Thursday, May 19, 2011

US: Dear Liberals: It’s Your Fed’s Paper Money That’s Thwarting Full Employment – by Ralph Benko

Last week, the Roosevelt Institute took notice of a massing conservative attack on the Progressives’ Achilles heel: the Fed’s paper dollar system. The Roosevelt’s Mike Konczal wrote, “Conservatives are organizing against a full employment mandate and rallying around the gold standard wing of their party, and I believe it is time progressives and liberals start to play offense.”

Konczal is half right and half wrong. But he is more astute than most. Conservatives are rallying around the gold standard wing of their party. But not against a full employment mandate.

Konczal hurriedly is convening “The Future of the Federal Reserve Event” this week. Konczal’s a big deal. He is read by Krugman. His blog,Rortybomb, was recently tapped by Ezra Klein in Time Magazine as the world’s 22nd best economic and finance blog. Reuters’ Felix Salmon rhapsodizes that he is “the Italian Vogue of the economoblogosphere, the best that there is, read by everybody who matters, if nobody else.” And the Roosevelt Institute? Its chief economist is Joseph Stiglitz.

The progressive movement now is starting to play offense by … riding to the defense of the Federal Reserve. High time that liberals are rallying to defend their mothership, arguably their most powerful bastion in the federal government. Conservatives indeed are launching a serious critique.

A revived supply side movement has captured and secured Fort Knox, the nation’s gold repository. It is using Fort Knox as a base from which to direct heavy fire at the left’s main redoubt, Fort Fed, where the printing presses are spraying an enfilade of deadly QEs.

“Conservatives are organizing…and rallying around the gold standard wing of their party.” It began with important initiatives by some nonprofit organizations (with which this writer is professionally associated). Last year the American Principles Project and American Principles in Actionmobilized. Momentum grew substantially stronger this year when joined by the Lehrman Institute’s web-based The Gold Standard Now.

The movement also strengthened when, at a ceremony at the Capitol Visitor’s Center, Dr. Judy Shelton importantly took leadership of Atlas Economic Research Foundation’s Sound Money Project. And the Manhattan Institute convened an extraordinary gathering to chart the future, introduced by Forbes’ own Steve Forbes, articulating a clearly developing consensus for the gold standard. Only two months ago theTea Party Patriots conducted a full breakout session on the gold standard at its first American Summit, a populist summit attended by thousands, and thousands more by web.

Cato Institute re-issued the iconic Gold Commission’s Minority Report, “The Case for Gold,” in e-book form, a report kept available to the public for many years by the Mises Institute, long a lonely voice for gold. Mises also makes available Jacques Rueff’s crucially important work on monetary policy and the classical gold standard, The Monetary Sin of the West.

In the media, turned itself into the Fort Knox of cutting edge analysis for the restoration of gold. The Wall Street Journal re-opened its editorial page for significant occasional analysis of gold. The Weekly Standard’s Bill Kristol, from the right, publicly praised the gold standard, (as did the Atlantic’s Michael Kinsley, from the left).

The information (downloadable here) from Bloomberg’s successful lawsuit against the Fed under the Freedom of Information Act is causing some of the greatest elite trembling since WikiLeaks. In the “economoblogosphere” The Supply Side became an internationally admired “Drudge Report” on supply side economics, including all things gold standard. (How did Time Magazine miss it?)

Libertarian icon Dr. Ron Paul conducted perhaps the most importantmonetary policy hearing in 40 years on rising prices, featuring three distinguished gold standard proponents: James Grant, Lewis E. Lehrman, and Prof. Joseph Salerno. Conservative champion Rep. Mike Pence, in a speech before the Detroit Economic Club, said “The time has come to have a debate over gold and the proper role it should play in our nation’s monetary affairs.”

Upcoming: The Iowa Tea Party, in concert with American Principles in Action, is revving up a blitz throughout the first caucus state. One of its featured messages? Gold money is honest money.

Upcoming: hearings by the House Domestic Monetary Policy Subcommittee discount window lending practices by the Fed.

Bravely facing this onslaught, Konczal cleverly insinuates a counterfactual clause: “against a full employment mandate.” Conservatives embrace gold not “against a full employment mandate” but because, by history and data, gold-based currency has proven itself as the key to the full employment mandate. Conservatives are turning to classical gold convertibility as the authentic proven way of uplifting workers. As the Sage of Mexico, Hugo Salinas-Price, has written most eloquently, “the gold standard is the generator and protector of jobs.”

As pointed out by columnist Charles W. Kadlec, writing in the Wall Street Journal:

“From 1947 through 1967, the year before the U.S. began to weasel out of its commitment to dollar-gold convertibility, unemployment averaged only 4.7% and never rose above 7%. …

What’s happened since 1971, when President Nixon formally broke the link between the dollar and gold? Higher average unemployment, slower growth, greater instability and a decline in the economy’s resilience. For the period 1971 through 2009, unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67 average, and real growth rates averaged less than 3%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for the past 14 months.”

When confessed liberal Paul Krugman recently attacked gold proponentsit drew this withering response from esteemed economic historian and columnist Professor Brian Domitrovic:

“There’s another fact-defying entry from Paul Krugman. His blog post from January 30 is titled, “Recessions Under the Gold Standard,” and the text manages to undermine both terms in that title. A total of one recession is adduced, that surrounding the panic of 1893, which as they used to teach in school, came about specifically because the US had recently balked at the gold standard and permitted the mass monetization of silver. No “recessions” plural and no gold standard.

You’ve got to look under a lot of rocks to find recessions in the era before the silver purchase act of 1890. For the 1880s, when the US was closest to being on a full gold standard, were the greatest decade of real economic growth in the nation’s history, and the only competition is the 1870s, when the US made the decision to commit to gold. We’re talking 5-6% growth per annum for the long haul.”

The progressive fairy tale (which they actually seem to believe, and is rather sweet … except for the calls to guillotine us, probably, dear reader, including you), casts conservatives as miserly creatures looking to squeeze every ounce of work from the sweet, vulnerable, working class at bare (and preferably below) subsistence wages.

Not so fast, Mike. That’s all fairy tale. It’s the progressives who have proved too willing to sell out the workers in return for elevating the liberal elites. Conservatives stand for real jobs, more jobs and better jobs. According to the supply side’s narrative the last time we were in power, with Reagan, we formulated and implemented a policy of a strong dollar and lower tax rates. That policy mix, of which gold is an improvement, quickly generated 20 million jobs. The nice thing about our fairy tale is… it’s true.

Yes, Mike, the Supply Side is rallying … after being out of power for three Bush terms with benighted, Progressive-scale, 2% annual growth rates. And your people have been in power for years. The unemployment rate is way over 8%. It is understandable that you would feel defensive.

The evidence shows your Fed’s papier-mâché money to be a big part of what is thwarting full employment. Honest money — dollars convertible to a defined weight of gold, not “faith-based” Federal Reserve Notes — carries the full employment mandate. That mandate belongs to conservatives, not to the Roosevelt Institute.

Peruvians wary of Humala –

Peruvians wary of Humala – by Carlos Alberto Montaner

Runoffs are never good and never were. Especially for the candidate who provokes greater rejection. The balloting makes clear not what the voter wishes but what he doesn’t want.

In a runoff, you vote against someone. For example, the Peruvians gave Ollanta Humala 33 percent of the votes and Keiko Fujimori 22 percent in the first round. Shortly thereafter, a poll revealed that the distance between them when facing each other, one on one, had been reduced to eight points. The latest survey reveals that only four points separate them. The trend favors Keiko.

It is inevitable to remember the 2006 elections. In the first round of that contest, Ollanta Humala obtained 30 percent of the votes and Alan García came in second with 24. In the runoff, despite the terrible experience of his first administration (1985-1990), characterized by hyperinflation and corruption scandals, García won with 53 percent of the vote.

