If you want an unusual insight into our potential future, take a look at Channel 4’s interview on Thursday with Peter Mandelson (UK’s Business Secretary, very close to Gordon Brown and a key person around the G20 summit).
In this clip, Mandelson comes on around the 12:48 mark (after Peer Steinbruck, the German finance minister, provides some complacent sound bites.)
But the surprising statement comes after the short interview with me (I start at 17:40 approx; Mandelson comes back around 21:38). I have no idea if Mandelson knew this could happen, but Jon Snow (the anchor) goes back to him and asks if he agrees with me that the UK could borrow from the IMF.
The conventional answer, of course, would be something like “under no circumstances.” Instead, Mandelson says the UK won’t be “at the top of the queue” for going to the IMF. Even when pressed, he laughs but refuses to categorically rule out that the UK might need to borrow from the Fund.
And he also clearly articulates the broader G20 strategy vis-a-vis the IMF: destigmatize borrowing. And what could be more helpful, in that regard, than countries such as the UK borrowing when they need assistance (think banking, budget deficit, current account deficit) but before they approach a traditional full-blown crisis situation?
By Simon Johnson
The Baseline Scenario 
Wow, are we talking about a world-wide TARP? Can confidence preservation work on the nation-state level?
This is the broadest avenue of hope for reflating economies generally. Given the reluctance of the Europeans to adopt direct stimulative measures, there is a certain inevitability to it. Very hopeful.
Simon, forgive me if this has been asked and answered, but by any chance would you considering going back to the IMF now that they will be better funded? Admittedly I am ignorant in these matters, but when they cut funding a couple of years ago were you part of that “collateral damage” or did you leave willingly?
And finally, what are the chances that international regulators will have the courage to be tough on institutions that hold the fate of so many of us?
Thanks again for your great blog, and great job. If I am not mistaken, you’ll be a guest tomorrow on Washington Journal, I look forward to hearing more of your thoughts.
It seems that the new mantra is not that the B of E and the Fed are the lenders of last resort – but that role will be filled by a better funded, kinder and friendlier IMF
Perhaps this is a dumb question – but where is the IMF going to get funds to lend? Even with the IMF’s expanded resources, given the need for support in the developing economies, won’t the IMF already be over-extended?
If the IMF is to “print money”, won’t they have to be set up as a Central Bank?
How does Straus-Kahn’s hint that China is looking for the IMF to issue Bonds play into all this?
Since several practical issues stand in the way of the UK obtaining support from the IMF, this seems like drowning men clutching at straws.
That was a good interview. However, what I heard was something along the lines of: Now that the IMF has a big enough budget, we can take some of the stigma out of going to the IMF by lowering the punitive nature of any loans.
My concern is that it almost sounds like promoting lax underwriting standards and easy credit, which we all know was the main culprit that sparked the crisis in the first place. But it is worse, the easy credit is now being extended on a country scale. Any loans made by the IMF should contain a punitive element or else they will encourage countries to borrow even more. Countries acting like hedge funds is not the way to get us out of the crisis.
Countries, just like corporations, that behaved irresponsibly should suffer the consequences. I think we have all had enough with bailouts. Instead of making countries suffer, we are now extending bailouts at even larger scales.
Please IMF, do not become an enabler of the behavior that created the crisis. Tough love is needed. Don’t let the IMF become another AIG. The last thing we need is an “IMF put”.
I like donailin’s question above: “And finally, what are the chances that international regulators will have the courage to be tough on institutions that hold the fate of so many of us?”
I feel somewhat (though not greatly) optimistic about this approach, in terms of providing credit and support where it might actually be in demand, but there must be stict conditions on how the money is used, such that it CAN’T be FUNNELED TO THE BANKSTERS.
AND it is fine to have conditions and regulations, but it they are not enforcable or enforced, they are effectively detrimental (benefitting those who abuse them, and undermining fair players).
The focus must be on (1) providing safety nets for people, and (2) production of real goods and services, NOT financial phantom wealth. I am 100% convinced the U.S. does not “get” this, but some other countries appear wiser.
Time will tell.
Re Economic Darwinism’s comment – you have expressed it well – the rationale behind the new role for the IMF is precisely an IMF put i.e. a safety net under the global financial system to protect it from itself.
Maybe it’s just my imagination getting a little over-heated but that sounds like the ultimate Ponzi scheme.
That $250bn for the IMF members has to be used for something… I’m betting on the UK trying to desperately find some friendly, easily accessible reserves for the coming run on the pound.
So the cycle continues, on a larger scale.
The same problems that happened on a national level with debt will now happen on a global level.
You are basically saying that nations will have to grow their debt to deal with their current debt.
