Felix Salmon

The IMF oddsmakers

Felix Salmon
May 18, 2011 19:48 UTC

The Economist has one list of William Hill odds for who’s going to succeed Dominique Strauss-Kahn as managing director of the IMF; William Hill itself has a slightly different list. I would be much obliged if a reader in the UK would please pop down to William Hill for me and place a lot of money on Christine Lagarde at 20-1, as she’s listed on the William Hill site, or even at 14-1, where the Economist has her.

Kemal Dervis is the clear favorite here. But I don’t buy it: for one thing, the single most important issue facing the managing director of the IMF right now is Greece. And the bad blood between Greece and Turkey is so deep and so ingrained that I simply can’t see how any Turk could be credibly impartial on the subject of Greece.

Second-favorite is Montek Singh Ahluwalia, who at 67 is too old for the job. He’s followed by the top EU official on the list, Axel Weber. Again, given that the head of the IMF is going to be essentially brokering a deal between Greece, on the one hand, and Germany, on the other, it doesn’t make sense to me to put a German in that job.

Also near the top of the list are Gordon Brown, who’s already been ruled out by David Cameron; John Lipsky, who’s American and therefore a non-starter for anything but a temporary position; and Peer Steinbrück, who’s also German. Interestingly, Arminio Fraga is not on the list at all, and neither is Turkish finance minister Mehmet Simsek, one of the few people to openly lobby for the position.

If it were possible to short these odds, I’d happily short all Turks, Germans, and North Americans, including Mark Carney and Agustin Carstens. But since it’s not, I’ll make do with a long bet on Lagarde. Anybody willing to help me out?

Update: William Hill have now tightened Lagarde in to 10/1. Still worth a £25 bet, though. Thank you Matt!


@RS108 I disagree completely with your assessment of Manuel, he successfully managed to balance many different forces (labour unions, leftist pressure, big business etc etc) while Finance minister of SA and the country implemented some very tough economic reforms that ensured lower inflation and smaller budgets in SA. Maybe he’d habe the attitude and balls to actually stop bailing out every single Euro nation that can’t keep their spending in check. Ask yourself this question, would Mexico or Brazil have received such “wonderful” loans as Greece has? No – clearly the wonderfully qualified heads of the IMF have not used their “fantastic” degrees properly.

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Ben Stein Watch, DSK edition

Felix Salmon
May 17, 2011 18:35 UTC

Without further ado, the top ten lines from Ben Stein’s article on Dominique Strauss-Kahn:

  1. If he is such a womanizer and violent guy with women, why didn’t he ever get charged until now?
  2. This is a case about the hatred of the have-nots for the haves, and that’s what it’s all about.
  3. So far, he’s innocent, and he’s being treated shamefully. If he’s found guilty, there will be plenty of time to criticize him.
  4. Can anyone tell me any economists who have been convicted of violent sex crimes?
  5. Maybe Mr. Strauss-Kahn is guilty but if so, he is one of a kind, and criminals are not usually one of a kind.
  6. He is one of the most recognizable people on the planet. Did he really have to be put in Riker’s Island?
  7. A man pays $3,000 a night for a hotel room? He’s got to be guilty of something. Bring out the guillotine.
  8. Was Riker’s Island really the place to put him on the allegations of one human being? Hadn’t he earned slightly better treatment than that?
  9. Can anyone tell me of any heads of nonprofit international economic entities who have ever been charged and convicted of violent sexual crimes?
  10. People accuse other people of crimes all of the time. What do we know about the complainant besides that she is a hotel maid?

I’m amazed how many of even the people criticizing Stein have overlooked these two Neanderthal statements:

“The prosecutors say that Mr. Strauss-Kahn “forced” the complainant to have oral and other sex with him. How? Did he have a gun? Did he have a knife?”

“if he was so intimidating, why did she immediately feel un-intimidated enough to alert the authorities as to her story?”

Has this prominent journalist read ANYTHING about rape in the last few decades?

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How will the new IMF head be chosen?

Felix Salmon
May 17, 2011 17:54 UTC

It takes Mohamed El-Erian until the very last paragraph of his FT op-ed to rule himself out of the running for managing director of the IMF: “I will not be part of this process,” he says, adding that “I already have a great job, here in California.”

