Alex’s Notes: This is absolutely classic. I used to do work with one of the largest Aerospace Unions in the United States, and I have seen this before. When those who run an organization come to the realization that the organization is headed for extinction because it has outlived its usefulness, the entrenched employees start looking for ways to take care of themselves at the expense of those they are supposed to serve.

So too it seems with the IMF. If you cant earn your keep, you might as well sell off someone elses gold and float your own paycheck for as long as possible it seems.

Global Gold Diggers
June 7, 2008; Page A10 Wall Street Journal

What if there was a global financial crisis and no one called the IMF? Even better, what if no one even noticed the International Monetary Fund wasn’t there? We’d call it progress, and further evidence that the one-time financial ambulance service has outlived its usefulness.

This is no hypothetical. Global currency and financial markets have been in turmoil, soaring food and energy prices are causing political upheaval, and central bankers have taken extraordinary steps to prevent systemic failure. But the IMF has barely rated a mention. Meanwhile, its lending portfolio is down to one-tenth of its $100 billion peak in 2003.

A survey of countries where the fund has played a leading role explains the IMF’s isolation. From 1994 until 2002 the fund’s policy elixir of currency devaluation and tax increases often left its “clients” worse off. Think Mexico, Indonesia, Thailand and Argentina. Many IMF victims have since designed alternative financial backstops. In Asia, the Asean countries have teamed up with China, Japan and Korea to create a regional lending facility known as the Chiang Mai Initiative. These governments have $80 billion in international reserves, held at their central banks, ready to help in a liquidity crisis.

Few understand the current irrelevance of the fund better than its own employees. So a couple of years ago, the IMF formed an “eminent persons committee” to study survival plans. Last year this group of eight central bankers and private investment executives offered a “new income model” for the dying bureaucracy. The centerpiece is a raid on the gold vault at the fund.

There are some 103 million ounces of gold at the IMF, deposited by member countries when the fund’s mission was to defend the gold standard in a balance-of-payments crisis. With an original value equivalent to $56 an ounce but now worth more than $850 an ounce, the ingots have generated huge gains for their owners. These are not only rich countries; some 25% of the gold belongs to developing nations. India has a paper gain of more than $2 billion, the U.S. about $21 billion.

This money rightfully belongs to the members. But the fund now has a budget that exceeds its income by about $300 million a year, so it’s not surprising that the fund’s managers are looking to crack the gold safe for a second time. In 1999 the fund revalued one-eighth of the bullion (12.9 million ounces) in the vault at market prices – then $335 an ounce – in order to boost its asset profile and generate money for debt relief.

Now it wants more. Under the “new income model” of the eminent persons, that same one-eighth would be sold outright. At $850 an ounce, proceeds would top $11 billion. Some $6.7 billion – which is the excess over the gold’s current book value – would go to finance a permanent IMF endowment. The U.S. share of that gain is about $1.7 billion. At a 4% annual return, the gold sale would provide $267 million every year for IMF operations. Not coincidentally, that would just about fill the fund’s annual budget shortfall.

This income would roll in year after year, exempt from member-country review. This is a recipe for policy mischief. Despite its reduced importance, the fund still has enough power to make trouble by again bailing out nations from bad decisions and imposing antigrowth policies in the bargain.

If the fund wants an endowment, it should ask for an appropriation from Congress like everyone else. We think we know how that would play on Capitol Hill.

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