On the Political Economics of Dominic Strauss Kahn's Political Death

This post is about the economic and political significance of Dominic Strauss Kahn’s (DSK hereafter) arrest. It will say nothing about the merits or otherwise of the charges against Dominic Strauss Kahn, the IMF’s Managing Director. All cases of alleged sexual assault brought against high profile men place two equally important  (yet often counter-opposed) demands upon the rest of us: The importance of respecting the anguish of the alleged victim (as well as of respecting her tussle against the spectre of terror that all women face when it comes to deciding to accuse a powerful man) and, at once, the obligation to respect the defendant’s presumption of innocence. In this spirit, the following lines will say nothing about the case but will concentrate on an important part of contemporary political economics.

Normally, the ‘elimination’ of an IMF Managing Director, of the President of the World Bank, even the President of the European Commission, would have no more than a passing effect on the relevant institution. I suspect that DSK’s demise will be different. It is not just that DSK was a heavyweight that pushed the IMF into a different mode of thinking (one that involved a more nuanced approach to the deeper causes of crises). Far more significant was the manner in which he seems to understand what makes the global economy tick.

To cut to the chase, I shall give one poignant example; one which transcends all anecdotes about the greater ‘leniency’ that DSK demonstrated during the EU-IMF Greek government negotiations over the terms of the massive Greek ‘bail-out’ loans. To make my point I shall quote him directly, rather than base my argument on hearsay.

Back in January (of 2011), DSK was being interviewed by a BBC Radio journalist in the context of a documentary on the history of the IMF.[1] Toward the end of the program, I heard the distinctive voice of DSK responding to a journalist’s question about how the global economy ought to be reconfigured in the aftermath of the 2008 Crisis. His astonishing answer was:

“Never in the past has an institution like the IMF been as necessary as it has been today… Keynes, sixty years ago, already foresaw what was needed; but it was too early. Now is the time to do it. And I think we are ready to do it!”

This was, in my estimation, a bombshell of a programmatic statement by the IMF’s Managing Director. What was he referring to? He was, of course, referring to Keynes’ powerfully put argument (in the context of the 1944 Bretton Woods conference) that a system of fixed exchange rates cannot survive for long without an automated mechanism that treats (a) systematic trade surpluses and (b) systematic trade deficits as the different sides of a problematic coin.

Keynes’ recommendation (which the USA turned down, through its representative at Bretton Woods, Harry Dexter White) was that, to deal with the systematic destabilising effect of deficits and surpluses, the world needed a mechanism which would rebalance it by transferring surpluses from the surplus to the deficit countries. In short, the world needed a Surplus Recycling Mechanism (SRM) – click here for an extensive (though academic) account of the arguments in favour of an SRM.

This was, quite naturally, a radical suggestion. The Unites States, as expected, rejected the proposal not because the New Dealers in power, at that time, did not recognise the importance of an SRM at a global level, but because they did not like the idea of the automaticity of recycling (which Keynes was proposing).[2]

As I have explained in some detail (see here for example) the poignancy of an SRM (and of its absence), I shall desist from repeating it here. Suffice to point out the political and economic significance of DSK’s endorsement of Keynes’ suggestion and, in particular, the determined statement that Keynes was ahead of his time but not, after the Crash of 2008, “Now is the time to do it. And I think we are ready to do it!”

If the reader requires a little more persuasion on the significance of that statement, consider this: Looking at things from a European perspective, DSK’s declaration means that, in his viewfinder, Germany is as much of a problem for the eurozone as Greece is. For if systematic surpluses have the capacity to undermine a common currency (or fixed exchange) area, then Germany’s developmental model is undermining the eurozone (just as much as Greece’s chronic deficits).

I think that DSK had a good point. But whether the reader agrees with me or not is not the issue. The issue is that DSK’s political death (the announcement of which may turn out to be premature) carries with it unprecedented significance both within the without Europe.

Within Europe, the prospect of a French President who believes strongly (and is prepared to back up his convictions with a formidable analytical panoply) that the eurozone cannot survive without a Surplus Recycling Mechanism (which channels German surpluses to the deficit countries in the form of productive investment) had the potential radically to alter the political and economic agenda of the continent. It would, in particular, offer an invigorating counterpoint to the current mental incapacity to come to terms with the deeper causes of the euro crisis and to, at long last, recognise that the debt crisis is a symptom, not the cause of the string of failures that threaten the eurozone’s very existence.

More broadly, the global debate about what to do with China’s increasing surpluses was also bound to take a different course depending on whether the IMF’s Managing Director believes, as DSK declared he does, in the importance of creating automated, supra-national mechanisms for recycling surpluses (as opposed to Tim Geithner’s insistence that global imbalances should be dealt with by nothing more than adjustments to the exchange rates.)

