IMF

Stop blaming the IMF for everything by Matt O'Brien

IMF bailouts

NYT Says Obama Administration Thinks the Government Has Obligation to Protect Investors Who Are Too Dumb to Judge Risk by Dean Baker

I.M.F. Shifts Its Approach to Bailouts

ROUGH TRANSCRIPT: STIMULUS OR STYMIED?: THE MACROECONOMICS OF RECESSIONS

Panel Moderator: J. BRADFORD DELONG (University of California-Berkeley)

Panelists:
CARLO COTTARELLI (International Monetary Fund)
PAUL KRUGMAN (Princeton University)
VALERIE A. RAMEY (University of California-San Diego)
HARALD UHLIG (University of Chicago)

The Frustrating Fiscal Stimulus Debate by Yglesias

Is he right? Will rightwingers admit they don't care about the unemployed, inequality or the output gap? You would think that rightwingers would like to close the output gap and then funnel the gains to the 1 percent and/or cut taxes.

The IMF and Capital Controls by Krugman

Krugman links to:

Capital Control Freaks by Krugman (Slate, 1999)

IS-LM, WICKSELL-KEYNES-HICKS, AND THIS TIME REALLY DOES LOOK DIFFERENT! by DeLong

Past time to add Portes and Wren-Lewis to the links.

A Financial Crisis Needn’t Be a Noose by Christina Romer


Olivier Blanchard Isn't Very Serious by Krugman

Larry Summers Poor Memory on the IMF by Dean Baker

Larry Summers, who was Treasury Secretary under President Clinton and a top Obama economic advisor, apparently has forgotten the IMF's role in the world economy. In an oped column he told readers that:

"From the problems of Britain and Italy in the 1970s, through the Latin American debt crisis of the 1980s and the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about precise policy choices the fund has made. But the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations."

This is arguably wrong as a general proposition, but it is certainly wrong in reference to the East Asian bailouts in 1990s that were largely engineered by Larry Summers and the U.S. Treasury Department, which controls the IMF. The conditions demanded in the East Asian bailouts required the countries in crisis in repay loans to western banks in full.

It allowed them to get the money needed to make the repayments by having the dollar rise in value against the currencies of the region (i.e. Robert Rubin's strong dollar policy).It was not only the East Asian countries that deliberately lowered the value of their currency against the dollar, developing countries throughout the world adopted a policy of accumulating massive amounts of reserves in order to avoid ever being in the same situation as the East Asian countries.

This led to the enormous trade deficits that the U.S. has incurred in subsequent years. This situation was not sustainable, contrary to Summers' assertion that the IMF puts countries on a sustainable course.

In fact, the trade deficit between the United States and the rest of the world was the major imbalance in the global economy in the last decade. It created the gap in demand that was filled by the stock bubble in the 90s and the housing bubble in the last decade. It is striking that the Post's opinion pages are only open to people who try to conceal this fact rather than economists who try to explain this history to readers. 

Italy was already letting the IMF look at its books and there were rumors of a deal. Summers is saying the IMF should apply a structural adjustment program to Italy if the ECB is accommodating. Summers writes,

Third, when engaging individual members of a monetary union, the IMF cannot assess the prospects of one member in isolation. If some countries are to enjoy reduced trade deficits, others, most notably Germany, must face reduced surpluses. If there is no clear path to reduced surpluses there is no clear path to reduced deficits and hence to solvency. More generally, the sustainability of any program must be assessed in the context of realistic projections of the economic environment. The IMF must not approve adjustment programs that are unrealistic.

Twice, he emphasizes the point that European banks need to be recapitalized.

A Song of Ice and Ire: Iceland in Context by Krugman

(Nice! Skip down to Session II. via Krugman)

Update: Session II

The IMF's Epic Fail on Egypt by Yves Smith

Needless to say, there has also been a great deal of consternation as to how the West’s supposedly vaunted intelligence apparatus failed to see this one coming. This lapse is as bad as the inability to foresee the collapse of the Soviet Union (it’s arguably worse: a lot of people profited from the Cold War, and they’d have every reason to fan fears and thus look for evidence that would support the idea that the USSR was a formidable threat...

(And there was the CIA's George Tenet on the "slam dunk" of finding WMD's in Iraq)

If this isn’t bad enough, other sections of the report are downright embarrassing. The IMF does acknowledge that poverty is a bit of a problem, and look at the remedies it suggests:

Reforms for Sustained Growth
9. Continuing the reform momentum and reducing fiscal vulnerabilities remain the key medium-term challenges. Rapid growth is crucial to tackling poverty and the high level of unemployment. In this context, reinvigorating the structural reform agenda should help raise productivity and reinforce Egypt’s competitiveness.

