No time to wait

November 5, 2008

Simon Johnson is a former chief economist at the International Monetary Fund and is currently a professor at MIT and a senior fellow at the Peterson Institute for International Economics. Reuters is not responsible for this content and any views expressed are the author’s alone.

Senator Barack Obama won the presidency on Tuesday and comes to Washington in January. But before he even takes office, leaders from around the world descend on Washington November 15th for a Group of 20 summit to tackle the global financial crisis.

The US is saying that a statement of principles (or is that platitudes?) and the establishment of some working groups would constitute success.  The Europeans, particularly Messrs. Brown and Sarkozy, want to establish a process that moves towards some sort of new international financial/economic system (“Bretton Woods II” is the jargon), although they are still quite divided on what this would mean in terms of regulation for financial institutions or – the key point – capital flows.  The emerging markets, who will be very important participants, are not yet putting their cards on the table.

There is another, more pressing potential agenda item currently being discussed (mostly behind closed doors).  While this may not to come to the forefront in public discussion, as markets are now relatively quiet, if there is a major downturn in sentiment or if the news about the real economy in the US and elsewhere is sufficiently dire, this issue (and all that goes with it) may well find itself right in the middle of the negotiating table – perhaps as early as the G20 finance ministers and central bank governors meeting in Brazil this weekend.  (Remember: this meeting used to the culmination of the annual G20 process; the heads of government meeting is an innovation, and really needs to deliver something out-of-the-ordinary in order to be worthwhile.)

Here is the main item on the shadow agenda: the IMF needs a lot more money.

The powers-that-be (read: US, UK, France; probably not Germany) have over the past week or two made their approach to the globalization of the crisis clear – they want the IMF to fund continuing growth in emerging markets.  In the age-old choice between “adjustment” (tight money, painful fiscal contraction, etc) and “financing” (borrow more) to deal with external payments problems, the G7 and their friends would like the emerging markets to finance, big time.  This will keep world growth higher and thus keep the G7 (and their banks) from getting into even deeper water.

It’s risky, of course, because global deleveraging – the big contraction in global credit that is likely already underway – means lower asset prices, including lower commodity prices, and most likely a reduction in global growth for the foreseeable future.  Cushioning the blow is fine, but commodity exporters need to do some adjusting and all emerging markets may need to cut back, to some degree, in order to keep things sustainable.  And someone (in or around the IMF) has to decide how much growth in emerging markets is “right” for this situation.

In particular, in the global strategy we now see forming, a key issue for sizing IMF (and related) resources is credit growth in emerging markets.  This has been high, fuelled in part by loans taken out in foreign currency, i.e., borrowing from abroad.  The effects of this now, in terms of slowing growth, are most obvious in East-Central Europe, but are beginning to be felt in many emerging markets.  The private sector is cutting back on its lending to emerging markets.  How much does the IMF want to step up and fill this gap?  The publicly available information on the Hungarian program suggests an answer: a lot.  (The final program details will likely be published early next week, then we can run the numbers properly.)

Now, there are many options for increasing the resources for IMF programs, including the funds that it brings as a so-called catalyst (this could be from the European Union for EU members like Hungary, or from other countries/groups on a case-by-case basis).  But given the nature of this crisis, it would be good to announce at least some of the resources that are available.  Among other things, this would signal the scale of further monies that would be made available if needed.

The IMF has $200-250bn in available resources.  They put $100bn into what we are calling their Express Boarding Lane (i.e., keep your policies basically are they are; have some money).  About $50bn are probably already spoken for, in lending to about half a dozen confirmed and likely customers.  Clearly the remaining $100bn is not enough for the rest of the world, particularly if the idea is to help finance continued high growth, rather than force painful adjustment.

How much is enough?  That is not the right question.  The right question is: how much would convince the market that the IMF can draw on the essentially unlimited pockets of the G20, in order to achieve just a gentle slowdown in world growth.  Clearly $50bn would not do that, and I doubt that $100bn could now be decisive. I’ve floated $1trn (trillion, with a “t”) as a plausible amount, around which to open discussion.  Unoffficial reactions to this so far have been positive, but let’s see what we hear officially.


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Mr. Johnson,

The IMF is an out-dated institute and should be abolished (bank of crooks and criminals).

Most projects of the IMF only benefitted corrupt regimes and large contractors (Bechtel, Halliburton

The only thing that should be done is increase interest rates in all economic zones and stimulate investment trough low taxation.

Further goverment operations/overhead should be decreased with 50%.

I suggest to have another deep look at the Austrian School and see what adjustments it need to fit current conditions.

Posted by Jack Michigan USA | Report as abusive

[…] – the agenda needs to focus more on some immediate problems.  Reuters’ MacroScope has a piece from me today on arguably the most pressing issue: […]

Posted by Now the U.S. Election is Over – On to the G20 Agenda « The Baseline Scenario | Report as abusive

Integrity is a precondition for economic survival around the Globe.Consumer Confidence is low in most countries due to Inflation & Political unethical attitude.Zero Tolerance for all kinds of Lobbyists is needed to end influence in policy decision for Global Economy revival around the Globe.IMF & National Authorities must frame mandatory laws for implementation & oversight to ensure confidence & avoid such an Unprecedented Global Financial System Failure in future .Let all countries join to rebuild a new order beneficial to all countries big & small.

Posted by chander | Report as abusive

[…] article is an adaptation of a posting by Mr. Johnson at Reuters Macroscope and also Mr. Johnson’s blog, Baseline […]

Posted by RealTime Economic Issues Watch | Report as abusive

[…] The IMF can work with countries needing fiscal and balance of payments support.  It is already signaling that it will reduce the detailed conditions for which it is so well known, and increase its flexibility.  The G7 should support this, and make additional resources available.  We recommend a significant expansion in the IMF’s lending capacity, perhaps up to $1 trillion. […]

Posted by Baseline Scenario, 11/10/08 « The Baseline Scenario | Report as abusive

[…] emerging borrowers all have to cut back because of concerns about a lack of financing that would be a further blow to global demand. That should worry Europe – and Germany. If Eastern […]

Posted by Brad Setser: Follow the Money » Blog Archive » G-20 post mortem | Report as abusive