(SOUNDBITE OF TV SHOW, "SATURDAY NIGHT LIVE")
UNIDENTIFIED ACTOR #1: (As character) Probably not the high-end accommodations you're used to, Mr. Strauss-Kahn, but make yourself at home.
UNIDENTIFIED ACTOR #2: (As character) Mr. Dominique Strauss-Kahn, former head of the IMF.
UNIDENTIFIED ACTOR #3: (As character) Well, guess what, Mr. Strauss-Kahn? I have a question for you. What's the IMF going to do about the debt crisis in Greece?
(SOUNDBITE OF SONG, "GROWN OCEAN")
FLEET FOXES: (Singing) In that dream I'm as old as the mountains. Still is starlight reflected in fountains.
DAVID KESTENBAUM, HOST:
Hello, and welcome to PLANET MONEY. I'm David Kestenbaum.
JACOB GOLDSTEIN, HOST:
And I'm Jacob Goldstein. Today is Tuesday, May 24. That was a clip from Saturday Night Live you heard at the top.
On the podcast today, we'll be talking about the International Monetary Fund. We're not really going to get into the sexual assault charges against Dominique Strauss-Kahn, about the head of the IMF, but we will talk at the end about what those charges may mean for the organization.
KESTENBAUM: For the most part, we are going to geek out and talk about what the place, the IMF, actually does. We're going to ask, do we need it anymore? But first, our PLANET MONEY indicator.
GOLDSTEIN: Today's PLANET MONEY indicator is 80% - sales of newly built homes, they've fallen by about 80% since the peak of the housing bubble. The latest new home sales numbers came out today. They were for April. They were a little higher than the numbers for March - but basically really, really low still.
KESTENBAUM: So when you read the news stories about the new numbers, there's always a quote from someone saying how grim they are. But, you know, we just came out of a housing boom, right? We overbuilt. We had too many houses out there. You know, there are plenty of used houses for sale. It's not surprising people aren't buying new homes.
GOLDSTEIN: Yeah. Not only are there used houses for sale; there are a lot of foreclosed houses. And those tend to be cheaper. So rationally, you know, if you can get a deal on a foreclosed home, it makes sense to buy that rather than go out and buy some shiny, new expensive home. And that's what people are doing. The housing industry knows it. They're not building as many newly built homes. And actually, you really see that in construction jobs. You know, we're in this recovery. Jobs are coming back. But they're not coming back in construction. That still is really grim.
KESTENBAUM: Thanks very much.
KESTENBAUM: So today's podcast - the International Monetary Fund - what is it? Why was it formed in the first place? And do we need it anymore? If you hear about the IMF today outside of the recent scandal, you hear about the IMF setting up loans to countries that are in trouble. But at the beginning, at its founding, the IMF's job was very, very different. And it's really kind of struggled over the years to find its place in the world.
GOLDSTEIN: So today's podcast is going to be a sort of deep read with Simon Johnson. He's an economist at MIT, and he was chief economist at the IMF from 2007 to 2008.
SIMON JOHNSON: All right. Well, I've brought with me a prop. I don't know how you communicate this on the radio, but I have the Articles of Agreement of the IMF in front of me for all the hard questions you're going to ask. It's 115 pages of text in a very appropriately dull, gray-green cover.
GOLDSTEIN: Is the opening paragraph kind of grabby?
JOHNSON: The opening paragraph - it was the best of times. It - oh, no, sorry. That's another book I'm carrying with me.
KESTENBAUM: Those pages Simon was holding were written in 1944 in Bretton Woods, N.H. And to understand why the IMF was formed, you have to remember that the world was a mess at the time. Remember, we've had the Great Depression. People are hoping World War II is close to an end. And they're trying to figure out some way to put the world back together - some way to put the financial world back together.
GOLDSTEIN: Leaders and economists from around the world, they get together to figure out, what are we going to do?
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GOLDSTEIN: This is an old newsreel. It shows men in suits and hats getting off an old train.
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UNIDENTIFIED REPORTER: At Bretton Woods, N.H., delegates from 44 Allied and associate countries arrive for the opening of the United Nations Monetary and Financial Conference. Invited by President Roosevelt to the first major world financial meeting since the London conference of 1933, they will work in the seclusion of this White Mountains resort.
GOLDSTEIN: So in the seclusion of this White Mountains resort in Bretton Woods, they wind up really setting up the way the global economy is going to work for the next several decades.
