Opinion Editorial | |
| Wednesday, June 9, 1999 | |
Reevaluate The International Monetary Fund |
Last year, Congress went through a wrenching debate over the International Monetary Fund (IMF). Members were under enormous pressure to give the IMF billions more in resources to deal with the Asian financial crisis. A few, like House Majority Leader Dick Armey (R-Texas) and Joint Economic Committee Chairman Jim Saxton (R-N.J.), tried to focus the debate on fundamentals, but to no avail. However, the issues they raised have not gone away and unless they are dealt with it is only a matter of time before the IMF is back asking for more of U.S. taxpayers' money.
The key question is whether there is really any need for the IMF. It was created after World War II to help manage an international monetary system based on fixed exchange rates. But this regime completely collapsed in 1971. Since then, the world's major currencies have floated, adjusting their exchange rates daily in response to changing market conditions. Hence, the fundamental reason for the IMF's existence disappeared some 28 years ago.
But like all good bureaucracies, the IMF did not go away simply because it no longer had a job to do. It found a new job helping developing countries deal with their debt problems. However, this was a job the IMF was never really equipped to handle. As with domestic debt problems, what the international debt problem has always needed is some sort of bankruptcy court, where lenders and creditors could work out an enforceable arrangement. Since no such court existed and since the IMF was not set up institutionally to fulfill that function, it instead ended up bailing out debtors rather than liquidating them.
The IMF's bail-out policy never got at the roots of the debt problem, but only papered over them. In the process, it created a new problem as international investors began expecting IMF bailouts whenever a country got in over its head. Banks were lending money that they never would have lent except with the expectation of an IMF bailout. Thus the IMF in effect created the very problem it was trying to cure.
Although Congress refused to grapple with this moral hazard problem last year and simply threw more money at the IMF without demanding fundamental reforms, a number of economists have continued to look at the issue. Most recently, the Federal Reserve Bank of Minneapolis devoted its entire 1998 annual report to a review of the IMF's policies. It concludes that the IMF should cease lending money because it only exacerbates the problems it is trying to fix.
The problem, the report argues, is that the IMF is trying to be something it cannot be: a lender of last resort. In individual countries, the central bank fulfills this function, injecting reserves into the banking system whenever there is danger of a systemwide collapse. But the central bank is not supposed to bail-out individual banks. The IMF doesn't have the resources to fulfill the function of an international lender of last resort and can only aid specific countries and governments. As a result, the report concludes:
"The IMF's policies generate rampant moral hazard so that they may actually increase the likelihood that countries get into financial difficulties. In this sense, the IMF's activities are harmful."
At present the Asian financial crisis seems to be largely over. But sooner or later there will be another, requiring billions more taxpayer dollars. That is why now is the time for a serious reevaluation of the role and function of the IMF. By the time the next crisis arrives it will be too late.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 8, 1999.
For Minneapolis Fed report
http://minneapolisfed.org/pubs/ar/1998/ar1998.cfm
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