Hello everyone and welcome to Power and Consequences. My name is Simon Johnson.
And I'm Gary Gensler. And today we're talking about a topic that I'm not sure is yet a household topic around the world, but it should be, and it maybe will be after this podcast: the IMF annual meetings. And Simon, we maybe should even say, what does IMF stand for? You live there. You were the chief economist.
Yes, it's the International Monetary Fund. And to be fair, the meetings we're talking about, which are coming up in mid-October in Bangkok, Thailand, it's actually strictly speaking the International Monetary Fund and the World Bank have joint annual meetings. So that's the topic. We think you should care. We think you don't care right now. We think you probably never heard of these meetings. Well, this episode is to try and persuade you to care and tell you what we think may happen.
All right, Gary. So, do you want to start off by asking me some of the basic questions just to make sure we level set, because I know this stuff a bit too well. Might forget to tell people some of the basics.
Well, for our listeners, full disclosure: Simon was the chief economist at the International Monetary Fund for a number of years, right before the global financial crisis. And I have attended these meetings, these IMF, World Bank meetings, multiple times, more times than I can recall, not as a member of the IMF or the World Bank, but just in my various US governmental roles. But Simon, could you go back and just maybe tell us, before we talk about the meetings, just what are the IMF and the World Bank, and then we'll go to what the meetings are all about.
Right. So, as World War II was drawing to its end in 1944, the US convened a meeting of the allies, as they called themselves, including the Soviet Union. Interestingly enough, they met at Bretton Woods, at a conference center up in New Hampshire, and they decided that the world needed some different financial architecture from what it had had before. Of course, between World War I and World War II, there was a Great Depression. There was a lot of inflation in some countries, and then there was another war. So, the question was, could we do better? And the IMF and the World Bank were two key pieces of this. The IMF was in charge of exchange rates. The IMF was designed to help countries manage short-term problems around their balance of payments or around their budgets. And the World Bank was designed initially to help Europe rebuild with additional capital, and then took on the mission of helping developing countries become more prosperous.
And when I think about those post-World War II reforms, both the IMF and World Bank were set up at the same time that the United Nations was, within a year or so, and also the origins of a global trading system, the General Agreement on Tariffs and Trade, which was not precisely the same time, but it was all around that time. It was the global order that, frankly, the United States, with at that time half of the world's economy, many other countries were decimated during the war, of course, but with half the world's economy we were in the lead. The US dollar had finally become that leading dominant currency, and these were some arrangements. But fast forward 80 years later, of course, the economy is different, the world order is different. We, the United States, are just about 25% of the world's economy now. China, depending upon how you measure the statistics, is something around 17% of the world's economy. So, things are quite different. Simon, what would you say about these meetings? I don't even know how many decades they go back. I've attended them. My gosh, I think my first ones may have been in the late 1990s, but I dare say they may have been going on well before that.
Oh, they've had meetings since the beginning, Gary, because this is an essential part of the governance of the IMF and the World Bank. They're a little bit like credit cooperatives, to be honest. All countries more or less belong or are invited to belong. The Soviet Union and its allies did not participate during the Cold War, but after 1991, they did pretty much all get on board. I agree with you, by the way, that the General Agreement on Tariffs and Trade, which then became the World Trade Organization, is quite an integral part of this conversation. They meet separately. It's not at the IMF World Bank meetings necessarily or always the primary issue. The UN, which has just had its General Assembly, is somewhat different and not that closely connected, but it is the same spirit of cooperation. And what I would also stress, Gary, is that while the creation of the IMF and the World Bank was not about altruism, in my perspective, it was about the US helping other countries to help themselves, so they could become better, more robust markets and not have major global wars or great depressions. I think there was a spirit of non-oppression that's quite remarkable looking back. So, for example, the managing director of the IMF initially was a European, because the Europeans were presumed to be the debtors and the US was going to be the creditor. Now it's changed. The Europeans are no longer the debtors to the world economy. The US is no longer the creditor either, but the Europeans still have a very big voice at the IMF and the World Bank. And that may be consequential for this year also.
