If You Haven't Been Sending Your Messages to Delong@econ.Berkeley.edu, I Have Not Been Getting Them...
The Financial Times Editorial Board Turns Shrill, Joins the Left Opposition, and Calls for More Economic Stimulus

Simon Johnson Half-Convinces Me That Christine Lagarde Would Be a Good IMF Head

Simon Johnson says Christine Lagarde wants to run the IMF so she can lemnd all its money to the Greeks, the Irish, the Portuguese, etc., and so rescue the German and the French banks:

Just a few years ago, euro-zone countries were at the forefront of those saying that the International Monetary Fund had lost its relevance and should be downsized. French authorities regarded the I.M.F. as so marginal that President Nicolas Sarkozy was happy to put forward the name of a potential rival, Dominique Strauss-Kahn, as a candidate for its managing director, in fall 2007. Today the French government is working overtime to make sure that a Sarkozy loyalist, the leader of his economic team — Finance Minister Christine Lagarde — becomes the next managing director. Why do France and other euro-zone countries now care so much about who runs the I.M.F.?

The euro currency union has a serious problem, to be sure, with the likes of Greece, Ireland and Portugal, but it is beyond bizarre that these countries are borrowing from the I.M.F.... Greece has a current account deficit, but its money, the euro, is one of the world’s hardest currencies — a reserve currency in which central banks and private business keep their rainy-day funds (as are dollars, yen, Swiss francs and, perhaps, British pounds). The euro zone as a whole does not have a current account deficit.

I vividly recall discussions with euro-zone authorities in 2007 — when I was chief economist at the I.M.F. — in which they argued that current-account imbalances within the euro zone had no meaning and were not the business of the I.M.F. Their argument was that the I.M.F. was not concerned with payment imbalances between the various American states (all, of course, using the dollar), and it should likewise back away from discussing the fact that some euro-zone countries, like Germany and the Netherlands, had large surpluses in their current accounts while Greece, Spain and others had big deficits.... As the euro is a reserve currency — and a highly regarded one; for example, it remains strong relative to the dollar — the I.M.F. is now essentially lending euros to the euro zone through its various bailout programs.

Does this make sense? No, unless you understand that the goal of these various bailouts is to ensure that German and French taxpayers do not realize the full extent of their losses or appreciate the ways in which their banks have been mismanaged...

I would say that spreading the losses over the IMF's entire capital base rather than making French and German taxpayers pay them is only a second-order goal. The first-order goal is to prevent another flight-to-safety and a Great Depression-scale sovereign debt crisis. Odds are that if you give the French and German taxpayers the choice between paying for the eurozone's financial crisis losses on the one hand and risking a much deeper depression on the other, they will risk deeper depression.

And that would be bad.

I fear Christine Lagarde as a bureaucrat who would bring the euro-austerity consensus to the IMF. Simon fears that she is someone who will not let Mediterranean Europe twist slowly, slowly in the wind.

Our fears cannot both be right.

And we are at a stage in which almost any stimulative policy moves by almost any organization with the political maneuvering room to undertake them is a good idea.

There are times to worry about moral hazard. This is not one of them.