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IMF Insinuates ‘New Consensus’

March 9, 2011

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IMF Insinuates New Consensus

Long post; put your thinking caps on. This is of major importance as to the new United States monetary policy…. which affects everybody.

It is no mere academic debate. World governments are being asked to cooperate on economic policy at a level never seen before. Some of the ideas being discussed could affect everything from long-run unemployment rates in the United States to the extent of welfare benefits in Europe or the availability and cost of home mortgage loans.

Global bank regulators are talking of rules to limit asset bubbles – possibly making it more difficult for home values in the United States to recover their previous levels. They are developing lists of large institutions that need more regulation – a potential constraint on the financial industry as a whole. In Europe, some are pushing for a kind of shared sovereignty that would limit a country’s ability to make its own decisions on government spending.

At IMF, the Hunt for a New Consensus, Washington Post

Today, I was listening to Professor Olivier Blanchard, an economics counselor at the International Monetary Fund, IMF, on Bloomberg Midday Surveillance – ( BTW, a show everyone should watch). He was discussing the “new consensus” approach being developed by the IMF and economic and banking policy institutions from around the world. He insinuated something of great interest: that “behavior economics needs to be introduced into the mainstream,” as in mainstream economic thinking. Blanchard went on to say the IMF felt more regulation was necessary, although he couched his language on this point.

So, what exactly is the IMF insinuating that it must get mainstream economists to buy into it? Let’s take a quick look back to see what the real meaning is behind the term “new consensus”. The reference is the old paradigm called, the Washington Consensus.

The “Washington Consensus” is a term originally coined by economist John Williamson to describe the commonly shared “policy instruments” of the Washington-based Bretton Woods Institutions and the Treasury Department in 1980s Latin American economic recovery. The Consensus, as written by Williamson, was a broad set of 10 recommendations for economic outcome in Latin America of “growth, low inflation, a viable balance of payments, and an equitable income distribution.” Source: Foreign Policy Network, Josh Hopkins

Here is the list. As you read through it you will see some very astonishing things, like privatization of state enterprises and deregulation, but of course, in Latin America. Enter the Reagan era with those specifics and the birth of conservative politics. And as we see today, billionaire conservatives are deeply engaged with and heavily influencing our own state politics, i.e. the proposed privatization of Michigan local governments! PLUS further attempts at deregulation at the EPA (ongoing right now) and the weakening of the Dodd-Frank financial regulation reform bill is a high priority for the corporatist right-wing.

The following is a brief review of the 10 recommendations used by these institutions as Williamson described them in his 1992 paper, “What Washington Means by Policy Reform”:

1. Fiscal policy discipline

2. Policy reform with regard to public expenditure from subsidies toward education, health and infrastructure investment (especially to benefit the disadvantaged)

3. Increased taxes as a remedy to fiscal deficit

4. Market-determined, positive interest rates

5. Market-determined, competitive exchange rates

6. Import liberalization (i.e. anti-protectionist balance between export and import industries)

7. The promotion of Foreign Direct Investment with debt-equity swaps

8. Privatization of state enterprises and growth of private sector

9. Deregulation

10. Securing property rights

Number 2 is interesting and it would seem there is some inconsistency in the approach. But, Williamson was trying to suggest a balanced approach. Again Josh Hopkins:

It’s taken 20 years and a new administration on the heels of a global economic downturn for Washington to begin giving serious attention to the fusion of economic interest with the relief of many of these social ills mentioned by Williamson. [and as you can see, conservatives are fighting this fusion tooth and nail as it requires business and corporate tax revenues play a larger part] Hopkins continues: And yet, I find the most grave of consequences from the Washington Consensus to be more apparent in relation to growth and development in the Eastern hemisphere more than failures in the West. As the Washington Consensus was becoming more closely associated with neoliberal free market economics, “Chindian” economic policies began paving the way for the current wielding of financial prowess that these countries are starting to exercise in our own backyard.

This addresses two recent developments: (i) China opening new banks in Chicago and New York in the last six months, and with that, influence will flow both ways with the Federal Reserve. (ii) the neoliberal free market economics that undermined the Washington Consensus ironically was due to lack of regulation in the global swaps markets! Unregulated forces in the credit default swaps market largely undermined the whole paradigm.

