Treasury Secretary “Hank” Paulson was the trailblazer with his proposal for TARP in September 2008. He walked into the Capitol with a list of demands—unlimited powers to hand unlimited amounts of taxpayer money to whomever—and threatened that the whole world would collapse if his demands weren’t met immediately.
When Congress didn’t go for it, markets fell off a cliff, and Paulson’s world of finance appeared to come to an end. So Congress approved a more limited TARP, which ended up being irrelevant compared to the trillions the Fed would hand out. Thus, Paulson’s extortion had worked—though the source of money had shifted from the Treasury to the Fed. It would be copied.
In November, just after the G-20 meeting in Cannes, France, it was Greek Prime Minister Giorgios Papandreou’s turn. With a single sentence about a referendum on Greece’s exit from the Eurozone, he knocked the world’s financial markets into a tailspin. His message: give me more money and larger write-downs on Greek debt, or else I will say a whole paragraph. It reopened the spigot, and money started flowing again (temporarily).
In early January, it was Greece’s new Prime Minister Lucas Papademos. He threatened the world with “disorderly default.” His goal: impose salary cuts on private-sector workers and ever bigger “voluntary” haircuts on banks and hedge funds that hold Greek debt. “So we can get the next loan installment,” he explained. Unions rebelled, and bondholders dug in their heels, but they started talking again.
Now Christine Lagarde, managing director of the IMF, has stepped into the extortion racket herself and threatened that there would be another Great Depression—the red line on the financial threat-o-meter—if certain countries and their taxpayers didn’t fork over more money. She never mentioned Germany and the US by name, but those were her prime targets.
“It is about avoiding a 1930s moment,” she said at the German Council of Foreign Affairs in Berlin, “a moment, ultimately, leading to a downward spiral that could engulf the entire world.”
Paulson couldn’t have phrased it more darkly.
The discussions Sunday evening between her and German Chancellor Angela Merkel must have been interesting, and there was no dog and pony show or even common statement afterwards. But Monday, Lagarde made clear what she wanted:
– €500 billion in mostly German taxpayer money to double the size of the future bailout fund, the ESM, to €1 trillion, so that it would be large enough to bail out Italy and Spain. Their insolvency “would have disastrous implications for systemic stability,” she threatened. So, pay up German taxpayers.
– $500 billion in taxpayer money from around the world, specifically from the US, Japan, and Germany, the three largest contributors to the IMF, to double its bailout lending power to $1 trillion.
– More government spending in those European countries that can afford it, to stimulate the economy for everyone else. She didn’t mention Germany, but German taxpayers, please step up to the plate. Your money is needed elsewhere. Or else—
– Common liabilities, such as Eurobonds, through which taxpayers in fiscally stronger countries, like Germany, would guarantee the debt of others.
– Elimination of trade imbalances by stimulating internal demand in countries with large trade surpluses. Alas, Germany’s economy lives and dies by its exports, and a drop in the surplus has a vicious effect on GDP.
Merkel and her government immediately rejected Lagarde’s demands on essentially all fronts. To commit more money to the ESM would also require a vote in the Bundestag where the last bailout increase passed only by a thin margin. And the US Congress is in no mood to hand over more money to the IMF. But as Paulson’s efforts have shown, extortion has a way of migrating. If recent history is any guide, Lagarde’s threat of another Great Depression will work, and money will start flowing from taxpayers to her anointed recipients.