Though somewhat diminished from their glory days at the peak of the Washington Consensus in the early 1990s, the autumn meetings of the International Monetary Fund (IMF) and World Bank nevertheless remain the world’s largest and most important annual gathering of finance ministers, central bank governors and financiers. It is their time to talk about the big issues facing the global economy. Expressions of the highest hopes for the future mingle with massive outpourings of hot air.
The meetings this year in Istanbul were dominated by a personality who has mastered the art of producing both. IMF managing director Dominique Strauss-Kahn was their man of the moment, at once the champion and the scourge of global finance. He has been head of the fund for less than two years but is already overshadowing his predecessor. For the technocrats at the IMF, Strauss-Kahn is a wind of change that is unlikely to leave the fund intact.
As the world economy recovers, following the greatest co-ordinated programme of government intervention in history, Strauss-Kahn used the Istanbul meetings to set an agenda for the future of finance that will strike a chord with many. It will also sound an alarm in the boardrooms of every bank on earth.
A former economics professor and socialist politician who was French finance minister in 1997-98, Strauss-Kahn has declared the system for keeping the global economy on track and regulating the behaviour of banks is inadequate. At a meeting in Istanbul’s Ciragan Palace on 2 October, before the IMF discussions started, he called for the creation of a global lender of last resort with sufficient resources to support countries battered by currency speculation. It was obvious he believes the IMF should get that job.
This would involve a big increase in the fund’s resources. Currently, it has $500bn available to lend to the IMF’s 186 members. The possible goal is to increase this to $2 trillion. That would still be barely enough to resist a run on the currency of a medium-sized economy, but would be a good starting point for further capital increases.
There are two obstacles. The first is getting IMF members to agree to quadrupling their contributions. But that is minor compared to the challenge of persuading the US to allow its share in the fund to be reduced or for its effective veto over big decisions to be eliminated or both. But for Strauss-Kahn, who apparently has ambitions to run for the French presidency in 2014, there are few downsides. Challenging US global economic dominance is exactly the kind of issue that will get him noticed and remembered by French voters.
Strauss-Kahn also called for stronger financial sector regulation and supervision. This has never been an IMF job, but the fund is helping to set up the Financial Stability Board (FSB), a body created by the Group of 20 (G20) in April to devise new, global banking standards. To the extent that anyone notices what the leaders of world finance say, Strauss-Kahn is now probably seen as the champion of common people against the excesses of the banking industry.
Founding a global lender of last resort and defining new regulations to prevent a repetition of the 2007-08 credit crunch constitute the biggest reform of global finance since the IMF was created in 1944. It will take years and may never happen. The high hopes of 2009 could be seen in due course as just more hot air. The sceptics are right to be sceptical. But Strauss-Kahn’s vision is defining the terms of the debate about the future of the fund and global finance this autumn.