Choice of I.M.F. Critic Highlights Trump’s Reversal of Global Policy

2017-03-20 06:09:03

 

Choice of I.M.F. Critic Highlights Trump’s Reversal of Global Policy

For nearly 20 years, Adam Lerrick, a conservative economist, has been a vocal scold of global organizations like the International Monetary Fund, arguing that such institutions burn through taxpayer money and foster an insular culture of elitism, bailouts and scant accountability.

Now, Mr. Lerrick, a former investment banker and a visiting scholar at the right-leaning American Enterprise Institute, is set to get a chance to turn philosophy into policy, after the announcement last week that President Trump intended to nominate him as deputy under secretary of the Treasury for international finance.

The selection of Mr. Lerrick, who is well known in global financial circles for his evangelical opposition to bailouts for banks, countries and investors, underscores how Mr. Trump’s economic team is turning to critics of global economic policy as it seeks to reverse decades of Washington consensus.

Notably, Peter Navarro, an academic and author known for his highly critical views on China’s economic policies, was named a senior trade adviser to the president, with a brief to examine relations between the United States and countries like China and Germany.

Mr. Lerrick’s new job has not yet been formally announced, and he must be confirmed by the Senate before he can get to work.

But his pending appointment signals that another major cornerstone of conventional thinking under Democratic and Republican administrations — broad support for the I.M.F., the World Bank and other international financial institutions — will be scrutinized at the highest levels of the new administration.

Mr. Trump’s first volley on this front came last week in his proposed spending plan, which calls for slashing $650 million in financing to the World Bank over three years. And Congress, never a fan of taxpayer support for the I.M.F., continues to have its doubts. Also last week, Representative Bill Huizenga, Republican of Michigan, introduced a bill that calls for the United States to oppose the fund’s “cofinancing of a third Greek bailout.”

Mr. Lerrick, if he is confirmed to the new position, will report to David Malpass, the top Treasury official overseeing matters of international finance, who himself has a long record of criticizing the I.M.F.

Mr. Lerrick’s official remit includes advancing the Treasury’s policy agenda with America’s top economic allies, but it is expected that a major part of his job — his first in government — will be to push for major changes in how the World Bank and the I.M.F. are run.

His skepticism of the fund’s role as presiding firefighter of the global financial system dates to the late 1990s, when he became disenchanted with the I.M.F.’s response to countries in Southeast Asia experiencing runs on their currencies.

In 1999, having already quit his career as a senior investment banker at Salomon Brothers and Credit Suisse First Boston, Mr. Lerrick wrote a paper in which he argued that American taxpayers could save a bundle if the I.M.F. were allowed to tap global bond market funds rather than relying solely on quota-based disbursements from the United States and other large nations.

In essence, Mr. Lerrick’s complaint was that the fund had strayed too far from its original mandate: to provide short-term loans to developed economies running short on cash. Instead, he said, it had become a lender of first resort to developing economies in various states of financial distress.

This notion of the I.M.F. as an overstaffed body of meddling economists too eager to bail out the next spendthrift government to come knocking on its door — be it South Korea, Brazil, Argentina or, ultimately, Greece — became a recurring theme for Mr. Lerrick in his critiques over the years.

It immediately caught the eye of Allan H. Meltzer, a top economist in the Reagan administration who hired Mr. Lerrick in 1999 to help him with a report, ordered by Congress, that examined the business models of the I.M.F., the World Bank and other international lending bodies supported by Washington.

The study, published in 2000, criticized the fund and the World Bank for overreaching and recommended a number of radical reforms meant to reduce the scope of those bodies’ powers.

That Mr. Lerrick, 60, may now be in a position to put some of their long-cherished ideas into practice thrills his mentor. As a policy maven and academic, Mr. Meltzer has promoted the view that countries and investors should suffer the consequences of their mistakes, whether flawed fiscal measures or bad lending decisions. The popular anti-bailout slogan “capitalism without failure is like religion without sin” has been credited to him.

“It’s corrupting to give money to countries like Greece that never reform; those are taxpayer monies the people who voted worked hard for,” Mr. Meltzer, now a professor at the Tepper Business School at Carnegie Mellon University, said in an interview last week. “If we bail out countries that do things that are not in the interest of their citizens, then we just get more of the same. Adam is the right man for this job.”

Mr. Lerrick declined to comment for this article.

When it comes to preaching the no-bailout line, he is such a true believer that he has come to be seen among bond investors and hedge funds as a sort of prince of darkness, counseling finance ministers from Buenos Aires to Berlin to impose losses on investors when governments can no longer pay their debts. He played a leading role behind the scenes in both the Argentine and Greek debt-restructuring dramas and also advocated haircuts for depositors in Cyprus.

Of course, there is a long tradition of criticism of the I.M.F. and the World Bank from conservative economists at think tanks, in university classrooms and on opinion pages.

Once in government, though, and in the thick of a financial calamity, economists may find deploying the expertise of the fund and its war chest tempting indeed.

That is what happened in 2010, when the I.M.F. joined Europe in bailing out Greece, Ireland and Portugal; as a result, the fund’s loan book jumped to a high of $96 billion in 2012, from just $9 billion in 2007.

Loans outstanding are now down to $54 billion, and at $10 billion, Greece is the fund’s second-largest exposure, after Portugal. That Greece and the fund are still trading barbs seven years later, over how to restructure the Greek pension system, highlights a point Mr. Lerrick has frequently made: that the I.M.F. should not involve itself in such detailed, and politically fraught, matters of a country’s economy.

Since the global financial crisis, the policy mood toward such rescues has shifted in Mr. Lerrick’s direction: Those left holding Greek bonds in 2012 took a big hit, depositors with more than 100,000 euros in Cypriot banks in 2013 lost money, and there are now laws in place in Europe that make bond investors pay when a bank fails.

The I.M.F. has also moved to ensure that debt-restructuring options are examined more closely when a struggling nation petitions for help.

Called before the Senate in 2000 to testify about the I.M.F.’s future and the extent to which the United States government should continue backing the institution, Mr. Lerrick was asked point-blank by a senator: Do you think we need an I.M.F.?

Yes, he replied, there was a big role for the I.M.F. to play as a lender of last resort to emerging markets. The problem, he said, is that when the fund does all these other things, its utility is diminished.

“What I would propose is that there is a valuable role for the I.M.F. to play,” Mr. Lerrick said. “But reforms must be instituted to make sure that the costs are minimized, if not eliminated.”

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