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« Henry Paulson's Ethics Waiver | Main | Whitewash On Wall Street: How Henry Paulson Created The Financial Crisis That Brought Down The World »

Dominique Strauss-Kahn, Tim Geithner And The IMF

Source - Muckety Maps


Tim Geithner an 'utter failure at IMF' - Sydney Morning Herald

Reprinted with permission.

In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.

Geithner thought Asia's problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.

The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.

But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans - Thailand, South Korea and Indonesia - all had sound public finances.

The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.

But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.

Keating continued: "Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power."

Exactly who was the "gigantic fool"? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category.

Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose."

China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.

Keating continued: "This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves.

"These reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it's 50 per cent of their annual income. It's a huge thing for a developing country to not spend its wealth on its own development."

Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so: "After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money."

And Asian capitals know that they have no real influence over the IMF - while European governments enjoy 40 per cent of the voting power on the IMF, Japan, China and the rest of east Asia put together have only about 16 per cent. This is an artefact of the immediate postwar power structure, when the IMF was set up.

Keating urges that the fund should be decapitated, with control passing to the governments of the Group of 20 countries whose leaders are to meet in London on April 2. The summit, which is to include China, India and Indonesia as well as Australia, is meeting to consider solutions to the global crisis.

As for The New York Post's claim that Geithner was the hero who cajoled those quarrelsome Asians into agreeing to a $US200 billion rescue, the key fact burned into the minds of Asian elites is that the US was deaf to requests for funds. Washington did not contribute a cent of its own money to any of the emergency packages. Japan and Australia were the only nations that made loans to all three of the stricken Asian countries.

Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy.

China invested most of its reserves in US debt markets. Keating again: "So we have this massive recycling of funds into the system by [the former US Federal Reserve chairman Alan] Greenspan's monetary policy so even if you are greedy Dick Fuld [the former head of the collapsed investment bank Lehman Brothers] or you are hopeless Charles Prince at Citibank, you're being told there's an endless supply of money at a low interest rate and no inflation. So of course the system geared up to spend it.

"That is the fundamental cause of the problem - the imbalance is the fundamental cause."

If Keating's opinion of Geithner had circulated in the US, the Americans would not have been so surprised and disappointed with their new Treasury Secretary. They quickly learned that he had failed to pay $43,000 in taxes owing.

Then, when he announced his much-anticipated plan to rescue the US banking system, share prices slumped by 4 per cent immediately and a new round of weakness in the financial sector began. The pundits turned savagely against him: "So much for the saviour-based economy," wrote Maureen Dowd of The New York Times. Senator Shelby changed his mind: "Aggravating economic problems by contributing to marketplace uncertainty about what steps the Government will take - is that what this is?" he fumed.

US bank stocks weakened so much that nationalisation seems to be the only remaining option to put them quickly out of their misery.

Australia's banks, by contrast, are strong, said Keating, because of his decision as Treasurer to create the "Four Pillars" policy. This requires that the four big banks remain separate, barred from taking each other over. This prevented them "cannibalising each other", in Keating's words. As protected species, they had no need to mount risky takeovers to bulk themselves up defensively.

Their strength certainly wasn't due to the brilliance of their managers, whom Keating described as "counterhopping clerks" who had managed to work their way up the bank hierarchies. A further source of the soundness of the Australian banks, he said, was that they had learned well the lessons of risky speculative lending as a result of "the recession we truly did have to have".

In sum, Tim Geithner is a gigantic fool, the IMF the gun that can't shoot straight, Alan Greenspan a bungler. The big US banks were run by the greedy and the hopeless, the Australian banks by counterhopping clerks. It's a world of many villains. And only one hero.