But it’s clear what process he wants:

It is therefore critical that, in the coming weeks, the IMF Executive Board finalise and publicise a process that would be used, should Mr. Strauss-Kahn be forced to resign. Specifically, the post of Managing Director should be open to all nationalities, with candidates assessed on the basis of transparent job qualifications.

It should also involve an internationally balanced committee to evaluate applicants and put forward 2-3 finalists for Executive Board consideration, and the final choice should emerge from a fair vote of the Board.

The first problem with this is that Strauss-Kahn will and should resign much sooner than that. But that problem isn’t insurmountable: he should just say that Lipsky is the new interim managing director, and that one of Lipsky’s main jobs will be to put together a transparent, qualifications-based process for choosing his permanent successor.

More generally, the international community can no more ignore a candidate’s nationality when it comes to running the IMF than can FIFA when it comes to choosing a referee for the World Cup final. Since it’s the board and shareholders who are going to be choosing the IMF’s next managing director, it’s the board and shareholders who are going to be nominating candidates. And when a country nominates a candidate, that candidate is always going to be considered a partisan of that country.

Which is the main reason, in fact, why Christine Lagarde might not end up getting the job. Taimur Ahmad, the editor of Emerging Markets — the very magazine which helped cement Lagarde’s status as front-runner back in April — has an interesting theory on this front. Essentially, Lagarde is Sarkozy’s finance minister, and while she might make sense as IMF managing director with DSK as president, it seems a bit much to have her at the IMF when Sarkozy has a real chance of retaining the presidency.

If it’s not Lagarde, then, who will emerge as the consensus candidate of the EU? Lorenzo Bini Smaghi? It’s all, still, very murky.


lagarde was put under investigation recently,
not sure if this is well known outside france.

http://www.guardian.co.uk/world/2011/may  /11/christine-lagarde-invetigation-bern ard-tapie

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Felix TV: The next head of the IMF

Felix Salmon
May 17, 2011 02:43 UTC

Most of this video is reasonably serious: I genuinely do think that Christine Lagarde is going to be the next managing director of the IMF. And it probably won’t take long before she gets the job, either.

At the end, I throw out a very left-field name which almost nobody outside the world of sovereign-debt geeks has ever heard of. But there’s a serious point there: the single biggest job of the IMF managing director is going to be navigating and architecting a round of pretty much unprecedented sovereign-debt restructuring deals. Can Lagarde do that? I don’t know that she can. But there’s one man who undoubtedly can.


Well, Lagarde is also a former lawyer – so should help her, should she want and get the job. Her English is impeccable and she’s very well respected. And the IMF can of course hire Cleary and others to advise on the technical/legal aspects – the head of the IMF though needs to be able to hang with world leaders on an equal footing – that clearly reduces the pool of candidates. And at this particularly moment, my guess is that it makes sense for a European to get the job – but that’s not to say that an Asian one wouldn’t be helpful too as much of the rebalancing of the global economy will depend on how Asia and of course India/China manage their economy over the next few years. My sense is that having a European at the IMF might help on the EZ sovereign situation – but in global terms (and despite the risk of contagion) these are fairly small matters compared to the effect of addressing global imbalances…

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Why DSK’s arrest is bad for the IMF, France, and Greece

Felix Salmon
May 16, 2011 18:44 UTC

With Dominique Strauss-Kahn being denied bail this morning, it’s clear he can no longer run the IMF, let alone run for president of France. No matter how the trial turns out — even if he’s fully exonerated of all charges — this arrest has effectively ended DSK’s career.

So when Mohamed El-Erian writes about the effect of the arrest if DSK’s career is over, we can take him as describing the state of the world as it is today: this news is bad for the IMF, bad for France, and bad for any Greek hopes of battling through without a debt restructuring.

The IMF first:

This would erode the confidence of an institution that, under the personal authority of DSK, has taken significant financial and reputational risk in making loans to countries whose medium-term debt viability is far from robust. It would undermine its effectiveness in responding to new challenges. And it would pull the rug from under initiatives aimed at enabling it to play a more effective role in global policy coordination and, more generally, in improving global economic governance and filling a damaging vacuum at the center of the international monetary system.