Why did Alan win, without being destroyed by the bad memories left by his previous presidency? He won because most Peruvians regarded Humala a radical in the mold of Venezuelan President Hugo Chávez who might drag the country toward the abyss of the so-called “21st-Century socialism,” a chaotic way to impoverish society, strain human relations and poison international ties.

In those elections, Alan García very skillfully campaigned against Hugo Chávez more than against Humala, Chávez’s man in Lima, and achieved victory.

Humala learned the lesson, and in this campaign he presents himself as a disciple of President Luiz Inácio Lula da Silva rather than Chávez. He’s no longer a carnivorous socialist, he says. He insists that he has become tame and vegetarian. But the Peruvians, if we judge by the electoral trends, don’t believe him.

When did that transformation occur in Humala’s heart and conscience? Where are the express condemnations of the violations of democratic standards and human rights that happen in Cuba, Venezuela, Bolivia, Nicaragua and Ecuador — countries that, for now, shape the map of 21st-Century socialism?

The Peruvians fear, not without reason, that Humala’s moderation is a disguise. They think that he is the same radical and dangerous wolf he always was, this time clad in a lamb’s wool coat that’s too small for him. His current discourse is not what he really believes in but what has been suggested to him by the voting experts who advise him. They are making him sing a kind of dishonest ideological karaoke.

Once installed in Pizarro Palace, suspicious Peruvians presume, Humala will begin the dismantling of the democratic system, the cutting back of freedoms and the substitution of the economic model of market and private property by something similar to Chávez’s model.

How? The Fidel Castro-Hugo Chavéz model has a method. First step will be to elevate the level of popular support above 70 percent of the population. That can be done in less than 18 months through the creation of a framework of subsidies and government aid that wrecks the economy but draws loud popular applause.

The purpose is to recruit an army of grateful stomachs, for which he would rely on the large economic reserves left by Alan García’s outstanding second term, and the help of Venezuelan petrodollars, now that the barrel of crude exceeds $100.

The script then calls for a summons to referenda to reform or revoke the Constitution, to remake Parliament and give the president special powers, until, through a majority vote, the “liberal democracy” enjoyed by the Peruvians, founded on a division of powers and the limitation of authority, is replaced by a “dictatorial democracy,” agreed to and legitimized by the governed. This monstrosity has a precedent in Roman law, when the consuls agreed to turn over all authority to a supreme leader called the “dictator.”

Will Humala manage to overcome the fears of most Peruvians? That will depend on the decision made by that high percentage of voters who prefer not to vote or to spoil their ballot rather than opt for him or Keiko.

That’s what happened in 2006: Millions of Peruvians who had sworn never to back the APRA pinched their noses and voted for García, to keep Chávez from imposing his will in Peru. In the end, it was a good decision and García governed effectively. It is very likely that the same will happen this time.

Obama faces pivotal week on Mideast policy

Obama faces pivotal week on Mideast policy

President Barack Obama delivers remarks at a DNC event at Austin City Limits Moody Theater in Austin, Texas, May 10, 2011. REUTERS/Jim Young


(Reuters) - President Barack Obama's bid this week to reconnect with the Arab world after the killing of Osama bin Laden poses a daunting challenge complicated by an uneven U.S. response to the region's uprisings and his failure to advance Israeli-Palestinian peace.

Obama on Thursday will give his much-anticipated "Arab spring" speech, the centerpiece of a pivotal week of Middle East diplomacy that also will include talks with Jordan's King Abdullah II and Israeli Prime Minister Benjamin Netanyahu.

By laying out his own vision for a "reset" with the region, Obama aims to counter criticism that he has been slow and inconsistent in dealing with an unprecedented wave of popular revolts that have upended decades of U.S. Mideast policy.

But even as he reaches out to a wider Arab audience, he is likely to disappoint many with what will be left out -- fresh U.S. proposals for breaking the impasse between Israel and the Palestinians and getting them back to negotiations.

Clashes on Sunday on Israel's borders, where Israeli troops killed at least 13 Palestinian protesters, underscored the depth of Arab frustration over the decades-old conflict, which remains a central preoccupation in the region.

Unlike Obama's 2009 Cairo speech that sought to win the hearts and minds of Muslims worldwide after years of estrangement under his predecessor, George W. Bush, the White House insists the address Thursday at the State Department will focus on new flashpoints in the Middle East and North Africa.

Less than three weeks after U.S. Navy SEALs killed bin Laden in Pakistan, Obama will try to tie together events in the Arab world and put the al Qaeda leader's demise in the context of the region's political transformation, aides say.

However, it is unlikely -- according to Obama aides -- that he will use the chance to articulate an overarching strategy to supplant the case-by-case approach to turmoil engulfing U.S. allies like Egypt and Yemen and foes like Libya and Syria.

"The 'Arab spring' has huge uncertainties," said David Makovsky of the Washington Institute for Near East Policy, citing an Islamist rise to power as Washington's biggest fear. "So they want to avoid a one-size-fits-all doctrine."


Even before the bin Laden raid, aides were crafting a narrative on Middle East upheaval for Obama to roll out. Obama, enjoying a boost in his foreign policy standing following the risky assault, will make the case for Arabs to reject al Qaeda's Islamist militancy and embrace democratic change.

Aides suggest Obama's speech could carry a veiled warning to Iran, which he has said cannot be allowed to develop nuclear weapons, that he is a leader who matches words with actions.

But Obama's push for democratic reform will remain tempered by a desire to preserve longtime partnerships with autocratic Arab governments like Saudi Arabia considered crucial to fighting al Qaeda, containing Iran and securing oil supplies.

Obama's critics probably will not be satisfied.

"I don't think you can get away with a Mideast policy that just cherry-picks the easy ones," said Elliott Abrams, a senior fellow at the Council on Foreign Relations and Bush's former deputy national security adviser.

Obama's domestic opponents have accused him of acting too timidly in Libya to break the stalemate between Muammar Gaddafi and rebels trying to oust him, and of not being tough enough with autocratic allies in Yemen and Bahrain.

The administration also is under pressure to take stronger action against Syrian President Bashar al-Assad over his government's violent crackdown on a pro-democracy protests.

It's obviously a very fluid situation and every country is different," White House spokesman Jay Carney said.


Obama's advisers had weighed using Thursday's speech to present a new formula for restarting long-stalled peace talks between Israel and the Palestinians.

That was put on hold after a reconciliation deal between the Palestinian Authority and the Hamas Islamist movement, an accord Netanyahu denounced on Monday as a barrier to peace. The resignation last week of Obama's Middle East envoy, George Mitchell, further underscored faltering diplomatic prospects.

Obama raised Arab expectations for a more active and even-handed U.S. role when he took office but the mood soured when he backed down from confronting Israel over settlement building in the occupied West Bank. His unmet pledge to shut the prison at Guantanamo also has drawn Muslim criticism.

While Obama is expected to recommit broadly to seeking Israeli-Palestinian peace in his speech and during talks with Netanyahu on Friday, there are no plans to seek major Israeli concessions for now. Nor has the right-wing Israeli leader given any sign concessions would be forthcoming.

Pushing Netanyahu would risk alienating Israel's support base among the U.S. public and in Congress as Obama seeks re-election in 2012. Relations between Obama and Netanyahu already have been strained and both want to smooth over ties.

Obama will address the pro-Israel lobbying group AIPAC on Sunday to stress the "unshakeable bond" between Israel and the United States, the White House said. That gives Obama a chance to pre-empt Netanyahu's speech to Congress two days later.

