Extraordinary news here in New York where the IMF’s Dominique Strauss-Kahn was this afternoon hauled out of the first class cabin of an Air France plane at JFK airport to be arrested for – allegedly – sexually assaulting the chambermaid in his room at the Sofitel Hotel.

According to the New York Times, Strauss-Kahn fled to the airport after the attack, leaving his mobile phone in his room, but was apprehended just 10 minutes before the plane was due to depart.

Strauss-Kahn, who had been expected to run for French President, was embroiled in a sex scandal back in 2008, when he slept with an IMF employee at Davos, and was then accused of ushering her into a new job outside the Fund. Unlike the World Bank’s Paul Wolfowitz, who was forced out for giving preferential treatment to his partner, Strauss-Kahn kept his job.

Ironically, it was only on Friday that the Guardian ran an article by French journalist, Melissa Bounoua, lauding the open-mindedness of the French voter, who she claimed would happily have Strauss-Kahn as President, even if he were a serial shagger for whom consent wasn’t that big a deal.

Is Dominique Strauss-Kahn, current head of the International Monetary Fund, a “queutard” – literally, a man who makes extensive use of his intimate parts?[...] Strauss-Kahn (widely known as DSK) had an affair with Piroska Nagy, a Hungarian economist, while working at the IMF in 2008…

That wasn’t the only scandal. There was a fuss last year when a young French author, Tristane Banon, described her encounter with him. She explained that she had interviewed him for a book about public figures and their missteps, and claimed she had to fight him off physically…

“Personally, I doubt this side of DSK’s life would have any influence on how he would run the country,” Ms Bounoua claims in an article that makes all the usual excuses for the sexual proclivities of the powerful and is hailed, rather breathlessly, by the Guardian’s Jessica Reed as giving readers “sex, power, politics AND… a new French word: queutard.”

One wonders how Ms Bounoua and the Guardian will react to this new ‘fuss’…

Update: It’s worth remembering that ugly, if unproven, rumours have swirled round Strauss-Kahn for many years. Here’s Felix Salmon – now with Reuters, and one of the best financial journalists around – discussing the Frenchman’s ‘lower half problem’ in 2007 before he took over at the IMF.

Salmon quoted French journalist Chris Masse’s account of a previous Strauss-Kahn ‘fuss’:

A cable TV show (“93 Faubourg Saint Honoré”, on Paris Premiere, hosted by Thierry Ardisson) invited a young (and unknown to me) French actress. I don’t remember her name. She said that she had a bad encounter with Dominique Strauss-Kahn. Here’s what happened. She was asked to come in a little apartment he had in Paris, and then the next thing, Strauss-Kahn jumped on her and tried to undress her and more. She yelled, and told him that that was a rape, but the word “rape” (“viol” in French) didn’t seem to perturb him. She said that he was like “a gorille en rut” (a gorilla in rut).

Guinea-Bissau’s leaders will at least be pleased it’s not the other way round.

First, he argues that the American gambit was not sudden but is a response to what he characterizes as longstanding European intransigence. He believes that Europe has failed repeatedly to respond to American signals of discontent over the past five years.  “In 2008 and 2009, they basically said that this issue was not on the table,” he recalls. In that context, the new U.S. position is “an aggressive move in the context of a pretty aggressive defense.”

He also emphasizes the oddity of current European policymaking in a body like the IMF. It’s not as if each of the European seats offers a unique policy perspective. Through the EU, individual member states coordinate their positions in advance. “They just get eight to ten voices every time an issue comes up,” he says. Truman contends that it might actually be better to revert to a smaller board, not least for reasons of cost. IMF executive directors and their staffs are relatively expensive, and in today’s environment of budget-slimming there could be some non-trivial savings for the Fund in a pared-down board.

On this issue, Washington is aligned with India, China and Brazil in an effort to tame traditional European prerogatives. If that trend continues, it could spell trouble for Europe in the world of multilateral institutions. 

It’s commonplace to describe the financial crisis as a once-in-a-century event, but I question whether that is the case. Perhaps we’re not in the midst of a short-lived financial shock, but a long crisis that stretches back into the 1990s.