Hopkins writes of the IMF’s new role a full year before comments were made this week. So, this has been a longtime in the making. Blanchard states the global financial situation is complicated and will remain for several more years. The IMF is dealing with many moving targets: inflation, oil crisis, emerging markets, food prices, EU bank solvency, American recovery, etc.

A new scope to the IMF will include more monitoring of the global economic system, including a review of the U.S financial system, while also granting new powers to countries like China, India and Brazil that previously had little influence at the Fund. The IMF will also act more like a global government banker with increasing flexibility to print its own money (based on the dollar, euro, yen and pound) and inject liquidity into global markets in ways previously held by central banks. To increase its lending capacity, it will also increasing funds through government pledges, and bond issuance.

Printing its own money? As I reported here last month, the IMF wants to replace the dollar as the standard currency in the world: CNNMoney:

The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system. SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends countries funds denominated in SDRs. While they are not a tangible currency, some economists argue that SDRs could be used as a less volatile alternative to the U.S. dollar.

So, what does it all mean? It means the United States will be dancing to a new tune — the New Consensus – and that tune is largely determined by the IMF, an organization where everyday Americans have zero influence. As with all countries, our currency is tied to our sovereignty, and when our currency is sidelined in any way, we lose economic power in the world. With the rise of China and ‘Chindian” economic policies, we are under pressure like never before to hold our pre-eminant place in the world as the dominant global economic power. Most of us today have never lived with it being otherwise. Only our parents, who lived pre-WWII when America was in the Great Depression know what that was like. It took a World War on an unprecedented scale to propel America to it global position. What will it take to help it stay there in the 21st century?

Again, Josh Hopkins comments on China’s rising economic influence:

I read in a recent article from the Washington Post (China Uses Global Crisis to Assert Its Influence) Chinese loan packages of $138 million to Jamaica made it the biggest financial partner to this small, Caribbean island. And while the numbers seem miniature, when compared to the amounts we’re currently spending on loans to some of our banks and other companies, it represents a flexing of economic potential previously unable to match the sheer strength of the U.S. In fear of sounding dramatic, China’s flexing of its economic muscle in U.S waters sends a clear message that its time to bury the already dead Washington Consensus. The article’s writer gave a nice thought to chew on with the following statement, “Chinese officials increasingly are challenging the primacy of the dollar, warning other countries about the danger of keeping reserves in just one or two currencies, such as dollars and euros. And as the global economic crisis has eroded faith in U.S.-style capitalism, there’s growing talk that a new ‘Beijing Consensus’ will replace the long-dominant Washington Consensus on how developing countries should manage their economies.”

Hopkins ends with this encouraging comment – one I quite agree with:

So as the U.S fights to regain its once celebrated economic prowess, it will take an approach that compromises a strict enforcement of a “one-size-fits-all” model of American development for an unyielding pursuit of stable, global institutions that support the pursuits of the people. Hopefully, a new consensus in Washington can be reached that turns away from the mired Washington Consensus of the last 20 years and toward the original American consensus of the inalienable rights of all human beings for life, liberty and the pursuit of happiness.

Bottom line, the IMF is a solid partner – not a friend, not a foe. At this juncture, Americans will need to fight their own local battles while the Federal Reserve along with the IMF and other global institutions develop the New Consensus. The drift I caught from Olivier Blanchard is this: the IMF will be asking (pressuring) the United States to implement financial regulations on it wayward banks and the implied message is, if we don’t, the international community will. We may not like it, but there is a new sherriff in town.

Related:

At IMF, the Hunt for a New Consensus
http://www.washingtonpost.com/wp-dyn/content/article/2011/03/07/AR2011030704560_2.html

Signs of Overheating in Emerging Markets
http://www.businesstimes.com.sg/sub/latest/story/0,4574,429388,00.html

John Williamson, born 1937, is an economist and coined the term Washington Consensus. He is a critic of capital liberalization and the bipolar Exchange rate.
Williamson has been a Senior fellow at the Peterson Institute for International Economics since 1981. He was the project director for the UN High-Level Panel on Financing for Development (the Zedillo Report) in 2001. He was also on leave as Chief Economist for South Asia at the World Bank during 1996-99. He was an adviser to the International Monetary Fund from 1972 to 1974 and Economic Consultant to the UK Treasury from 1968 to 1970.

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