Prioritizing reforms that promote macroeconomic stability and improve the investment climate will support the resumption of foreign direct investment. As noted, the planned fiscal adjustment and tax reforms are an important element of generating confidence, improving the business environment, and ensuring space for the private sector. Resumption of privatization and development of public-private partnerships (PPPs) will help mobilize private sector financing and know-how. Contingent liabilities associated with PPPs, however, should be monitored closely.

Reinforcing financial soundness and promoting financial sector deepening will help mobilize savings needed to finance private sector-led growth. The stability of the financial sector during and since the crisis is a testament to reforms since 2004. Staff supports the continuation of reform efforts with the CBE’s Phase II agenda. Introducing Basel II standards and supporting financial sector development will help facilitate intermediation of savings and increase private sector access to credit. Staff supports plans to adopt additional prudential measures to contain vulnerabilities that will arise with greater integration with the global economy and the introduction of new asset classes. Close coordination between the new nonbank supervisory authority and CBE will be a priority, and consideration should be given to introducing forward-looking risk management and developing global standards on liquidity and leverage.

Strengthening data quality and transparency will help improve the policy debate and business environment, and enhance Fund surveillance. The need for greater transparency and higher frequency data was underscored by the global financial crisis, and enhancements would help ensure that data availability is on par with other emerging markets. In particular, there is a need for more robust CPI and GDP deflators, and for publishing higher-frequency aggregate financial soundness indicators (as planned), and encouraging banks to make available detailed performance and soundness indicators.

This is all neoclassical trickle down twattle. People are hungry and can’t find work, and what does the IMF have in its toolkit? "Public private partnerships".

However Tunisia was a relatively wealthy Arab country and the Egyptian protesters were inspired by the successful Tunisian revolt.

Dean Baker's entire post on the "currency wars" is excellent, so I'll repost the entired thing.

The NYT had a piece on the recent decline in the value of the dollar and effort by other countries to offset its impact. The article noted in particular developing country efforts to reduce capital inflows that are raising the value of their currency.

It would have been worth noting that in standard economic theory, developing countries are supposed to be borrowers. The logic is that capital is relatively scarce in the developing countries, which means that it gets a higher return. Capital therefore should flow from relatively to slow growing rich countries to more rapidly growing developing countries.

This was the direction of flows until the East Asian financial crisis in 1997. The harsh conditions that the IMF imposed on the East Asian countries led developing countries throughout the world to focus on building up reserves so that they would not have to deal with the IMF. This reversal coincided with the "high dollar" policy touted by then Treasury Secretary Robert Rubin. It helped to lay the basis for the imbalances associated with the stock and housing bubbles.

To a large extent, the decline in the value of the dollar would effectively reverse the distortions to the world economy resulting from the IMF-Rubin policy of the late 90s. It is also worth noting the recent decline in the dollar is largely just reversing its run-up as a result of the financial crisis in 2008. Money flowed into the U.S. as a safe haven, pushing the dollar well above its pre-crisis levels. It is now falling back toward the level it was at before the crisis.

What would you call the reasonable reaction of China and others to the harsh conditions imposed by the IMF in the wake of the 1997 crisis? It would be the opposite of morale hazard. Once can be too indulgent and too harsh or strict.

This New York Times piece argues that England's current austerity measures are partly due to memories of the IMF bailing them out in the 1970s.

They Learned Their Lessons Well

Krugman directs us to this David Pilling column on Asia's Keynesian response to the crisis.

However much Asians trumpet the value of parsimony, their governments have been as bold as any in opening the fiscal sluices. One reason is the bitter memory of the 1997 Asian financial crisis when the International Monetary Fund imposed fiscal austerity on several Asian countries. Those measures are now almost universally seen as a blunder that unnecessarily exacerbated economic misery.

Asian governments have taken the lesson to heart. According to Fitch Ratings, fiscal stimulus packages as a percentage of gross domestic product amounted to 6.9 per cent for Vietnam, 7.7 per cent for Thailand, 8 per cent for Singapore, 13.5 per cent for China, and a whopping 14.6 per cent for Japan. Taiwan, with a relatively modest stimulus of 3.8 per cent, gave $100 spending vouchers to each of its 23m inhabitants, including convicts. The Singaporean government subsidised businesses that retained staff. In China, the mother of all stimulus packages funnelled $585bn of spending into the economy, and even more through directing state-controlled banks to increase credit.

