After a speech last week at the Brookings Institution on the financial crisis, IMF Managing Director Christine Lagarde took questions from the audience, including one from U.S. Bureau of Economic Analysis economist Garth Trinkl. Trinkl wanted to know if a massive mortgage bailout — funded by taxpayers — was in the offing and what Lagarde and the IMF thought about it.
Asked Trinkl, “Is this a time where there could be some debt restructuring within the older [advanced] countries to add to aggregate demand in the U.S.? And could this expand beyond just foreclosures so that there could be — now that the financial sector has had a boost — the middle class in the OECD could have its own boost?”
“A matter of urgency”
Lagarde responded to Trinkl’s question, saying, “This is something the IMF has had a long-standing position on. The housing problem is something that needs to be addressed as a matter of urgency.”
But what business is it of the IMF’s? Is Lagarde joining the Obama reelection campaign to push for his policies? Taxpayers in part pay for her salary. Is this what they’re paying for?
The only thing Congress should be “urgently considering” is withdrawing the $165 billion of U.S. taxpayer funds from the IMF. Because of the IMF, we are on the hook for tens of billions of debt owed by bankrupt countries in Europe and elsewhere.
This is a very dangerous precedent. The IMF — along with the European Union — is already making demands on the sovereignty of countries like Greece, Ireland, and Portugal that have been forced to accept bailout refinance loans for their sovereign debt.
Now, Lagarde is inserting herself and the IMF directly into the economic decisions of the United States. She is proving the worse fears of many that the IMF intends to dictate economic terms to every nation in the world. By inserting herself into the already highly charged domestic political debate over mortgage bailouts, Legarde has lite a fuse that could explode at any time.
Mortgage bailout debate heats up
Trinkl was implicitly referring to recent pressure being placed on Federal Housing Finance Administration head Edward DeMarco to use taxpayer money to bail out borrowers who owe more on their mortgages than their houses are worth.
So far, DeMarco has refused on the grounds it would put Fannie Mae and Freddie Mac further into the red when his statutory mission provided by Congress was to “ensure that… each regulated entity operates in a safe and sound manner”. For that, he has been blasted by congressional Democrats who want an election year handout for a favored constituency.
Now, the Obama Administration wants DeMarco to tap directly into what remains of the Troubled Asset Relief Program (TARP) so that the costs of the bailouts will be added directly to the national debt and not be booked as losses for Fannie and Freddie — which of course, would still have been added to the debt anyway.
But DeMarco is still resisting. At a recent Brookings Institution speech of his own, he noted even if Fannie and Freddie engaged in mortgage principal forgiveness, eligibility for such a program would be limited to at most about 691,000.
Said DeMarco, “Whether Fannie Mae or Freddie Mac forgive principal or not, the universe of Enterprise borrowers potentially eligible for a HAMP PRA is well less than one million households, a fraction of the estimated 11 million underwater borrowers in the country today.”
But by Lagarde’s analysis, a far more widespread principal forgiveness strategy of as much if not all of the nation’s $717 billion negative equity would be needed to unclog the arteries of the global financial system.
She explained, “The boys and girls, Fannie and Freddie, have to be part of the equation, because clearly, the American households have to be able to unload a bit. Just in the way we’ve encouraged banks to lend, well, the households have to be helped to borrow so that consumption and appropriate indebtedness can be reinitiated. That’s our position.”
“Appropriate indebtedness can be reinitiated”? That’s what she said, folks.
Lagarde is referring to the total amount of credit outstanding in the U.S., a figure that has typically doubled every decade since World War II. But since 2008, it has remained essentially frozen at about $53 trillion.
Lagarde is suggesting that in order to boost aggregate demand — the premise of Trinkl’s question — taxpayers must assume the costs of borrowers’ bad decisions to take on loans they either could not afford or did not understand the risks associated with them.
By extension, Lagarde takes the ironic position that the only way banks will be able to expand lending — which Keynesians believe is necessary to facilitate economic growth — is if households are “able to unload a bit” of their bad debt onto taxpayers so that those troubled borrowers are able to take on new “good” debt.
This is akin to sending new credit cards to people who have just defaulted on their old ones.
Therefore, in Lagarde’s opinion, upside down mortgages in Nevada, Florida, California, and Arizona are holding back growth around the world.
Earlier in her Brookings Institution talk, Lagarde emphasized the urgency involved in her analysis, saying “countries have to be totally convinced of the interconnectedness of our economies”.
Lagarde was very much concerned that policymakers did not understand the implications of globalization on the financial system, noting that the “most connecting [thing] in a way is that of the financial sector’s totally integrated and organizing links and binds between our economies.”
She explained her apprehension: “My personal fear is that we lose sight of that, and some countries rather retire and withdraw in the vast territory that they have under their control and do not pay attention sufficiently to what happens to the rest of the world. Because what happens in the rest of the world is going to either have a negative or positive effect on them.”
Toeing the company line
While Lagarde’s worldview eagerly embraces expanding U.S. indebtedness on both a governmental and individual level to prop up the global financial house of cards, this is not a vision that embraces the concept of individual sovereignty our nation was founded on. It is one that treats individuals more like drones in a bee hive, working toward collective ends.
In other words, in Lagarde’s mind, we’re all in this together, so the U.S. and its citizens had better get on board and toe the company line — by taking on massive amounts of new debt.
But let’s leave that aside for a moment, and even the fact that Lagarde is sticking her nose where it doesn’t belong. Let’s just consider everything she said.
If she is telling the truth, that global economic growth depends in fact on the American people going deeper into “appropriate indebtedness,” being nothing more than slaves to the world bank cartel, we’ve got a much bigger problem on our hands.
If what she says is true, then liberty cannot survive while the cartel is allowed to exist. That the only way to save the individual from totalitarianism on a global scale — is to let it burn. So, stripped of all the diplomatic-speak and the polite decorum, is this what Lagarde was saying, is this the choice she is laying out for the American people and other peoples of the world? If so, we are in for a very rocky time.
Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.