The case against Christine Lagarde
Following the resignation of alleged rapist and serial sexual predator, Dominique Strauss Kahn, from the Managing Directorship of the International Monetary fund, Christine Lagarde, unfortunately, has emerged as front-runner to replace him. Surely the associated reduction in testosterone would prove to be a blessing for all female employees within the organization (perhaps even some males, since, as yet, we do not know the full reach of DSK’s sexual predations). However, Christine Lagarde carries three intractable impediments of her own, first that she emanates from France, second that she is a bail-out repeat offender and third that she has no training in economics.
France is a member of the Euro-Zone and an aggressive defender of that seriously non-optimal monetary union. At the present time, the Euro-Zone needs to be saved from its own folly. It needs an outside agency to force out non-conforming members – Greece, Portugal and Ireland for sure – and to place them into non-Euro, E.U. membership while they repent their fiscal sins, revalue their currencies, and restructure their debts. The woes of these countries are not the woes of illiquidity, but rather the woes of insolvency. The rightful home for insolvents is bankruptcy, where they negotiate with creditors and flagellate themselves for their sins. Any emissary from France – one of the founding members of the original Treaty of Rome - could not even begin to contemplate such surgery.
2. Madame Bailout
Christine Lagarde has never seen an insolvent that she would not bail-out. In the movie, Too Big to Fail her character is portrayed as scolding Henry Paulson, the U.S. Treasury Secretary, for allowing Lehman Brothers to go bankrupt. Drenching her Armani and Chanel clothing, her Hermes handbag, and her stylish scarf, with flowing tears, she once observed that if the investment bank had only been named Lehman Sisters, it would not have found itself in such dire straits.
As Minister of Finance in the French government since June 2007, Madame Bailout has played a lead role in bailing out errant members of the Euro-Zone in ways that have failed spectacularly. She simply does not understand the crucial difference between illiquidity and insolvency, and she certainly has no idea how to prevent the former ending up as the latter.
She has led the ‘no-restructuring’ school of thought in recent months with regard to Greece and other failing Euro-Zone nations. Most tellingly, Christine Lagarde has fought tooth and claw against tightening bank capital requirements during the recently concluded Basel III negotiations. Low bank capital creates serious systemic financial risk for Europe and the world. Madame Bailout simply does not comprehend this reality.
3. Economics Ignorama
Christine Lagarde is a lawyer, not an economist, by training. President Sarkozy also views her as an intellectual lightweight, but that may be a calculated political judgment. At the present time, however, an absence of economic training is an unforgivable impediment for anyone aspiring to a lead role in the International Monetary Fund. Her occupying that position would be equivalent to FDR assuming responsibility for pulling the United States out of the Great Depression. And we all know how that ended up!
Tomorrow, I shall make the case for a far superior appointment to the Managing Directorship of the I.M.F.. Because his case is so strong, he faces an uphill task in a world largely governed by special interests like Goldman Sachs, who exist to exploit financial crises. This column does not respect the notion of political infeasibility, even if it recognizes that reality. So the case will be made to the very best of my ability.