KESTENBAUM: And all the big thinkers of the day were there, including the economist John Maynard Keynes, who we talk about a lot in this podcast. And I actually found this short clip of Keynes talking. It's kind of awesome. I'd never heard his voice before.
(SOUNDBITE OF ARCHIVED RECORDING)
JOHN MAYNARD KEYNES: We've been working quietly, away in the cool woods and mountains of New Hampshire. And I doubt if the world - it understands how big a thing we are bringing to birth.
GOLDSTEIN: Today, we're going to bring you the story of that birth in three chapters.
KESTENBAUM: What are you going to call the first chapter?
GOLDSTEIN: I'm going to call it, Chapter One...
GOLDSTEIN: Do Not Let The Depression Happen Again.
KESTENBAUM: It's kind of a long chapter title.
GOLDSTEIN: But it really hits at the heart of it.
KESTENBAUM: All right. So remember at the time of Bretton Woods - right? - the world is a wreck. The thing that had financially unified everyone for a long time, the gold standard, that had been abandoned during the Great Depression. And these people are trying to figure out, what are we going to do? What should replace it?
GOLDSTEIN: And they come up with a system. The system actually winds up being named for this meeting. It's called the Bretton Woods system. And what it does is it sets the exchange rates for the world's big currencies. And under Bretton Woods, those rates are supposed to be very stable. So say if one British pound is worth $3 in 1951, a pound should be worth $3 in 1952. And if you're a country and you want to change that, you're supposed to consult the IMF first.
KESTENBAUM: Gold still played a role in the system, but only a small role. The basic idea was, all the currencies were fixed relative to the U.S. dollar. And the U.S. kept gold around to back up the dollar. Countries could trade in their dollars for gold, but that didn't usually happen. You can kind of think of this as the last vestige of the gold standard.
GOLDSTEIN: And the IMF's job is to make sure this whole new system stays in place, that countries follow the rules and don't suddenly move their currencies around relative to each other.
KESTENBAUM: Though, Simon Johnson says, this did not really work as planned.
JOHNSON: The big powerful countries were always able to move their currencies without IMF permission. You were supposed to - the goal was the IMF would be the sort of international inspectorate of economics, and they'd come in and look at your books and say, you know what, chaps? I think it's really time for a 5% revaluation or a 2.5% devaluation or whatever. And that - maybe that did happen for some of the weaker, poorer countries in the world. But for the big players, including the big European countries or for the United States, it was all about what those countries wanted to do. And they would notify the IMF late in the day, or maybe the IMF could just read about it in the papers the day it happened.
GOLDSTEIN: So if you're saying that the IMF was created as part of this move to have more global cooperation and that, sort of, this period was its golden era, on the one hand, but on the other hand, big countries just did what they wanted anyway, what was the point? I mean, what did the IMF do in any meaningful way?
JOHNSON: That's a good question. It's a fair question. First of all, the IMF works in many countries. It works, basically, in all countries that are willing to be engaged in a market economy. And many of them need technical assistance, though a lot of new countries that came into existence, the IMF helped them out on the - you know, how to run a central bank, how to run a tax system and so on and so forth. The nuts and bolts of macroeconomics are not so glamorous but absolutely essential. And with regard to the big countries, it's true that the IMF did not operate as envisaged and as the founders had really desired. But on the other hand, it does serve as a form of constraint.
GOLDSTEIN: Basically, Simon says, yes, the IMF, it was not perfect, but its very existence did lead countries to be a little more open about their international financial dealings.
KESTENBAUM: So this first chapter we're talking about here, it ended in 1971. The guy who writes the last sentence of the chapter, who forces it to end, that's Richard Nixon. He makes a big speech saying, you know what? I don't think we like this fixed exchange rate, Bretton Woods, quasi-gold-standard thing.
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RICHARD NIXON: In full cooperation with the International Monetary Fund and those who trade with us, we will press for the necessary reforms to set up an urgently needed new international monetary system.
GOLDSTEIN: So this new system Nixon is talking about, it turns out you don't really need the IMF for it. Basically, the world wound up just letting exchange rates rise and fall. So today, say, 1 British pound gets you $1.60, but next year, it might get you $2, or on the other hand, it might get you $1.
KESTENBAUM: Which puts the IMF in a weird spot 'cause its main job, it's no longer necessary. So we're going to call Chapter 2 international fund of mystery because, at this point, it's sort of a mystery what the IMF is supposed to do.