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Reader Comments (14)

Merkel of Germany, the EU, the regulator of the British banks and even the IMF wanted to give a fairer deal to Ireland. Geithner bullied them out of it. The Geithner Doctrine: "Big banks, however irresponsible and mismanaged must be rescued and kept alive at all costs. Mere citizens can go to the back of the line/queue." Any relief for Ireland would injure the big German banks that lent huge amounts irresponsibly to privately owned Irish banks, whose debt the Irish government agreed to pay. Geithner and his ally in putting big banks first, the ECB, are willing to destroy the economies of Ireland, Greece, Portugal and Spain in order to adhere to the Geithner Doctrine.

This adherence to his doctrine could result in the collapse of the Euro and the breakup of the EU. Another botch for Geithner. But remember that Geithner is obeying his masters at Goldman Sachs. They will make multi-billions for this Geithner botch.
May 15, 2011 at 5:46 PM | Unregistered CommenterJohn Mack
Tim Geithner was an utter failure everywhere.
May 15, 2011 at 7:11 PM | Unregistered Commenterjim ryan
As you see what happened to the President of the IMF today. They are corrupt and out to take over our country and the world.

Why isn't Washington, and I don't mean Obama and Co. doing something to stop them?

Even on Fox, they act like the IMF is something special. Between the IMF and the UN trying to take over the world, and the United States, we live in a very scary time.

Stop the IMF, stop the UN, they are both against the people and all about control!
May 15, 2011 at 7:15 PM | Unregistered CommenterLinda Maddox
thanks dr. p.
May 15, 2011 at 10:23 PM | Registered CommenterDailyBail
The U.N. and the Fed BOTH are weapons to put nations back under the control of the royal houses of Europe. This talk of Geithner bullying people. Pop a ___ in his ___ if he bullies you . You are a goddam national leader. Act like it. The IMF is a weapon and Geithner is a mercenary who leaves total destruction in his wake. Why is this so difficult for you necktie people to understand? If you knew it already, why did you not warn us? If you cower, get out. Your putting your comfort before your people is shameful. I don't care how much you will miss the buffet table.
May 15, 2011 at 10:36 PM | Unregistered CommenterHoward T. Lewis III
Group of 30, don't be silly.
May 15, 2011 at 11:17 PM | Unregistered CommenterPatriot Games the Party Tribalist
Somebody talk me down. The IMF sits on no "real" property. It's just a corporation that is funded by other countries for what? To bail out other countries. They have no capital(or capitol) I saw onn CNN today the IMF has the lending capacity of 750 billion dollars. We gave that twice over to Wall Street, not to mention QE1 and QE 2. Why do we want to go to another bankster that we fund and will only bury us deeper in debt? Bankers of last resort? Pleez.
May 16, 2011 at 5:51 PM | Unregistered Commenterrobertsgt40
Emerging markets are increasingly losing faith in the International Monetary Fund due to its overtly European focus and questionable handling of the ongoing sovereign debt crisis, Ashmore’s head of research Jerome Booth has said.

Jul 28, 2011 at 12:44 PM | Registered CommenterDailyBail
No More Tax Exemption for Churches

While Americans are forced to move from their homes, due to the inability to pay real estate taxes, churches should not be allowed to ride the “no taxes” gravy train.

Jul 28, 2011 at 12:45 PM | Registered CommenterDailyBail
"It's a huge thing for a developing country to not spend its wealth on its own development."---We're not even a developing country yet. We haven't been fully dismantled yet. We have a little futher to fall.
Jul 28, 2011 at 4:39 PM | Unregistered Commenterrobertsgt40
Geithner is the kid brother that Paulson and Bernanke have pushed through the broken rear window of the candy store while they stay outside and do 'look-out'. Predators? Hardly. More like the sprat that is about to be gulped down in one bite, if WE CAN GET A LITTLE LAW AROUND HERE.
Jul 29, 2011 at 2:07 AM | Unregistered CommenterHoward T. Lewis III
The story of the Asian Financial crisis is never complete without mentioning PM m mahathir of Malaysia. He imposed currency control for his country and in the process exposed one of the plundering tool of the IMF
Jul 31, 2011 at 11:48 AM | Unregistered Commenterjeffgoh

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