Many public and private organizations establish grand missions, but here's one that raises the bar to unparalleled heights: "to foster global monetary co-operation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world." If these goals were mission impossible before the global economic crisis, imagine how difficult they are now. But you've got to give International Monetary Fund (IMF) managing director Dominique Strauss-Kahn and his band of global interventionists a big red star for trying.
Unfortunately, not all of their hastily assembled plans are good ones. Out of the "global monetary co-operation" file came a proposed three-pronged tax on bank earnings, compensation and debt capital, supposedly to create a fund to bail out banks in the next financial meltdown. The tax on banker compensation is current populist politics, but in the real world banks will still need to pay what it takes to attract talent. And it would be piled on top of the proposed new levy on earnings, which are already subject to corporate tax. Capital taxes are toxic to capital formation, which puts the would-be IMF tax train on collision course with another train called the Bazel Accord, mandating higher bank capital reserves.
Despite these glaring flaws, finance ministers from most of Canada's traditional Western allies came to the recent G20 meeting supporting the proposal. In the end, it was the following question that defeated it: Why should Canada, Australia, and emerging economies such as China, that didn't have to bail out their banks, pay into a bailout fund designed for those who did? Canada's team of Finance Minister Jim Flaherty and Central Bank Governor Mark Carney successfully led the argument that it was the responsibility of countries whose flawed national financial and regulatory policies caused the banking crisis to clean up their own houses. And in doing so, they could take note of the policies of Canada and other countries whose regulations worked.
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Immediately following that Washington G20 meeting, IMF and euro-zone leaders rushed to Brussels for yet another discussion on the deepening Greek tragedy. After selling new bonds underpinned by a euro-zone and IMF "standby support mechanism," Greek Finance Minister George Papaconstantinou had confidently predicted that no actual bailout funds would be needed. Then came renewed anti-austerity protests led by communist labour unions, shutting down the beleaguered economy - including ferries transporting tourists to the country's (previously) popular resort islands. This unrest, and revelations that its deficit is even worse than thought, was followed by skyrocketing yields on plummeting Greek bonds. Even as the euro zone and IMF struggled to get sensibly reluctant Germany onside, French Economic Minister Christine Lagarde admitted that the euro zone/IMF €45-billion ($61-billion) bailout would only keep Greece afloat for a year. Meanwhile, worries that Portugal and possibly Spain may be sliding toward the Greek abyss drove up yields on their debt and drove down the euro.
It may come as a surprise to most Canadians that as the ninth largest IMF shareholder, the IMF's €15-billion share of the Greek bailout will cost our country well over half a billion dollars. And a Greek bailout would be only one of many bailouts supported by Canada. From 2000-09, countries receiving IMF "loans" included Argentina, Brazil, Turkey, Ukraine, Hungary, Iceland, Pakistan, Belarus, Mexico, Romania, Poland and Sri Lanka. And just last week, a request to the IMF from Ukraine for $20-billion (U.S.) coincided with television footage of newly elected parliamentarians engaged in punching matches and throwing eggs at the Speaker though the haze of a smoke bomb. Like Greece and the Ukraine, almost all of the IMF bailout "loans" go to countries suffering from self-inflicted wounds, including runaway deficits, corruption and socialistic policies toxic to business.
Canada also provides financial support for a separate IMF program funding debt relief for Afghanistan, Bolivia, Guyana, Haiti, Honduras, Madagascar, Nicaragua, and more than 20 African states. Again, mostly bailouts of the dysfunctional and corrupt.
Last year, in response to the economic crisis, member countries agreed to commit an additional $250-billion to the IMF. Canada pledged $10-billion, roughly doubling our current backing. The IMF works closely with the World Bank, where Canada's commitment exceeds $12-billion, bringing our combined contribution to well over $30-billion.
A review of IMF and World Bank official websites reveals a breathtaking myriad of initiatives that require shareholder funding. While their work is well intentioned and noble, critics point out that few recipients follow through with the stringent fiscal and policy actions set as a condition of funding. Why? The reason was summed up by the IMF itself on page 8 of its 1998 World Economic Outlook: "Moral hazard exists when the provision of insurance against a risk encourages a behaviour that makes that risk more likely to occur. In the case of IMF lending, the concern about moral hazard stems from the perception that the availability of financial assistance may weaken policy discipline, encourage international investors to take on greater risks in the belief that they will only partially suffer the consequences, or both."