And you raise a number of interesting points. The International Monetary Fund was set up and still largely is what I would say a financial crisis or country crisis firefighting department. What do I mean by that? That means that when a country gets into distress around its international bonds, its debt, its currency, its balance of payments, as Simon already said, the IMF stands ready. Now, they have a governance system. They don't always come in, but they come in sort of as a firefighter. But this is an interesting set of firefighters. They show up at your house as it's burning and they say, 'Before we're going to put some water in and before we're going to send the firefighters in, you need to agree to these following conditions.' So this conditional firefighting is, I don't know if that was initially what they were doing 80 years ago, but that's what they've come to be seen as. Whereas the World Bank, through its two big programs, makes loans. They make loans largely in this day and age to developing countries, the Global South broadly, either traditional loans or what's often called concessional loans, where they don't really expect to get it all paid back. But you were at the IMF. Do you think my characterizations are fair, or do you want to take some umbrage as to how I say this?
Well, I'm not going to take umbrage, but I do think the firefighting metaphor is a bit overstretched. It's much more like if one of your relatives gets into financial trouble, a relative who you care for, and you don't want them to hit bad times, you may rush over to their house, you may help them go through their accounts, you may even write them a check on the spot, I don't know, but then you probably want to have a conversation about, okay, what happened here exactly? What did you miss? How much debt are you carrying? What can we do about that? It's not crazy when somebody or a country has encountered problems which usually manifest themselves now in financial markets. Financial markets have turned against you. You can't finance government debt, for example. Sure, outsiders can lend you money. Often that's going to be very helpful. But it's not unreasonable for them to have a conversation about what exactly went wrong here. Is it just bad luck, or was there something more systematically wrong or not ideal? And can we make some adjustments there? Now, having said that, there's a lot of concern, continues to be huge debate about whether the IMF is fair. Does it apply the same criteria to different kinds of countries? And that's a debate that will never end, but that also feeds into one of the topics that they'll be having in Bangkok in mid-October, which is who has a seat at the table, how many shares it's called quota there, but it means what's your voting shares in the IMF, and is that fair?
Look, as an individual who spent my life around finance, I do appreciate and think if I were ever asked to have a role at the International Monetary Fund, I would think about, am I lending to a country that's just been in such stress and not thought about what they need to do to sort of remedy or get on a pathway to remediation of their fiscal situation, of their monetary situation possibly. So I do have support for that. But over the decades, they definitely, the IMF, have come into quite a bit of debate as to whether these conditions are the right set of conditions. Are they done in a timely way? Are they done consistently? And it's about power and consequences. In the middle of the 1990s, when I was at the US Department of Treasury, there were a lot of use of the IMF for countries in distress in Asia and around the world, and there were some questions, all right, what is the US trying to, are they trying to remake through the IMF some of these economies in their own image and so forth. More recently, the Europeans very much want to add at these upcoming meetings, they want to add some further lending to Ukraine, and you know, what does that mean and so forth. And of course, Ukraine's very much still at war, and you can appreciate why they might need funding. So it's just an interesting set of dynamics for a lender and the conditionality in those programs.
Right. Well, you put your finger on two key sensitivities: the power of the US relative to the IMF and also the voice of the Europeans. Look, the headquarters of the IMF is located two blocks from the White House for a reason, and the only substantial organization between the IMF and the White House is the World Bank. So there's no question that the US intended to have a big voice, and it also has a veto over major decisions. So you can't make a big lending decision or other major policy decisions without the US being on board. Now, you were at the Treasury in the 1990s, late 1990s. I don't know your perspective on this, Gary, but a lot of people felt that the way that the IMF handled the so-called Asian financial crisis of 1998, which included not only some Asian economies but also Brazil and Russia, the feeling was that maybe the US Treasury was behind some of the IMF's policy prescriptions, and maybe that advice or the requirements the IMF imposed were not exactly what those economies needed. And maybe that was tilted a little bit more towards what the US Treasury wanted or the US Treasury view of the world. Would you care to comment on that or not? It's a long time ago, but may still be sensitive.
