IMF chief Christine Lagarde Under Formal Investigation in French fraud case.

IMF chief Christine Lagarde has been put under formal investigation by French magistrates for alleged negligence in a political fraud affair dating from 2008 when she was finance minister.

Lagarde was questioned by magistrates in Paris this week for a fourth time under her existing status as a witness in the long-running saga over allegations that tycoon Bernard Tapie won a large arbitration payout due to his political connections.

Under French law, magistrates place a person under formal investigation when they believe there are indications of wrongdoing, but that does not always lead to a trial.

Lagarde’s lawyer, Yves Repiquet, told Reuters he would personally appeal the magistrates’ decision. That means Lagarde would not have to return to Paris in the meantime, allowing her to continue her duties as managing director of the International Monetary Fund uninterrupted.

The inquiry relates to allegations that Tapie, a supporter of conservative former President Nicolas Sarkozy, was improperly awarded 403 million euros ($531 million) in an arbitration to settle a dispute with now defunct state-owned bank Credit Lyonnais.

The inquiry has already embroiled several of Sarkozy’s cabinet members and France Telecom’s chief executive, Stephane Richard, who was an aide to Lagarde when she was Sarkozy’s finance minister.

In previous rounds of questioning, Lagarde has not recognized as her own the pre-printed signature to sign off on a document facilitating the payment, Repiquet told Reuters by telephone.

What’s This Really About?

Politics. If Nicholas Sarkozy won the last presidential election instead of Francois Hollande, there would be no investigation.

Is Lagarde guilty of anything?

Not knowing the peculiarities of French laws (other than to know full well from personal experience, French laws are damn peculiar), it’s hard to say.  For my experience, please see Mish Fined 8,000 Euros for Quoting French Blog.

In the US, it’s safe to conclude that anyone who funneled funds for political purposes would be considered a hero by one side, with the other side demanding “justice”.

In the US, individuals other than Bernie Madoff and Martha Stewart don’t get prosecuted. And companies, especially banks, get off the hook with at most a small fine relative to the billions of dollars siphoned out of the system.

Does it Matter?

Does it matter if Lagarde is forced out of the IMF?

Not at all. I am quite certain the IMF can find someone equally incompetent, if not far worse, to take her place.

Isn’t that the goal?

Meet David Lipton

Waiting in the wings to replace Lagarde is David Lipton, IMF First Deputy Managing Director, a US citizen who would likely replace Lagarde if she could not fulfill her duties.

Previously, Lipton was a Managing Director at Citi, where he was Head of Global Country Risk Management.

Lipton an Obama Clone on Income Inequality

Please consider Lipton’s views on Fiscal Policy and Income Inequality.

Thank you for providing me the opportunity to present the key findings of a new IMF study on fiscal policy and income inequality.

Income inequality has been rising in many parts of the world in recent decades. This, and the social tensions associated with fiscal consolidation that many have faced in part stemming from the global financial crisis, have put the distributional impact of governments’ tax and spending policies at the heart of the public debate in many countries. Of course, the question of just how much redistribution the state should do is, at its core, a political one that economic analysis cannot answer. But I think that we can all agree that whatever degree of redistribution governments choose, it should be done with fiscal instruments that achieve their distributional objectives at a minimum cost to economic efficiency.

Based on these principles, we examine a range of options for achieving redistribution efficiently.

To start, countries could consider making their income tax systems more progressive. For example, in economies where a flat rate is used, there may be scope for more tax progression at the top.

There is also scope to more fully utilize property taxes, both as a source of revenue and as an efficient redistributive instrument.

On the VAT, the recommendation is thus to minimize exemptions and special rates, in order to efficiently raise revenues to help finance pro-poor spending. For instance, elimination of reduced VAT rates in the United Kingdom, and using the proceeds to increase social benefits, would significantly reduce inequality.

On the expenditure side, I would like to start first with education. Improving the access of low-income families to education is an efficient tool for boosting equality of opportunity, and over the long run, it can also reduce income inequality. In advanced economies, this entails increasing the access to tertiary education for low-income families, including through scholarships and loans. For developing economies, a strengthening of access to quality secondary education is also required, for example, by eliminating tuition fees.

The good news is that quite a lot is now known about how governments can best address the challenges of squaring their equity and efficiency concerns, a task on which the Fund stands ready to help.

Thank you.

Things Can Always Be Worse

If you thought Lagarde was bad, the on-deck alternative clearly shows things can always be much worse.

Common Sense Proposal

The IMF is far worse than useless. Ideally, it should cease to exist. At a bare minimum, the US should stop all funding of this socialist predator entity.

Unfortunately, and given the IMF plays the role of economic hit-man for US banks, don’t expect my common sense proposal to be adopted.

Mike “Mish” Shedlock