Dominique Strauss-Kahn's forced resignation from the International Monetary Fund – and the search for an IMF successor – is a blessing in disguise. Strauss-Kahn's term in office saw a vast expansion of the IMF's activities, a fact often used to praise his tenure.
But a close examination yields a very different picture. Under Strauss-Kahn, who took over as the IMF managing director in September 2007, nearly every intervention has resulted in failure: The IMF allocated capital to places it shouldn't have allocated capital to, and propped up governments that shouldn't have been propped up.
The ideal IMF successor to Strauss-Kahn would be Ebenezer Scrooge – as a prelude to closing the institution down altogether.
That's because the IMF is a waste of money … your money.
To understand why, let's take a look at what the IMF is, and see how it works.
The IMF is an international financial institution that's based in the U.S. capital. It operates a bit like a credit union, but on a global scale. Like a credit union, the IMF's member countries – all 187 of them – provide the funding. And the IMF board then lends that money out.
Each member country has a financial stake in the IMF – a funding "quota" that's expressed as a percentage – and contributes accordingly. Because the United States is the single-biggest stakeholder in the IMF, it also has the single biggest quota (17.75%).
The United States is followed by Japan (6.58%), Germany (6.14%), and then France and the United Kingdom (at 4.52% each).
But that doesn't necessarily mean that this country (meaning U.S. taxpayers) is responsible for 17.75% of the money the IMF doles out as its share of the global bailout packages that have been issued during the past few years.
Indeed, the U.S. stake is actually higher. That's because some IMF-member countries have currencies that potential borrowers just cannot use. The IMF refers to this as "non-usable resources." As of January 2010, about 21% of the IMF quota contributions fell into this category.
Because the United States, Japan and their European counterparts have "usable" currencies, the IMF relies on them for funding contributions that are actually greater than their official quota.
And that means the burden on U.S. taxpayers is higher than most realize.
Some Wins, Many More Losses
There are exceptional cases where the IMF has done some good. A $2.3 billion loan to Latvia in December 2008 was only partly drawn, and helped Latvia to survive the savage deflation needed to maintain its currency peg against the European euro.
Having downsized its government and reduced wage rates, Latvia's current account is now in balance, and its budget deficit for 2011 is projected to fall below 6% of gross domestic product (GDP), according to projections by The Economist. Best of all, Latvia's economy is growing again: It advanced at a healthy 3.6% clip in 2010.
In this case, the Latvian government did most of the hard work. And the Latvian people suffered most of the pain. Even so, this is one situation where IMF intervention was clearly helpful, albeit in a modest way.
But victories like the one in Latvia have been more the exception than the rule. And that's something the IMF successor needs to address.
Larger programs without energetic local government support have been more problematic. In Ukraine, for instance, the IMF dragged its feet on lending to the pro-Western Yulia Tymoshenko government. Then, after Tymoshenko lost the January 2010 election, it released further resources to the anti-market Viktor Yanukovych government, which has allied the country firmly with the nastier elements in Russia's Medvedev/Putin regime.
A total of $14 billion of IMF money is currently outstanding here. Any economic – and, indeed, political – "reforms" have gone in the wrong direction.
By far, the IMF's largest current commitment is the huge sum of about $40 billion to Greece – of which just over $20 billion is outstanding [Editor's Note: Make sure to check out a related story on the Greek debt crisis that appears elsewhere in today's edition of Money Morning.]
This commitment of around 13% of Greek GDP is not an attempt to help poor folks, since Greece's per-capita is more than $30,000 – far in excess of most East European economies.
But what it did accomplish was to prolong an entirely untenable situation.
Since Greece joined the European Union in 1981, decades of EU subsidies – many of them obtained through fraud – have raised the country's standard of living far above its production. Very early retirement and extremely poor tax collection indicate that the desire to pay reasonable taxes to support the state isn't overwhelming in Greece. Instead, more than a little of the financial burden, over time, has been shifted to international banks, German taxpayers and other deep-pocketed patrons.
There's also the fact that consumption is lavish while exports are almost nonexistent, meaning that even in this deep recession Greece is running a current-account deficit of around 10% of GDP.
If Greece ends up defaulting – as now seems overwhelmingly likely – the IMF will be repaid 100 cents on the dollar, because it is by international agreement ranked senior to commercial debt. That means the IMF loans, by enabling Greece to spend an additional year or more squandering its resources, will have greatly reduced the likely payout to the country's private creditors.
Thus, the IMF has not even taken risks with its own capital, but has extracted its subsidies from the unfortunate shareholders of major international banks foolish enough to lend to the country.
There is plenty of blame to go around.
Greece's 2001 entry into the Eurozone was facilitated by a Goldman Sachs Group Inc. (NYSE: GS) scam that allowed the country to report phony deficit figures. However, the IMF's $40 billion has merely prolonged the Greek rave-up and stiffed bank shareholders, without producing any possibility of genuine reform or long-term stability.
As the above figures suggest, far more of the IMF's money goes to the Greeces and Ukraines of this world, than to the more-deserving Latvias.
By subsidizing the world's most profligate and unproductive countries – and doing so by extracting the money for financing from the hard-working taxpayers of Germany, Japan and the United States – the IMF is damaging world growth and preventing Schumpeterian "creative destruction" from happening as fast as it should.
Scrooge for IMF Successor
In principle, the world would be very much better off without the IMF. Indeed, freed from that financial drain, development finance could be properly carried out by the private sector – by skilled merchant-bank practitioners – as was the case before 1914.
But if we must have an IMF, at least let us have an IMF that does not pour money down ratholes. The closer the new chief is in spirit to Ebenezer Scrooge, the better.
By all means, let the IMF successor to Strauss-Kahn be someone from the emerging markets (all the IMF managing directors have hailed from Europe). But if that's the route we're going to travel, may he or she come from a well-run emerging market – such as Singapore – where they understand the value of a buck and won't listen to soppy hard-luck stories from leftist corruptocrats.
For investors, there is not much to be done – other than avoiding the shares of the major international banks, which will undoubtedly be presented with much of the bill for this useless institution's activities. That bill will ultimately find its way to us – the put-upon U.S. taxpayer.
Exactly 12 months ago, not long after an IMF bailout for Greece was first proposed, then-U.S. Rep. Todd Tiahrt, a Kansas Republican, urged the United States to oppose participation in the package. His statement is worth a look.
Said Tiahrt: "It is simply unfair-as a matter of principle-to force American taxpayers to use their hard-earned money to prop up failed policies in relatively wealthy nations."
We're with him.
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Indeed, in his "Permanent Wealth Investor" advisory service, Hutchinson has identified one particular global economy that meets all his requirements, and represents such a rich profit play, that we couldn't give it – or the investments he's recommending – away for free.
To find out more about these investments, and Hutchinson's service, check out this link.]
News and Related Story Links:
Geithner: Lagarde, Carstens 'credible' for IMF.
- The Wall Street Journal:
Who's on the Hook for the IMF's Greek Bailout?
- The International Monetary Fund:
About the IMF.
International Monetary Fund.
- The Independent:
Goldman Sachs: The Greek Connection.
- University of California Santa Barbara:
Joseph Schumpeter: Creative Destruction.
- The Wichita Eagle:
No Regrets for Todd Tiahrt as He Exits Congress.