Jordan's monarch, expected to voice Arab frustrations over U.S. peace efforts when he meets Obama on Tuesday, said in Washington the peace process was the region's "core issue."

With Arabs increasingly resigned to the limits of what they can expect from Obama, analysts in the Middle East question whether many will even be paying close attention on Thursday.

The White House already has cautioned against the notion that the speech -- which some U.S. media have dubbed "Cairo II" -- will be on par with his enthusiastically received address in the Egyptian capital nearly two years ago.

"People in the region who put a lot of hope in Obama and his rhetoric have been disillusioned by his actual policies," said Mouin Rabbani, an independent Middle East analyst based in Amman. "They may not be interested in tuning in for more."

Legal woes could derail Lagarde's IMF prospects

Legal woes could derail Lagarde's IMF prospects

France's Finance and Economy Minister Christine Lagarde (C), surrounded by the media, leaves a Parisian food and goods retailer after a visit focused on French employer's subsidies of meal coupons or restaurant tickets in Paris May 19, 2011. REUTERS/Benoit Tessier


(Reuters) - Christine Lagarde's deft handling of the G20 presidency has made the French finance minister a frontrunner to become the first woman to run the IMF, but a potential legal inquiry could upset her chances.

With Europe pushing hard to retain the IMF leadership in the wake of Frenchman Dominique Strauss-Kahn's resignation after his arrest for attempted rape, Lagarde has emerged as Europe's strongest candidate to fend off the claim of emerging economies.

Her fluent English and more than two decades of practicing law in Chicago are likely to boost her transatlantic appeal.

However, her chances could be undermined by a legal row, unlikely to be resolved before June at the earliest, over her decision to settle a dispute between the state and businessman Bernard Tapie, a personal friend of President Nicolas Sarkozy.

Lagarde denies any misconduct, and there is no suggestion of personal profit. But legal trouble could make her unacceptable to the IMF as it tries to polish its image after Strauss-Kahn's dramatic fall from grace.

"This weighs on Lagarde's candidacy. I don't see anyone putting someone with an affair like this looming over them at the head of the IMF," said one French parliamentary source. "Lagarde would be legitimate if it wasn't for the Tapie case."

Lagarde has won admirers from Washington to Beijing for skillfully balancing the interests of the world's major economies under France's Group of 20 presidency while making progress on guidelines to avoid a repeat of the global financial crisis.

Lagarde, 55, has also received plaudits for her instrumental role in approving a bailout mechanism to aid struggling members of the euro zone last May, making her well-placed to lead the multilateral lender as it grapples with Europe's debt crisis.

Officials in Berlin say Lagarde is liked and respected by Chancellor Angela Merkel, while European colleagues such as Swedish Finance Minister Anders Borg back her for the job.

In France, officials say that, though her appointment would deprive Sarkozy of a popular minister ahead of the 2012 presidential election, it would also hand him a powerful ally to promote his agenda for the G20 and the euro zone crisis.

Next week's Group of Eight summit in France gives Sarkozy the perfect opportunity to lobby the leaders of most of the IMF's main stakeholders on Lagarde's behalf, if he chooses to.

In a Reuters poll, 32 of 56 economists said Lagarde was the person most likely to be named to the post.

"Lagarde is Europe's joker in the pack. No one else has her profile," said one source close to IMF thinking. "The main problem is her judicial case. The most important thing for the IMF Board right now is a clean bill of health."


On May 10, a public prosecutor recommended a full judicial enquiry into Lagarde's role in awarding a 285 million euro payout to Tapie, a former left-wing minister whose support for Sarkozy's 2007 presidential campaign helped to discredit his Socialist rival.

Tapie had sued the government, alleging that the former state-owned bank Credit Lyonnais had defrauded him during the sale of his stake in the sports company Adidas in 1993.

Opposition deputies accused Lagarde of abuse of authority after she dropped a legal battle with Tapie in a bid to end the long-running case and submitted it to an arbitration panel, overruling officials in her ministry.

The prosecutor alleges that Lagarde ignored recommendations to check if the arbitration process was legal, and refused recommendations to appeal against the hefty compensation award.

Three judges now have to decide whether to proceed with the case against her or drop it.

"There is no deadline on the statutes but this should take around a month," said a prosecutor. "It's almost impossible for them to take a quick decision, given how technical the case is."

Lagarde says others are trying to sully her reputation, and even some leading opposition politicians have expressed regret that she is under scrutiny, saying the ultimate decision to go to arbitration came from Sarkozy's office.

Timing could be crucial. If the IMF seeks to fill the post quickly to turn the page on the sex scandal and press ahead with its European rescue packages, that could rule Lagarde out.

"It could take a while until she's clear and that could be a problem as far as the IMF is concerned," said Jacques Reland of the Global Policy Institute. "Otherwise, she has most of the qualities for the job."

U.S. Secretary of State Timothy Geithner appeared to give Lagarde breathing space on Wednesday by suggesting the IMF should name an internal head on an interim basis.

But Merkel said on Thursday that, while she wanted a European in the job, it was important to find a quick solution.

A final deadline could be September 1, when acting managing director John Lipsky's term ends. This could leave the IMF rudderless as the naming of a new deputy is the prerogative of the managing director, not the Board.


Europeans, who have controlled the Washington-based lender since its creation in 1945, insist that it must be a European who does the job at a time when the IMF is heavily involved in the "old Continent's" debt crisis.

Lagarde would be likely to continue Strauss-Kahn's policy, which softened the Fund's "orthodox" approach to stabilization policy and opposed debt restructuring in Europe.

Though Lagarde is not a trained economist, her strengths include stamina, negotiating skills and flawless English.

Lagarde has refused to comment on reports of her candidacy, though she is understood to be welcome the prospect of a return to the United States, where she worked as the first female head of the Chicago law firm Baker & Mackenzie before being recruited in 2005 by France's then-prime minister, Dominique de Villepin.

One senior European source said Lagarde already had backing from Washington and several large developing countries.

The court case is one of very few blemishes in Lagarde's four years as minister -- the second-longest tenure of any French finance minister of modern times.

She has made a handful of gaffes -- angering the French by telling them to take to bicycles when fuel prices rose -- and recently had an investment called briefly into question.

"Christine Lagarde is an extremely well-qualified candidate ... It would be inappropriate to decide to go for someone who is less qualified simply because they are non European," said DeAnne Julius, head of the Chatham House think-tank.

"I'm always in favor of a qualified woman getting a high profile job, so I think that would be an added plus."

Former Turkish economy minister Kemal Dervis is regarded as her main rival, combining impeccable emerging market credentials with experience of the World Bank and United Nations.

Wall Street flat on data; LinkedIn soars in debut

Wall Street flat on data; LinkedIn soars in debut

A flag flies on outside of the New York Stock Exchange building in New York May 6, 2010. REUTERS/Lucas Jackson


(Reuters) - U.S. stocks barely budged on Thursday after a mixed bag of economic data kept confidence in the economic recovery on shaky ground, but LinkedIn's shares surged in their Wall Street debut.

Economic data painted a cloudy picture after weekly jobless claims suggested the labor market was on track for recovery, but factory activity in the U.S. Mid-Atlantic region grew much more slowly than expected in May. In addition, sales of previously owned U.S. homes fell in April in a sign the housing market is still struggling.

"We continue to see the rate of growth slow. That has been the prevailing trend for the last three or four weeks and the Philly Fed is adding to that pressure," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

"With earnings season mostly behind us, it's been difficult to find or identify a catalyst that will take you to the next level, not without at least consolidating or absorbing some of the information and getting through some time."

In their public trading debut, shares of LinkedIn Corp (LNKD.N) more than doubled their IPO price in a jump reminiscent of the heyday of investors' love affair with Internet stocks. The stock rocketed to an intraday high of $121.97 -- or as much as 171 percent above its initial offering price of $45.

