"Presto: Another $750 Billion".
Presto: Another $750 Billion
How Treasury will conjure that new money for the IMF.
The U.S. and Europe were widely expected to clash at the G-20 summit in London last month over how to address the global financial crisis. Voila, in just two days the problem was solved with a joint promise to increase International Monetary Fund resources by $750 billion to a total of $1 trillion.
The U.S. portion of this new commitment is more than $140 billion. Yet Congress has debated neither the amount nor the proposed use of the funds. Instead, President Obama and his fellow leaders simply waved their hands, like a Star Trek captain, and said make it so.
Recall that the IMF was founded in 1944 when the world monetary system operated on a gold standard. The fund's job was to act as a lender of last resort when countries encountered balance-of-payments shortfalls. When the world went to a fiat-currency system, the fund's original role became obsolete. It is possible to argue that a modified version of the lender-of-last-resort remains important for the global financial system. But over the past 30 years the fund has increasingly strayed from that limited mission to become a vehicle for transferring wealth to poor-country governments. The London agreement further advances these foreign aid ambitions with no oversight from Congress.
Exhibit A is a $250 billion increase in "special drawing rights," or SDRs -- one third of the new resources. SDRs are homemade credit allocations printed by the fund and handed out to all members. They are redeemable for subsidized loans from hard-currency fund countries. Prior to last week, there were about $32 billion in SDRs. The fund's board had lobbied for 12 years to double that number. But because the loans cost taxpayers more than $300 million a year and because there are no minimum governance standards that must be met by borrowers, Congress refused to approve the expansion.
Now Mr. Obama has overruled Congress and blessed an SDR increase -- not twice the existing number, but eight times. As Juergen Stark, a member of the European Central Bank Executive Board, told the German daily Handelsblatt, "It was never examined whether there indeed is a global need for additional liquidity," adding that "one used to take a lot of time to check something like this." He also called it "helicopter money for the globe." If Mr. Stark keeps this up, his G-20 dining privileges will be revoked.
As to the other $500 billion, here is the G-20 communique: "We have agreed to increase the resources available to the IMF through immediate financing from members of $250 billion, subsequently incorporated into an expanded and more flexible New Arrangements to Borrow [NAB], increased by up to $500 billion, and to consider market borrowing if necessary."
Keep your eye on that "expanded and more flexible" lingo. Fund rules state clearly that money under NAB can only be used "to forestall or cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system." In other words, to draw on the NAB the IMF has to argue convincingly that there is systemic risk. Moreover, there is a clear view that the money should be repaid as the crisis passes.
But now the NAB will be "expanded and more flexible." This implies an intention to alter the restrictive nature of NAB lending so that the London commitments can be used at the discretion of the fund, without approval of the contributors. A fund spokesman told us that the idea of increasing flexibility is that "the NAB money becomes part of the general resources of the fund and if the managing director decides that the fund needs to step in somewhere, it can."
That would be nirvana to IMF employees who have been running low on money to lend but love to roam the world signing up new "clients." Borrowers would like it too, since they take the general resources of the fund at rock-bottom rates with no implied obligation ever to retire the loan.
You may wonder why the IMF simply doesn't ask for a quota increase to expand its resources. Probably because that requires 85% of member votes and can take years. By using the NAB, Treasury can simply attach the request to any spending bill, and that is apparently what we can expect. A U.S. Treasury official told us last week that "the current U.S. share of the NAB is about 20%, so consistent with that, our share of a NAB increase of $500 billion could be up to $100 billion."
The upshot for U.S. taxpayers is that neither the $40 billion-plus in new SDRs nor the $100 billion for the NAB will get much democratic scrutiny. Yet they amount to a massive expansion in U.S. foreign aid. We can see why the G-20 applauded. But this is the opposite of the "transparency" this Administration has promised, and someone on Capitol Hill should blow the whistle.
How Treasury will conjure that new money for the IMF.
The U.S. and Europe were widely expected to clash at the G-20 summit in London last month over how to address the global financial crisis. Voila, in just two days the problem was solved with a joint promise to increase International Monetary Fund resources by $750 billion to a total of $1 trillion.
The U.S. portion of this new commitment is more than $140 billion. Yet Congress has debated neither the amount nor the proposed use of the funds. Instead, President Obama and his fellow leaders simply waved their hands, like a Star Trek captain, and said make it so.
Recall that the IMF was founded in 1944 when the world monetary system operated on a gold standard. The fund's job was to act as a lender of last resort when countries encountered balance-of-payments shortfalls. When the world went to a fiat-currency system, the fund's original role became obsolete. It is possible to argue that a modified version of the lender-of-last-resort remains important for the global financial system. But over the past 30 years the fund has increasingly strayed from that limited mission to become a vehicle for transferring wealth to poor-country governments. The London agreement further advances these foreign aid ambitions with no oversight from Congress.
Exhibit A is a $250 billion increase in "special drawing rights," or SDRs -- one third of the new resources. SDRs are homemade credit allocations printed by the fund and handed out to all members. They are redeemable for subsidized loans from hard-currency fund countries. Prior to last week, there were about $32 billion in SDRs. The fund's board had lobbied for 12 years to double that number. But because the loans cost taxpayers more than $300 million a year and because there are no minimum governance standards that must be met by borrowers, Congress refused to approve the expansion.
Now Mr. Obama has overruled Congress and blessed an SDR increase -- not twice the existing number, but eight times. As Juergen Stark, a member of the European Central Bank Executive Board, told the German daily Handelsblatt, "It was never examined whether there indeed is a global need for additional liquidity," adding that "one used to take a lot of time to check something like this." He also called it "helicopter money for the globe." If Mr. Stark keeps this up, his G-20 dining privileges will be revoked.
As to the other $500 billion, here is the G-20 communique: "We have agreed to increase the resources available to the IMF through immediate financing from members of $250 billion, subsequently incorporated into an expanded and more flexible New Arrangements to Borrow [NAB], increased by up to $500 billion, and to consider market borrowing if necessary."
Keep your eye on that "expanded and more flexible" lingo. Fund rules state clearly that money under NAB can only be used "to forestall or cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system." In other words, to draw on the NAB the IMF has to argue convincingly that there is systemic risk. Moreover, there is a clear view that the money should be repaid as the crisis passes.
But now the NAB will be "expanded and more flexible." This implies an intention to alter the restrictive nature of NAB lending so that the London commitments can be used at the discretion of the fund, without approval of the contributors. A fund spokesman told us that the idea of increasing flexibility is that "the NAB money becomes part of the general resources of the fund and if the managing director decides that the fund needs to step in somewhere, it can."
That would be nirvana to IMF employees who have been running low on money to lend but love to roam the world signing up new "clients." Borrowers would like it too, since they take the general resources of the fund at rock-bottom rates with no implied obligation ever to retire the loan.
You may wonder why the IMF simply doesn't ask for a quota increase to expand its resources. Probably because that requires 85% of member votes and can take years. By using the NAB, Treasury can simply attach the request to any spending bill, and that is apparently what we can expect. A U.S. Treasury official told us last week that "the current U.S. share of the NAB is about 20%, so consistent with that, our share of a NAB increase of $500 billion could be up to $100 billion."
The upshot for U.S. taxpayers is that neither the $40 billion-plus in new SDRs nor the $100 billion for the NAB will get much democratic scrutiny. Yet they amount to a massive expansion in U.S. foreign aid. We can see why the G-20 applauded. But this is the opposite of the "transparency" this Administration has promised, and someone on Capitol Hill should blow the whistle.
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