Here’s Paul Blustein on Alan Greenspan:

The Fed chief told the G-7 that in almost fifty years of watching the U.S. economy, he had never witnessed anything like the drying up of markets in the previous days and weeks.

Greenspan wasn’t speaking in Autumn 2008 when Lehman’s collapsed, however, but ten years’ earlier in the wake of the spectacular blow-up of Long-Term Capital Management, which lost $4.5 billion almost overnight in what the fund’s principals post-rationalised as a 100-year flood.

Long-Term (with its superbly hubristic name) was brought low by derivatives, just as Lehman’s would be a decade later.

(Robert Rubin, Clinton’s Treasury Secretary, was one of those left picking up the pieces – part of ‘the committee to save the world’, with Greenspan and Larry Summers. Rubin went on to preside over Citigroup as it needed a succession of massively expensive bailouts, when its derivatives tanked in the subprime crisis.)

The proximate cause of Long-Term’s failure was Russia’s Rouble crisis, when the country defaulted on its debt after the IMF refused to mount a second bailout.

The Russian crisis itself came in the midst of a long series of dramatic economic failures that hits the world between 1997 and 1999, mostly in East Asia (Thailand, South Korea, Indonesia etc), but which also battered Brazil and would devastate Argentina in 2002. Blustein again:

Time and again, panics in financial markets proved impervious to the ministrations of the people responsible for global economic policymaking.

IMF bailouts fell flat in one crisis-stricken country after another, with the announcements of enormous international loan packages followed by crashes in currencies and sever economic setbacks that the rescues were supposed to avert.

Greenspan believed that the crisis of 1997-1999 was caused by “more investment monies flow[ing] into these economies than could be profitably employed at modest risk.”

Ben Bernanke,his successor at the Fed, took a similar view. In 2005, he argued that, in response to the crisis, East Asian countries became net exporters of capital, rather than net importers. Even countries such as China, which had survived the crisis unscathed, built up reserves, in part to hedge against future financial turbulence.

In practice, these countries increased reserves through the expedient of issuing debt to their citizens, thereby mobilizing domestic saving, and then using the proceeds to buy U.S. Treasury securities and other assets.

Effectively, governments have acted as financial intermediaries, channeling domestic saving away from local uses and into international capital markets.

In the meantime, the money that had flowed into emerging markets was looking for a home. During the dot.com era, it found it in technology stocks. But they crashed in 2001, costing investors $5 trillion of losses. To restart the party, Greenspan then cut interest rates savagely (and even more so after 9/11). Rates were down at1% well into 2004.

As a result, the United States (and the UK and various other deficit countries) were faced by the toxic combination of low interest rates and what Bernanke dubbed a ‘global savings glut’ (e.g. lots of capital competing to find risk).

And my, how the debtors loved it! Bankers went stark raving mad, lending standards collapsed, and a massive asset price bubble was inflated. It ended in a colossal hangover (mostly confined to the West, it should be remembered), once US housing prices finally started to fall in March 2006.

In a seminar I led at Brookings with Bruce Jones earlier this week (discussing our recent paper with Alex on globalization’s woes), I argued that perhaps we should stop pretending the financial crisis started in 2007, but should instead picture it as a truly global crisis that has had (so far) three main waypoints:

• The East Asian crisis (with hits on other countries outside Asia).
• The dot.com crash.
• The ‘subprime’ crisis, (which may itself be triggering another wave of sovereign debt crises).

Admittedly, there was some push back to the notion that we are in the midst not of a shock, but of a slow motion car crash. But the connections seem strong to me. At the very least, it unwarranted to claim that recent events have been ‘unprecedented’ accidents that will only occur every century or so.

It all makes me think of The Way Things Go, a famous and fantastic film by the Swiss artists Peter Fischli and David Weiss – in which you watch unfold a chain reaction of levers, pulleys, slides, seesaws, and lots of whizzes, bangs and explosions. The full film is half an hour long, but the short clip at the top of this post gives you a flavour.

