Money Is Power An Inside View of the IMF's Massive Global Influence

By and Ullrich Fichtner

Part 7: 'A Greek Bankruptcy Is Unavoidable'


Periods of crisis are good times for Kenneth Rogoff, who served as the IMF's chief economist from 2001 to 2003, under then-Managing Director Horst Köhler. Rogoff and Carmen Reinhart recently published their book "This Time Is Different: Eight Centuries of Financial Folly," a global history of financial crises. The book, seven years in the making, has attracted the attention of economists, financial managers and politicians.

Rogoff, who lives in Boston, is extremely near-sighted. With his bald head and wire-rimmed glasses, he bears a passing resemblance to a character in a Woody Allen film. He has the biography of a misfit -- a chess genius who lost himself in the game. Rogoff won the New York State Open at 14, and at 15 he played simultaneously against 26 opponents with his eyes blindfolded. He won the title of a grand master at 25, but then he stopped playing chess, like an alcoholic going cold turkey. He hasn't touched a chess piece in 30 years. It's "too dangerous," he says.

Instead, he threw himself into a much bigger game: the global economy. How can the complexity of the world be mastered? How effective are models, and on what basis do institutions like the IMF make their decisions?

In his book, Rogoff suggests that many of the theories currently in circulation cannot be correct. "Wall Street," says Rogoff, by which he means all stock markets, "ultimately believes in a simple calculation: If prices fall by 4 percent today, they will eventually rise by 8 percent. We have demonstrated that this isn't true. It's more complicated than that. And much of this we don't understand."

Rogoff and Reinhart show that the Lehman case was a symptom for the biggest recession since the 1930s, which was fed by many factors. Most of all, the two authors show that financial crises like the current crisis always lead to national debt crises, no matter what remedies governments take. Unemployment and bailouts cause public deficits to explode, leading to panicked cost-cutting programs, which in turn lead to new recessions. This vicious cycle is what is happening today, a cycle Rogoff and Reinhart described before Greece's troubles began. Anyone who reads their book can discover what is likely to happen next.

'A Certain Number of Countries Will Go Bankrupt'

Sitting in his bare office at Harvard University with the shades drawn, Rogoff says, coolly and soberly: "A Greek bankruptcy is unavoidable. There is a 95 percent chance that Spain will go bankrupt. Hungary is on the brink. Things will get much worse in Eastern Europe. We will have a certain number of countries that will go bankrupt. We will have a number of euro zone countries that would be well advised to take a sabbatical from the euro for a year. The situation in the United States is very worrisome. The markets will refuse to tolerate this level of debt." The worst of it is that it sounds as if he were expressing unavoidable facts.

"What we need is radical change," Rogoff says, but he doesn't seem to believe that it's possible. Not too long ago, he says, the US government asked him to comment on a draft bill on the regulation of the financial sector. "The draft had 2,000 pages," says Rogoff. "I don't know what to say to that. I suspect that those 2,000 pages are filled with enough loopholes that Wall Street will discover and exploit to come up with new business models."

Is he implying that there is no way out? "There are many ways to skin this cat," he says. A real reform of the banking and finance sector would have to drastically shrink the system to a business volume that existed 30 years ago. Rogoff says: "The financial market, with all of its products, adds up to $200 trillion, $120 trillion of which represents trading in debt securities. I remember a speech given by Angela Merkel. She said that the Americans make the profits while distributing the risks, with all those debt securities, worldwide. That's true. This could be curbed."

Rogoff says that he never understood why banks are allowed to inflate their capital with loans. Why can they do business with many times more capital than is available to them? "I don't know," says Rogoff. "There's no reasonable explanation." According to Rogoff, new regulatory institutions would have to be created that were on a par with the financial industry and that had drastic sanctioning powers.

He can't understand why the IMF and many governments are patting themselves on the back for their crisis management efforts. "We are fundamentally too quick with bailout packages and too hesitant with default," he says. Rogoff believes that the G-20 and the IMF, with their protective mechanisms, have already pre-programmed future misconduct. Experts call this a "moral hazard," the notion that bailout packages, instead of preventing crises, simply create new ones. "It boils down to the banks ultimately speculating with taxpayer money," says Rogoff.

But that's human nature, which Rogoff has studied in various ways: on the chessboard, in life and on the basis of the numbers he is constantly producing. He has concluded that the notion of "normalcy" constantly reinvents itself. France has been bankrupt before, Greece has been bankrupt five times in 200 years, and the German Reich was both insolvent and bankrupt. Crises, says Rogoff, are crises, not the end of the world.