I think this is right. There’s a tension, at the IMF, between the staffers, who don’t want to make loans which might not ever get repaid, and the shareholders, who want the IMF to be the lender of last resort and to bail them out whenever they run into difficulty. DSK’s job was to walk that fine line, and to imbue the Fund’s decisions with his own gravitas, authority, and consensus-building abilities. Here’s Wolfgang Münchau:

Mr Strauss-Kahn was respected by both Angela Merkel (whom he had planned to visit on the weekend when he was arraigned) and by George Papandreou, the Greek prime minister. He supported the view, also held by the European Central Bank, that a eurozone member should not rush into default. The eurozone clearly needed the IMF’s technical competences in dealing with its sovereign debt crises – a set of skills largely absent in the European institutions. It also needed the IMF’s co-financing. But the IMF’s single most important influence in eurozone crisis resolution has been political. In a situation marked by a lack of political leadership, the IMF filled a vacuum.

The problems for France are big, too:

France now faces the possibility of an even more complex, and a more polarizing presidential campaign. This would come at a time when the country heads both the G-8 and G-20, and when it plays a stabilizing role at the center of Europe now that the Merkel-led government in Germany, the other large economy at the core of the region, is facing growing political strains.

It’s never optimal to try to play a global leadership role in the middle of a presidential election campaign, and with this particular campaign now being thrown wide open, domestic politics are certain to trump international statesmanship for the foreseeable future. If politically difficult decisions need to be made with respect to Greece or anything else, don’t expect France to be brokering them.

And then there’s Greece:

Desperate to avoid a debt restructuring, Greece is heavily dependent on exceptional official assistance. Up to now, a DSK-led IMF has shown little hesitation in aligning itself with a controversial European approach that uses liquidity to address a solvency problem — essentially, piling new debt on top of Greece’s already excessive debt.

A possible DSK departure from the IMF would make the institution less enthusiastic for an approach that has already shown signs of slippage, ineffectiveness and overall fatigue.

Whether this is a good thing or not depends on whether you think that it behooves the IMF to help Greece kick the can down the road indefinitely. But if there is to be a Greek restructuring, it certainly helps to have a powerful IMF head shepherding it along. And frankly none of DSK’s possible successors have his degree of power and influence in the all-important European political circles.

The honorable thing for DSK to do, I think, is to announce his resignation now, saying that his arrest is an unhelpful distraction to the IMF, which will be ably run by John Lipsky until a permanent replacement can be found. He must surely realize that he can never return to the Fund. And if he’s going to leave, best he do so sooner rather than later.



On Greece, it seems we Europeans remember why the Great Depression lasted so long – the Central Bankers withdrew liquidity by increasing interest rates at a time when they needed to be reduced. Reducing liquidity now will hurt more than it fixes. It’s like trying to halt a runaway vehicle by driving it into a brick wall. Better to apply the brakes gently.

Today the neocons are singing from the same song sheet that ruined the world economy in the late ’20s and through the ’30s and caused the Second World War. The Europeans suffered greatly then, while the US gained Treasure, the Russians gained Territory and the Neocons gained a bogeyman to control the American people in such a tight grip it is still there today.

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Why Lagarde will be the next IMF managing director

Felix Salmon
May 16, 2011 00:24 UTC

It now seems more likely that Dominique Strauss-Kahn will end up in a prison cell than that he will be elected president of France. Either way, his career at the IMF is over, which means that the race to succeed him is on.

Gordon Brown would love the job, but he’s not going to get it, which is great. The front-runner is Christine Lagarde, who would be better than Brown. But France has held the top job at the IMF for 26 of the past 33 years. It’s time for a change, on that front.

Historically, the IMF managing director has always come from Europe; if Lagarde doesn’t get the nod and the tradition is continued, then the obvious name is Italy’s Mario Draghi. But there are very good reasons why the head of the IMF, at least this time round, should not be a European — not least that Strauss-Kahn himself, along with various European finance ministers, said when he was nominated in 2007 that this was the last time Europe would get to railroad its own candidate into the job.

