American Taxpayer Liabilities Just Went Up, Again – Why Isn’t Congress Paying Attention?

By Simon Johnson

Most Americans paid no attention this weekend when the International Monetary Fund announced it was well on its way to roughly doubling the money that it can lend to troubled countries – what the organization calls a $430 billion increase in the “global firewall.”

The United States declined to participate in this round of fund-raising, so the I.M.F. has instead sought commitments from Europe, Japan, India and other larger emerging markets.

At first glance, this might seem like a free pass for the United States. The additional I.M.F. lending capacity is available to euro-zone countries that now face pressure, such as Spain or Italy, so it might seem that global financial stability is increased without any cost to the American taxpayer.

But such an interpretation mistakes what is really happening – and actually represents a much broader problem with our budgetary thinking. The I.M.F. represents a contingent liability to taxpayer sin the United States – much as the Federal National Mortgage Association (known as Fannie Mae) and Freddie Mac (formerly the Federal Home Loan Mortgage Corporation) have in the past — and as too-big-to-fail mega-banks do now.

The budgetary consequences of all those government-supported enterprises are known as “contingent liabilities” – simply meaning that, when something goes wrong, the taxpayer is on the hook. (If you believe any of these guarantees are costless, please read the new book James Kwak and I wrote.)

The I.M.F. is not a corporation nor does it exactly resemble any other legal entity you are likely to encounter. To understand the way in which the American taxpayer is on the hook, focus on the fact that, like any corporation, the I.M.F. finances its activities with a combination of equity and debt.

Traditionally, the I.M.F. was funded mostly with “equity” – contributions paid in by member governments. In the 1940s, when the organization was created, the United States paid in dollars and gold (this was when gold was the mainstay of the international payments system). Other countries have also paid in gold, as well as in acceptable “strong” currencies.

According to the I.M.F. Web site: “The I.M.F.’s gold holdings amount to about 90.5 million troy ounces (2,814.1 metric tons), making the I.M.F. the third largest official holder of gold in the world.”

(On Tuesday, gold was trading around $1,640 a troy ounce, so the market value of the I.M.F.’s holdings was close to $148 billion. For more detail, including on how countries might get back “their” gold, see this fact sheet.)

More recently – and particularly since 2009 – the I.M.F. has increased its lending capacity not so much through additional equity (known as “quota” in I.M.F. jargon) but through debt. In effect, the I.M.F. is borrowing from some countries in order to lend to other countries.

There is a simple reason for this switch. The I.M.F. quota comes with voting rights – and these are currently skewed toward those countries that held the balance of power in the 1940s and 1950s (the I.M.F. was created in 1944). The United States has a veto, and the Europeans are overrepresented.

Now, the emerging markets, like China and the oil producers, have the cash reserves. Emerging markets would be happy to get more quota at the I.M.F., but there is no way that Europe or the United States and its allies would be comfortable with a big shift in who is calling the shots within the international monetary system.

But there’s the catch and to see it, think about the European Union’s recent decision to lend 200 billion euros (about $260 billion) to the I.M.F. If the E.U. lends to European countries under duress, it could lose this money, in the event of a complete default. But if the E.U. lends to the I.M.F. and the I.M.F. lends to stressed European countries, then the E.U. has some downside protection – from I.M.F. shareholders.

In the event of default or complete nonpayment on official borrowing, including loans from the I.M.F., the losses would be borne in the first instance by shareholders. In this sense the I.M.F. is like a bank, with loss-absorbing shareholder capital. If that capital were exhausted by losses, then the I.M.F. would be unable to pay back what it in turn had borrowed.

Some officials assert that none of this could happen, because the I.M.F. always gets paid back – one way or another. Certainly that has been the pattern in the past, but then again we have not seen this level of stress on the international system at least since the 1930s, when all the rules were torn up repeatedly.

A major euro-zone meltdown would cause severe damage around the world. Anyone who thinks otherwise has not been paying attention.

Over the weekend, the I.M.F. became a lot more leveraged – that is, its debt increased relative to its equity. The potential future liability to American taxpayers went up, because the risk of large credit losses increased, and those losses would need to be covered by shareholders (and our stake in the fund is 17.69 percent of quota, with 16.8 percent of the votes).  There is also an implicit guarantee – arguably without limit – from the US to the IMF.  We set up the world trading system after World War II, and we have a huge amount to lose if it fails.  We also have deep pockets, compared to almost other countries.