In short, DSK is one of the very rare officials heading an extremely powerful institution while holding views with a power, a verve and a freshness that is atypical of grey, number-crunching bureaucrats. His institutional and political passing may go unnoticed simply because his tenure at the IMF was shortlived and his French Presidency never materialised. However, I suspect strongly that he may well turn out the most significant French President we never had, as well as the most influential IMF Managing Director we nearly had.

[1] BBC Radio 4, Inside the IMF – Part Two, broadcast on 17th January 2011

[2] The United States proved that they did not reject the idea of surplus recycling by effecting the Marshall Plan (a fabulous example of massive surplus recycling) and by taking a myriad steps between 1947 and 1970 to recycle a large percentage of American surpluses in Europe and in Japan. What they did reject was the idea of a supra-national institution that would do the recycling outside Washington’s political control.


  • I think you’re clutching at very flimsy straws to make these – rather extravagant – last remarks in your political obituary for DSK.
    But then, it does look like one hell of a bloodless (excuse the pun) political assassination carried out with surgical precision and swift, irreversible results. It’s therefore worth asking who had the motive and the means to “commission” the killing, because with DSK’s sexual frivolity, there would be no shortage of “opportunities”.
    Your theory certainly seems closer to the truth than the more popular one about an alleged “vendetta” with Sarkozy over the French presidency.
    And you’ve also got Timmy Geithner’s higher authority (Goldman Sachs) to consider.
    But I wonder why DSK’s abortive “summit” meeting with Angela – “My Merkel Right and Wrong” – scheduled for the day after the hit, didn’t deserve even a fleeting mention in your narrative.
    Surely, that was an ideal opportunity to put DSK’s money where his mouth was in January, regarding “SRM” and a Keynesian “comprehensive solution to the eurozone debt crisis” we all wish for.

    • I think I made it clear that, as a matter of principle, I am not prepared to pontificate on the legal case against DSK. Which means I refuse to discuss whether it was a conspiracy or not. My piece was about the political economics of his demise. And I am sticking to my guns!

  • The reality is that the IMF policies since the Eurocrisis rescued that institution from the dead have not changed one bit: cut wages, pensions, subsidies, public investment, labor protections and corporate taxes. Maximum countercyclicality and regressiveness. DSK’s pretty words about Keynes are the equivalent of Obama’s rethoric abot “fat cats”: slightly different PR to cover business as usual.

  • As you mention in the last GK (kathimerini’s monthly magazine), there is no capitalism without debt. Keynes had the point very early.

    Ι am not getting to the “consipany” analysis, I stay with your analysis saying that if DSK was determined to change the EU treatment to crisis this would be a strong stripping disclosure first of all for the German banks. I don’t know if any european pension funds or any other institutional investors (except banks) are still swimming in toxic assets in their balance sheets. I believe EU is sitting on a toxic bomb, although this bomb is “plasmatic”.

    And of course is very early to bury this man. The upcoming hours or dates are critical and if DSK come out clean, the EU suits should hold their breaths.

  • Thanks Yanis,

    There has been a change at least in rhetoric (and perhaps this extends to policy – a case in point being that the IMF wanted less onerous terms for the Irish ‘bail-out’ than the ECB) in the IMF. I didn’t understand the role of Strauss-Kahn in this, and your article has helped. If he was genuinely pushing for an SRM, then his passing from the political stage might have some significance.

    In any case, a vacuum at the at the head of the IMF will further paralyse European decision makers.

  • An intriguing assertion.
    I wonder however whether DSK’s approaching the idea of such an automated supra-national SRM not from the perspective of Keynes, but as the chekmate move (or final nail in the coffin, if you will) in the contest between governments and economic institutions over who really governs financial policy.
    If you take away countries’ choice in dealing with their surplus and put it all under the automated control of an IMF-like organisation, then that organisation’s power to dictate policy trumps all.
    I’m not suggesting that a SRM is a bad idea, but I *am* concerned about it being put together with the same…shall we say…”occasionally deficient” transparency and accountability that the IMF operates under. The great inertia in these supranational institutions is also a worry. To use the IMF as an example, whatever more nuanced approach DSK has introduced into its outlook, it still has not trickled down into the application of policy- the solutions it proposes to the EU tend to be the “same old, same old” austerity it has enforced/supported.

  • Just note that if instead of excess German capital going to Greek bonds, Irish real-estate banking, US mortgage backed bonds and so on, the money had been paid out to German workers for vacations in the South, the world economy would have been on a more solid footing and German workers would have been happier.

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