What a Load of Bankers Straying from our usual area of St Anne's and Fylde, we've been moved to comment on plans being considered by the G7 nations to reform the International Monetary Fund (IMF). Our regular readers know that counterbalance doesn't usually get involved in high finance, so whats going on?

The idea being mooted is to shift the focus of the IMF away from helping (although even that's a rather dubious description of what's been happening in recent years), countries with balance of payment problems, and to move toward monitoring and supervising the effect such problems might have on other countries.

It is almost certain to happen, and it is a disastrous move, but then, with Paul Wolfowitz in charge, who can be surprised.

Quite apart from his unedifying demonstration of personal moral values, this man has driven the IMF down a path that is the financial equivalent of the Iraq war, exporting not US democracy this time but their self-centred free market ethos, and this has been a disaster for many developing countries who were not mature enough to take the acquired taste an unfettered market brings.

In our quite recent history, several intergovernmental organisations were established. These included:

The United Nations - whose mandate was to maintain peace.

The International Labour Organisation whose agenda promoted 'decent work' around the world, and

The World Heath Organisation which was concerned with improving health conditions around the world.

Toward the end of Word War II, in 1944, the US Monetary and Financial Conference was held in New Hampshire. The outcome became known as the 'Breton Woods Agreement.' It laid the foundations for three new intergovernmental financial institutions. They were:

The World Bank (formally the International Bank for Reconstruction and Development), whose aim was to fund the reconstruction of Europe after the devastations of WWII, and to save the world from future economic depressions.

The International Monetary Fund (IMF), which was given the task of ensuring global economic stability.

Keynes was a participant in this, and he postulated that it was the lack of sufficient aggregate demand that caused economic downturns, so it was Government's role to regulate and, most notably, encourage, consumerism.

He maintained that Government policies could help to stimulate what he called 'aggregate demand' (for which, read domestic consumption).

Where their monetary policy (budget deficit, inflation, trade deficit etc) was ineffective, Governments could use fiscal policy, (increasing expenditure or cutting taxes), to release money for consumer spending into their economy.

The World Trade Organisation (WTO) was the third institution. Its role was to govern international trade relations so as to inhibit countries from engaging in 'beggar your neighbour' trade policies - where countries would raise tariffs to maintain their own economies at the expense of their neighbours.

Unlike the IMF and the World Bank, the WTO doesn't make rules itself, but it is a forum within which trade negotiations can take place.

It's interesting to note that these organisations behave in concert, regulating the inputs and outputs of a country just like businesses would seek to establish a cartel (which they, who promote competition and private ownership as the foundation of growth, so despise).

We quite enjoy the delicious irony of seeing the world's freemarketeers 'beggaring their own neighbours' by preventing them from competing in a free market.

But this pleasure is usually tempered by our concern that at the other end of their agendas are real people, struggling to cope with everyday life made worse by these hypocrites.

The IMF abhors capital controls, and soon took to conditioning the loans it made to governments so they were required to allow the free movement of money in (and out) of their country.

The IMF is populated and run by the finance ministers and central bank governors who are in thrall to (and affected by the views of) the financial community, not the ordinary people whose lives are affected by their decisions.

It would not be unfair to say their policies and the loan conditions they impose are as much about opening up opportunities for western (for which read chiefly the US) banks and financial institutions to profit from the affected countries they 'support'.

The IMF also normally requires the 'liberalisation' of a country's currency and interest rates - arguing that the private sector is a better and more efficient manager of such matters. They also usually require countries to open their banking systems to foreign competition - which is often good for multinational banking companies, but bad for local businesses who are seen as being 'too small to bother with' once the local banks have been put out of business.

In effect, countries seeking an IMF loan have to hand over their economic sovereignty to the policymakers of the IMF, who also (typically) require privatisation of publicly run enterprises.

But at least they got the loan

Until now.

Now the focus is to shift to 'monitoring and supervising the effect such problems might have on other countries.'

So now it looks as though the loan won't just carry conditions based on and affecting the recipient country's economy, but on the effect that country might be having on other countries.

Not much hope of this being the right direction to ensure global economic stability, (Unless, of course, like democracy in Iraq, it's going to be imposed by the US.)

Perhaps this is why there is a move by so many developing countries to extricate themselves from the clutches of the IMF, and why alternative intergovernmental funding institutions being set up, particularly in the middle and the Far East, thus fragmenting what should have been maintained a unifying international institution.

The changes that have been wrought in the IMF, mostly in recent years, by people like Wolfowitz, and have become self-denying. Those who need their services no longer trust them to have at their interests at heart.

Like bankers in this country they have short term horizons. Just as the young couple looking to borrow for their first home are no longer seen as an opportunity to develop a long term customer relationship, but as a short-term profit taking and selling opportunity, so the IMF now wants to know what's in it for their own 'shareholders'.

That's why it's such a disaster.

Dated: 19 April 2007