The analogy is not perfect though. Fischli and Weiss understood the causality that tied together their mish mash of junk and chemicals. They could tell you where it was all going to end up. Their whole thing had been intelligently designed.

Our economy, I think, has surpassed human understanding. We can bash, poke and kick it, and hope it will start running smoothly again. But it would be foolish to trust those who confidently pronounce this crisis over, and even less those who claim to know what is coming next.

Update: Alex sends me this 1999 essay on Long-Term Capital Management by Michael Lewis, who has written a much heralded book on the recent crash. Here’s an extract:

It is interesting to see how people respond when the assumptions that get them out of bed in the morning are declared ridiculous by the wider world. There is obviously now a very great social pressure on the young professors [who reinvented bond trading and whose models blew up Long-Term] to abandon the thing they cherish most, their hyperrational view of the world…

Oddly, the question that occupies them is not whether to push on with their models of financial behavior but how to improve the models in light of what has happened to them. ”The solution,” [Nobel Prize winner and Long-Term partner] Robert Merton says, ”is not to go back to the old, simple methods. That never works. You can’t go back. The world has changed. And the solution is greater complexity.”

- The core negotiations seem set to finalise agreement over a “framework for balanced and sustainable growth” – particularly critical from US and Chinese perspectives – that seeks to give the IMF a greater reporting role in policing global imbalances. The FT’s Money Supply blog offers a sceptical comparison of the leaked draft agreement with the IMF’s current role.

- As to the Europeans: Gordon Brown seems to be adopting a broader focus, calling in an NYT op-ed for “a new system of governance” to form the “next common economic goal”. (He also announced that UK Business Minister Shriti Vadera would be going on secondment to the South Korean government to help develop proposals on global financial architecture ahead of their G20 presidency next year.) For Angela Merkel, the “most important subject” is financial regulation; she argues that “we must not search for substitute issues”; and for Sarkozy too, the top priorities look to be bankers’ bonuses and agreement over capital requirements for banks.

- Trade and protectionism are sure to form another important aspect of negotiations, particularly for China and India. VoxEU takes an interesting look at trends in world trade since the November 2008 Washington Summit,  highlighting how G20 states’ oft-proclaimed commitment against protectionism has been broken by member governments approximately once every three days since last year’s commitments. “No other statistic”, Simon Evenett argues, “better demonstrates the paucity of global leadership on contemporary protectionism”.

- Robert Zoellick, President of the World Bank, calls for the summit to focus on the world’s developing economies, highlighting the positive contribution they can make to the health of the global economy. Pittsburgh, he argues, can mark the advent of a more “responsible globalisation” founded on “multiple poles of growth”. Brazilian President, Luiz Inácio Lula da Silva, meanwhile, presents his take on the G20 grouping in the LA Times.

- Around the think tanks, finally: Brookings has an in-depth report focusing on some of the broader implications of the G20 agenda, from the protectionism issue to African and Latin American perspectives, as well as assessing the G20’s approach to climate change. The Carnegie Endowment, meanwhile, has an interesting take on Saudi Arabia’s approach to the summit, given its increasing exposure to instability in the financial markets and vulnerability to shifts in oil and food prices.

Elsewhere, Chatham House has analysis of some of the key short-term economic indicators, as well as long-term GDP forecasts – arguing that it is still to early too be coordinating exit strategies. The Canadian-based Centre for International Governance Innovation, meanwhile, takes a comprehensive look at some of the challenges facing the G20 as a forum for global economic governance, with contributions from policymakers and academics alike.

Like the executed British admiral in Voltaire’s famous phrase, Lehman had to die pour encourager les autres – to convince the other banks that they needed injections of public capital, and to convince the legislature to approve them.

- Sticking with matters financial and economic, Der Spiegel has an interview with the head of the IMF, Dominique Strauss-Kahn, on the Fund’s actions during the crisis and the potential for a new role for the institution going forward. Former MPC member, David Blanchflower, meanwhile, offers a telling insight into the inner workings of the Bank of England’s decision-making as financial meltdown ensued.