JOHNSON: A good friend of mine tells me that he started - his first day of work at the IMF was the day that Nixon took the U.S. off gold, and he did wonder if he'd made a good career choice. But the IMF did find a role, a most definite role, although a very controversial role, when countries started to get into financial trouble at the end of the 1970s and into the 1980s. So it became a lender of, if not last resort, a lender that you go to late and with great reluctance.
GOLDSTEIN: So in Chapter 2, the IMF becomes this emergency fund, lending basically to developing countries when they get in trouble. And the way this works is - there are now 187 member countries in the IMF. All the members have to put up money, and that's the money that gets loaned out in these emergencies. And the rich countries of the world, they put up more money, so they have more say. And so you wind up with rich countries dictating terms of loans to poor countries in the middle of financial crises. So maybe not surprisingly, this setup leads to a fair bit of controversy about the IMF.
KESTENBAUM: First, though, we're going to hear the argument in favor of these loans - the pro-IMF case. So Simon Johnson says the argument for these loans is that the IMF comes in when countries have gotten themselves in trouble, and it lends them the money they need, and it also requires some economic reforms that probably the country should have been doing for a while but maybe were politically unpopular. He points to Brazil in 2002 getting a $20 billion loan; the conditions of the loan required the government of Brazil to reduce its budget deficit, and now Brazil has this thriving economy.
GOLDSTEIN: So that's the pro case.
JOHNSON: So the anti-IMF case, which I'll state in a somewhat extreme form, is that the IMF represents the creditor countries. It's on the side of the big banks. It is - its major shareholders are the U.S. and the bigger countries in Western Europe. And what it mostly wants to do is get those banks or other kinds of lenders paid back. And it will impose policies on you that are not in your best interest. They are in the interests of the creditors. And notice, then, in the anti-IMF version I said impose; I didn't say negotiate or, you know, hold hands with you and work out a joint agreement. But the critics of the IMF would say, no, no, it comes in and imposes, perhaps, the same policies everywhere. I think that's not such a plausible claim. But the policies may well be inappropriate from the point of view of the government, the point of view of the citizens of that country. So the pro-IMF view is they save you, but it's late in the day, and, you know, you get yourself into big trouble, and it's difficult to get out of it. The anti-IMF is they come in with a big stick, and they start whacking around somewhat indiscriminately until the creditors get their money back.
GOLDSTEIN: So when you lay out this kind of case, you know, the IMF comes in and it helps countries that have waited too long to ask for help, or the IMF comes in and it sticks it to countries so that the big banks will get their money back - I mean, you worked there. Now you don't work there. What feels true to you?
JOHNSON: It depends on which country you're talking about and when.
GOLDSTEIN: A key moment where the IMF really got a black eye was the Asian financial crisis of the late 1990s. In fact, in South Korea, they call that the IMF crisis. And looking back, Simon says, it's pretty clear that the IMF misdiagnosed the problem and, basically, recommended the wrong medicine, at least at first.
JOHNSON: The IMF also did things and recommended things that were at the behest of the U.S. Treasury, including saying, you must open up your financial markets more to banks like Citibank and to financial companies like AIG. This has all been very well documented, by the way. And much of that advice, looking back over 10 years, doesn't seem particularly appropriate and generate a lot of resentment on the part of Koreans, who felt that the IMF was speaking too much on the part of big global banks and too little worried about the Korean side of things. So the legitimacy of the fund at the end of Chapter 2 was not good. And that's the story that gets - you pick up in the early 2000s with the IMF trying to find a role in which emerging markets are comfortable with it and want to borrow from it. Because the emerging markets - particularly the Asians, but not only Asians were saying by 2005, 2006, we're not going to borrow - we'll pay back our loans. We're not going to borrow from you ever again. You know, just get out of our lives. We don't like you.
KESTENBAUM: I mean, I remember, beginning the financial crisis, there was this question, like, what is the IMF for? Like, who cares?
JOHNSON: Oh, look, I remember very well talking to PLANET MONEY. And they never wanted to mention the fact I was former chief economist of the IMF. They regarded that as being an irrelevant distraction.
JOHNSON: And perhaps they were right, to be honest. But Chapter 3, which was mostly after I left the IMF, turns out to be all about the IMF lending to Europe, to Western Europe and to eurozone countries.
KESTENBAUM: Jacob, this is the final chapter - Chapter 3. And I'm going to call it lender to the once rich and famous. Just to recap, Chapter 1 - IMF had this sort of boring role trying to help keep exchange rates in line. Chapter 2 becomes a controversial emergency lender to the developing world. Now in Chapter 3, it's an emergency lender to rich countries, to the very nations who are supposed to be running and guiding the IMF.
