The International Monetary Fund (IMF) has made another mistake – a mistake that'll cost U.S. taxpayers a lot of money.
The organization's executive board yesterday (Tuesday) selected French Finance Minister Christine Lagarde as its new leader. A U.S. pledge of support Tuesday morning secured Lagarde's approval. She already had backing from European countries and major emerging markets Brazil, Russia, and China.
But with Lagarde in the driver's seat, the IMF is likely to continue lending billions of dollars to struggling European countries that are drowning in debt.
Those billions come from member countries that hold a financial stake in the IMF – and the United States is the single-biggest stakeholder.
This means that thanks to the IMF, U.S. taxpayers will keep funding countries that contribute little to the global economy.
"The IMF is a waste of money – your money," said Money Morning Contributing Editor Martin Hutchinson. "We'd be better off without the IMF and its terrible record of funneling resources down ratholes."
Here's why Lagarde will perpetuate that terrible track record.
Feeding the PIIGS
The IMF has been a fervent supporter of forking over money to troubled economies. Last year the IMF approved a record $91.7 billion in emergency loans, and is behind one-third of the European bailout packages. The group so far has pledged $110 billion to help troubled Eurozone economies, which need much more to survive.
Lagarde has served as French finance minister since June 2007, and her political proximity to the financially unstable PIIGS – Portugal, Ireland, Italy, Greece and Spain – means she's likely to continue their support started under former leader Dominique Strauss-Kahn.
"Lagarde is by French standards free-market, certainly more so than Strauss-Kahn," said Hutchinson. "The problem is she has much too strong a political drive to funnel more resources into the EU crisis. The EU PIIGS are not actually poor countries, and in the case of Greece, the problems can't be solved by pouring in more money."
Lagarde, who as finance minister played a key role in orchestrating aid for Greece, Ireland and Portugal, has already said she adamantly opposes a Greek debt-restructuring – meaning more bailouts ahead.
And the PIIGS aren't the only financial drain. The IMF tradition to lend has sent U.S. taxpayers' money to other failing economies.
"It has a big position in Ukraine, where it was partly responsible for replacing a pro-market government with the current anti-market government," said Hutchinson.
With Lagarde sharing the bailout mentality of Strauss-Kahn, and with plenty of money to lend, the IMF's generous handouts will continue.
"The real IMF problem is that we gave it huge infusions of capital under Strauss-Kahn, so it now has the capability to waste much more money," said Hutchinson. "Where the money will be wasted next is not yet clear (other than the PIIGS), but it will go to prop up unproductive systems, not to speed the growth of productive ones."
Emerging Markets: U.S. Taxpayers' Last Hope
Hutchinson said the new IMF chief ideally would've been from an emerging economy, especially a well-run one "where they understand the value of a buck and won't listen to soppy hard luck stories from leftist corruptocrats."
Lagarde's only rival, Mexico's Central Bank Governor Agustin Carstens, was backed by several Latin American nations, but couldn't rally enough support to topple Europe's dominating presence on the IMF board. Mexico, Canada and Australia were the only members of the IMF voting board in Carstens' favor.
"I would have preferred Carstens, or better still a successful emerging markets leader like former Colombian President Alvaro Uribe or Singapore's Central Bank Chairman Goh Chok Tong," said Hutchinson.
Many emerging-market leaders and economists have criticized Europe's consistent position as IMF leader, especially as the global economy has shifted toward emerging market growth.
"The Europeans have really further undermined the legitimacy of the IMF," Simon Johnson, a Massachusetts Institute of Technology professor and former IMF chief economist, told The Wall Street Journal. "It doesn't feel like an evenhanded international organization. It seems like much more of an organization run by the U.S. and Europe."
Lagarde has said she will implement a 2010 agreement that adjusts IMF representation according to the size of countries' economies, which would boost the stakes of China and Brazil and weaken the influence of advanced European economies. If this goes through, then emerging economies may be able to rally together in the next vote and support a non-European candidate.
Until then, expect your money to continue funding weak, and in some cases doomed, economies.
"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," said Hutchinson. "That bill will ultimately find its way to us – the put-upon U.S. taxpayers."
News and Related Story Links:
- Money Morning:
Ebenezer Scrooge: The Ideal IMF Successor
- The Financial Times:
US backs Lagarde to head IMF
- The Wall Street Journal:
U.S. Endorses Lagarde for IMF
call me stupid or naive but I was never as tuned in to Hamshers complexity as you guys have stated revealed ..So youre saying she is not really some lefty liberal but a centrist democrat?.And dont make the mistake of confusing her with a progressive?.I visit FDL once in while and have even signed a couple of petitions but I did not realize Hamsher was this nefarious democrat but then sometimes I have trouble with the labels and who they stick to..
"We'd be better off without the IMF and its terrible record of funneling resources down ratholes."
I am in full agreement with you, wishing however to extend the "we" to the "whole world". The US have backed Christine Lagarde's candidacy in bargaining their presidency of the world bank, another inistitution we would be better off doing without.
As to funneling resources down ratholes, its indeed a pity, but the biggest rathole to come, the US
will still have to be financed. Do not forget the the US contribution is made out of borrowed – not to say stolen – money from all over the world, money which the US will never be able (or willing) to repay.
Whoever the lenders are to whoever is the borrower, let them face their responsibility and write off what ought to be written off!
As if we need another outlet for our dwindling cash. One of these days, we may have to consider
getting out of things like IMF, UN & NATO and take care of ourselves.
Who said we need to be the world's gatekeeper and financial giftgiver for every nation and environmental quirk???? I firmly believe that we need to maintain a presence in these organizations – we should always be represented. But enough of the freebies and giveaways when we have such massive challenges right here at home! We need to bring our soldiers home and let's focus on our own needs for a change, such as sorting out our ridiculous entitlement programs (keeping Social Security and Medicare since they've been funded by our money), adopt and enforce a governement budget, reduce our government to a minimum ….It's time to relinquish our domineering ways and adopt a more laissez-faire approach. Pardon me for rambling, and thanks for listening.