Therefore, unlike with a typical corporation, we the shareholders in the IMF do not have limited liability – so we should care a great deal about the downside risks.  The Europeans are currently increasing those risks – by lending to the I.M.F. and planning to use I.M.F. loans as part of future bailouts.

The Congressional Budget Office is getting better at scoring contingent liabilities, including United States obligations to the I.M.F., but there is still a lot more work to do. It’s time for Capitol Hill to pay more attention to the implications for the United States budget (and therefore the likely path for our national debt) of what is happening at the I.M.F. – points also made by Desmond Lachman in recent congressional testimony (see points 12-16 here.)

Do not take the statements of global leaders at face value. Congressional leaders on both sides of the aisle should begin by asking the C.B.O. to update its scoring of American commitments – explicit and implicit – to the fund.

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


56 thoughts on “American Taxpayer Liabilities Just Went Up, Again – Why Isn’t Congress Paying Attention?

  1. Simon, knowing a reasonably accurate scoring is, of course, important.

    But I am also concerned with this statement:

    “The Europeans are currently increasing those risks – by lending to the I.M.F. and planning to use I.M.F. loans as part of future bailouts.”

    What exactly is the I.M.F. bailing out? Is it shoveling more into that endless pit of derivatives exposures of European banks, etc. or is it setting up constructive tranches of funding so that new infrastructure can be built, or decrepit projects rehabilitated?

    I don’t see any significant benefit in not doing those types of things for the real European economy. Big banks who didn’t manage risk out of greed or whatever, should no longer be comforted, or supported, especially with the contingent liability nature of I.M.F. financing.

  2. I’m not all that convinced that the US wouldn’t turn isolationist in the event of an IMF bankruptcy and just let it go under. It’s hard enough these days to sell bailing out our own institutions, or paying our explicit commitments. I wouldn’t be at all surprised to see the US back out of its present role in stabilizing the world economy, and let others try (although not with our old equity).

  3. Walking away from IMF obligations is not so easy – possible, but not easy. Bond markets would implode. Banks would follow. Without hyper-aggressive Fed easing (which happens only with a 2-6 month delay), equity markets would implode.

    Right now, it all goes back to the ECB and the Euro. If germany had built a detailed plan to enslave the south to debt, it could not have executed it more perfectly – at debt/gdp radios ~100%, with interest rates >5% and real growth sub-zero and inflation ~2%, the south of europe is behaving like Argentina with the dollar peg, with an extra dose of traditional european far right fascism.

    Simon, have you changed your views with regard to the likely future of the Eurozone that you expressed here:


  4. First I wanna say that I really have a lot of respect for Professor Johnson for writing this post. There is a lot of “good ol’ boy” type networking on these types of jobs/positions, and they come with high salary and high status, and walk just about anywhere and have instant respect a certain degree of Kowtowing I would even dare say. The easiest example to give would be our wide-eyed Mr. Timothy Geithner who thought that even though he signed a paper (and make no doubt about it, a guy like Geithner doesn’t sign his name to anything without making damn sure what he is signing and his legal obligations are) stating he knew the income from IMF was taxable, thought he could just ignore it. And who is to say that even until this day, had he not got the Treasury appointment, no one would have known or had the hutzpah to challenge him on it??? My point is, that by writing this article as a man formerly in a high ranking position at IMF, Prof. Johnson is not making any friends and most likely burning any bridges he has back to the IMF. Some idiot commenters will no doubt pooh-pooh this, but it is no small thing to a driven person.

    I like to think that generally the things the IMF has done in the past have been good. I think some people like Stanley Fischer (who I have high admiration for as far as his sharp mind) generally have good intentions. But I think we have hit a new era of the IMF, and I think it is crazy for the USA to backstop the huge amount of corruption that is going on in southern Europe, and even a lot of corruption in the “core” of the EU. I think many people/investors would literally sh*t in their pants if they knew the true amount of corruption in French banks currently.

