the FED was finally forced through lawsuit to reveal the recipients of … bailout funds distributed in 2008, it became clear that a considerable amount of fiat (… a debt burden for U.S. taxpayers) was not going into American pockets, or American banks, but banks in Europe:”

    “…every time the IMF issues another bailout to a European nation, WE are footing at least 20% of the bill, on top of any capital we send directly overseas. The IMF is currently putting together a brand new bailout for Greece, barely a year after the last debacle costing around $150 billion. And, again, … Obama is pledging U.S. “help” (i.e. lots of your money) to aid in slowing the crisis in Europe:”

    “This is why, in the end, America will hit the ground hardest. We are essentially covering the overhead for collapses on both sides of the Atlantic. Therefore, we are devaluing our currency at a far faster rate than the EU ever could. If the EU was forced to print to bailout its own economic members, the story might be a little different, but as the situation stands, the dollar is being gutted to sustain foreign nations, so that they do not have to gut the Euro.”

    “Why would the Obama Administration, the Federal Reserve, and the IMF pursue such a policy? Well, it makes little sense unless your goal is to deliberately implode the dollar, destroy its world reserve status, and replace it with something else (that something else being the IMF’s “Special Drawing Rights”).”

    Excerpts from:

    http://www.alt-market.com/articles/152-in-a-currency-tug-of-war-the-us-dollar-loses