- Elsewhere, the WSJ reports on President Sarkozy’s call to broaden indicators of economic performance and social progress beyond traditional GDP, following the findings of the Stiglitz Commission. Richard Layard, expert on the economics of happiness, offers his take here, arguing that “[w]e desparately need a social norm in which the good of others figures more prominently in our personal goals”.

- Wolfgang Münchau, meanwhile, assesses the implications of an Irish  “No” vote in the upcoming referendum on the Lisbon Treaty.  “There is an intrinsic problem for the Yes campaign in Ireland”, he suggests, “which is that the core of the treaty was negotiated seven years ago. This is a pre-crisis treaty for a post-crisis world… If we had to reinvent the treaty from scratch, we would probably produce a very different text”.

- Finally, last week saw the German Marshall Fund of the US publish its Transatlantic Trends survey for 2009. Unsurprisingly, a majority of Europeans (77%) support Barack Obama’s foreign policy compared to the 2008 finding for George W. Bush (19%); though the “Obama bounce” was less keenly felt in Central and Eastern Europe than Western Europe. A multitude of other interesting stats – on attitudes to Russia, Afghanistan, Iran, the economic crisis, and climate change –  can be found here (pdf).

According to House Republican, Mike Pence:

Once the American people learn that the Democrats are using a war-funding bill for a global bailout, they’ll know what to do. We’ll take the message to the floor and to the American people, and I expect we’ll win this fight.

John Boehner, House Minority Leader, agrees. According to his spokesman:

It is the Democratic leadership that is playing politics with our troops by insisting on using them as leverage to pass over $100 billion in global bailout money for the IMF.

Republicans are inching close to advocating complete US disengagement from the global system – UN, World Bank, IMF and all. It’s a worrying trend.

Update: Politico notes how Boehner’s position has hardened over the years.

Boehner now derides the inclusion of IMF cash in the bill, calling it a “global bailout,” despite President Obama’s request that Congress make a down payment on the $100 billion he’s committed to keeping the financial crisis from swamping developing countries, including Pakistan.

That wasn’t Boehner’s tune in 1998, when the Clinton administration requested $18 billion in IMF funding to ameliorate the effects of the Asian financial crisis.

“I have been as critical about the IMF as many, but given the crisis we have around the world, the U.S. needs to provide leadership,” the Ohio Republican told the [Newark, N.J.] Star Ledger in Oct. 1998. “The only real avenue is the IMF.”

His trajectory, it seems, is typical of the whole of his party.

Unfortunately, US politics being what it is, the increased funding is part of another bill… an Iraq war financing bill. Of course, this means that Congressmen and women can’t vote for IMF funds without also voting for war funds and can’t vote against war funds without also voting against IMF funds. (And vice versa.) According to Mark Weisbrot:

from the beginning, the administration has faced tremendous obstacles to getting a majority members of the House of Representatives to vote for the money in an up-or-down vote. This is because many members of both parties are afraid that it would be seen as another taxpayer bailout for the financial industry – and foreign banks at that.

So we are left with a state of affairs in which some Democrats are rebelling against the Bill for war reasons, and others because they want moves on IMF reform (particularly in terms of its dangerously austere lending conditions) in exchange for the increasing funding proposed. Few would argue that this is a sensible and eminently just request. However, the US Treasury (which of course has an enormous degree of sway over IMF policy) has refused to commit to this as a condition of the increased funds. Republicans, meanwhile, ostensibly just want the IMF money put to a separate vote. But (Weisbrot again):

Interestingly, the Republicans are not trying very hard to get the IMF money removed. They are not saying anything on television or in the media. This indicates that they may want this money to pass with only Democratic votes, so that they can attack the Dems – especially those in conservative districts – when the money ends up bailing out the European banks in eastern Europe.

Of course, that’s a solid criticism and no doubt it’d play very well. But at the end of the day, this is exactly what the IMF is meant to do, it’s part of what it was set up for and it’s certainly part of the job of a hegemonic country that claims to be ‘ready to lead once more‘.