    Here is my question, which I have asked before: How can we extend loans (“we” here meaning the U.S.A. vis-a-vis IMF) to Europe and European banks when they refuse to open their bank books to us?? Doesn’t any responsible person/institution that extends a loan to someone check the person’s financial standing, debts, and collateral assets before coughing up money to them??? Shouldn’t this practice hold the same or even more so to the IMF?? I think the problem seems to be, if you (“you” being the IMF) don’t want to know the answer to a question, then you don’t ask.

    I think if Bernanke (or whoever makes this choice, I frankly doubt it is truely Christine Lagarde’s call) wants to loan Europe money, there must be the condition/prerequisite that “You show high-level U.S.A. officials ALL your major bank books in detail or the answer is a definitive “NO!!!”.

  5. SJ writes: “Some officials assert that none of this (a Eurozone meltdown and complete default of IMF loans) could happen … ” Yes, quants and allies said that about residential backed mortgage securities.

  6. Any suggestion of applying additional funding is an exercise in futility.

    There isn’t enough money in to go around to solve the problem with insolvent banks, and all there is now is austerity, un-happiness, betrayal, and dis-integration.

    Real economy investment is what builds wealth, not plying the bankers.

  7. Congress knows full well what the IMF will cost. A blind eye it may be but it is a willful blind eye. Congress is quite ready to spend money and assume liabilities if it is for the greater good of large Corps. A TBTF that needs a government to borrow from the IMF in order to pay off a government debt owed to the TBTF is always a good debt in the eyes of Congress. Even if that debt was cause by the TBTF entity. Congress thinks nothing of socializing debts of large Corps and or privatizing government services at an additional cost to the taxpayer.

    Could it be that Congress is not concerned with the theft of the public purse?

  8. @emailers2 – “Could it be that Congress is not concerned with the theft of the public purse?”

    From the peanut gallery comes the snark, “Gee, ya think…?!”

  9. I saw that Annie, pretty freaking disgusting taking food from indigent Americans to feed a war machine.

  10. Working class indigent Americans – which goes back to how no *ism* acknowledges the basic HUMAN RIGHT to make our lives less miserable through HONEST WORK.

    If you pick a couple thousand head of cabbages a day to send overseas – when did it become okay to not have one for yourself for dinner in the USA?

    I guess in the case of my Grandma, I don’t know the exact numbers, but she certainly had a daily quota of electrical wall outlets she was expected to complete properly, so over the 20+ years she made thousands. Then right as she was to retire, the silicon valley bubble popped and her stock portfolio was cut in half. So in the end, thanks to machinations in the whole *technology* field (the stock was Verizon when her share was cut in half), she didn’t have an electrical wall outlet to call her own. God, we all loved her – a genius by all standards – but as a WWII refugee, she wasn’t going to rise beyond the level pre-ordained by the McCarthyites et al – especially as a woman. She probably could have contributed enormously to medical research – what she knew about how nature works was incredible considering it was *self-taught* – and I’m talking measurable science, not metaphysical psychobabble shamanism. She always wondered why *rich* women in USA were not into medical research as scientists when they could so easily afford the education. And right on cue, 20 years later, the daughter doesn’t have anything to show for all her contributions to “increased productivity”, either, thanks to the *housing bubble*.

    Everyone sees the pattern now, because it is faster (nano-second) and takes it ALL – nothing left behind. So that’s why it’s okay for Huff and Post to feed the “there’s nothing you can do to stop them, look at what they got away with now” social engineering scam prevalent on the internet and post an article about “congress” literally ripping the food out of someone’s mouth in 2012 in order to gather up the “interest” owed to the Fed for perpetual war-mongering in the one place on earth where it is guaranteed there will never be peace. Heck, why not just show up and spit out the last piece of cake at Marie at the Fed – “…here you go, be happy you got it all….”.

    Cake factory closed forever, ain’t coming back. Get over it.

    Yup, as far from a BELIEF that every human being has the right to make their lives less miserable through honest work as you can get – this *ism* that has no name yet that really defines it. Used to be called “Nihilism” – I guess when Nihilism was abstracted and became a math model and then deconstructed into a business plan, it was re-named to Vulture Capitalism…?

