There is at least one fast food chain whose menu offers customers a simple hot potato. On Wednesday, the Obama administration served a hot potato at the House Financial Services Committee's Monetary Policy and Trade Subcommittee hearing titled “Evaluating U.S. Contributions to the International Monetary Fund.”
The lone witness was Lael Brainard, Under Secretary of the Treasury for International Affairs, one of the leading administration voices on behalf of free trade.
By way of background, as a staff member of the committee, I drafted dissenting views on several occasions when administrations sought increased contributions for the International Monetary Fund (IMF), World Bank and regional development banks. These proposals inevitably passed with the backing of the “too big to fail” banks and their multinational corporate clients, but the objective of opponents was to make the administration and the industry beneficiaries pay the highest possible political price.
Brainard’s message to the subcommittee, in essence, was that this cycle is about to start again, because the administration proposes to shift $63 billion from New Arrangements to Borrow (NAB) at the IMF to the U.S. quota in order to fulfill a commitment made to the G20 in 2009 in response to the 2008 episode of the ongoing financial crisis. She argued that this action is necessary to maintain the standing of the United States as the contributor of 17.69 percent of the fund and the sole nation among the 188 members countries empowered to veto actions of the IMF.
Subcommittee Chairman John Campbell, R-Calif., a CPA, expressed disappointment that the administration has not included this proposal in its budget request, given that the shift in the funds from the reserve to the quota results in 25 percent of the amount taking the form of callable capital. Thus, he argued, nearly $16 billion would have to be charged to the budget. In addition, the United States would accept an amendment to the IMF Articles of Agreement to change the composition of the Executive Board in a manner that would preserve the U.S. board seat and veto.
Brainard contended, as previous Treasury representatives have done for generations, that the U.S. contribution is merely an “exchange of assets” that has no budgetary implications.
Campbell retorted that all purchases are exchanges of assets; if one buys a chair, one exchanges money for the chair, but it is an expenditure of the money.
Brainard touted the three functions the IMF performs in the global economy: 1) providing funding for balance of payments adjustments coupled with conditions, 2) market surveillance and 3) technical advice. She emphasized that the United States enjoys a special advantage due to its veto power, which gives it effective control over the programs when it chooses to exercise it. Thus, the IMF is, in effect “our thing.”
Campbell’s response could be viewed as akin to the question associated with Sarah Palin, “So how’s that workin’ out for ya?” A more sophisticated view, presented in a recent article
in this space, is that the IMF was created at Bretton Woods in order to establish the predominance of the dollar as a reserve currency convertible into gold under a regime of fixed exchange rates that collapsed in 1967 when the French under Charles de Gaulle decided the time was ripe to present more dollars than the United States could redeem in gold.
So four decades later, what is the point? Apparently, the point is, first, that the administration made this commitment, and second, the dollar has reached a point where critics contend that its role as the sole reserve currency is unsustainable, although it has not actually been replaced by gold, a basket of currencies or some other alternative.
The outlook is for this issue to become part of the negotiations between congressional Republicans and the administration over the budget, the debt ceiling, bailouts of too big to fail banks, pending nominations and pet issues of legislators.
In this process of horse trading, the administration may argue, as it did with the debt ceiling, that it will not pay a price for meeting commitments the United States has made to its global creditors. Congressional leaders will probably package this in a manner that will avoid a separate vote, and opponents will employ a variety of tactics to force one. Watch this space for further developments.
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