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lakechamplainer 10/05/2010
1. Who elected Strauss-Kahn?
I found this to be a very informative article. Kudos to Klaus Brinkbaeumer and Ullrich Fichtner. I get the sense the that Strauss and the other IMFers were trying to be careful about what they said, but didn't realize how it would sound to an average person. For example, * Print * E-Mail * Feedback 10/04/2010 Money Is Power An Inside View of the IMF's Massive Global Influence By Klaus Brinkbäumer and Ullrich Fichtner Photo Gallery: 9 Photos Martin H. Simon / MHS Three years ago, the International Monetary Fund was irrelevant, an object of derision for all opponents of globalization. Under director Dominique Strauss-Kahn and as a result of the global economic crisis, the IMF has since become more influential -- governing like a global financial authority. It is also putting Europe under pressure to reform. The building that houses the headquarters of the global economy is a heavily guarded, 12-story beige structure in downtown Washington with a large glass atrium and water bubbling in fountains. The flags of the 187 member states are lined up in tight formation. Visitors walking into the office building find the cafeteria on the right, where many meetings are held. There, experts in their shirtsleeves, their jackets draped over the backs of chairs, drink lattes out of paper cups and talk countries into crises or upturns. A little farther down the hallway is the Terrace, the IMF building's upscale restaurant where the director receives official guests. On a Tuesday afternoon in late September, as the first leaves are falling from trees outside, the director, wearing a blue suit and a blue tie, is sitting on a blue couch high up in his office at the headquarters of the International Monetary Fund (IMF), outlining his idea of a new world. Some of it already exists, in the form of a new world order established in September 2008 to replace the one that was collapsing at the time. The result wasn't half bad -- but it is robust? 'The Money Is The Medicine' These are important times for humanity. The crisis has forced everyone to see many things from a new perspective. Now the IMF is preparing for its annual meeting on Oct. 8. Can it live up to expectations, and can it police the new global economic order and keep global banks in check? "You have to imagine the IMF as a doctor," says Dominique Strauss-Kahn, the 61-year-old director of the International Monetary Fund. "The money is the medicine. But the countries -- the patients -- have to change their habits if they want to recover. It doesn't work any other way." He smiles benevolently as he says these things, his eyes disappearing behind small cushions of wrinkled skin. Who elected him to anything? Who his he to say how human beings should order their societies? In Strauss-Kahn's view, the IMF should become an administrative unit of sorts for the G-20, an agency that "tries to find solutions for global and national problems," and comes up with plans and create values. "In the end we aim at much more than just the right financial and economic policies. The ultimate goal, of course, is world peace through economic stability." This is the way Strauss-Kahn views his organization, and the astonishing thing is that hardly anyone, with the exception of a lone professor in Boston, disagrees with him anymore. As an American, I don't recall a process being followed to give up sovereignty and assign it to the IMF, and to assign them control of a large chunk of my tax dollars. I certainly don't support it, and it is clearly against the US Constitution.
BTraven 10/07/2010
2.
Zitat von lakechamplainerI found this to be a very informative article. Kudos to Klaus Brinkbaeumer and Ullrich Fichtner. I get the sense the that Strauss and the other IMFers were trying to be careful about what they said, but didn't realize how it would sound to an average person. For example, * Print * E-Mail * Feedback 10/04/2010 Money Is Power An Inside View of the IMF's Massive Global Influence By Klaus Brinkbäumer and Ullrich Fichtner Photo Gallery: 9 Photos Martin H. Simon / MHS Three years ago, the International Monetary Fund was irrelevant, an object of derision for all opponents of globalization. Under director Dominique Strauss-Kahn and as a result of the global economic crisis, the IMF has since become more influential -- governing like a global financial authority. It is also putting Europe under pressure to reform. The building that houses the headquarters of the global economy is a heavily guarded, 12-story beige structure in downtown Washington with a large glass atrium and water bubbling in fountains. The flags of the 187 member states are lined up in tight formation. Visitors walking into the office building find the cafeteria on the right, where many meetings are held. There, experts in their shirtsleeves, their jackets draped over the backs of chairs, drink lattes out of paper cups and talk countries into crises or upturns. A little farther down the hallway is the Terrace, the IMF building's upscale restaurant where the director receives official guests. On a Tuesday afternoon in late September, as the first leaves are falling from trees outside, the director, wearing a blue suit and a blue tie, is sitting on a blue couch high up in his office at the headquarters of the International Monetary Fund (IMF), outlining his idea of a new world. Some of it already exists, in the form of a new world order established in September 2008 to replace the one that was collapsing at the time. The result wasn't half bad -- but it is robust? 'The Money Is The Medicine' These are important times for humanity. The crisis has forced everyone to see many things from a new perspective. Now the IMF is preparing for its annual meeting on Oct. 8. Can it live up to expectations, and can it police the new global economic order and keep global banks in check? "You have to imagine the IMF as a doctor," says Dominique Strauss-Kahn, the 61-year-old director of the International Monetary Fund. "The money is the medicine. But the countries -- the patients -- have to change their habits if they want to recover. It doesn't work any other way." He smiles benevolently as he says these things, his eyes disappearing behind small cushions of wrinkled skin. Who elected him to anything? Who his he to say how human beings should order their societies? In Strauss-Kahn's view, the IMF should become an administrative unit of sorts for the G-20, an agency that "tries to find solutions for global and national problems," and comes up with plans and create values. "In the end we aim at much more than just the right financial and economic policies. The ultimate goal, of course, is world peace through economic stability." This is the way Strauss-Kahn views his organization, and the astonishing thing is that hardly anyone, with the exception of a lone professor in Boston, disagrees with him anymore. As an American, I don't recall a process being followed to give up sovereignty and assign it to the IMF, and to assign them control of a large chunk of my tax dollars. I certainly don't support it, and it is clearly against the US Constitution.
Presumably the man who runs the IMF does not know that his organisation could became redundant given that most countries "helped out" by the IMF have learned its lesson, namely to stockpile as much money as possible. China does it, Brazil too, even Argentina piles lot of cash. From one extreme to another one.
esperonto 10/08/2010
3. a bee in the bonnet
Its plain to me that these old guys who want the New World Order have what is known as a "bee in their bonnets", meaning a little idea they hope to capitalize on, which is more grandiose in concept than in its true practice -- namely, that this New World Order will not pan out. It will fall apart, but perhaps before doing so, a few people will get rich, and that is all it is really about. Humanity will shirk off the stress the NWO is putting on them with all this military action, and they will relax back into normal humans and laugh at the diabolicalness of the western minds trying to push people over the edge.
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