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The headline news from the G-20 summit in Pittsburgh is that progress has been made on "IMF reform," meaning increased voting power for emerging markets relative to rich countries—remember that Western Europeans are greatly overrepresented at the IMF for historical reasons. But further change in a sensible direction is being blocked by the United Kingdom and France because they have figured out that this logic implies they would lose their individual seats on the IMF's executive board.
The way to break this impasse is (1) for the European Union to consolidate into a single seat or membership, and (2) for the Union to assert its right to be the headquarters of the IMF (under the Articles of Agreement: "The principal office of the Fund shall be located in the territory of the member having the largest quota…").
The United States will push back hard—arguing that only countries can be members of the IMF. But what's a country for these purposes? The United Kingdom, for example, has elected assemblies in constituent parts of its union (and different soccer teams), but can still belong to the IMF: "Membership shall be open to other countries at such times and in accordance with such terms as may be prescribed by the Board of Governors. These terms, including the terms for subscriptions, shall be based on principles consistent with those applied to other countries that are already members."
Ultimately, this kind of decision is more about high politics than international law. The only part of the world where the IMF currently has the legitimacy to make a difference is in Eastern Europe, and most of the additional resources for helping that region should come from Western Europe—after all, Brussels had the not-so-good idea that "convergence" through EU accession meant that running massive current account deficits was somehow a good idea.
Europe still insists on the right to nominate one of its own to be managing director of the IMF, which is an awful anachronism at this point. The New IMF could be based in London with a French boss, or in Paris with a British boss. The European Union would have a powerful voice and the United States would keep its veto. The emerging markets, outside of Eastern Europe, would still be annoyed and with good reason—but they should really stop complaining and just set up their own fund (building on the Asian Chiang Mai initiative); China, India, Russia, Brazil, and Saudi Arabia have more than enough financial firepower to make this happen.
Also posted on Simon Johnson's blog, Baseline Scenario. The following was previously posted.
Neal Wolin and the Bankers
Simon Johnson | September 24, 2009
Deputy Treasury Secretary Neal Wolin addressed the Financial Services Roundtable Thursday. His prepared remarks included the following key paragraphs:
The days when being large and substantially interconnected could be cost-free—let alone carry implicit subsidies—should be over. The largest, most interconnected firms should face significantly higher capital and liquidity requirements.
Those prudential requirements should be set with a view to offsetting any perception that size alone carries implicit benefits or subsidies. And they should be set at levels that compel firms to internalize the cost of the risks they impose on the financial system.
Through tougher prudential regulation, we aim to give these firms a positive incentive to shrink, to reduce their leverage, their complexity, and their interconnectedness. And we aim to ensure that they have a far greater capacity to absorb losses when they make mistakes.
… Leading up to the recent crisis, the shock absorbers that are critical to preserving the stability of the financial system—capital, margin, and liquidity cushions in particular—were inadequate to withstand the force of the global recession.
While the largest firms should face higher prudential requirements than other firms, standards need to be increased system-wide. We've proposed to raise capital and liquidity requirements for all banking firms and to raise capital charges on exposures between financial firms.
There is nothing wrong with this statement of principles, although I would prefer a much blunter statement of "Too big to fail is too big to exist."
But where are the numbers? How much is the administration proposing to raise capital requirements, and how will these steepen as banks and other financial firms move into the "red zone" above $100 billion total assets? Without specific figures on the table, it is simply impossible to evaluate whether this is a good proposal or window dressing.
Don't tell me leading administration figures don't have a view on the numbers—with the lobbyists and behind the scenes with journalists they are happy to provide more specific briefings, and you know that Treasury/Federal Reserve Board guidance or "input" into the regulatory process will have huge weight. And all the background information—including Treasury's recent actions vis-à-vis big banks, this week and last—point in the same direction: window dressing.
Mr. Wolin, for your proposals to have credibility and to win support, you must answer the question: In the view of the administration, how much capital is "enough"?