There’s a reason why no species out there has access to an endless supply of food; the system is always in a state of balancing itself. It’s mathematical.
There’s also a reason why nature is never in perfect harmony; some species grow, others shrink. You can’t have rich without poor.
Jobs need to be created, that’s your only solution. And to do that, you must revise who you trade with, and on what terms.
Trading with the biggest protectionist nation in the world gets you cheap goods in exchange for lost jobs and lower salaries due to protectionism-backed-competition, and your only solution is to hide the fact from your own people that their purchasing power is continuously shrinking as a result, by hiding the problem under a blanket of credit, until eventually debt grows to such levels that the blanket must be removed and you all realize you can’t afford to trade with a protectionist nation anymore as the whole process is completely unsupportable without massive debt creation.
You can’t expect both sides to rise. If one is rising, the other is falling. There’s no way around it. You’ll have to make a choice eventually, it’s either you or them.
I put a partial transcript of the interview with some additional thoughts here:
The IMF Put
http://economicdarwinism.wordpress.com/2009/04/05/the-imf-put/
The lender of last resort mentality is the problem. By propping up the IMF as the ultimate lender of last resort they are making the problem bigger. What’s next when that fails?
Mr. Johnson,
I am new to baseline scenario so forgive me for a general question rather than specific to this article. My question is:
Wouldn’t it make more sense to encourage the “good” banks rather than subsidizing the “bad” banks? If we are going to be putting all this taxpayer money at risk why not encourage past good behavior? Am I missing something? Are all the small good banks (there are thousands of them out there I think) just so small they couldn’t make a difference?
Thanks
Pat C
Daphne, AL
Let’s see.
Why don’t the G20 get together and start several banks? Like the Pan-National Bank, The World Trust Bank, The Global Savings Fund….
They will only cost a few million to start each: that is, some directors, computers, and fancy office space.
Each of these “independent international financial entities” will of course allow the charter nations special drawing rights, say 250 billion each. Uh, make that 250B a year. Up to, say, a trillion. Of course these loans are good as gold—they are backed by sovereigns!
Each government now has all the money they will ever need to borrow. When the loans are paid back, they can close out the books. Or hey, the banks can just forgive all the loans! After all, the sovereigns jointly own these banks, they can do what they want. Banks forgive loans all the time, right?
What could possibly go wrong?
Having read Confessions of an Economic Hit Man, I’m thinking that borrowing from places like the IMF and the World Bank have taken on a whole new meaning. It’s not only the poor countries that have to be robbed of their natural resources to make the banker happy now. It’s always about the oligarchs. It’s just not only the East India Tea Company anymore. We’re all banana republics now.
Well it looks like before getting support for good banks we need the “bad banks” to fail…In order to do that and bearing in mind that they are busy fudging their accounts a sound run on several “bad banks” will solve the problem.
Pat,
The “good” banks didn’t pay bribes to the american politicians, for instance the way Citi, BofA and certainly AIG did (Chris Dodd?). There’s no incentive for the american politicians to do anything at all for the “good” banks, as the good banks will flatly not pay the american politicians the protection money they require. It may, in the end, be best for the good banks to start paying the politicians their bribes. It seems to be the only way to actually get anything done over there in The Home of The Brave. Pathetic, but i’m afraid, true.
Bearing in mind that the ECB cannot directly bailout member countries banks, this looks more like a way for IMF to do what the ECB cannot. West eurozone banks have made many loans in eastern european countries that are now experiencing difficulties. The same route could be used to prop the UK economy, but a straight answer to a simple question rarely comes naturally to politicians such as Peter Mandelson.
IMF recommended euroisation to eastern Europe
by P O Neil.
That’s the apparent scoop in Monday’s Financial Times, reflecting sight of a document that apparently circulated among senior policymakers in the last month as the debate about the appropriate multilateral vehicle for sovereign bailouts intensified. The logic is simple:
http://fistfulofeuros.net/afoe/currencies/imf-recommended-euroisation-to-eastern-europe/
graghs are important but maybe the answer is in a basketball game. just that simple. nothing fancy just some beer and some hoops.
my grandmother loathed flies. but i respect them and loathed my grandmother. point is don’t always agree. trailblazers wanted.
just like buying a polo instead of target. are we there yet? looks like some work still needs to be done. but beleive the fifth inning the reds lead 6-5.
Peter Mendelson suggests that we need to “destigmatize” going to the IMF–in fact while we are at it, let’s just forget that there is any such thing as a lender of last resort…the whole world can jump on the ‘lets make monopoly money” bandwagon….if everyone jumps on board, than no one can be blamed when the whole thing just doesn’t work and we still get DOW 4500 sometime in the next year or so.