The competition was tougher in 2004, when two serious heavyweights were nominated to contest the election of a European — Stanley Fischer and Mohamed El-Erian. I suspect that El-Erian’s far too happy at Pimco (and in California) to throw his hat in the ring this time round, but he’s been so vocal on public-policy issues of late that it’s just conceivable he could allow his arm to be twisted. Fischer is still a contender, but he’s 67 years old now — as is Montek Singh Ahluwalia, another potential nominee. The age limit on IMF managing directors is 65 for a reason, and although it can be changed by a vote of the Fund’s member countries, that extra hurdle is likely to be enough to prevent either of those two men from getting the job. And Fischer has other counts against him — he was vice chairman of Citigroup during the bubble years of 2002-2005, for starters.

What’s more, there would be something a bit weird about the first African managing director of the IMF being a white Jew — culturally, Fischer is closer to Strauss-Kahn than he is to, say Trevor Manuel, whose elevation to IMF managing director would be a very visible and welcome change in the way the international financial architecture is run. Manuel is pretty light-skinned, but he grew up on the wrong side of the color line in apartheid South Africa, and has the years in South African detention during the 1980s to prove it. The men who have run the IMF to date are the heirs to Europe’s colonizers; Manuel very much counts as one of the colonized.

If the IMF is looking for an international technocrat, rather than a politician, then Mexico’s Agustín Carstens is likely to be in contention — but I very much doubt that he’ll get the job, if only because the head of the World Bank is (as ever) an American, and the rest of the world would not stand for both institutions being run by North Americans.

South Americans, by contrast, would be fine: one dark-horse candidate might be Brazil’s Arminio Fraga.

The top name on Alan Beattie’s list, however, and the most likely non-EU head of the IMF, is Turkey’s Kemal Derviş. Richard Adams says that he “ticks all the boxes”, but the IMF has more power than ever these days, and is going to be called on to make incredibly important decisions with respect to troubled European sovereigns over the course of the next managing director’s tenure. Whether Derviş is up to such a task is very much open to question:

Dervis carries limited political weight. He was his country’s economic affairs minister for just two years and his career has been spent mostly with the World Bank (20 years) and five years as head of the UN Development Program — not an organization that inspires achievement.

Add it all up, and my guess is that the French are going to do it again: Christine Lagarde will become the first female managing director of the IMF. She has the political skills and the economic credentials to get the job, and Europe will feel much more comfortable with a European in the role over the next few turbulent years. The US won’t object, and the Asians will go along with the choice since they don’t really have a candidate of their own. As ever, there will be some pro-forma gnashing of teeth about how a non-European should really get the job next time. But I’m not holding my breath.


“THere are so many conspiracy theories out there as a result of this story already……..” Yes, and then perhaps he inadvertantly grabbed his willy and shoved it in her mouth by mistake.

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Why Gordon Brown can’t run the IMF

Felix Salmon
Apr 19, 2011 14:11 UTC

Gordon Brown is very comfortable at the IMF. He chaired its most important committee, the IMFC, for many years, and he would love to take the top job of managing director. There might be a vacancy soon, if the incumbent, Dominique Strauss Kahn, steps down to run for president of France. But it won’t be filled by Brown, now that UK prime minister David Cameron has made his opinions crystal clear.

Mr. Cameron told BBC Radio 4′s Today program: “I haven’t spent a huge amount of time thinking about this. But it does seem to me that, if you have someone who didn’t think we had a debt problem in the UK, when we self-evidently do, they might not be the best person to work out whether other countries around the world have a debt and deficit problem”.

He added: “Above all what matters is the person running the IMF someone who understands the dangers of excessive debt, excessive deficit, and it really must be someone who gets that rather than someone who says that they don’t see a problem.”

Mr. Cameron also said: “I certainly don’t want a washed-up politician from another country. It’s important that the IMF is led by someone extraordinarily competent.”

He suggested that the next IMF head could come from “another part of the world”, such as China or India. By convention they are usually chosen from European countries.

All of this is exactly right. Brown comes with way too much baggage: he’ll never be able to admit that enormous chunks of what he did as Chancellor turned out, in hindsight, to be disastrous.

The head of the IMF has to deliver tough news about debt and deficits to heads of state around the world — and Brown simply has no credibility on that front. And his diplomatic skills leave something to be desired as well.

More generally, it would be crazy to appoint a European to head the IMF right now, just as the biggest sovereign crises in the world look set to take place in Europe. If the IMF itself wants credibility, it must appoint a non-European to provide independent leadership in an era when the IMF will surely be asked to help bail out troubled European sovereigns.