The Dow Jones industrial average .DJI rose 20,43 points, or 0.16 percent, to 12,586.61. The Standard & Poor's 500 Index .SPX inched up 0.46 of a point, or 0.03 percent, to 1,341.14. The Nasdaq Composite Index .IXIC was up 2.93 points, or 0.10 percent, to 2,817.93.

Semiconductor shares fell after Goldman Sachs cut its rating on Intel Corp (INTC.O) to "sell" from "neutral," citing slowing processor shipments, rising competition and record capital expenditure levels this year. The firm also lowered its rating on Applied Materials (AMAT.O) as part of a wider downgrade on the semiconductor equipment sector.

Intel shares lost 1.4 percent to $23.55 and Applied Materials dropped 1.7 percent to $14.26. The PHLX semiconductor index .SOX declined 1 percent.

Stocks, bonds, gold and the euro are expected to fall in the three months after the end of the Fed's second massive bond-buying operation, also known as quantitative easing, or QE2, a Reuters poll of 64 analysts and fund managers found on Thursday.

Obama seeks to recast ties with skeptical Arab world

Obama seeks to recast ties with skeptical Arab world

President Barack Obama delivers a speech about United States' policy on the Middle East and North Africa at the State Department in Washington May 19, 2011. REUTERS/Jason Reed


(Reuters) - President Barack Obama on Thursday invoked the killing of Osama bin Laden as a chance to recast relations with the Arab world and said the top U.S. priority was to promote democratic change across the region.

Obama, in his much-anticipated "Arab spring" speech, also ratcheted up pressure on Syrian leader Bashar al-Assad, saying for the first time that he must stop a crackdown on protests and lead a democratic transition "or get out of the way."

He hailed popular unrest sweeping the Middle East as a "historic opportunity" and said the U.S. future was bound to that of the region now caught up in unprecedented upheaval.

"The people have risen up to demand their basic human rights. Two leaders have stepped aside. More may follow," Obama told an audience of U.S. and foreign diplomats at the State Department in Washington.

His bid to reset ties with the Arab world also faced skepticism over what many have perceived as a hesitant and uneven response to the region's uprisings that threaten both U.S. friends and foes.

Struggling to regain the initiative in a week of intense Middle East diplomacy, Obama was seizing an opportunity to reach out to the Arab world in the wake of the death of Osama bin Laden at the hands of U.S. Navy SEAL commandos.

"We have dealt al Qaeda a huge blow by killing its leader," Obama said. "Bin Laden was not a martyr, he was a mass murderer ... Bin Laden and his murderous vision won some adherents but even before his death al Qaeda was losing its struggle for relevance."

Seeking to back democratic reform with economic incentives, Obama planned to announced billions of dollars in aid for Egypt and Tunisia to bolster their political transitions after revolts toppled autocratic leaders.

Obama's speech was his first major attempt to put the anti-government protests that have swept the Middle East in the context of U.S. national interests.

He has scrambled to keep pace with still-unfolding events that have ousted long-time leaders in Egypt and Tunisia, threatened those in Yemen and Bahrain and engulfed Libya in civil war where the United States and other powers unleashed a bombing campaign.

Strauss-Kahn Resigns as IMF Chief

Obama: Middle East Support is Priority

Obama’s Middle East Speech

Obama’s Middle East Speech Has Many American Audiences

President Obama spoke about Middle East policy at the State Department on Thursday.Doug Mills/The New York TimesPresident Obama spoke about Middle East policy at the State Department on Thursday.

Thursday’s speech by President Obama on the upheaval in the Middle East is aimed at a global audience. But it will also play out in a domestic — and political — context as Mr. Obama seeks a second term in the White House.

Since taking office, Mr. Obama has sought to strike a balance between reaching out to the Muslim world while also combating terrorism and pushing for progress toward peace between Israel and the Palestinians. The as-yet unfulfilled promise of that approach, which he described in a speech in Cairo in 2009, helped win him the Nobel Peace Prize early in his presidency.

But the effort to construct a cohesive narrative for American voters about his administration’s efforts in the region has proved more difficult. The peace process has been largely halted. The move away from Bush-era terrorism policies has gone more slowly than expected. And the uprisings in the Arab world have forced case-by-case decisions that sometimes appear contradictory.

“They need to make the case for why all of this stuff matters to Americans and give some narrative that makes sense for all the different things we are doing,” said Marc Lynch, the director of the Institute for Middle East Studies at George Washington University.

Mr. Obama’s decision to launch the raid in Pakistan that killed Osama bin Laden has clearly helped to define for Americans a new Obama story in the region. Thursday’s speech will give the president the opportunity to put those actions in a broader context, Mr. Lynch said.

Jewish voters are a small but critical Democratic constituency in terms of both votes and fund-raising; Mr. Obama, a Democrat, won nearly 80 percent of the Jewish vote in the 2008 election. That support will be particularly important Mr. Obama, who has been viewed with suspicion by some Jewish voters because of his early efforts to put pressure on Israel to stop settlement construction.

“Pivoting into presidential campaign season, they are going to want to have in place a robust story to tell,” said Mr. Lynch, who writes the Middle East blog for Foreign Policy magazine. “The more that they can choose a few clear themes that fit together into a clear story, the better.”

Thursday’s speech at the State Department is designed to be the first in a series of rhetorical opportunities for the president. On Friday, he will meet with Israeli Prime Minister Benjamin Netanyahu for a conversation that will be closely watched by the Jewish community in the United States.

And this weekend, Mr. Obama will address the American Israel Public Affairs Committee, the largest pro-Israel lobby in the United States. Together, the post-speech events will give the president a chance to assert his support for Israel early in the 2012 campaign cycle.

White House aides who previewed the speech for reporters Wednesday said that the president would use the opportunity to speak about the Middle East and North Africa region as a whole and how its challenges relate to the United States.

“Now, having wound down the Iraq war and continuing to do so, and having taken out Osama bin Laden, we are beginning to turn the page to a more positive and hopeful future for U.S. policy in the region,” a senior administration official said. “The president will have the opportunity to speak broadly about the change in the Middle East and North Africa, the implications for U.S. policy, and some concrete proposals for American policy going forward.”

Whom will he be speaking to? Leaders and citizens in the Middle East, of course. But several different American audiences will also be listening carefully to what he says. Here are some of them:

* His 2012 rivals: Before Bin Laden was killed, the Republican candidates for president had begun attacking Mr. Obama as a weak, feckless leader with no backbone. That argument is more difficult to make now.

But Mr. Obama’s rivals for the White House are not going to back away entirely from their criticisms of his foreign policy. They will be listening to his speech on Thursday for ways to criticize his policies toward Iran and his outreach to the Arab world.

They will also be watching closely for any evidence that Mr. Obama is being critical of Israel in the hopes they could use that as an electoral advantage.

* Liberals: Mr. Obama’s base has been frustrated at times by his willingness to continue anti-terrorism policies put in place by his predecessor. The terrorist detention facility at Guantánamo Bay — which remains open despite Mr. Obama’s promise to close it — is a constant reminder of their dissatisfaction.

The speech gives Mr. Obama a chance to describe how his approach to the region fulfills his campaign promises and to claim that his policies have worked better than Mr. Bush’s. That could help energize his base — a crucial part of the path toward getting reelected.

* American Jews: The president’s early decision to press Israel to end settlements was done in the hope that it might kick-start peace talks with the Palestinians. In fact, after the Israelis balked, the policy has so far failed to move the peace process along. The administration’s top negotiator, former senator George Mitchell, quit last week.

