CNN's Zakaria: Head of International Monetary Fund Should Exclusively Be Chinese From Now On
Fareed Zakaria's desire to give power to all countries except the one he currently resides - the United States! - is nothing less than appalling.
On the CNN program bearing his name Sunday, Zakaria actually said, "It might be necessary to make clear that Christine Lagarde would be the last non-Chinese head of the [International Monetary Fund]" (video follows with transcript and commentary):
FAREED ZAKARIA: The European crisis that you've been reading about in the paper is worth watching carefully. In fact, it has now morphed into something much bigger than a European crisis - it could batter the entire global economy, which is pretty fragile anyway.
You've read a lot about Greece, but the problem in Europe is Italy. Greece is a nano-state; it makes up about 2% of the European Union's gross domestic product. Italy, on the other hand, is one of the seven largest economies in the world. Its debts are greater than those of Spain, Portugal, Ireland and Greece combined. It has long been governed in an almost cartoonishly bad manner. Italy is too big to fail but might also be too big to bail. Even Germany might not be able to credibly bail it out along with all the other troubled countries. So what can be done?
I don't think the leading proposals will work - creating Eurobonds or giving Brussels broader power to tax. They're simply not going to happen. Governments oppose it and people oppose it. And anyway, creating a tighter European Union will take ten years. Markets needs reassurance now.
So I have a proposal: We need a big bazooka. Facing a similar crisis in 2008, then-Treasury Secretary Henry Paulson talked about the need for a sum of money large enough to scare markets into submission. A bazooka. But the problem is this: All of the EU combined doesn't have one big enough. So who has the kind of money Italy needs?
Take a guess? They have $3 trillion in foreign exchange reserves. Yup, China. In fact, today, 10 trillion dollars of foreign exchange reserves are sitting around across the globe. That is the only pile of money large enough from which a bazooka could be fashioned.
The International Monetary Fund could go to the leading holders of such reserves - China, but also Japan, Brazil and Saudi Arabia - and ask for a $750 billion line of credit. The IMF would then extend that credit to the troubled EU economies, but insist on closely monitoring economic reforms, granting funds only as restructuring occurs. That credit line would more than cover the borrowing costs of both Italy and Spain for two years. The IMF terms would ensure that the two nations remained under pressure to reform and set up conditions for growth.
Now, the Chinese would have to devote at least half the funds. What's in it for them? A new global role. This could be the spur to giving China a much larger say at the IMF. In fact, it might be necessary to make clear that Christine Lagarde would be the last non-Chinese head of the organization.
In a world awash in debt, power shifts to creditors. After World War I, European nations were battered by debts, and Germany was battered by reparation payments. The only country that could provide credit was the United States. For America, providing desperately needed cash to Europe was its entry into the councils of power, a process that ultimately brought a powerful new player inside the global tent. Today's crisis is China's opportunity to become a "responsible stakeholder" in the global system. If this doesn't happen, hold on to your seat because we're in for a rough ride.
In principle, I don't have an argument with Zakaria's general idea here. In fact, it's not a bad one.
But in exchange for China's investment into this fund, it gets to run the IMF forever?
That's an absolutely absurd amount of economic power to be granted to one nation.
Maybe far more importantly, Zakaria completely ignored a significantly more urgent matter for America's economic future: China allowing its yuan to float.
At the present time, China's currency is pegged to the U.S. dollar in a fashion that keeps it very low relative to ours. This assures that its products are cheaper than ours across the globe.
America will only be able to compete with China if the yuan's value is determined by the foreign exchange markets. Until that point, China will continue to be able to dominate global trade.
Without a resolution of this issue, any additional economic power granted China - like giving it the authority to run the IMF forever! - would further diminish America's role in the world as well as our future income potential furthering inhibiting our ability to balance our budget and deal with the over $100 trillion of unfunded liabilities associated with Medicare and Social Security.
Does Zakaria care about this, or is his love for all countries other than his own far more important than the best interest of the nation he's decided to raise his family in?