City slicker

UK Chancellor of the Exchequer George Osborne statement to IMF governing meeting in Washington DC —

The deficit is forecast to be the highest in Europe in 2013 and gross debt is set to reach 100 percent of GDP in the coming years. The UK also has a large and systemically important financial sector, which the IMF described as a “global public good” in the 2011 UK Spillover Report. A strong and credible consolidation plan is therefore essential for global, as well as domestic, financial stability.

That referenced IMF’s 2011 UK Spillover Report —

The size and interconnectedness of the U.K. financial sector make it a powerful
originator, transmitter, and potential dampener of global shocks. The U.K.
agglomerates core international financial functions making it a key node in “funding”
liquidity and balance sheet hedging, providing buoyancy to global markets and
acting as a key channel transmitting shocks or stabilizing measures.

The stability and efficiency of the U.K. financial sector is therefore a global
public good, requiring the highest quality supervision and regulation. Significant
efforts to strengthen supervision will help contain the risks to global stability posed
by the sector’s size and complexity. Stronger liquidity, capital and leverage rules
should dampen credit cycles and lower systemic risk, as can the U.K.’s
macroprudential policies. 

Thus, the IMF did not say that the UK financial sector was a global public good. It said that it performs various functions (for which, by the way, it is handsomely remunerated) but in doing so it is potentially destabilizing to the global economy. Furthermore, it said that this property motivated various policies regarding regulation and supervision — not contractionary fiscal policy, as Osborne implied.

George Osborne went to a Washington IMF meeting and put on the record a willfully and egregiously misconstrued version of IMF analysis of the UK. But more column inches will be expended tomorrow on Luis Suarez’s teeth than on Osborne’s sleight of hand. Something ain’t right.

Endnote: the use of the term “global public good” specifically in connection with the financial system seems to have gotten its most careful articulation from Alberto Giovannini. It’s clear that not what Osborne meant.

Also, you’d think Osborne might have been wary of complicating his IMF visit given the austerity backdrop to it.

1 thought on “City slicker

  1. But it did say that one feature of the UK financial sector is a global public good: its stability and efficiency. And in the twisted minds of so many important and powerful people, a stable and efficient financial sector needs a sound government budget which in turn needs contractionary fiscal policy.

    You can build impressive careers by stringing together tough and complex sounding non sequiturs, delivering the impression that you mastered rocket science.

Comments are closed.