But in the process, the tough-love approach to Israel caused friction between Mr. Obama and some Jewish voters. That could be particularly important in certain swing states like Florida, where there is a large Jewish population.

* Congress: The debates in the House and Senate during the next 18 months are likely to focus primarily on the domestic economy. But with the House under Republican control, leaders there may be looking for ways to question Mr. Obama’s handling of foreign policy, especially in the volatile Middle East.

Republicans struggled at the height of the Middle East uprisings earlier this year, first criticizing the president’s lack of action in Libya and then later criticizing the aggressive use of force in ways that Mr. Obama said would halt the slaughter of those leading the uprising.

Democratic lawmakers, too, will be watching the speech for clues to the defense they may have to mount to Republican criticism. Last year’s extended debate over a nuclear treaty with Russia showed how differences over foreign policy can sometimes play out in the halls of Congress.
President Obama gives a speech directed at the Muslim world in Cairo in 2009.

The Economics of Abundance

The Economics of Abundance

Mises Daily: by

[Excerpted from The Critics of Keynesian Economics (1960)]

A situation in which abundant unused reserves of all kinds of resources (including all intermediate products) exist may occasionally prevail in the depths of a depression. But it is certainly not a normal position on which a theory claiming general applicability could be based.

Yet it is some such world as this which is treated in Mr. Keynes's General Theory of Employment, Interest and Money, which in recent years has created so much stir and confusion among economists and even the wider public. Although the technocrats, and other believers in the unbounded productive capacity of our economic system, do not yet appear to have realized it, what he has given us is really that economics of abundance for which they have been clamoring so long.

Or rather, he has given us a system of economics which is based on the assumption that no real scarcity exists, and that the only scarcity with which we need concern ourselves is the artificial scarcity created by the determination of people not to sell their services and products below certain arbitrarily fixed prices. These prices are in no way explained, but are simply assumed to remain at their historically given level, except at rare intervals when "full employment" is approached and the different goods begin successively to become scarce and to rise in price.

Now if there is a well-established fact which dominates economic life, it is the incessant, even hourly, variation in the prices of most of the important raw materials and of the wholesale prices of nearly all foodstuffs. But the reader of Mr. Keynes's theory is left with the impression that these fluctuations of prices are entirely unmotivated and irrelevant, except toward the end of a boom, when the fact of scarcity is readmitted into the analysis, as an apparent exception, under the designation of "bottlenecks."[1]

And not only are the factors which determine the relative prices of the various commodities systematically disregarded;[2] it is even explicitly argued that, apart from the purely monetary factors which are supposed to be the sole determinants of the rate of interest, the prices of the majority of goods would be indeterminate. Although this is expressly stated only for capital assets in the special, narrow sense in which Mr. Keynes uses this term, that is, for durable goods and securities, the same reasoning would apply to all factors of production.

In so far as "assets" in general are concerned the whole argument of the General Theory rests on the assumption that their yield only is determined by real factors (i.e., that it is determined by the given prices of their products), and that their price can be determined only by capitalizing this yield at a given rate of interest determined solely by monetary factors.[3]

This argument, if it were correct, would clearly have to be extended to the prices of all factors of production the price of which is not arbitrarily fixed by monopolists, for their prices would have to be equal to the value of their contribution to the product less interest for the interval for which the factors remained invested.[4] That is, the difference between costs and prices would not be a source of the demand for capital but would be unilaterally determined by a rate of interest which was entirely dependent on monetary influences.

We need not follow this argument much further to see that it leads to contradictory conclusions. Even in the case we have considered before of an increase in the investment demand due to an invention, the mechanism which restores the equality between profits and interest would be inconceivable without an independent determinant of the prices of the factors of production, namely their scarcity. For, if the prices of the factors were directly dependent on the given rate of interest, no increase in profits could appear, and no expansion of investment would take place, since prices would be automatically marked to make the rate of profit equal to the given rate of interest.

Or, if the initial prices were regarded as unchangeable and unlimited supplies of factors were assumed to be available at these prices, nothing could reduce the increased rate of profit to the level of the unchanged rate of interest. It is clear that, if we want to understand at all the mechanism which determines the relation between costs and prices, and therefore the rate of profit, it is to the relative scarcity of the various types of capital goods and of the other factors of production that we must direct our attention, for it is this scarcity which determines their prices.

And although there may be, at most times, some goods an increase in demand for which may bring forth some increase in supply without an increase of their prices, it will on the whole be more useful and realistic to assume for the purposes of this investigation that most commodities are scarce, in the sense that any rise of demand will, ceteris paribus, lead to a rise in their prices. We must leave the consideration of the existence of unemployed resources of certain kinds to more specialized investigations of dynamic problems.

This critical excursion was unfortunately made necessary by the confusion which has reigned on this subject since the appearance of Mr. Keynes's General Theory.

What "Full-Employment" Policy Means

In order to understand the situation into which we have been led, it will be necessary to take a brief look at the intellectual sources of the full-employment policy of the "Keynesian" type. The development of Lord Keynes's theories started from the correct insight that the regular cause of extensive unemployment is real wages that are too high.

The next step consisted in the proposition that a direct lowering of money wages could be brought about only by a struggle so painful and prolonged that it could not be contemplated. Hence he concluded that real wages must be lowered by the process of lowering the value of money. This is really the reasoning underlying the whole "full-employment" policy, now so widely accepted.

If labor insists on a level of money wages too high to allow of full employment, the supply of money must be so increased as to raise prices to a level where the real value of the prevailing money wages is no longer greater than the productivity of the workers seeking employment. In practice, this necessarily means that each separate union, in its attempt to overtake the value of money, will never cease to insist on further increases in money wages and that the aggregate effort of the unions will thus bring about progressive inflation.

"Après Nous Le Déluge"

I cannot help regarding the increasing concentration on short-run effects — which in this context amounts to the same thing as concentration on purely monetary factors — not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization. To the understanding of the forces which determine the day-to-day changes of business, the economist has probably little to contribute that the man of affairs does not know better.

It used, however, to be regarded as the duty and the privilege of the economist to study and to stress the long effects which are apt to be hidden to the untrained eye, and to leave the concern about the more immediate effects to the practical man, who in any event would see only the latter and nothing else. The aim and effect of 200 years of continuous development of economic thought have essentially been to lead us away from, and "behind," the more superficial monetary mechanism and to bring out the real forces which guide long-run development.

I do not wish to deny that the preoccupation with the "real" as distinguished from the monetary aspects of the problems may sometimes have gone too far. But this can be no excuse for the present tendencies which have already gone far toward taking us back to the prescientific stage of economics, when the whole working of the price mechanism was not yet understood, and only the problems of the impact of a varying money stream on a supply of goods and services with given prices aroused interest.

Mises Academy: Robert Murphy teaches Keynes, Krugman, and the Crisis

It is not surprising that Mr. Keynes finds his views anticipated by the mercantilist writers and gifted amateurs: concern with the surface phenomena has always marked the first stage of the scientific approach to our subject. But it is alarming to see that after we have once gone through the process of developing a systematic account of those forces which in the long run determine prices and production, we are now called upon to scrap it, in order to replace it by the shortsighted philosophy of the business man raised to the dignity of a science.

Are we not even told that, "since in the long run we are all dead," policy should be guided entirely by short-run considerations? I fear that these believers in the principle of après nous le déluge may get what they have bargained for sooner than they wish.

Can Government's Finances Be Compared to a Household's?

Can Government's Finances Be Compared to a Household's?

Mises Daily: by

Politicians often try to empathize with struggling Americans by promising to cut government spending, "just like regular households in tough times." This simile evokes different reactions depending on one's economic views. Keynesians think it's reckless, proponents of Modern Monetary Theory (MMT) think it's absurd, and Rothbardians think it's correct as far as it goes, but it falsely equates tax revenues to an honest living.