JOHNSON: The loan to Greece is an incredible breakthrough and a transformation. And of course, since then, we've also had Ireland and Portugal, and who knows where it goes from here.
GOLDSTEIN: Why is the loan to Greece such a big deal?
JOHNSON: The eurozone is a reserve currency area. Reserve currency area means you print your money. People want to hold it. And to run into these troubles and to not be able to deal with them yourself or to have to bring in the IMF, well, it's extraordinary. It's a humiliation. It's not something the founders would ever have envisaged happening, I'm sure. And it's actually been handled quite well by the IMF so far.
GOLDSTEIN: Handled well in what way? Why do you say that?
JOHNSON: Well, look, I think in this conversation we're dancing a little bit around - well, the person we're not mentioning is Mr. Dominique Strauss-Kahn. And just to accentuate the positive here, Mr. Strauss-Kahn deserves - receives and deserves a lot of credit for persuading the Europeans, not forcing them, not badgering them, definitely not bullying them, but cajoling them and coaxing them into understanding that they had a big problem in Greece, that they were not able to deal with it themselves, that it would greatly help them if the IMF were brought in with a lending program to Greece that is not exactly a standard lending program. Greece has got better terms than most other countries have ever had. But it is much more of a rescue bailout conditional loan than one could ever have envisaged the eurozone taking.
KESTENBAUM: There are people who would argue now that bailing out Greece - I mean, you said that was a revolutionary idea. There are people now who'd argue that bailing out Greece was a mistake, that Greece is going to default and, you know, that we just needed to work through that earlier. You just postponed the pain.
JOHNSON: Yes. And I'm on the record as saying that myself.
KESTENBAUM: (Laughter) OK.
JOHNSON: But this is - we're in Chapter 3, and Chapter 3 is not over. And at the end of the day, was I right on Greece or is the IMF's and the European Union's policy approach right? I don't know. These things take years to play out. Let's see.
GOLDSTEIN: So what do these charges against Dominique Strauss-Kahn mean for the IMF?
JOHNSON: Well, these are very difficult days for the IMF. If this transition period is handled well, if the succession is run in a fair, open and transparent process, that is potentially a big new and important chapter for the IMF. If, on the other hand, the European countries come together and try and stitch it up so they get another European in or let alone another French person, that would be, from my point of view, disastrous.
KESTENBAUM: You said it matters how the succession is handled. That makes me think of, like, who's the next pope or, you know, who is going to succeed King George or something
JOHNSON: Or Henry VIII. Seriously. That's exactly how you should think of it. The IMF is a law unto itself. The - it is explicitly and completely exempt from anything to do with U.S. law. And its codes of conduct, as you may now be discovering from the newspapers, are completely made up by itself. And they can change the rules at any time with regard to retrospective actions or whatever.
KESTENBAUM: Why do we need the IMF now? Like, what would the world be like without an IMF?
JOHNSON: Well, nobody knows. And why would you want to find out? Look, we have many explosions, financial explosions around the world all the time. The global structures we built turned out to be much more precarious than anybody thought, including me. You know, in September 2008, I was shocked to see exactly how fragile the U.S. financial system had become. And the IMF - would you invent it now if you didn't have it? No, you probably wouldn't be able to. Should you abolish it under these circumstances? That would seem unwise. Should you argue a lot about what it should do and how it should do it? Absolutely. Should it be subject to much more external scrutiny and governance, including a regular, you know, biweekly podcast from PLANET MONEY? Yes. Is that going to happen? No, unfortunately it's too boring. But that's what we should do - work to make it a better, more effective, more open, more transparent institution, not wish it away.
(SOUNDBITE OF SONG, "GROWN OCEAN")
FLEET FOXES: (Singing) And I know someday, the smoke will all burn off. All these voices I'll someday have turned off.
GOLDSTEIN: Simon is right. We are in fact not going to be doing a biweekly IMF PLANET MONEY podcast. But please let us know what you would like to hear, what questions you have about the global economy. You can email us at email@example.com.
KESTENBAUM: Or leave us a comment on the blog - npr.org/money. We're going to post that old newsreel from the 1940s. I'm David Kestenbaum.
GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.
(SOUNDBITE OF SONG, "GROWN OCEAN")
FLEET FOXES: (Singing) In that dream, I could hardly contain it. All my life I will wait to attain it. There...
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