It long since time that the head of the IMF stopped being a European. If and when DSK leaves, let’s replace him with someone highly qualified — someone who wasn’t a partial cause of the last financial crisis — from elsewhere in the world. It doesn’t really matter where, just so long as it’s not Europe or the U.S. Gordon Brown should be disqualified on both counts.


Yeap, it is all politics. Brown left a fantastic legacy of no boom and bust, very low debt, strong currency, great record of GDP growth and a bullet-proof financial system. I didn’t even need “A whole slew of major economists” to tell me that. And he clearly is not responsible for any of the issues that the UK that the UK doesn’t have anyway. After all he was merely in charge of the economy for 13 years, not nearly enough time to have any impact whatsoever, apart from the positive impact which is all due to him whilst clearly the non-existent negative impact, that only lying political opponents that can’t grasp his innate genuius claim exist, are all down to everyone else.

Just goes to show you can fool some of the people all of the time.

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The bumpy New Normal

Felix Salmon
Oct 11, 2010 04:41 UTC

Mohamed El-Erian delivered this year’s Per Jacobsson lecture at the IMF annual meetings, and was very clear that the international community has failed in its job over the past year or so:

The impressive degree of global coordination highlighted by the April 2009 G-20 meeting did not last long. It only took a few months for that moment of extraordinary collaboration to give way to solely domestic agendas.

The result of that, he says, is going to be ugly indeed:

Having won the war, industrial country societies are in the process of losing the peace. Indeed, absent some important mid-course corrections, industrial countries confront the prospects of low growth; high unemployment that is increasingly structural in nature; welfare losses, including a growing number of citizens falling through the large gaps created by overly stretched safety nets; and a rising risk of protectionism.

El-Erian is characteristically vague on exactly what those corrections should be, beyond saying, unhelpfully, that “structural reforms are key”. But the question’s probably moot in any case: countries are moving further apart, and tail risks are higher than ever.

El-Erian gave his speech on the same day that the ECB’s Lorenzo Bini Smaghi said that “if Greece restructures it would have a total collapse of the economy” — exactly the tail risk which is preventing Greece’s spreads from coming down to a sustainable level.

But if you want a clear visual of what the new world of higher tail risk looks like, you could do a lot worse than this chart, from the Bank of England’s latest inflation report, pointed to by El-Erian:


This is most emphatically not your typical bell curve, with the most likely outcome being represented by a peak in the middle. In fact, it’s inverted: the chances of inflation being outside the central 1.5% to 2.5% range are significantly higher than the chances of inflation falling within that sweet spot. And the UK’s central bank is, if anything, even more pessimistic:

The Committee judges that, given the scale of the risks in both directions, at both the two and three-year horizons there is only around a one-in-four chance that inflation will be within 0.5 percentage points of the 2% target.

This is a world which is out of the control of governments and central banks, where everybody is getting used to expecting the unexpected, and where uncertainty breeds a high degree of risk aversion even as monetary policy tries to push companies and investors to take ever-greater risks with their capital.

I’m inclined to agree with the message of El-Erian’s lecture: infighting between the world’s governments has failed the global economy, and we’re all going to be buffeted by unpleasant and unforeseeable consequences as a result. Fasten your seatbelts: the New Normal is going to be very bumpy.


Felix, try the following link:
http://www.bankofengland.co.uk/publicati ons/inflationreport/ir10aug5.ppt

Look at charts 5.6-5.10 (the one you show is 5.11). At least to a first approximation, these projections ARE normally distributed. They are simply normally distributed with a very wide spread.

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The IMF worries about international banks

Felix Salmon
Oct 6, 2010 21:34 UTC

photo.jpgThe IMF held its first-ever blogger meet-up on Friday, with PR honcho Caroline Atkinson, first deputy managing director John Lipsky, and various other Fund types sitting rather formally around a big table at IMF headquarters in Washington. “The discussion here is on the record, because I’ve been told that bloggers don’t do on-background,” said Atkinson — which made for an interesting contrast with how they do things at Treasury.

