THE BLOG

Re-electing Mme. Lagarde: Bad for the US and the World

An election with only one candidate? Sounds like a stitch-up. But with nominations just closed, the one candidate in the forthcoming poll, Madame Lagarde, will be re-elected as Managing Director of the IMF regardless.

To many, this may seem unremarkable. Mme Lagarde is stylish, engaging, and a welcome breath of fresh feminine air among technocrats, politicians, and her predecessors. She's doing an earnest job that, in the global scheme of things, doesn't really matter, except to people who don't really count. And among those who do count, the charge that her credibility is compromised by selection bias that excludes Americans and others is of little concern. We could do, and have done, much worse. Let it go.

If that is how you think too, you might want to think again.

Given that prevention of another Great Depression is the IMF's founding mandate and task, it is notable that the case for her reappointment makes no reference to her work on those matters. That is doubly notable because the global, euro, and China crises are not so much in recent memory as still ongoing.

So it is far from self-evident that the IMF does not matter or that it has done its job.

Indeed, multiple global developments within just the past week say otherwise.

Take China. Barely a moment elapsed between Mme Lagarde's plaudits--culminating in folding the renminbi into the "gold standard" IMF-SDR currency basket and tweaking IMF voting rights in Beijing's direction--and the melt-down of Chinese equity and foreign exchange markets, taking emerging and global markets with them. Last week, this even forced pushback in the US Federal Reserve policy rate "lift-off".

Or, take Greece. Her predecessor may have set matters off on the wrong foot, but it was her Greek program that saw the biggest default to the IMF, ever. Mme Lagarde insisted on the "debt is sustainable" fiction through late 2014 and--as evidenced by further breakdown of negotiations just last week over pensions--has yet to clarify what exactly should be done about Greek debt.

More widely in the eurozone and Europe, she backed the across-the-board write down of Cypriot bank deposits in 2013, all but reigniting the euro crisis before that proposal was scuttled. And her support for monetary austerity for the eurozone in 2011 and against its fiscal manifestation in the UK in 2013 both had to be unceremoniously withdrawn within a year. Unchastened, and despite the findings of IMF research, she continues to endorse qualified austerity in the Euro area and worldwide even as every vintage of her global forecasts subsequently has had to be revised down.

Or, take Ukraine. After decades of program starts and stops there, last year Mme Lagarde approved further IMF billions over three years, assuring all that reform prospects were better than they had been in decades. But just last week, a key reform minister resigned protesting continued debilitating corruption, forcing her to call time on her much-hyped program there, yet again.

Or, take financial stability. In recent years, she backed revival of securitisation--the very activity which precipitated the global crisis--and cheered formulaic increases in liquidity and bank capital requirements in the eurozone and worldwide underpinned by bail-ins and CoCos, all said to avert further crisis. But within just the past week, Deutsche Bank has tottered, CoCo's have crashed, and the "doom loop" between euro banks and sovereigns has resurfaced. All this is exactly what is to be (and was) expected from the Lagarde-blessed solution to Euro and global financial fragility emphasizing bail-in rather than base capital.

And to cap all this off, Mme Lagarde is a senior eurozone politician, representing them at the IMF. As the eurozone is now by far the IMF's largest debtor, this establishes a direct conflict of interest. It is elementary common sense that credit institutions, like the IMF, should not be run by their main debtors. And not just common sense; its import is evident in the litany of failings of IMF work on Europe summarised above. With her reappointment, that conflict of interest and the associated failings will continue to dominate the anchor global credit institution.

It is testament to her PR and élan that, in the rush to acclaim Mme Lagarde's re-election, it feels almost unseemly even to mention these things. But in any other context, such a record would prompt a thorough review not just of the incumbent's performance but, alongside the poor record of her predecessors, of the "are-you-one-of-us?" and selection-biased appointment criteria for her post.

And its not as if there are no other options, candidates who are not Europeans, not politicians, and who possess the necessary professional qualifications and standing. Names such as Christina Romer, Ragu Rajan, Hyun Song Shin, Mohammed El-Erian, and even IMF-insider Abebe Selassie, immediately spring to mind.

But no one protests.

In the week of the New Hampshire primaries, in which US economic fragilities and role in the world swept two populists to victory, the US Government was unperturbed. Neither the IMF's hat-trick of global early-warning failures (Lehman's, the Euro, and now on Madame Lagarde's watch, the China crisis) nor, despite being its major creditor, the takeover of the IMF by its biggest debtor, nor the pre-exclusion of Americans from this post sufficed to stir Washington. Rather than insist on accountability for and correction of these global early-warning, conflict of interest, and eligibility matters, the White House merely said last week that the US would give its determining vote to Mme Lagarde in the forthcoming poll, and has already turned its attention to the Supreme Court nomination.

Likewise, in the week that Mr. Cameron from Downing Street is pressing for approval of his semi-reset of UK-EU relations, loudly insisting on "no UK contribution to Euro bailouts", he also backed Mme Lagarde, even though the sizable past and future UK contributions to all Euro bailouts will thereby once again pass through a Euro-managed IMF.

And the developing world, seeing all this but knowing it is always outvoted, bites its lips.

So Mme Lagarde's re-election is a done deal. It will be celebrated in ostentatious style--joyously, unanimously, and oblivious to the panoply of events, even in just this past week in China, Greece, Ukraine, financial markets, Hew Hampshire, and Downing Street, which underscore how brazen and subversive her reelection is for an institution whose founding mandate is warning and prevention of global economic catastrophe.
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CoCo's; a primer. Bank for International Settlements.
http://www.bis.org/publ/qtrpdf/r_qt1309f.pdf

Comments on proposal to ensure the loss absorbency of regulatory capital at the point of non-viability. Anat Admati.
http://www.gsb.stanford.edu/sites/default/files/research/documents/AdmaticommentsforBaselCommitteeOct12010.pdf

The Bank of England must think again on systemic risk. John Vickers.
http://on.ft.com/1U0Qauf

Four signs another eurozone financial crisis is looming. Wolfgang Munchau.
http://on.ft.com/1U0NVXZ

Lessons from the crisis: ending too big to fail. Neel Kashkari..
https://www.minneapolisfed.org/news-and-events/presidents-speeches/lessons-from-the-crisis-ending-too-big-to-fail