    Middle Class never asked for Congress to give it anything other than the security to make sure that organized force and fraud didn’t go unchecked to the point where CRIMINALS could *legally* steal it all for War Lords….

    rattle and hum – as the article notes, congress is not paying attention…

  11. Socialist country’s are internationalist country’s, and non-socialist country’s are nationalist one’s. You can’t have it both ways, but you can have your cheese, and you can have your cake. Or you can have your cheesecake, facts, or nothing but the facts, maam.

  12. “The I.M.F. represents a contingent liability to taxpayer sin the United States”

    It think you meant “since” not “sin”. Freudian slip perhaps. ;-)

  13. Annie, it is all about predator capitalism for them and victim consumerism for us. We are not even considered workers anymore. Just consumers. Who will be the next victims when they destroy the great American middle class? Oh, yeah the Chinese… Just how much can you pay for consumption on earnings of a few dollars a day.

  14. @ella – rattle and hum :-)
    Get into the predator’s head – what did they HATE when everyone was thriving and happy? Why did they start stalking you and inventing this whole galaxy of *psychobabble* to imprison the NORMAL mind? What bugged them so much about the happiness of so many people being the best that they could be? What was so wrong with LIFE when every human being was making their lives less miserable through honest work?
    Tell me, who needs to be “destroyed”? By calling you a *consumer* did your DNA change and you became a “thing”? I was told that “sticks and stones can break my bones but words can never hurt me” – so isn’t that a big irreconcilable cultural difference in this melting pot? How do you find peace with predators?
    This is all a bunch of delusional yaddayadda – they are criminals – liars (politics of personal destruction is a GAME), thieves (pump and dump the bubbles) and murderers (war lords, drug lords and slave lords). Their WHORE is *government*…the hard-on of the sadist…”one ring to rule them all”…

  15. Of course, Simon, knowing that you were formerly the Chief Economist of this organization, at least for me, leads me to conclude that your comments are completely accurate. The mere fact that we are, and have been, burdened by this contingent liability, is, of course, not a problem in normal economic times. However, in the present world economic and financial situation, it becomes far more critical. The problem, as I see it, is that there is probably no realistic or even possible way for us to shed this liability. Sadly, when, not if, Greece goes under, at least in theory, this could cause a massive problem not just in the Eurozone generally, but, very probably a real crisis for the US banking behemoths, who are endlessly creating a new CDO “bubble”, of course hedged with CDS’s, which could suffer dramatically if the Greece “problem” is insufficiently covered by the ECB, such that the IMF then becomes the savior of last resort. It is obvious that the dominoes involved in this massive destructive potential catastrophe would surely be beyond any country’s financial power to handle, and would probably result in massive international political destabilization. And, one would believe that, politically, the possibility of future bank bailouts is completely off the table.

    Am I wrong. Someone please tell me I am.

  16. Bayard, you are correct, as usual. Dumping $$$$ into veritable black hole that is TBTF and whomever ponying up, won’t supply the required escape velocity to the current world wide depression, because it hasn’t so far, the problem is so far-reachingly insoluble.

    It’s like tackling a Tiger tank with a spitwad, it ain’t happening.

  17. Here, Waterbury, this one’s for you :-) – how to talk about things when they get out there…

  18. Annie, thanks, wonderfully entertaining. Jethro is my generation. Or I’m his. It was a time when we still couldn’t understand just how bleak the future was. And, that was after suffering through the first major military oligarch’s war. And now we ship jobs to Vietnam. Go figure.

  19. Hey kids, I hear London calling,

    And Bayard, it was Vietnam who began the financial crisis when they saw their purchasing power diminishing during the US, Euro housing bubble. They stopped exporting rice in 2007 and soon India and Brazil followed suit. Prices of all commodities soon rose and we responded with monetizing our debt rather than bankruptcy and austerity. Even the speculators belief, was that so much rice based ethanol fuel was being produced world wide, that without it a bbl of oil would go to $200. And they speculated it up to $150, losing money in the process of course, because their premise was wrong. As are so many of our politicians today, but you can’t convince them of that, or change their behavior. The good news is that the half life of a politicians life, after following their wrong premise, falls into effect as soon as they make their first other wrong move after making the wrong premise move, which already was a short 52 years on average. So if we ship jobs to Vietnam, its only because they want us too.

  20. “…So if we ship jobs to Vietnam, its only because they want us too….”

