The Shrinking International Monetary Fund

Extreme versions of this criticism note the fact that the rich countries who are the heaviest contributors to the Fund are prodigious consumers of natural resources, while the poorer boom-and-bust countries that occasionally seek IMF assistance tend to be producers of natural resources. They then argue that the IMF serves the wealthy countries by effectively “keeping down” countries which produce natural resources such that those countries will supply their resources to the rich countries at low cost. A side benefit is that the poor countries never gain enough wealth to compete much on the resource consumption side.

The problem with these criticisms is that no one has to accept IMF assistance or involvement, so in theory it is just an additional option provided to countries in need. Further, at the time of construction, the IMF was envisioned as an organization that would facilitate rich countries lending to one another, not rich countries lending to poor countries.

As we accept $1.4 trillion deficits in the US in perpetuity, we should reflect on the fact that the US response to its recent financial crisis has run directly counter to the response that the IMF would have pushed, should the US have been just another nation seeking its assistance. The IMF is strongly orthodox in its policy recommendations — it places a very high premium on movement towards sustainable government budgets and current accounts, even when that means substantial pain (in terms employment, equity values, and real estate values) in the short-term.

Most economists today would probably agree that the IMF has tended to strongly towards orthodoxy in its past recommendations, and, at any rate, comparing the US to other counties who’ve sought US assistance is an apple-to-oranges comparison, as the US is a fiat currency issuer that borrows in its own currency.

One area, however, where US policy has clearly been in conflict with past prescriptions from the IMF is policy regarding the banking sector. IMF policy here has always been: develop transparency as quickly as possible, shut down insolvent banks, put the bad assets obtained from the insolvent banks into private hands as quickly as possible. This was essentially the policy employed by the US after the savings and loan crisis.

It’s worth quoting Paul Blustein’s “The Chastening” at length:

Shortly after the mission arrived in Bangkok in late July 1997, its members were shocked to learn of the extraordinary lengths to which the Thai authorities had been going to keep the system from collapsing. To compensate for the steady withdrawals of deposits from the finance companies and some of the weakest banks, the Bank of Thailand had secretly lent about $20 billion to these institutions, at below-market interest rates. Those loans, moreover, went well beyond the standard central banking practice of acting as a lender of last resort to healthy financial companies that are suffering runs by panicky depositors. Although a central bank is supposed to lend freely to banks that are temporarily short of cash, the Bank of Thailand was propping up insolvent institutions that were so loss-ridden that they weren’t genuinely viable as business concerns…. The Fund insisted that Thailand must stop the secret bailouts and start shutting down insolvent financial companies. …