I wonder what our colleagues at the Bretton Woods Project would make of this. Before going to sleep last night, I caught news that IMF Managing Director Dominique Strauss-Kahn was held in New York en route to France on attempted rape charges [1, 2]. Having written about the big kahuna's peccadilloes before, this latest episode will probably surprise Americans more than those of us in Europe who've become accustomed to these sorts of allegations against DSK. Yet, alike with the Monica Lewinsky allegations, the magnitude of these claims invites initial disbelief. This news story has even topped Yahoo! News. When the IMF only receives popular coverage when an event like this happens, you know that it has a problem with getting the public to understand what it does as well as with the kind of attention it receives. Pick your news outlet of choice: it may be a slow weekend, but DSK is front-page on nearly every one.Much comment has already been made about the incident. While innocent until proven guilty is the operating principle, you can certainly argue that this incident has damaged DSK's credibility mortally. There are of course many implications here:
- His chances of being the Socialist Party standard-bearer for next year's French election against the UMP's Nicolas Sarkozy are now nugatory. Various polls have claimed that he led Sarkozy at various points in the run-up to 2012. Though he probably did not foresee the extent of it, offering DSK as IMF managing director was a Sarkozy masterstroke in neutralizing a potential rival on the domestic political scene. Segolene Royal partie deux, mon ami?
- In his place, American First Deputy Managing Director John Lipsky--formerly of JP Morgan and a securitization cheerleader in his earlier days [1, 2]--takes control. This certainly isn't the outcome most of us wishing for more diversity in IMF leadership want. However, this is mitigated by Lipsky indicating that he will step down at the end of August. Fancy that: a guy most clearly associated with promoting securitization prior to the crisis now has to deal with the fallout from their abuse and misuse.
- On the bright side, the unlikely return of DSK and the stopgap term of Lipsky will put to test IMF indications of reform (including from DSK himself) to make it reflect the world's changing centre of economic activity. Your truly will certainly hold it to account in choosing its next chief from a developing country instead of the unbroken tradition of having a European head and an American #2. Given the buildup in previous years, I can certainly assure you that developing countries will cause a ruckus if it doesn't happen this time around. All change at the top is long overdue.
- A non-European head would still come too late to limit IMF "mission creep." I have written on why the IMF should not bail out Greece, Ireland and Portugal since the primary causes of their crises were not balance-of-payments difficulties which the IMF was designed to address. Hopefully, an LDC chief would resist calls from rich Western countries to misallocate funds meant for aforementioned BOP crises--especially contributions from LDC members. If the EU wants to bail out its own, fine, but don't use monies set aside for other purposes at the IMF.
- DSK was already becoming antsy about Greece's similarly socialist leaders not living up to their end of the bargain. With this rapport now ended, the IMF's already limited powers of persuasion in keeping Greece in line will probably take another knock. Ironically, Sarkozy's efforts to keep EU bailouts a European affair will likely suffer a blow from his fiercest rival effectively discrediting himself via nasty entanglements. The IMF/EU/ECB troika with the possible exception of the ECB has taken its lumps. but is not terminally damaged to the point of not being able to work alongside each other.
As for le grand seducteur, some people just want to party all the time. DSK is a socialist in the way Super Mario is a communist, and his hankering for the good life looks to have terminally ended his future political prospects. But hey, loving the limelight, he can always become an Eliot Spitzer-esque talking head.
UPDATE 1: The NYPD making DSK do the perp walk shows a good amount of confidence by the authorities in their case.
UPDATE 2: Yahoo! News now features three stories on the case. Is this a case of misplaced priorities or something else? You know something is up when the IMF shares top billing with the world's best known if deceased terrorist.