Everybody was kind of feeling their way at this first meeting, so it’s too early to draw much in the way of conclusions; I did get the impression that Fund staffers would like to engage the blogosphere in theory, but don’t actually spend as much time reading blogs as their Treasury counterparts do. That makes sense: the blogosphere has lot more in the way of policy prescriptions aimed at Treasury, or even the World Bank, than it has wonky discussions about the Fund’s areas of expertise.

I went in to the meeting with the idea that the Fund is on something of a downward trajectory these days. Its high point was surely the 2009 G20 meetings in London, which ended with a much beefed-up role for the IMF, and a lot more money too. But since then, the occasional Germany-mandated foray into Greek fiscal policy notwithstanding, the IMF seems to have played less of a role, especially in terms of crisis resolution and prevention, than I and many others expected it would.

I left the meeting a bit more impressed at what the Fund has managed to achieve in the past 18 months: it’s not hogging the financial-press headlines, but it is doing quiet, necessary work, especially in non-G3 nations where its expertise and money can be put to best use.

Matt Yglesias said the most interesting thing along these lines — that maybe the IMF didn’t want to get caught up in the headlines, and could actually be more effective if the eyes of the world were pointed elsewhere, at institutions like the G20. Just like Basel, it’s often easier to get things done when what you’re doing isn’t particularly politicized.

It’s also asking some important questions. I spoke to Lipsky a bit about cross-border resolution, and the way in which neither Basel III nor any other international agreement seems to have made it any likelier that a failed international bank might get resolved in a non-messy manner. Much of the worst damage from the Lehman collapse came as a result of the forced liquidation of its London operations — something the panicked meeting at the New York Fed over the previous weekend had barely stopped to consider. And Lipsky pointed out in a speech in July that even European bank failures have run into significant problems associated with duelling national authorities.

In the case of Fortis, [resolution] was complicated by national interests coming to the fore even between jurisdictions whose financial regulators have a long tradition of co-operation and whose legal frameworks are considerably harmonized. As a result, the Fortis group was resolved along national lines in a protracted process.

“Basel III is microprudential”, said Lipsky, and there’s very much still a need for big-picture cooperation between countries when international financial institutions get into trouble. That said, he was at pains to say that he didn’t want the job: “we’re not supervisors, we’re not regulators, and we do not aspire to be either. We can provide perspective to the standard setters. This will be an agreement among sovereigns.”

I’m not going to hold my breath. Here’s what Lipsky said in his speech:

A basic problem with many national regimes is that the authorities often are effectively precluded from cooperating in an international resolution exercise. For example, in liquidating the local branch of a foreign bank, some countries require their authorities to ring-fence the local assets of the branch for the benefit of local creditors and, in this manner, effectively prevent participation in a broader international process. Under our approach, national legislation would be amended to remove these obstacles. Moreover, it would call for national authorities to cooperate with other countries in the framework, but only when they believed such cooperation to be consistent with the interests of creditors and supportive of financial stability. A jurisdiction will be willing to defer to another only if it is clear that local creditors will be treated equitably and will receive at least what they would have received had the entity been liquidated on a strictly national basis.

In order for Lipsky’s proposed framework to work, then, two highly improbable things need to happen. First, the U.S., along with lots of other countries, would need to change its national legislation so that it can cede control of bank-resolution processes to other countries’ regulators. I wouldn’t like to be the legislator proposing that.

And secondly, if an international institution failed, the regulators of the good bits would have to decide that they’d be better off throwing those good bits into the international pot, rather than holding onto them themselves. Think of AIG, for instance: it had one huge black hole in London, and another big black hole in its U.S. securities-lending operation. It was highly profitable in Asia. Why would Asian regulators, if they had the power to keep the Asian operations for themselves in a resolution, give up that power and accept whatever fate befell the counterparties of the parent company more generally?

As Lipsky says, these questions are tough — so tough, indeed, that I doubt anybody’s going to seriously address them. Financial institutions will always spill across borders, and when cross-border institutions fail, it’s always going be messy. Lipsky’s warnings might make policymakers think about such issues, but I doubt that they’ll prompt them to actually do anything substantive about them.


You’re right about that. At one point I believe she was set to be the Obama administration’s undersecretary for international affairs. She knows her onions. And to the IMF’s credit, they appoint very smart and knowledgeable people to their PR honcho position. It’s definitely a senior job.

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