Christine Lagarde is turning the IMF into a change agent

By Edward Harrison On Nov 13, 2012

A few weeks ago, I postulated that Christine Lagarde was increasingly moving the IMF away from its position as ‘enforcer’ of orthodox neoclassical economic policy. I backed this up with three specific ways in which the IMF was becoming a change agent by taking a heterdox approach. This week, I have two more examples that demonstrate yet again that Christine Lagarde is radically changing the IMF’s approach to economic policy.

The brief background here is that the International Monetary Fund has always been seen as the economic agent of creditor nations. It has always been seen as a tool through which developed economies force less developed economies to restructure in order for the developed economies to be able to extract as much bond principal as they can. This was certainly the role the IMF is seen to have played in the Asian crisis that began in 1997 with the devaluation of the Thai Baht. In that case, the IMF took over, demanding that several Asian economies take their economies through the wringer via austerity with the goal being debt repayment. In the Wikipdia entry for the Asian Crisis, the article specifically mentions the IMF as seen to be making the crisis worse, causing some to dub the crisis “the IMF crisis“. The aftermath of the Asian crisis can be seen in the mercantilist trade policy that permits the huge accumulation of US dollar reserves by a number of Asian countries as a protection against the type of balance of payments-style crisis they experienced in the late 1990s.

Fast forward to the euro crisis and we see the IMF being taken onboard by the European Commission as an enforcer for the same reasons it was used in Asia in the late 1990s. However, with Lagarde now at the helm, the IMF has taken on the role of heterodox economic policy change agent, clashing again and again with mainstream economic thinking and leading the charge toward a new economic policy paradigm. Here are the three examples I gave in October:

Over German opposition, the IMF is championing the position that Ireland should not be saddled with its bank debt. Instead, the IMF argues, Ireland should be given debt relief and allowed a retroactive bank recapitalisation that is paid for through common European funds. This would reduce Ireland’s sovereign debt and allow the country to raise money in the capital markets like other sovereigns do instead of relying on bailout funds.
The IMF has moved to a backloaded-austerity position from the front-loaded austerity line it took in the Asian crisis. This is not a complete repudiation of deficit reduction as a economic policy goal. Nor is it a repudiation of austerity as a vehicle for deficit reduction. However, it is very much at odds with the prevailing orthodoxy in Europe on how the crisis in the periphery needs to be addressed. It seems that the IMF is the first of the Troika to recognise that austerity has in fact worsened the situation as it did in Asia 15 years ago. See here for when the IMF first voiced these views last October.
Lagarde has criticised the easy money policies of the Fed and other major central banks. She is now officially taking the line that William White is leading in saying that easy money is no free lunch. It will have severe unintended negative consequences down the line.

Here are two more examples of the IMF’s new heterodox positioning:

In Greece, the IMF is now taking the position that more haircuts need to happen. And this is causing great acrimony as the EUropeans want to keep up the pressure on Greece despite the obvious economic depression and political radicalisation their policies are causing there. According to Reuters, Lagarde had a “sharp exchange” with Eurogroup Chairman Jean-Claude Juncker over whether Greece’s targets should be relaxed as a result of writing down Greek debt. On the surface, it seems the IMF wants a more aggressive fiscal timetable. But, underneath this positioning as enforcer is the realisation that those targets cannot be met without more aggressive debt writedowns that will mean losses for Greece’s creditors. The IMF is willing to leave the Troika in Greece unless it gets what it wants.
Steve Keen recently mentioned an IMF working paper that is revolutionary in backing away from the bogus loanable funds model of money and banking. He writes that, “[a]n IMF working paper has received a lot of attention recently – and not for the usual reasons. Whereas the IMF is usually criticised for being dogmatic about free market economics and effectively beholden to the banks, this paper is being both praised and criticised for wanting to radically reform them.” The IMF working paper gets closer to an “endogenous money” view of the monetary system that is more accurate in understanding why central banks cannot review credit growth by pumping the system full of reserves.

So that’s five ways the IMF is moving away from economic orthodoxy and taking on a role as a change agent under Christine Lagarde. This turnabout is unexpected but should be welcome as the IMF is now espousing views that are more realistic and more consistent with economic growth.