But, i guess the expansion of the IMF funding will make it less likely that the euro falls apart…anyone else have any thoughts on this?
Snake: “So the cycle continues, on a larger scale…you are basically saying that nations will have to grow their debt to deal with their current debt.”
Private debt levels are falling worldwide, and public debt is being substituted to buffer the decline. Net debt is still negative.
“the system is always in a state of balancing itself. It’s mathematical.”
Yes, policy makers are trying to avoid a too-rapid rebalancing by borrowing some of tomorrow’s income to service yesterday’s debt.
I, too, am new to baseline (and economics and politics), and I have a similar question for Simon:
What would happen if US Taxpayers (we little guys), en masse, took all of our banking/financial business out of the banks that participated in the feeding frenzy that got us into this mess … and ONLY did business with banks/businesses that operated their businesses properly, i.e., could we (if acting in unison) somehow force the fat-cat banksters out of business (since our government doesn’t interested in doing that) and reward the banks who deserve our business? Would that help or would we be shooting ourselves in the foot in terms of overall recovery?
As far as I can see, Capricorn is right:
“… but where is the IMF going to get funds to lend?”
It will be existing money, lent to the borrowing member by the other members through the IMF.
There will be no newly created money, unless the national central bank of one of the lending countries creates new money, that country’s currency, for that purpose.
“If the IMF is to “print money”, won’t they have to be set up as a Central Bank?”
Which it isn’t, although Strauss-Kahn is obviously angling for it become the world central bank, with the right to issue its own global currency.
I also think that curious is right – intra-EU bailouts are prohibited by the EU treaties, but this is one way that money can surreptitiously channeled to any eurozone country which is in danger of defaulting on its debts.
Yes the IMF in effect prints new money: http://www.imf.org/external/np/exr/facts/sdr.htm
Surely the reason why Mandelson suggested the UK might wish to go to the IMF for help (and the reason why the increase in IMF resources could be very helpful) is the problem faced by Central Banks in countries where the domestic banking system has short-term liabilities in foreign currency. In this case the Central Bank cannot act effectively as lender of last resort, even if the banking system is solvent, because of the currency mismatch. This was a major problem for Iceland (although the banks there may not have been solvent). Short-term IMF finance would allow this sort of intervention.
Those who oppose this proposal must logically believe either that all lender-of-last-resort activity is wrong (an extreme liquidationist view), or that banks should not be allowed to incur foreign currency liabilities.
jw,
I think that is a good idea. Simple and elegant. I’ve been frustrated and outraged, but couldn’t think of a mechanism that would put a stop to the madness. Getting people riled up is one thing, but unless it leads to meaningful action, it is all pretty vacuous.
However, as you suggest, encouraging a large-scale deposit transfer from big banks to small banks would surely sink the big banks, while strengthening the position of the smaller, more responsible banks.
I’m shamefully guilty of having deposits at a big bank, but think I will do exactly as you say and transfer everything to a small regional FDIC insured bank. I encourage others to consider doing the same.
From the link you cited, polit2k:
“The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.”
Essentially the IMF provides a mechanism for one country to borrow existing money from the other countries, rather than for example negotiating a bilateral loan, and no new money is ever created unless one of the national central banks creates it in form of its own currency.
A new general allocation of SDR’s increases the scope for each country to borrow relatively small sums from the other countries, relatively easily and quickly, before it gets to the point of having to request a special loan.
But it doesn’t increase the quantity of money in the world, because whatever money the IMF lends to one member is money that the other members will no longer have available to spend or lend themselves.
please everybody take a break, pour a beer and watch the basketball game tonight. should be interesting and fun.
Barro-Ricardo equivalence proposition. The tax rise required may not occur for centuries, and will be paid off by the great-great-grandchildren of the population around at the time the debt was incurred. Ricardian equivalence only happens when the current generation has some concern for all future generations, even if not perfect concern. Barro phrased this as “any operative intergenerational transfer”. However, the underlying intuition of the Barro-Ricardo model is that individual action can unravel Government policy, that the economy does not act in a mechanistic manner, and that policies can have unintended consequences. This is a key point of modern macroeconomic policy.
concern for future generations is the key. i believe this administration and world have faith in the future generations. believe they call it confidence.
Before anyone gets too excited about Mandelson’s glib statements, we should all bear in mind that he has zero common sense when it comes to money, other than pocketing it.
He has had to resign twice already, due to shady dealings, one of which involved lieing about his true financial situation to his mortgage Co….he “forgot” to tell them about a massive private loan he had….
He would feel no shame about touching up the IMF, though they might want to check the UK’s books very thoroughly before handing anything over.
please keep talking. might want to focus on ricardo theory. this is an econ think tank. but seriously welcome outside ideas…..please talk.