- The Washington Times - Monday, July 4, 2011

ANALYSIS/OPINION:

Christine Lagarde was quietly appointed as managing director of the International Monetary Fund last week. She takes the place of Dominique Strauss-Kahn, the disgraced former chief who narrowly escaped criminal charges in New York. Tapping yet another European insider for this post is a sign the institution’s priority is business as usual. That’s bad news for taxpayers, who will not be so lucky as to escape the damage this organization will continue doing to the global financial marketplace.

The IMF no longer has a purpose. No country - not Argentina, India, Mexico or Greece - has been helped by its intervention. Nor will any country in the future. The IMF was created in 1945 as one of the Bretton Woods institutions, with the responsibility of maintaining order in the international monetary system. At the time, this meant regulating the system of fixed exchange rates in place. The world largely moved to floating exchange rates in 1971, depriving the IMF of its primary function.

Facing extinction, the bureaucracy came up with a new mission: offering “structural adjustment” assistance to countries that find themselves underwater. The typical package consists of loans conditioned on austerity measures, including sharp spending cuts by the borrowing governments, liberalization of capital markets and devaluation of the currency. These programs have been criticized heavily from all directions, some more justified than others.

Countries call the IMF after their own reckless policies get them in trouble. Greece’s debt is 158 percent of its gross domestic product (GDP) because its government spends far too much - the deficit was 10.5 percent of GDP last year alone. At the height of its crisis, Argentina’s budget deficit was just 6.4 percent of GDP. Argentina had been paying its public-sector employees 45 percent more than they would have earned in the private sector. Greece has been equally profligate.

The IMF takes this bad situation and makes it worse, particularly by failing to enforce austerity measures. The IMF is an enabler. By providing bailout after bailout, it allows governments to keep pursuing unsustainable fiscal policies without real consequence. Creditors keep lending to these governments, secure in the knowledge that IMF will come through. The possibility of easy credit lets politicians avoid making hard choices and continue with unsustainable policies for far longer. There is a term for this: moral hazard.

The IMF bureaucracy doesn’t care because it’s spending other people’s money. In the case of the Greek bailout, German taxpayers will be on the hook for a large part of what well might amount to more than $300 billion. The United States, as the largest single IMF shareholder, could wind up paying about 20 percent of whatever the IMF lends to Greece. The bureaucrats making the decisions don’t care what the American public might think about underwriting yet another big-government failure. They don’t answer to us.

As the IMF replaces one French socialist with another as its chief, it’s likely that we’ll keep paying for even more European failures. It would be better to get rid of the IMF. It’s obsolete, it’s dangerous, and its problems with morality extend beyond its former managing director.

Nita Ghei is a contributing Opinion writer for The Washington Times.

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