Saturday, January 17, 2015

HuffingtonPost: US Should Agree to IMF Reforms or "Get out of the Way"

Here is the latest article calling on the US Congress to approve the stalled 2010 IMF reforms. This is written by Wu Zhenglong (Senior Research Fellow at the China Foundation for International Studies). This article is obviously strongly in support of the IMF reforms. The IMF indicated it will be looking at this issue this month to see if it can come up with some "alternative options". 

This basically means some way to get the reforms implemented without the approval of the US Congress. We continue to monitor this story and continue to believe this is a very important issue that the media is mostly ignoring. Below some quotes from this article and then some added comments. Please click the link above to read the entire article. 


"As the U.S. Congress failed to incorporate the International Monetary Fund reform package of November 2010 into its budget legislation, the IMF quota and governance reforms are once again stalled."
"Ms. Christine Lagarde, Managing Director of the IMF, indicated in a statement that the board would meet next month (January 2015) to weigh "alternative options" to the four-year-old reform plan and ensure that the IMF has adequate resources."
. . . . . 
"In essence, the reforms have been crafted to democratize the IMF governance. Now, those sitting at the head of the IMF's table are either American allies, or its Western partners, whereas the developing countries are underrepresented as a whole. They do not have a say in the IMF decision-making process, or in protection of their fundamental interests."
"Should the reforms be put into effect, things will change, emerging economies will gain a significant increase in weight, and some will sit at the "head table". Perhaps, the United States will feel uneasy about that prospect."
. . . . . 
"There is growing discontent about the U.S.' chop and change approach. Fred Bergsten and Edwin M. Truman, senior fellows of Peterson Institute for International Economics, wrote to the Financial Times, calling for the IMF to move ahead without the United States. If the United States does not want to participate in reforming the IMF, it should get out of the way."
"They proposed two options. One way would be to make permanent the 2012 initiative by Christine Lagarde to arrange temporary bilateral credit lines of nearly $500 billion from 38 countries, augmenting the Fund's capability to finance its lending. The United States opposed that proposal, but the IMF and other countries could convert it into a permanent arrangement, placing decision making in the hands of the funding countries, not the United States. A more radical approach would be to increase total country quota subscriptions in a manner that would also not allow the United States to stop the Fund from reforming its governance on its own."
"More and more countries are fed up with the U.S. delay in approving the reform package. Some members of the IMF's steering committee indicated their desire to deprive the U.S. of its veto power on the IMF executive board."
. . . . . 
"Due to America dragging its feat, the failure to implement IMF reform plan has seriously affected public confidence in the IMF, making its representation, legitimacy and relevance questionable in the eyes of the international community. Therefore, it is imperative that the IMF rapidly advance the reform plan."
My added comments:
First, let's make one thing clear. We are not taking a position for or against the US passing the IMF reforms here on this blog. Our mission is to identify issues we think are important to potential monetary system change for readers to consider. It's up to readers to decide if they agree or disagree with any particular point of view on this issue. In an earlier post on this topic we posted a link to an article from a Senior Fellow at the Heritage Foundation who has a different view on this.
What we can do is make some observations after following this story for over a year now here on the blog. Below is a bullet point list of what we have seen following this story:
- the story gets very little media attention even though these changes will greatly impact the balance of power globally at the IMF and could easily lead to more substantial changes later.
-the BRICS nations led by China have repeatedly insisted that these reforms be passed. They have issued "deadlines" that they say must  be met. When the deadlines pass and nothing has changed, they express frustration and issue another new deadline.
-the IMF has expressed frustration and disappointment too many times over the last year to keep count. Finally, in December 2014, they announced that in January 2015 they would meet to discuss "alternative options" to get the reforms implemented one way or another
-it is clear that "alternative options' implies bypassing the US Congress. This would negate the veto power the US holds at the IMF if such an action were taken. We can expect some kind of reaction from members of Congress should this happen. 
-The IMF seems caught between and rock and a hard place here. They seem to want to try and convince the BRICS nations they are doing all they can to get the reforms passed. But they have not actually done anything yet except talk about it. Do they have the nerve to bypass the US Congress on this? If they do, how does Congress react to that?
-This is just another big issue that looks like it is coming to a head soon. The IMF will either really do something in this month or they won't. If they put this off again, how will the BRICS and China react? Will they just set yet another deadline sometime in the future? At what point do the deadlines lose all credibility?
We will continue to follow this story and readers here should too. There is a reason why this issue is so important to the global financial institutions and China. As things stand today, the IMF is not in position to become a true "global lender of last resort" and have the support of the entire global community of nations in the IMF behind them. 
Keep that in mind in relation to Jim Rickards forecast that the IMF will replace the US Fed in the next big financial crisis which he says is certain to happen at some point due to fundamental instability in the system. Both the IMF and the BIS have laid the groundwork to support Rickards forecast by repeatedly warning all during 2014 that there is substantial risk for another global crisis. We listed those warnings here.
Concluding comment: 
Readers here need to follow this story to see if the reforms are implemented. This must happen if the IMF is to become the new "global lender of last resort" as predicted by Jim Rickards. If it does not happen, the IMF will lose influence and will not be in position to act. If it does happen, it will open the door to substantially more lending capacity at the IMF. If another crisis emerges, the precedent would then be set to massively increase IMF lending reserves to deal with the crisis. This is why we keep following this issue and strongly encourage readers here to do the same. 

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