As the world has sought to recover from the great panic of last autumn and the calamitous drop in asset prices, trade and output, no one has been more important in driving recovery than the managing director of the International Monetary Fund, Dominique Strauss-Kahn.
A suave Frenchman, with matinee idol looks, Strauss-Kahn has shown a radicalism previously unknown among IMF leaders.
Together with his senior deputy John Lipsky, a former chief economist at Wall Street bankers JP Morgan, the IMF is undertaking the biggest transition since it was designed at Bretton Woods in 1944.
Strauss-Kahn was born in the Paris suburb of Neuilly-sur-Seine to Jewish parents in 1949. His period as head at the IMF has not just been about steering the global economy out of slump. It has also been about strengthening his CV as the most able French Socialist capable of challenging Nicolas Sarkozy for the French presidency in 2012.
His willingness to change the culture of the IMF -— to meet the stern requirements of the G20 group of world leaders — means Strauss-Kahn is already being given very high marks for the job. Even the disclosure of a dalliance with an attractive Hungarian IMF official last year failed to shake him out of his post.
Strauss-Kahn, who was French finance minister from 1997 to 1999, made a splash when he arrived at the Davos World Economic Forum in January 2008 and stunned financial leaders by suggesting that what the world needed, to prevent it falling into deep recession, was a large fiscal stimulus.
His diagnosis, some eight months before the collapse of Lehman Brothers, and more than a year ahead of Gordon Brown’s G20 summit in London was ahead of the game and a sharp divergence from IMF orthodoxy.
Until the new managing director’s intervention the IMF’s solution for everything had been so called fiscal consolidation — a polite name for cutting budgets and raising taxes. Over the decades, nations facing financial difficulty had feared going to the IMF for loans because of concern that its recommendations might affect their political future and even lead to riots on the streets.
Britain itself experienced the bad medicine when Denis Healey was forced to take an IMF loan in 1976 amid a full-scale sterling crisis.
Strauss-Kahn changed all of this. Together with Lipsky, from a Jewish family in Iowa, he designed a new flexible loan facility, a kind of overdraft for struggling countries which is instantly disbursed without conditions. As the financial crisis worsened in the autumn of last year, a series of nations from Eastern Europe to Mexico took advantage and drew down tens of billions of dollars of loans.
So great was the demand that at the G20 London summit in April 2009 heads of state committed to raise some $750bn of new cash for the IMF so that it could continue to keep disaster at bay.
Strauss-Kahn, in a departure with the past, also promised to make emergency funds available to the poorest countries of Africa — cut off from capital flows — at zero interest.
He made this promise even though he knew the money was not there. At this month’s IMF annual general meeting in Istanbul, Strauss-Kahn was able to announce that he had persuaded Britain and France to use a small proportion of their fund quotas — the equivalent of shareholdings — as security for loans to finance the African facility.
But Strauss-Kahn’s biggest surprise is his willingness to take on the global banks regarded by many as the main culprits for the credit crunch, subsequent market panic and global recession. The resurgence of the profits and bonus culture — at a time when unemployment and poverty are still rising — remains at source of tension.
At the G20 meeting in Pittsburgh, the IMF was authorised to look at ways of calming bank profits.
The IMF’s managing director has lost no time. He dominated the headlines in the British press when he revealed that he has asked Lipsky to look at the idea of a ‘Tobin tax’ on banks. In the 1970s, the late James Tobin, a Nobel prize winning economist, proposed tax a small tax on foreign exchange transactions with the money raised used to set up a fund for developing countries.
The idea floundered but was revised again by the head of the Financial Services Authority Adair Turner in an interview in late August. It was won support in Germany and France and now the IMF has now launched its own study with a view to setting up an “insurance fund” which would hold resources to deal with future crises.
Historically, the main barrier to a Tobin-style tax has been enforcement.
But the strengthening of global financial governance with the empowerment of the G20 means that regulatory arbitrage, the moving of operations offshore to avoid tax, has become more difficult. Moreover, the anti-bank mood in many of the Western economies means that a broader transaction tax, aimed at excess profits, looks feasible.
Agreement clearly is a long way off but one should not underestimate Strauss-Kahn’s political clout.