In this context, I was amazed to read a CNBC article earlier this week arguing that households were no role models for the politicians! It's worth going through a comparison to clarify the important issues.

Households a Bad Role Model for Government?

The article (which originally ran on Reuters) sets the stage:

Republicans, claiming revulsion over the U.S. government's $14.3 trillion in debt, say Washington needs to take a hard look at its finances and balance the books like the typical American family.

"It's simple. Spend what you take in. That's what every family has to do … imagine the federal government actually doing what makes sense," said U.S. Representative Jim Jordan, a prominent conservative Republican.

Jordan is among a string of politicians who say the nation's mounting debt can be resolved with a simple dose of prudent planning.

Although appealing to average voters, such rhetoric often annoys professional economists. For example, Keynesians argue that when the private sector is trying to wind down debt, the only way to maintain aggregate demand is for the government to run offsetting deficits.

Proponents of MMT would go even further, arguing that the analogy with households is simply an anachronism in our age of fiat money. The MMT position is that modern governments are never constrained by fiscal matters, since they can issue their own currency. The only problem with the government spending too much would be increasing price inflation, not an inability to finance the spending.

What is interesting is that the Reuters/CNBC article also objected to Jim Jordan's analogy, but for different reasons. To wit, the article argued that households were no role models when it came to financial management:

But in looking for ways to balance its budget, policymakers may want to avoid taking cues from American families.

According to the latest Federal Reserve statistics, U.S. consumer credit is at about $2.4 trillion for short- and intermediate-term borrowing on credit cards and for car loans, vacations, boats and college loans. That did not count the trillions of dollars in borrowing for home mortgages.

Americans are juggling about $796 billion in credit card debt alone, according to the statistics.

The average credit card debt per U.S. household is $8,329, Hardekopf said, quoting a March Nilson Report. That figure rises to $10,679 when only households that actually have credit cards — about 75 percent — were factored in, he said.

It's no wonder there's a bumper sticker out there asking:

"Can I pay my Visa with my Master Card?"

The National Foundation for Credit Counseling conducts an annual "financial literacy" survey that tracks consumers' borrowing habits and financial worries.

Its latest survey, carried out last March by Harris Interactive, found only 43 percent of families said they had a household budget and kept close track of how much they spent on food, housing and entertainment.

Fifty-six percent said they didn't have any budget at all.

And, according to the NFCC survey, while 68 percent said they paid their bills on time, many apparently were not paying off their entire credit card bills each month.

Forty percent said they carried credit card debt from month to month, while half said they did not. A whopping 73 percent said they were worried about their financial situation.

As we'll see, these statistics miss the point of the comparison.

When Times Are Tough, the Proper Move Is to Cut Spending

Of course, politicians of all stripes mouth platitudes while failing to enact policies living up to their rhetoric. But in this case, the rhetoric itself is correct: Just as most American households are much more careful about their finances now than they were during the housing-bubble years, so too should the government be.

Most of the statistics quoted above merely convey that households have debt. But that's not the issue — the government has a massive amount of debt as well. The difference is that once the housing bubble burst and everyone realized Americans had been living beyond their means for years, the average household changed its ways. That is, savings rates shot way up, and households began paying down their debt:

Figure 1

Of course, the federal government has just done the opposite. Even while Presidents Bush and Obama both acknowledged that excessive leverage and overconsumption were problems during the housing bubble years, and even as revenues plunged, this is what happened to spending on their respective watches:

Figure 2

There Are Solid Reasons to Support "Fiscal Austerity"

As I argued in my book on the Depression, the federal government didn't engage in "countercyclical policies" too much before the allegedly laissez-faire Herbert Hoover. Sure, the government would run up massive debts during wartime, but it would then pay them down. Indeed, Calvin Coolidge ran a surplus every year of his presidency.

In fact, as Tom Woods and I have pointed out repeatedly, the Depression of 1920–21 provides a textbook example of the Fed engaging in "tight-money" policies while the federal government engaged in (what are now almost) inconceivably aggressive budget cuts. The result was a short, painful, deflationary depression, followed by a decade of immense prosperity.[1] There are other, more recent examples of debt-ridden governments slowing or even cutting spending in order to eliminate budget deficits and improve economic growth.


In one sense, the analogy between households and the government is flawed: Households (generally) earn their income through voluntary transactions in which they provide goods and services to others. In contrast, the government raises the revenue with which to provide its "services" ultimately through the threat of imprisonment.

Even so, the deficit-hawk politicians are right when they say the government should be sharing in the belt-tightening along with everyone else. Slashing spending at the federal level would return much-needed resources to the private sector, where they would do the most good.

Who's Rich Enough to Tax?

Another IMF Scandal

Obama's Digital-Age Advantage

IMF Succession Heats Up

IMF Succession Heats Up

The battle for the top job at the International Monetary Fund kicked into high gear Thursday, with Europeans staking their claim for the post as the continent grapples with economic problems and Asian and emerging nations arguing now is their time to lead the international institution.

Agence France-Presse/Getty Images

French Finance Minister Christine Lagarde.

World Bank President Robert Zoellick said global leaders have started the formal process to replace Dominique Strauss-Kahn, who early Thursday resigned following his weekend arrest on sexual-assault charges.

"There's a process that the countries will use, and the shareholders and you can see it starting to form now," Mr. Zoellick said after speaking at the Bretton Woods Committee annual conference in Washington. "It's up to the shareholders to decide the next process that they take in leadership and I'm sure they'll pick a very fine person."

Asked whether the process would live up to promise by global leaders for a more transparent, merit-based process, Mr. Zoellick said, "I'm sure it will be."

The Group of 20 industrialized nations has promised to change the leadership selection process at both the IMF and World Bank, suggesting a move away from the automatic appointment of a European to the IMF and an American to the World Bank.

Mr. Zoellick spoke as European governments coalesced around Christine Lagarde, a corporate lawyer who has been France's finance minister since 2007 and who has emerged as the frontrunner for the IMF job in the days since Mr. Strauss-Kahn's arrest in New York.

WSJ's Ashby Jones reports Dominique Strauss-Kahn has resigned as managing director of the IMF. The News Hub panel also discusses possible successors for the fund's top post. (Photo by Emmanuel Durand-Pool/Getty Images)

Asian and other emerging markets nations, meanwhile, are pressing for increased representation, arguing that senior management should better reflect changes in global economic patterns.

The question of the IMF's leadership is sensitive as it comes at a time of change in the global economic power balance. Emerging market countries are expanding strongly, playing an ever increasing role in contributing to world economic growth. Most European economies, however, are growing slowly over the medium term, and many are creaking under the burden of government debt.

Some Asians think the rise of their continent should mean greater representation in international organizations—the IMF post involves directing the flow of billions of dollars to stabilize the global economy.

"There's no logic to the tradition that the IMF is run by a European," Thailand's Finance Minister Korn Chatikavanij told The Wall Street Journal Thursday in a telephone interview. "The world has come a long way in the past three or four years.

But Europeans argue that their problems—in particular some countries' unsustainable sovereign debt burdens—would make a European more suitable for the job. Crucially, German Chancellor Angela Merkel said that pressing concerns required a rapid appointment—something that might favor a European, as the most obvious candidates are European. "It's of great importance that we find a fast solution" for the IMF succession, Ms. Merkel told a press conference Thursday. "I am of the opinion that we should propose a European," she said, adding, "I won't give a name today, but we will talk about it in the E.U."

Ms. Lagarde said that any proposal for the post would need European agreement. "Any candidacy should have European support," she said during a visit to a Paris supermarket Thursday.