    Spite. Pure spite.

    “….thick as a brick….”

    They see 7 billion *consumers* and renteers – I see 7 billion dirty diapers. And I ain’t cleaning their….

    It’s a chick thing :-))

  21. filbt: I must agree. See, the plutocrats, both the private supporters and their governmental servants are not really pro-American. They are not Christian. They are owners and slaves, and their diety is money. Surely the reason why folks like Lord Blankfein make statements (which they believe sincerely and deeply) the they are or were doing “God’s work.” These folks are global. Theirs is not a real conspiracy. They are captives of the gods of greed and megolamania. They are hopeless and devisive purveyors of evil and dominance. Why do jobs keep leaving? Why do we keep borrowing from other nations? Why does the FED help megabanks and not plow those huge amounts into the “real” economy? Simply dominance strategy. And, it’s working like a charm, because most of our fellow citizens act like absurd trained dogs and beg and then roll over and play dead.

    If the rest of us don’t wake up to this tragic play, its finale is predictable. We all lose. End of story.

  22. You mean you see << 7 billion consumers and left 7 billion diapers in the dust, which you aint cleaning. I see 2 or maybe 3 billion people and a lot of space between you and me. HBD anyhoos.

  23. @Barney – when you clean a diaper for them – even with an amazing App that you concocted that can be downloaded from FaceBook – all you have to do is wave the diaper in front of the screen and it’s clean – their VIEW is that you just served THEM – proof positive of their superiority. Although there is the worry now about increasing isolation – the flip side of being 1% – and even in their Matrix World, the physics just ain’t with them…

  24. “Why isn’t Congress paying attention”?

    It is, especially when it pertains to the oligarchy, as in the IMF. It just defers mentioning these matters to the public, lest confusion be generated.

  25. Some people in this country think they know what capitalism is. In fact, a large number of them don’t. Capitalism doesn’t just mean you write your own ticket because you work at a bank or other financial institution. You have to contribute something positive to society, and sucking up resources and allocating capital to your birth name doesn’t count. Some people need to wake up to that fact, and the system needs to be adjusted back to where TBTF CEO’s feel some pain when they spend too much time with their thumb so far up their hiney they can’t micro-rotate their wrist. See here:
    And on that important note, the following is a special old school tribute to Vikram Pandit. This is only a scratch of the surface on how capitalism is supposed to work. Vikram, if you need to, take some notes and turn it up:

  26. There could be some truth to your statement, Bayard, I doubt all will lose though, there would be no point for humans to be in this situation should at least one person not lose, the queen perhaps, in my view. I do know that the solution will come from a God they don’t believe in, which is why today’s destroyers delay that outcome forever. And one which tomorrows destroyers will be first completely judged, but have the potential to be just as bad as their like minded counterparts before them, yet will have been on the defensive from the start, rather than initially tapping resources, and then imposing mandates as they step back financially. The good news is that we are already in overtime, so enjoy the time you have remaining, rather than trying to fix a completely broken system hell bent on racing to be the worst.

  27. @filbt – blah blah blah

    There are even rules in the jungle, no? And the FIRST organization (and most enduring) of humans was a posse to take out the predators. No where to go as a human if THEY roam around without boundaries!

    Theft is theft. Murder is murder. Tyranny is tyranny.

    It’s not a word game. Call it bhagntaniinslnf and abstract it into a math formula, then defragmentalize it and derivatize it – it is STILL unearned wealth! You STOLE it. And then, in this modern age of freakoethics, do what no high class thief (those stealing museum diamonds, etc.) ever did in the past – go back to INSULT the person (ie, “you’re too stupid to deserve that diamond”…) and call that insulting process *politics*…

    This behaviour is so far removed from what could possibly be the power behind the creation of universes that dragging a God into it is simple perfidy – a red herring…

  28. @filbt: My only remark is, of course we must go on, making inroads, if possible, but understanding that without a huge contingent, we will be likely to fail. Hoping against hope, with tomorrow being a special day (the May 1 celebration of the power of labor), this might spur some momentum. There are a few hopeful signs, peeking out from behind the trees. However, I remain mostly fatalistic, the same message I find in your thread. Let’s try a little optimism, not rose-colored, but at least a little smile, please.

