Not too long ago, policy makers, economists, even some elected officials were calling the International Monetary Fund irrelevant. After all, global trade was increasing at an impressive rate, emerging markets were roaring, and nations that previously were debtors were becoming creditors.
Some analysts were even suggesting that the IMF's Managing Director, the astute, and ever-polite Dominique Strauss-Kahn, was overpaid and not really earning his money, due to the IMF's light docket.
No longer 'non-essential'
Times change. The credit tsunami that has hit nations as a result of the financial crisis has underscored the vitalness of the IMF, as nations large and small, developed and undeveloped, scramble for funding to stabilize local and regional credit markets, prop-up attacked, declining currencies, and maintain functioning commercial arenas.
And there's no more-telling data point of the importance world leaders place on the IMF than the G-20's decision this week to increase funding for the organization to a record $1 trillion.
"The IMF is back," Strauss-Kahn told The Wall Street Journal. "Today you get the proof."
What will that $1 trillion do?
A good question investors and taxpayers may ask is 'what is the world getting for its $1 trillion commitment in new funds? First, up to $500 billion in intervention funds for the IMF: this includes the so-called 'fire storm' funds that prevent national system collapse and contagion. Second, special drawing rights worth about $250 billion: these rights are the equivalent of money which nations can exchange for hard currency – something that should increase liquidity in emerging markets that are hurting now. Third, a new, $100 billion credit line – increasing to $300 billion in three years – to encourage economic development via multi-country development banks. Finally, more funds to facilitate international trade – a finance provision that's been depleted by the financial crisis and recession.
The goal of the above? Stabilize national credit markets and facilitate commercial. So far in the financial crisis the IMF has had to intervene in Ukraine, Iceland, Latvia, Hungary, Armenia, Romania, Serbia and Pakistan, after they were unable to seek debt financing from private banks – who have been under pressure themselves during the financial crisis.
Policy Analysis: Hooray for the G-20! The G-20's decision to nearly triple the IMF's funding is a major step toward a new, more-stable global financial system. It's collective action and intervention at its very best. The IMF performs critical roles in boosting world liquidity, serving as a global lender, providing assistance to low-income countries, conducting economic surveillance, providing economic forecasts, and advising nations.
And, contrary to critics, the new, beefier IMF will strengthen capital markets and private enterprise around the world. Further, given the enormous resources and financial knowledge amassed in the developed and developing world, there should never be a 'failed economy' due to lack of liquidity in markets, and the G-20's new commitment to the IMF will prevent those tragedies, and others, from occurring, moving forward.
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