The scale of Asia’s stimulus may have matched, even surpassed, the west. But the context has been entirely different. Asian governments had plumped-up their fiscal cushions after the 1997 crisis, building a formidable pool of reserves. Such "prudence" meant, rather bizarrely, that poor countries such as China were foregoing spending and investment in order to facilitate rich foreigner’ binge-buying. But it also meant that, when the crunch came, they had the wherewithal to spend.

 ...

Japan looks like a cautionary tale for the west. But those peering into the Japanese mirror will see the reflection they want to find. Keynesians will argue that Japan’s fiscal stimulus was not wrong in principle, but badly implemented and undermined by half-hearted policy. For the fiscal hawks, Japan is proof that everlasting stimulus does not work. Japan’s nominal output has hardly budged in two decades, but its gross debt pile now towers at nearly 200 per cent of GDP. Twenty years after its bubble collapsed, Japan has still not crawled from the rubble. Western governments pondering what to do next must worry that this could be their fate.

Krugman adds:

There are several interesting things about this table; one is the fact that in the face of the crisis, Germany’s actions were very different from its rhetoric; it was pretty Keynesian in the crunch. I have no idea what was going on in Russia. But the main point here is that Korea and China both engaged in much more aggressive stimulus than any Western nation -- and it has worked out well.

Part of the reason Asians felt empowered to do this was the fact that during the good years they did what you’re supposed to do. Keynesian economics is often caricatured as a policy of deficit spending always; but as I’ve tried to explain, deficit spending is what you should do only when the economy is depressed and interest rates are at or near the zero lower bound. When times are good, you should be paying debt down.

Henwood on Dodd-Frank.

The Volcker Rule by John Cassidy

Volcker’s skepticism about bankers and other financiers dates back to his days at the Fed, where he opposed the Reagan Administration’s efforts to deregulate the banking system. In 1982, Congress passed the Garn-St. Germain Depository Institutions Act, which gave struggling thrift banks (also known as savings and loans) the right to make commercial loans. (Previously, they had been restricted to residential lending.) The legislation was intended to enable thrifts to earn higher profits, and it was strongly supported by Treasury Secretary Donald Regan, the former head of Merrill Lynch. Volcker repeatedly disagreed with Regan and with other members of the Administration. Referring to the S. & L.s, he told his staff, "Give ’em commercial lending power, and they’ll end up with all the bad loans."

This is precisely what happened, and Volcker regards the S. & L. crisis, which ended up costing taxpayers about a hundred and eighty billion dollars in today’s money, as a template for the financial catastrophe of 2007-08. Unlike many economists, who regard financial innovation as generally a good thing, he is suspicious of many things that today’s big financial institutions do, such as creating complex securities and building elaborate mathematical models. Last December, at a conference in England for banking executives, he said that the most important banking innovation of recent decades was the A.T.M.

...
"It does show leadership in the United States, which will help encourage actions abroad. Without the U.S. stepping up, you’d never get a coherent response." He pointed out that the language banning proprietary trading was strong and that even the much weaker language on hedge funds and private-equity funds still contained some safeguards that would force big banks to change how they do business. He also cited the crackdown on derivatives trading and a clause, which he had campaigned for, that creates a position for a second vice-chairman of the Fed, who will be explicitly responsible to Congress for financial regulation. "I think that might turn out to be one of the most important things in there," he said. "It focusses the responsibility on one person."

Anthony Dowd [Volker's chief of staff] added, "We both felt like we got kind of excluded at the very end. But, when you step back, there were fifty-four lobbying firms and three hundred million dollars spent against us. So we didn’t do too badly."

To summarize, the bursting of the housing bubble caused a loss of aggregate demand and turned many loans bad which caused firms like Bear Stearns, Lehman Brothers, A.I.G., etc. etc. to collapse. Which caused a chain reaction and panic - no one trusted anyone else's accounting until the "stress tests" - which further reduced aggregate demand in a vicious circle. And then the governments of the world stepped in.

The economy is growing again, yet there's risk of it slipping into a double dip recession. Many in the Pain Caucus - who don't like seeing all of this government action and deficit spending even during a recession - argue the economy needs no more help from the government or central banks and will continue to grow on its own.