It would be hard to avoid that implication on the numbers. The United States has currently about 16.5% of the voting rights at the IMF. That's called the quota. It's also interesting, that means you have to fund it. The US for 16.5%. Well, we're a quarter of the world's economy. You might say that that figure doesn't surprise you, but it takes an 85% majority at the IMF to make major decisions. Now, we're not on this podcast going to get into what those major decisions are, but the US by tradition for 80 or so years has said, 'Look, the Europeans can lead the IMF and have the director of the IMF, but the US by consensus, by norms, generally has the leading principal deputy at the IMF.' And as you say, the building itself is just two blocks from the White House, which makes it three blocks from the US Treasury, right?
Yes, absolutely. Treasury is on the other side of the White House. Yes. On the funding piece, Gary, it's interesting. Most of the funding for the IMF, the core funding was put in at the beginning, including contributions in gold, which still belong to the national authorities, by the way. If the IMF was dissolved, you get your gold back. There have been quota increases. There have been additional funding provided, but the US always managed to do it in a way that is substantially off-balance sheet. So this is not a big congressional spending item ever. The World Bank is different. The World Bank does involve commitments, and the World Bank also raises capital in international capital markets and uses the high credit rating of the US and other industrial economies to lower its cost of borrowing with an effective credit guarantee from those countries. So there's a bit more budgetary exposure there for the World Bank. For the IMF, yes, US candidate. Yes, the US is core to it. And in the good days, there's a lot of cooperation between the US and other countries there, but ultimately the US does have a veto. And I don't think we'd ever give up that veto.
Yeah. And back in those 1990s, when there were so many challenges around the globe in various countries, Time magazine ran a piece with on the cover it said, 'The Committee to Save the World.' And there it was a picture of the US Treasury Secretary Bob Rubin, the head of the Federal Reserve Alan Greenspan, and I think Bob's deputy Larry Summers at the time. And inside there was some glossy pictures that I even think Tim Geithner, who subsequently became a Treasury Secretary years later. So the US imprint was very much there. Now, Simon, I'm always intrigued because the balance sheets of these organizations, while consequential in today's $120 trillion economy and with global banks like the JP Morgans and so forth of the world and the largest Chinese banks weighing in at three and four and five trillion dollars, the International Monetary Fund has currently a balance sheet of about 170 billion. Now they do have, as you rightly pointed out, an ability to draw. They have these quota commitments. They have two other programs. In aggregate, their quota and other sort of non-funded commitments where they can draw is a little over another trillion dollars. Whether you measure it that they have 1.3 trillion or somewhere in that vicinity or ballpark, if there was a real crisis and they needed to make some big moves and big loans, they can move hundreds of billions of dollars in circumstances. They tend not to. Their biggest current loan is to Argentina, I think. I think it's like 40 or 45 billion dollars. And then you've got Ukraine and Turkey and a number of others at in the 10 to 15 billion dollars. And don't get me wrong, 10 to 15 billion can be quite consequential to some of these countries, but they're not quite the numbers, let's say, that Microsoft or Google are borrowing to build data centers. I just put it in context here.
Yeah, it's a really good point. So, the IMF and the World Bank were quite big relative to the world economy and relative to capital flows and relative to the kinds of trouble you could get into in 1945 or 1955, but not today. So one question that comes up all the time is, should they be scaled up? Is there an agreement or can you get commitment to do that? Who would contribute the new money? Lots of sensitivities around that. People are looking at China. China may have other priorities and also want more voice, more seats at the table. I would also say that the key though is not just the money, it's also your ability to mobilize resources in difficult times. And yes, 1.2, 1.3 trillion looks like the headline limit right now, but if there were a big enough crisis and if the key shareholders agreed, you could raise more money through various channels backed by those governments. Of course, if the governments don't agree, or if everybody in the world agrees and not the United States, then you have a problem.
Yeah. So, all right. So, let's turn to these meetings. You participated as a key person. I mean, you probably were on that big stage presenting on the, I think it's Tuesday, when the IMF and World Bank present their forecast for the global economy and how things are going, and then there's that next meeting quite near after it, either that same day or the next day, about financial stability events. That was one of the barn burners I looked to listen to very closely. Tell our listeners a little bit about how you think about these meetings and why are they important? Are they basically big convening meetings, important as they are, to get central bankers and finance ministers from around the globe in one place twice a year to compare notes, or is there something else going on beyond convening and the messaging related to that convening?
