Will IMF’s bailout of Euro Reach $ 3.5 trillion?

From the Daily Mail,

Christine Lagarde, the managing director of the IMF, said the current war chest of around £250billion ‘pales in comparison with the potential financing needs of vulnerable countries’ and needs to be expanded to deal with ‘worst-case scenarios’.

Sources in Washington said the IMF’s pot of cash could be expanded to £2.6trillion although officials in London said that figure looked ‘incredibly high’.

Mrs Lagarde’s warning came as U.S. President Barack Obama said the debt crisis in Europe was ‘scaring the world’ and that eurozone leaders were not dealing with the issue quickly enough.

And a top Bank of England economist urged leaders around the world to stop the world plunging back into recession. ‘It’s doing something rather than just saying something that counts,’ said Ben Broadbent, a member of the Bank of England’s Monetary Policy Committee charged with setting UK interest rates.

Danger: U.S. President Barack Obama said the debt crisis in Europe was 'scaring the world'

Britain is liable for 4.5 per cent of IMF funding – meaning it would have to contribute around £115billion to an enlarged bailout fund, or £4,600 per household.

It is conceivable that figure may turn out to be slightly lower because Britain’s share is falling as rapidly growing economies such as China contribute more.

Britain has already handed over £12.5billion in emergency loans to Greece, Ireland and Portugal to help prop up the euro.

The staggering rescue package proposed by the IMF signify that the rest of the world will be included. This would be led by the United States which reinforces their backdoor participation (aside from the monetary channels).

(Wikipedia.org: IMF)

And the proposed bailout implies of the inclusion of ASEAN and the Philippines with 3.94% voting share.

IMF: IMF Executive Directors and Voting Power

Yet such humongous bailout scheme, if it does become a reality, would adversely impact global economic growth as resources are shifted from productive use towards saving the skins of Euro bankers and the political class. Filipinos will pay for this with higher taxes or inflation.

Moreover, there are no guarantees that shock and awe bailout tactics will work over the medium term or the long term. Just look at what has been happening to the US, whose economy continues to flag despite the trillions of dollars expended by the US Federal Reserve and the US government.

Also, by funneling large amounts of resources to current rescue programs, the world would have depleted or drained their resources should another crisis arise anytime.

Lastly, the use of scare tactics to secure political deals, seem to be acknowledged by politicians. Except that for some, they pretend to fight them, when they in truth—they have impliedly been promoting them.

President Obama’s Use of Regime Uncertainty and the Political ‘Government Shutdown’ Blackmail

All of a sudden, President Obama embraces the Austrian perspective of Regime Uncertainty (Robert Higgs).

From the Washington Post, (hat tip Russ Roberts)

At a town hall meeting near Philadelphia on Wednesday, President Obama warned that the uncertainty of a shutdown could slow the economic recovery.

“Companies don’t like uncertainty, and if they start seeing that suddenly we may have a shutdown of our government, that could halt momentum right when we need to build it up — all because of politics,” Obama said.

Of course, the use of uncertainty here is all about political convenience. This have been predicated on the ongoing battle over proposed budget cuts from the Republicans.

The administration appears to use “government shutdown” as leverage to negotiate to prevent or mitigate these.

Graphics from Cato’s David Boaz

Yet what is being argued looks inconsequential relative to the budget (government spending) gains over the years.

And based on the Cato’s graphics, the Republican proposal would seem not as a NET reduction, but rather a reduction of expansion.

As Jacob Sullum of the Reason foundation writes,

The cuts represent less than 2 percent of the total budget, less than 4 percent of the deficit, and less than 5 percent of discretionary spending, which rose in real terms by 75 percent from 2000 to 2010 and by about 9 percent in each of the last two fiscal years.

Yet the administration is trying to spook (blackmail) the public with the prospects of mayhem from a prospective government shutdown.

US government shutdowns have not been rare.

Below is a table from Bespoke Invest showing previous shutdowns.

Bespoke writes, (bold highlights mine, table above from Bespoke)

“funding gaps in the federal government are hardly rare. While we all remember the two shutdowns in 1995, there have actually been a total of 17 shutdowns going back to 1975. However, due to their length as well as changes in federal law over the years, not all funding gaps are created equal. For starters, of the seventeen funding gaps highlighted, only eight lasted longer than three days. In other words, in most cases the shutdown was a one day affair or else it occurred over a weekend.

“As shown in the table, however, funding gaps prior to 1980 all lasted one week or more, and then from 1980 to 1995 all funding gaps lasted three days or less. The reason for this change is the fact that beginning in 1980 the US Attorney’s Office ruled that any time there was a funding gap, non essential federal agencies were required to begin terminating activities and ‘shutdown.’ Once that opinion was issued, funding gaps took on added urgency forcing lawmakers to come to an agreement. This is why the shutdown in 1995 was so notable.

Bottom line:

This serves as a lucid example that when it comes to cutting government (privileges) in terms of spending and control, you can hear the shrill of cry OUCH from politicians! Even if the proposed spending cuts seem inconsequential or even perhaps symbolical.

And in desperation or as a political maneuver, politicians employ various ‘strawmen-bogeyman’ tactics to scare the wits out of the public so that the public would be stampeded to approve their desires.

As former US President John Adams once wrote [The Foundation of Government],

Fear is the foundation of most governments; but it is so sordid and brutal a passion, and renders men in whose breasts it predominates so stupid and miserable, that Americans will not be likely to approve of any political institution which is founded on it.

Milton Friedman’s 4 ways money is spent

Stripping away control and spending other people’s money is so addictive that politicians can’t seem to do away with it and would fight heaven and hell to avoid it.

Update: Bespoke appears to have been proven right, a deal has been reached according to marketwatch.com. Details have yet to come in.