Inflation Fears

Ken Rogoff is a professor at Harvard and dues-paying member of the Pain Caucus. Not surprisingly he has worked at the IMF. Brad DeLong debates him in the Financial Times where he writes "Rogoff sees the economy now as suffering from structural maladjustments generated by the expansion of the 2000s in which workers must be trained in new kinds of jobs and shifted over to different sectors in which they have no previous experience, and that that process cannot proceed rapidly without generating inflationary pressures that will destabilise confidence in price stability." Maybe the bubbliciousness of the 2000s came in part from the profits made off of shipping jobs overseas?

Sewell Chan writes that the "Fed is in the Hot Seat," as Bernanke testifies before Congress today.

With unemployment high and inflation low, a question is being asked more often and more loudly: Can and should the Federal Reserve do more to get the economy moving?

...
So far, the debate within the Fed has occurred largely outside of public view, but it reflects how the economic picture has darkened from just a few months ago, when the prospects for a gradually improving economy and a robust stock market seemed more hopeful. Back then, the dominant talk was when to start tightening monetary policy and selling assets on the Fed’s balance sheet.

"Now there is a general recognition that that talk was premature," said Peter N. Ireland, a professor of economics at Boston College and a former economist at the Federal Reserve Bank of Richmond.

Why was that talk premature, as in why where they overly optimistic? That's what I would ask Bernanke after pointing out that the Fed missed the housing bubble which cost the economy trillions. Since the Fed has been consistently wrong, is it possible the Fed has a bias? (As Dean Baker points out, the IMF has been consistently wrong which suggests it's policy recommendations are politically motivated.)

Sewell Chan:

In addition, although core inflation, which excludes the highly volatile prices of food and energy, has been running at about half of the Fed’s target of nearly 2 percent, inflation expectations "have not come down nearly as much as one would expect, given how much slack there is in the economy," Ms. Dynan said.

The size of the Fed’s balance sheet, which has more than doubled since the financial crisis of 2008, and the large amount of bank reserves sitting at the Fed has made officials at the central bank nervous about the potential for rapid inflation once banks decide to start lending more vigorously again, she noted.

Where is Ms. Dynan's data on high inflation expectations? Link please? Again I don't understand where this fear of phantom inflation is coming from. With unemployment high, the economy in a liquidty trap, and aggregate demand weak, everyone should be afraid of deflation. Very afraid.

What Happened?

Atrios and Krugman linked this Romer-Bernstein chart on the Stimulus's effect on the economy. Obviously things have turned out worse, with the IMF forcasting 9% unemployment for 2010-11. Krugman blogs about what he believes Obama's economics advisors were thinking at the time. (Atrios just uses the chart to mock the Obama administration.)*

Now, I don’t have any inside information on what really happened; I do talk to WH economists, but they don’t offer -- and I don’t ask for -- any information on internal wrangling. But based on public reporting, like the Ryan Lizza article on Larry Summers -- which reads rather differently now that we know how things are really working out, or more accurately not working out -- it looks as if top advisers convinced themselves that even in the absence of stimulus the slump would be nasty, brutish, but not too long. That’s the assumption embedded in the now infamous Romer-Bernstein chart, above. So all policy needed to do was meliorate the worst, while we waited for the economy to recover spontaneously. From the Lizza article:

Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was "an insurance package against catastrophic failure."

I don’t know why Summers etc. believed this.

Krugman is right and the stimulus should have been larger, but there were political considerations - did they have the votes? - and the European sovereign debt crisis didn't help the situation. Greece has become a convenient club for the heartless bastards in the Pain Caucus. Also, uninformed independent voters don't like government debt and the administration probably wouldn't have done a stimulus (porkulus to the rightwing) prior to their yearlong campaign to reform health care, had interest rates not already been at zero.

As Krugman would probably argue, the administration should have hit the slumping economy with overwhelming force precisely because interest rates were at zero and the Federal Reserve Bank had used up all of its conventional tools.