Well, I see these meetings through the lens of my own experience. I think that's a fairly standard thing to do, and the role of the chief economist is to present the World Economic Outlook, which is an integrated perspective on where is the world today and what's likely to happen over the next, well, particularly 12 to 18 months, I would say. Now, this document, sometimes, and I did this a number of times, sometimes it was pretty good, I have to say, and we had a good articulation of the risks of what was going on. Sometimes it was not so good. It was a real negotiation within the IMF and between the IMF and all the various stakeholders, as I like to call them, or countries, if you want to be a little more blunt, with lots of arguments, but not confrontational shouting arguments, just a lot of back and forth with central banks or with ministries of finance about their forecasts, about private sector forecasts, trying to pull all of that together into what is the integrated global picture, because what I sell to you is what you buy from me, and so on and so forth. But there's a sort of a general attempt to build a consensus about where are we in the world economy? Are we booming? Are we in a recession? Are we going up or are we going down? And then what are the risks around that baseline?
What do you think they would do even today if the IMF career staff said China is only growing at X percent, and the Chinese officials say, well, no, no, no, we're really still growing at, call it their target, 5 percent, and the IMF crew says it's 2.5 percent? How do you get your report published? I've actually never thought about that dynamic for what is supposed to be kind of a thoughtful economic report.
Well, it's not a one-off conversation, and it's generally not that confrontational. A lot of back and forth, a lot of triangulation. What are other estimates out there? I think a bigger issue actually, Gary, now would be what if the IMF's forecast is not consistent with what the US is saying? That could be a big problem.
You think the US will try to be more sensitive and possibly push for a certain narrative even if the economists think that narrative is not accurate?
Yes, I do, actually, and I think other administrations, the Trump administration is not unique, to be completely clear. The US press does not pay a huge amount of attention to the IMF or the World Economic Outlook. There's plenty of other sources, but the US and its representatives don't appreciate the friction. They'll want the IMF to be on their side. They'll want a story about dynamism. They want a pro-growth AI investment story, and there'll be lots of concern about lethargy in Europe or slow economic growth, which, by the way, the European authorities are also concerned about. So I don't think there'll be so much friction on that point.
So my experience in attending these meetings, and I was always attending as a US government official, but not from the central bank. I might have been from the US Treasury or in various financial regulatory roles like chairing the SEC. So my experience was it was a great convening week. There were many officials from around the globe that I could get that quick half-hour meeting. There were some group meetings that we had. Interestingly, we used to have a group meeting amongst securities regulators who happened to be attending. So we just used it as that opportunity. And the Treasury Secretary often would get a group together on Friday of the week of about 15 or 20 of the leading central bankers around the globe. It was a remarkable sort of behind-the-curtains type of meeting, and each of the Treasury Secretaries ran it differently. Tim Geithner was a much more sort of, I would say, conversational, light meeting, but then it got more formalized in the next three or four secretaries. It got more formalized in the meetings. But nonetheless, some important exchange of views on the economy, on energy markets, on climate change, on AI, and most importantly, after the financial crisis in '08, a lot of conversation related to reform. And it wasn't always done in those two weeks a year, it was done in other forums like the Financial Stability Board. So that's how I found it an important, yes, talking, convening, colliding mechanism. And so I usually looked forward to them. My staff often said, 'Oh, we're going to lose Gary for a week. We need him to focus on SEC rulemaking and SEC enforcement actions.' But I usually tried to do a bit of that, but mostly go to the meetings.
Yes, I think there's two sides to this actually. One is on the positive side that officials in leading countries, which includes industrialized countries but also includes big emerging markets, they talk to each other a lot, so there's a great deal of exchange of information, there's exchange of ideas, there's also pushing back and forth on policy proposals that matter at the global level, and I think this is a good thing. So the IMF World Bank meetings are a culmination or one touch point in a continually ongoing, never-stopping series of interactions, and that's helpful for the world economy.