  29. I doubt it, and trusting in 20 year old kids to do the right thing before they even know right from wrong, is no reason to be hopeful. I personally am not fatalistic, but do see that in our current leaders.

  30. No, you check this out, that is how i know your age. You haven’t seen the light of the sun for more 50 plus years, and what you say is utter nonsense. Yours has all been done before and debated 6 feet under till the cows come home. Now if the fat lady has sung for the last time you might have something. But you and the fat lady have nothing but free time on your hands so enjoy it as if it were your last.

  31. Killing the Russian Czar, in retrospect, takes on a whole different light in this ongoing baseline scenario – lol

    Nikolai was small potatoes in regards to the amount of financial damage he inflicted on his peasant class through savage theft compared to the banksters…

    Happy B-Day, Waterbury!

  32. ‘Do not take the statements of global leaders at face value.’ Rarely can you ever do that. Statement from global leaders are frequently made to placate the masses, trick them into thinking everything is alright.

  33. So how can the *masses* placate the *global leaders*? Elephant tranquilizer?

    Deep deep deep inside the USA psyche is the experiential knowledge that life becomes dangerous, and worse, when power gets concentrated in too few pockets….evil (psychotic and violent selfishness in ONE self-proclaimed or anointed *leader*) is brutally repetitive, mediocre, mathematically predictable and BORING as sin, as we say….

    I don’t think *global* social engineers appreciate that the unpredictable explosion of violence in their own societies has to do with how BORING their brand of evil is….for how many millenia can you do the same stupid stuff????!!!

  34. That’s a very interesting question, one which I don’t think you would like the answer too. But lets start with the definition of insanity, which is doing the same thing over and over again, and expecting a different result. So the answer is yes, quite a few millenia. Why? Well that’s another story.

  35. @filbt – What makes you think you have an answer that is correct and, worse, you are acting like you are in some superior social position to not share that magic answer with anyone else…

    Seems to me like anyone who is NOT indulging in insanity is now under constant attack from War Lords, Drug Lords and Slave Lords – PREDATORS…guess that’s the one constant in life – the need to cull the Predators…is that the answer I won’t like…? Rabid raccoons have to be put down…?

  36. Well, that is your one constant, and since it bothers you so much, I am sorry for that. As to sharing what ever qualities it is you think I might have. You are right, when at war don’t show your cards, offer a peace pipe and watch him go silly crazy over that one, and be in the river of denile for his whole life, That’s what i’ve been doing successfully I might add, for, well, millenia.

  37. Now that’s corporate hollowood for ya – 942 guitars playing and nothing, can’t start a music biz with 942 guitars – no *inwestors*…

    So 10 more years of war – guess in 10 years the *ink gang* competition will be between Colombian and Afghanistan Drug Lords – coke or dope…which king will reign supreme….?

    Your tax $$$$ at work….

  38. @woop – “There have been many instances since 2008 where the National Guard should have been deployed to stop these kind of evictions, imo.”

    Thanks for “Your comment is awaiting moderation”…

    NICE CENSORSHIP – can’t comment on the business model that has a schtick called, “Rip their face off” – my bad…

    @woop – didja watch the “Frontline” 4 part series on PBS with Prof Johnson? Barry and Timmy destroy the world, but save the M a t r i x! woohoo!
    However, no mention in the Front line piece of perpetual war, Ponzi schemes, Medicare fraud, HUGE spy-on-own-citizen’s apparatus, etc. etc. Heck, all GLOBAL black market industries are bigger than ANY of 2012 earth’s country’s middle class in terms of how much $$$$ those *industries* stole from CIVILIZATION.

    Psychologically, the documentary was kind of forgiving of it all – “….whoops! we made a boo boo calculating the *risk*…girls gone wild…”

    In the BIG PICTURE, there is no SPACE for a sane and law-abiding *middle class* to make their lives less miserable through honest work. Middle class, GLOBALLY, is in a virtual financial con-camp, make NO mistake about it!

  39. @ Annie, No, I actually missed PRofessor Johnson appearing on Frontline. But i did get a kick out of what you said here:

    ” Barry and Timmy destroy the world, but save the M a t r i x! woohoo!”

    That was funny. :)

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