"Our objective is that the IMF is able to fulfil its mission and to meet its challenges," said a French foreign ministry spokesman. "It's quite clear that in this regard, Europe is a player of the first order."

Ms. Lagarde has already secured the backing of European capitals. Swedish Finance Minister Anders Borg on Wednesday said Ms. Lagarde stood out for the role she has played in managing the euro zone's fiscal crisis and global financial coordination. "Madame Lagarde is one of the obvious candidates," he said. Crucially, Ms. Merkel will support Ms. Lagarde if France puts her forward, according to people familiar with the matter.

But she is not the only high profile European name circulating. European Central Bank Governing Council member Nout Wellink said Wednesday that ECB President Jean-Claude Trichet would be "a fantastic candidate ... He knows everything in Europe, and he is fully independent. He has a big track-record and is very persuasive," Mr. Wellink said during a late-night talk show on Dutch television.

A volley of statements from Asia on Thursday seemed designed to preempt any hasty appointment of a European. Philippine Finance Secretary Cesar Purisima said Asia's role as an engine of growth for the global economy meant an Asian should take the reins at the IMF.

"Given the urgent need for stable leadership in the IMF, coupled with the shifting global economic landscape … there is no time more fitting than now for an Asian leader to take the helm of such a distinguished organization," Mr. Purisima said in a statement. "A new brand of leadership will send a positive signal that the IMF is indeed responsive to the changing world."

People's Bank of China Gov. Zhou Xiaochuan said in a statement that "the make-up of the top management should better reflect changes in the structure of the global economy and better represent emerging markets."

Indonesian Finance Minister Agus Martowardojo said: "It would be good if the opportunity is also open for Asian candidates. Indonesia certainly will welcome and support it."

Thai Finance Minister Mr. Korn argued that Asians knew how to deal with financial problems after the region's 1990s financial crisis, which erupted in Thailand before spreading across Southeast Asia and beyond.

"We've all had hands-on experience, and credit should go to Mr. Strauss-Kahn and the IMF for the way they have learned from their mistakes in Asia in the past," Mr. Korn said.

Still, it wasn't immediately clear whether Asian or emerging economies could coalesce around a single candidate. A former U.S. official said the only way to block France's Ms. Lagarde would be for the Brics countries—Brazil, Russia, India, China and South Africa—to quickly agree on a candidate and force the U.S. and EU to respond.

Mr. Korn said Singapore's Finance Minister Tharman Shanmugaratnam would be a good choice to take on the top job at the IMF, as would Indonesia's former finance minister Sri Mulyani Indrawati, who is now with the World Bank. But Mr. Tharman, who was given the added role of Singapore's deputy prime minister in a Cabinet reshuffle Wednesday, has dismissed speculation that he might get the job. "Fortunately, the new Cabinet has been announced and put paid to such rumors," he was quoted as saying in the local Today newspaper. Mr. Tharman's office had no immediate comment Thursday.

SaKong Il, a prominent South Korean economist also considered a contender, said the selection of the next IMF managing director should be "merit-based," not dependent on the home country of the candidate.

"It's time to follow through on what's been promised" by the Group of 20 leaders,"said Mr. SaKong, who organized the G-20 summit in Seoul in Nov. 2010. "I think the global community is watching."

Speaking from London, Mr. SaKong said he was "honored" to be considered a candidate but said it would "too presumptuous" for him to say how he would propose to run the IMF.

One strike against Mr. Sakong is that he is 71 years old. IMF rules say that a managing diredtor must be younger than 65 when he starts his first term. According to the IMF's bylaws, the managing director must retire at 70. However, those rules can be changed.

One Japanese national sometimes mentioned as a candidate is Asian Development Bank President Haruhiko Kuroda, a former Japanese vice finance minister. The ADB said Thursday that Mr. Kuroda wouldn't be available for comment but that the Manila-based lender "looks forward to continue working with the IMF and its recently appointed acting Managing Director, Mr. John Lipsky."

Other financial leaders from emerging economies have also questioned the tradition of appointing a European to head the IMF since it was created in the aftermath of World War II. Brazilian Finance Minister Guido Mantega has suggested a shake-up at the organization so that the person who leads it is selected on merit, not just for being European, while South Africa's Finance Minister Pravin Gordhan has said a candidate from an emerging economy would bring "a new perspective" to the IMF.

—Cris Larano in Manila, I Made Sentana in Jakarta, Owen Fletcher and Bob Davis in Beijing, Prasanta Sahu in New Delhi, Takashi Nakamichi in Tokyo, P.R. Venkat in Singapore, Enda Curran in Sydney and In-Soo Nam in Seoul, Gabriele Parussini and Nathalie Boschat in Paris contributed to this article.

Strauss-Kahn Resigns

Strauss-Kahn Resigns, Spurring Search for IMF Leader

Dominique Strauss-Kahn resigned as head of the International Monetary Fund, which he is widely credited with revitalizing at a pivotal time, throwing into high gear a global race to replace him following charges that he sexually assaulted a hotel worker in New York.

WSJ's Ashby Jones reports Dominique Strauss-Kahn has resigned as managing director of the IMF. The News Hub panel also discusses possible successors for the fund's top post. (Photo by Emmanuel Durand-Pool/Getty Images)

The 62-year-old Mr. Strauss-Kahn, in a statement released by the IMF shortly after midnight Thursday in Washington, said was leaving to "protect the institution," which has been largely paralyzed since he was arrested on suspicion of attempted rape in New York on May 14. In a letter to the IMF's board, he continued to deny that the charges against him. "I want to say that I deny with the greatest possible firmness all of the allegations that have been made against me," he wrote.

"I want to devote all my strength, all my time, and all my energy to proving my innocence," Mr. Strauss-Kahn said.

The IMF under Mr. Strauss-Kahn has played a key role in handling the fallout from the global financial crisis. It has bailed out more than a dozen countries with emergency loans, and worked with the European Union—less successfully—in keeping the crisis from spreading to Western Europe. So far, Ireland, Greece and Portugal have sought loans, though Greece hasn't come close to meeting the deficit-reduction requirements the IMF and EU set as conditions for the loans.


French Finance Minister Christine Lagarde is the leading contender to replace Mr. Strauss-Kahn.

French Finance Minister Christine Lagarde is the leading contender to replace Mr. Strauss-Kahn, though others are likely to emerge from developing nations. The leaders of the Group of 20 industrial and developing nations have committed to "support new open, transparent and merit-based selection processes," but haven't detailed how that would be handled. By tradition, dating back to the founding of the institutions after World War II, a European heads the IMF and an American heads the World Bank.

The IMF said it would "communicate in the near future" about a process to pick a new managing director. For the time being the fund's No. 2 official, John Lipsky, will run the institution. Mr. Lipsky has said he will resign by the end of his term on Aug. 31. He is scheduled to give a talk on the IMF's future in Washington on Thursday.

Associated Press

Christine Lagarde and Dominique Strauss-Kahn at a Europe-China trade conference in Paris in June 2010.

The resignation also may weaken Mr. Strauss-Kahn's hand in negotiating with the Manhattan District Attorney over possible punishment, given that he has already made a big concession by stepping down from his IMF job.

On Thursday, Mr. Strauss-Kahn will make a bid to be released from jail, attorneys in the case say. In papers filed Wednesday in State Supreme Court in Manhattan, Mr. Strauss-Kahn's attorneys redoubled efforts to have their client released from New York City's Rikers Island jail, offering to post $1 million in cash bail and saying he had agreed to submit to around-the-clock home detention in Manhattan and electronic monitoring.

Mr. Strauss-Kahn's accuser on Wednesday testified before a grand jury, which is weighing the charges and will return Thursday, said her lawyer, Jeffrey Shapiro.

