Tuesday, November 4, 2014

The Most Overlooked Issue that the US Elections Could Impact?

The US elections today will soon reveal if the Republicans will gain control of the US Senate or not. Expectations are that in the best case for Republicans they gain seats in the US House and take control of the Senate. In the worst case, they hold control of the US House and at least gain seats in the Senate. All this suggests further grid lock on major issues. But one issue virtually ignored by the media might be greatly impacted by these election results.

Christine Lagarde and the IMF have worked for years now to get the US Congress to pass the 2010 IMF reforms which provide more funding to the IMF and also rebalance the power structure there. Several futile attempts have been made to get Congress to pass the reforms. This new article shows that the IMF and Ms. Lagarde keep trying even as these election results may make it even harder for the reforms to pass.

Here are a few quotes as we await the election outcome:

"Congress should pass a package of reforms and funding increases for the International Monetary Fund that have been languishing for four years, IMF Chief Christine Lagarde said Wednesday as she warned that a continued impasse threatens her organization's ability to be the world's first responder in economic crises."

"Since taking charge of the IMF in July 2011, Lagarde, a former French lawyer and finance minister, has focused on steering the fund through the tumultuous years after the financial crisis. In 2010, the IMF approved a set of reforms that would shift some of the control of the fund's board away from developed countries and give galloping new economies like China more say in the management of the institution. The package of changes would also double the fund's reserves to $755 billion for helping national economies that are on the ropes."

"The Obama administration pushed for those changes in 2010, but legislation to ratify those changes has been stuck in Congress ever since. The IMF needs the U.S. to pass the legislation to move forward with the reforms, but Republicans worry that the changes would reduce Washington's influence over the IMF while handing more power to China and other powers."

"For Lagarde the stakes are very high. And a new set of faces after the midterm election could give her a whole new group of lawmakers to try to convince, even if it doesn't give her any better odds of success."

Here is the full text of a speech just given by Christine Lagarde in Washington to accept a diplomacy award.  She repeats a call she has made over and over for global cooperation to solve problems in this speech. It will be interesting to see what happens as she calls for more global cooperation at a time when the world seems headed for less cooperation based on recent political and geopolitical trends. And as the US Congress seems less likely to take up the IMF reform package.

Update: Here is another possible impact from the election noted by Bloomberg.

Update: The Republicans take control of the US Senate, increase their margin in the US House, and win over 30 Governorships. Along with all this they control more than 2/3's of the state legislatures in both houses. This may mean than IMF reforms are dead and buried for at least another 2 years. It may also bring more oversight to the US Fed from the Congress. For those who like political intrigue, here is theory that the Fed might fight back by letting the US stock market fall with blame for that falling on Republicans now that they are in power in Congress. We will watch it all and see what happens.

One last comment on the elections. It is not likely that the outcome of this election will change things much in terms of major monetary system change. Expect continued gridlock on any important issues related to the economy and financial system. If anything, there is some possibility that the political environment (frustrated lame duck President and hostile Congress) could become confrontational and lead to a situation that spills over into the markets.

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