Walking into the IMF’s HQ1 Building yesterday for the Spring Membership Meeting, I was struck by three dates carved in stone on the wall: 1973, 1983, 1998. Each major physical expansion of the IMF has coincided with three significant events in geo-economic history.
IMF History — A Snapshot
• 1973 (Phase I): Expansion occurred just as the Bretton Woods fixed exchange rate system was crumbling. By the end of 1973, all major reserve currencies were floating and the first oil shock had occurred.
• 1983 (Phase II): Expansion occurred against the backdrop of the Latin American Debt Crisis.
• 1998 (Phase III): Expansion, with its architectural homage to liquidity through the wall of water and fountains on Pennsylvania Avenue, occurred amid the East Asian Market Collapse (1997) and the Russian Bond Market Collapse (1998).
Where is Phase IV? Ten years after the most recent massive crisis, there is no Phase IV carved on the wall. Instead, the construction activity at the IMF focuses inward on making climate-conscious improvements in energy efficiency.
Recent History — Multiple Problems
It is not hard to understand the lack of a building boom at the IMF. Anti-globalization sentiment, perpetual controversy over the IMF’s role as a lender of last resort, and a range of controversial decisions over the decades (not to mention the populist sentiment against 50% of the IMF’s membership: central banks) would make any expansion impossible to justify.
A welcome return to economic growth globally, although tepid, cannot mask the concern about populism and political upheaval that have permeated the meetings and the risk assessments issued from the IMF so far this week. Uncertainty about the IMF’s future function hangs heavy in the air as voters in Europe and the US continue to question the value of, and need for, shared policymaking. This is no time to be considering “Phase IV” construction.
The challenges faced by the IMF and its companion Bretton Woods institutions will only grow from here as the tectonic shifts underway in geopolitics (driven by intensifying political polarization) press policymakers towards national solutions.
It’s not just populists seeking localization. Increasingly, technocrats and regulators seek it as well.
• Financial regulators are moving towards ring-fencing bank capital domestically through subsidiarization requirements in order to protect domestic financial stability.
• Regulators and banks have also been increasing reliance on local currency/local funding, localizing lending in order to insulate domestic banking systems from external spillovers.
• Tax regulators seek to challenge “Base Erosion and Profit Shifting” which is a technical way of saying they seek to localize tax revenues in the jurisdiction of the corporate headquarters.
• Other regulators seek to require data localization, sometimes for data privacy/protection purposes, sometimes for market surveillance purposes, and sometimes for economic policymaking purposes.
These broad trends help explain the lack of a visible commitment to expansion at the IMF in response to the most recent global financial crisis.
But the 2008 financial crisis and the 2010 EuroArea sovereign debt crisis are leaving an indelible mark on the IMF nonetheless. Seminars yesterday and today suggest to me in fact that the legacy of the recent round of crises will have a virtual impact on the IMF, literally.
Distributed Ledgers— An Opportunity?
The most recent crises did not occur in a vacuum. They occurred just as the globe was approaching a crucial singularity: the onset of cognitive computing and artificial intelligence. Technology is fueling a rise in alternative financial institutions and alternative financial tools better known as “FinTech.” The phenomenon is not limited to the private sector. At least three major central banks (Bank of England, European Central Bank, Monetary Authority of Singapore) have all announced plans to explore the possibility of issuing electronic national currencies at least for payment purposes.
A few weeks ago, the IMF created a High Level Advisory Group on FinTech. It’s formal remit is to “to study the economic and regulatory implications of developments in the area of finance and technology.” This is a stunning broad and vague mandate for an organization known to be a stickler for detail. The related seminar yesterday was a standing-room-only affair. Today’s session on the future of the IMF’s internal currency (the Special Drawing Right or SDR) was more thinly attended. But the link between the two issues is impossible to avoid.
The IMF seems once again to be exploring tentatively the possibility of permitting a broader use of the SDR beyond internal transactions among member central banks.
Potentially permitting public markets to use and trade SDRs at a point in time when central banks are flirting with issuing official sector virtual currencies suggests that technology could provide the IMF with a paradigm shift opportunity: the IMF could provide the private sector with a reliable, credible alternative currency to bitcoin.
Today’s seminar focused on the benefits of broader private market usage of the SDR, with strong support from China. Benefits included decreased FX risk and increased FX diversification (because the SDR is a basket of multiple currencies) as well as decreased exposure globally to the U.S. Dollar. This is an interesting topic for another day. I took the opportunity to ask the obvious technology question: do virtual currencies provide a bridge to facilitate the transition to market usage of the SDR? At least one panelist agreed and thanked me for the question.
The path towards market usage of the SDR is a long and uncertain one. Among other things, private usage of the SDR could require politically problematic amendments to the Articles of Agreement. In addition, as one panelist noted today, official sector use of distributed ledger technologies raises significant transparency issues.
But if the world seeks to diversify away from the U.S. dollar and the IMF seeks a new role, then technology could initiate for the IMF an entirely different type of construction project. For an institution whose nickname is “Its Mostly Fiscal,” floating an international currency could have quite an appeal for some. It would certain qualify as a virtual “Phase IV” construction effort on a par with the previous post-crisis physical building boom.