Before his arrest, Mr. Strauss-Kahn had been widely expected to leave the IMF around July to campaign for the French presidency, parlaying his stint at the IMF, where his reputation grew as a global economic leader. Those plans are now in tatters as well.

European governments Wednesday started to rally around Ms. Lagarde, a corporate lawyer who has been France's finance minister since 2007, as the fund's next chief, saying she would be best positioned to replace her compatriot and become the first woman to lead the institution. Swedish Finance Minister Anders Borg said that while the selection of an IMF chief should be open, Ms. Lagarde stood out because of her role in managing the euro zone's fiscal crisis and global financial coordination. "Madame Lagarde is one of the obvious candidates," he told the Sky News television channel.

As Dominique Strauss-Kahn remains in a New York City prison following his arrest on attempted rape charges, The White House has given the IMF orders to find a replacement as soon as possible. WSJ's David Wessel reports. (Photo by Stephen Jaffe/IMF via Getty Images)

The IMF, an organization of 187 countries, advises and lends to member nations while serving as a coordinator for global economic policies. Neither Ms. Lagarde nor her spokesman could be reached to comment. A spokesman for French President Nicolas Sarkozy couldn't be reached to comment.

Europe has a big edge in selecting an IMF chief—if it can maintain unity. European nations have 35.6% of the votes on the IMF board and a successful candidacy requires a simple majority. But other European candidates could emerge, dividing the region. Central Bank Governing Council member Nout Wellink, for instance, suggested that European Central Bank President Jean-Claude Trichet, who is retiring in October, would make a "fantastic candidate."

Associated Press

Dominique Strauss-Kahn is arraigned in Manhattan Criminal Court.

The U.S., which has 16.8% of the votes in the IMF, will play a big role in any selection and must weigh conflicting goals. On one hand, the U.S has traditionally had the No. 2 slot at the IMF and would like to put White House economic aide David Lipton into that job. A deal with the Europeans for the Nos. 1 and 2 slots could accomplish that. But such back-room dealing would frustrate another U.S. goal, which is to persuade developing nations, especially those in Asia, to participate more fully in international organizations.

Still, it isn't clear whether emerging economies can agree on a single candidate. Some, including Brazil, have said that it is reasonable for Europe to provide the next IMF chief—though that position could change now that Mr. Strauss-Kahn has resigned. South Africa's finance minister Pravin Gordhan forcefully argued otherwise on Wednesday.

"Institutions such as the IMF must reform so that they can become credible, and to be credible they must represent the interests and fully reflect the voices of all countries, not just a few industrialized nations," Mr. Gordhan said in a statement. A candidate from a developing country, he added, "will bring a new perspective" to the IMF.

A former U.S. official said the only way to block Ms. Lagarde would be for the Brics countries—Brazil, Russia, India, China and South Africa—to quickly agree on a candidate and force the U.S. and EU to respond.

China's government isn't expected to take the lead in any wheeling and dealing over a successor, said a number of prominent academics in Beijing. "I don't think Brics will sit together to find a candidate," said Peking University economist Huang Yiping. "If one country has a very strong candidate, it could look for support from the others."

Thailand's Finance Minister Korn Chatikavanij said that a candidate from the emerging market ought to run the IMF. Among the potential candidates from emerging markets, Mr. Korn said Singapore's Finance Minister Tharman Shanmugaratnam would be a good choice to take on the top job at the IMF. "He's technically very sound and he is respected within the institution," Mr. Korn said. "But there are potentially other candidates from within Southeast Asia, including [Indonesia's former finance minister] Sri Mulyani Indrawati, who is now with the World Bank. There are also strong candidates from India, China and South Korea."

A Potential Successor to Lead the Fund

Christine Lagarde's career in the private and public sectors

1956: Born in French port city of Le Havre to a university-professor father and schoolteacher mother

1981: Admitted to Paris bar; joins U.S. law firm Baker & McKenzie in Paris, specializing in corporate law

1999: Named chairman of executive committee at Baker & McKenzie

2005: Returned to France after 10 years in the U.S. to take post of trade minister in then-President Jacques Chirac's conservative administration

2007: Named finance minister in President Nicolas Sarkozy's government after a brief stint as agriculture minister

It isn't clear what ultimately persuaded Mr. Strauss-Kahn to give up his position. U.S. Treasury Secretary Tim Geithner put pressure on the IMF to make a change by calling for it to formally ratify Mr. Lipsky as acting managing director. Mr. Lipsky took on that role automatically under standard IMF procedures after Mr. Strauss-Kahn's imprisonment. But world leaders were wary of calling for Mr. Strauss-Kahn to step down while he was facing serious criminal charges out of concern for seeming to prejudice the case.

Mr. Strauss-Kahn took the helm of the IMF in September 2007 when it faced an uncertain future and probable financial losses because few countries were turning to it for loans as the global economy expanded smartly. He worked to reduce the size of the staff and shore up its finances. But he quickly ran into trouble when he was accused of abusing his position by having a sexual relationship with a female subordinate, Piroska Nagy, who was a senior official in the IMF's Africa department.

In a letter she wrote to attorney Robert Smith, who was conducting an investigation into the affair for the IMF's board, Ms. Nagy said she was confused and unsure how to respond to her boss's advances. "Despite my long professional life, I was unprepared by advances by the Managing Director of the IMF. As I told you, I felt that I was 'damned if I did and damned if I didn't.'"

Mr. Smith's report was released in October 2008 and found that the affair was consensual and that Mr. Strauss-Kahn didn't make either promises or threats to Ms. Nagy "to induce her to engage in the affair." Taking its cue from the report, the IMF board found that Mr. Strauss-Kahn committed a "serious error in judgment," but said there was no evidence of "harassment, favoritism or any other abuse of authority."

Mr. Strauss-Kahn apologized for his behavior and told the board and IMF staff that he was committed "going forward, to uphold the high standards" expected of a managing director. Despite weeks of humiliation, Mr. Strauss-Kahn was quickly able to win over the staff by helping steer the IMF so it had a major role in handling the deepening global financial crisis.

In her letter to Mr. Smith, Ms. Nagy called Mr. Strauss-Kahn "a brilliant leader with a vision for addressing the ongoing global financial crisis," but warned, "I fear he is a man with a problem that will make him ill-equipped to lead an institution where women work under his command."

With the global economy in turmoil, Mr. Strauss-Kahn helped persuade global leaders to stimulate their economies in a coordinated fashion. When countries ran into financial straits, he provided emergency loans, often without some of the detailed requirements for privatization and economic opening that the IMF had required of Latin American and Asian countries in past crises. That somewhat softer touch began to ease resentment toward the IMF in those countries.

He also improved relations with China, which had been resentful of IMF efforts to get it to raise the value of its currency, by shifting to less confrontational language and focusing on ways China could improve its growth prospects over the longer term.

As the G-20 took on a larger role in global affairs, it turned again and again to the IMF to provide research and advice. Under Mr. Strauss-Kahn, the IMF essentially became the staff of the G-20.

Mr. Strauss-Kahn, a former French finance minister, also was able to convince skeptical European leaders, especially in Germany and at the ECB, that the IMF should play a big role in bailing out EU countries that ran aground. Some EU officials thought that turning to the IMF would be a humiliating admission that their members were on a par with developing nations. Among Mr. Strauss-Kahn's strongest arguments: Much of the IMF staff was European and they had Europe's interests at heart.

Indeed, the IMF and the EU are now trying to decide what ought to be done to aid Greece, which hasn't lived up to the terms of an EU-IMF loan agreement. If the IMF cuts Greece too much slack, developing nations are bound to complain of a double standard. Mr. Strauss-Kahn won't be around now to try to finesse that political problem.

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