By Wolf Richter at Testosterone Pit
The IMF was lulled into its comfort zone by worldwide central-bank money-printing to bail out and enrich bondholders, bank investors, counterparties, and other investors via the masterful creation of magnificent asset bubbles. Now it’s waking up to the reality that the Fed, which instigated all this, is thinking out loud about pulling back. And that sent IMF heads fretting about “spillovers” to the rest of the world.
Bailing out holders of government debt is the IMF’s purpose. These bondholders are usually big banks; and when things curdle, hedge funds. The entire body of reports and other work and the bureaucracy that produces them are just decoration.
In return for extending emergency loans to bail out certain bondholders, the IMF pressures the debt-sinner country to impose “adjustments” on its people – usually cuts in wages, benefits, pensions, healthcare, and what not, joined by tax hikes that hit everyone but the elite. These adjustments are also known as “structural reforms” and have been lovingly dubbed “austerity.”
There are other options, such as letting the market do its job. Bondholders, who’ve benefited from the income stream, would lose their shirts in return for buying these crappy high-risk bonds in the first place. Countries would bear the consequences of their governments’ reckless spending and borrowing policies. Governments would either resort to prudent budgets or print and devalue the currency until the infuriated people throw the scoundrels out.
If the market were allowed to take over, much of the debt would be wiped out. The elite holding it would still be the elite, but less wealthy. A few banks might crater. But instead, the IMF intercedes, pushes out market forces, inserts international taxpayers, and voilà.
Greece has become the poster boy for this strategy. So its problems were self-inflicted. It’s one of the most corrupt Western countries. It cheated its way into the Eurozone, with the top-shelf help of Goldman Sachs, to get access to unlimited amounts of cheap euro-debt. Or it seemed cheap at the time.
Holders of Greek debt should have been forced to take their losses. OK, private-sector bondholders were given a haircut, but most of the bonds were held by the European System of Central Banks and other public institutions, and they were bailed out. But the Greeks have watched how their country got pushed into a six-year depression. The lucky ones suffered cuts in wages and benefits, accompanied by more taxes. The unlucky ones joined the mega-ranks of the unemployed.
Now the country is deeper in debt than before. More “structural reforms” are likely to be inflicted on the people, though the IMF is under withering fire. Spokesman Gerry Rice tried to put a positive spin on it when he said on Friday that the IMF supported the government’s “desire to avoid across-the-board cuts in wages and pensions.” But there will be more cuts – instead of making bondholders eat the losses. He conceded some IMF missteps but… “There is no apology in what I said,” he said.
This institution has been run by tainted French politicians, currently Managing Director Christine Lagarde, who is mired in a corruption affair in France. She’s alleged to have abused her position as President Sarkozy’s finance minister to shuffle €400 million in taxpayer money to the controversial businessman Bernard Tapie. In 2011, she’d replaced another French luminary and erstwhile presidential contender, Dominique Strauss-Kahn, after he’d gotten tangled up in some, let’s say, very unsavory scandals in the US and France.
Under this sort of management, the IMF is now fretting about the “spillovers” from the Fed’s winding down of QE and the eventual possibility of raising interest rates from nothing to almost nothing – a possibility that has been getting pushed out on a rolling 18-months schedule for years.
In an interview, Siddharth Tiwari, Director of the Strategy, Policy, and Review Department at the IMF, pointed out that the issues related to the unwinding of “unconventional monetary policy” – a formal euphemism for QE, ZIRP, and financial repression – would be “high on the IMF’s work agenda.”
For developed economies that have these policies in place, “the question is when and how” to undo them “smoothly,” given that there would be “repercussions for the rest of the world” – the “spillovers” – and for the countries unwinding them, currently the US – the “spillbacks.”
The IMF is full of euphemisms. “Spillovers” from the Fed’s policy changes, or perceived policy changes, are the gigantic sucking sound left behind when the hot money leaves the emerging markets. They got a taste of it last summer after the taper cacophony caused the hot money to suddenly evaporate. How developing countries respond “if capital flows and currencies become more volatile in this process,” he said, that’s the to-be-or-not-to-be question for those countries.
The IMF would produce some reports to help these countries become financially resilient so that they could “manage spillovers,” Tiwari explained. The IMF has already been “urging” these countries to implement solutions, namely – you guessed it – “structural reforms.” Hence, cuts in wages, benefits, pensions, and the like to make investors feel better about these crappy bonds.
In his mellifluous bureaucratese, it came out this way:
Indeed, with the space for supportive macroeconomic policies narrowing in many countries, structural reforms are increasingly needed as a policy lever. Structural reforms can take many forms, such as reforms to labor market policies, and education and health policies, just to name a few.
Greeks know all about the “many forms” that these “structural reforms” can take.
In addition, the IMF would “take a more fundamental look at how monetary policy should be conducted once financial conditions normalize,” he said.
Aha! Now the IMF is going to tell the Fed what to do – as if it weren’t bad enough that Goldman et al. are telling the Fed what to do. Lagarde shared her end of the fretting: “Excessive volatility in capital flows and major currencies, tighter financial conditions for emerging and developing countries, and subsequent spillbacks to source countries warrant attention.”
So, unless the IMF steps in, winding down QE and ZIRP are going to be chaos. With “subpar global growth” and markets that are “jittery from time to time,” like during last summer’s mini-mayhem, Tiwari warned it was “of utmost importance that we cooperate to support growth” – he means, stir up inflation – “and limit policy risks” – he means, stop the implosion of asset bubbles.
Didn’t the geniuses at the Fed, at the IMF, and at the other pillars of the financial cabal think about spillovers, spillbacks, shockwaves, hot money, giant sucking sounds, and bursting asset bubbles when they started that whole money-printing and financial repression binge? You’d think. But no! Six years into it, they’re suddenly fretting about it. And their vision of these issues appears to be a lot darker than the delusional optimism of the record-breaking financial markets.
So what happens when these huge and reckless buyers with their nearly endless resources start cutting back after a phenomenal peak? Well, we know what happened in 2008. Read….Last Time Corporate America Did This, The Stock Market Crashed