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*Which is why I don't like Atrios and rarely read Eschaton. That and the fact he was calling Treasury Secretary Tim Geithner "Timmeh." Look, yes Bernanke, Obama and Geithner et al. saved the financial system in ways that were more lenient on the bankers and more costly to the public than they needed to be. However, we were driving without a map and you can't really blame them for erring on the side of caution. The main thing is that the economy was in a tailspin and the governments of the rich nations coordinated successfully and stabilized the situation. However, as John Cassidy pointed out, the rescue of the financial system in the wake of the bursting of the housing bubble put the economy's inequities and unjust character in the spotlight:

The hardest part of his job, Geithner often says, is getting people to comprehend the inner logic of a financial-rescue operation, and the unpopular actions it entails. In fact, his problem may be not economic illiteracy but its opposite: Americans understand all too well what has happened. Financial crises have a way of revealing aspects of our economic system that otherwise remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms sometimes receive from the Fed and other government agencies, and the fact that the vast profits that firms like JPMorgan Chase and Goldman generate depend in part on an implicit guarantee from the taxpayer. When ordinary Americans are confronted with these realities, they get angry. "People just don’t get how these institutions got bailed out and their people are still making big bonuses," Mark Zandi noted. "It just does not compute. No matter what you say, you can’t persuade them it’s right."

And so it goes

I am reading Liaquat Ahamed's Lords of Finance and really liked these two paragraphs about Keynes on page 166.

The gold standard had only worked in the late nineteenth century because new mining discoveries had fortuitously kept pace with economic growth. There was no guarantee that this accident of history would continue. Moreover, while the original rationale for the gold standard -- the commitment that paper money could be converted into something unequivocally tangible -- might have been necessary to instill confidence at some point in history, this was no longer the case. Attitudes toward paper money had evolved and it was not necessary to allow the supply of precious metals to regulate the creation of credit in a sophisticated modern economy. Central banks were perfectly capable of managing their countries' monetary affairs rationally and responsibly, [Keynes] argued, without any need to shackle themselves to this "barbarous relic."

Though the Tract was a technical monograph, the Cambridge undergraduate in Keynes could not resist lacing the book with the playful sarcasms that had made The Economic Consequences such a success. He flippantly dedicated the book, "humbly and without permission, to the Governors and the Court of the Bank of England," knowing very well that the members of that august body would disagree with almost everything he had to say. He poked fun at the self-importance of those "conservative bankers" who "regard it as more consonant with their cloth, and also as economizing on thought, to shift public discussion of financial topics off the logical on to an alleged moral plane, which means a realm of thought where vested interests can be triumphant over the common good without further debate."

I never studied World War I much, so I was interest to read the Lords of Finance's discussion of World War I reparations, and the Treaty of Versaille, which many argue led to the rise of the Nazi party in Germany.

By the end of the war, the European allied powers - sixteen countries in all - owed the United States about $12 billion, of which a little under $5 billion was due from Britain and $4 billion from France. In its own turn, Britain was owed $11 billion by seventeen countries, $3 billion of it by France and $2.5 billion by Russia, a debt essentially uncollectible after the Bolshevik revolution.

At an early stage of the Paris Peace Conference, both the British and the French tried to link reparations to their war debts, indicating that they might be prepared to moderate their demands for reparations if the United States would forgive some of what they owed America. The United States reacted strongly, insisting that the two issues were separate.

Keynes and many economists found the reparations* excessive. British historian A.J.P. Taylor believed that the reparations weren't as over-the-top as Keynes viewed them, but that they were punitive enough to cause resentment in Germany while still not punitive enough to prevent Germany from rising to power again. According to Wikipedia,

In many ways, the Versailles reparations were a reply to the reparations placed upon France by Germany through the 1871 Treaty of Frankfurt, signed after the Franco-Prussian War. Note however that the amount of the reparations demanded in the treaty of Versailles were comparatively larger (5B Francs vs. 132B Reichsmark). Indemnities of the Treaty of Frankfurt were in turn calculated, on the basis of population, as the precise equivalent of the indemnities demanded by Napoleon after the defeat of Prussia.

(By the way, Daniel Radcliffe will start in a new version of All Quiet on the Western Front.)

DeLong asks for comments on his chapter on World War I titled "Chapter 15: The Knot of War, 1914-1920." 

Meanwhile, the overclass is demanding punitive reparations after the victory in its war on the lower class.

Reuters reports: 

In a statement after annual consultations with U.S. authorities, the IMF raised its U.S. growth forecasts slightly to 3.3 percent for 2010 and 2.9 percent for 2011, but said unemployment would remain above 9 percent for both years.

The lofty jobless rate, coupled with a large backlog of home foreclosures and high levels of negative home equity, posed risks of a "double dip" in the housing market, it said. But the IMF said it did not think a renewed recession was likely.

"The outlook has improved in tandem with recovery, but remaining household and financial balance sheet weaknesses -- along with elevated unemployment -- are likely to continue to restrain private spending," the Fund said.

Yglesias notes that at least the IMF is forcasting that the rest of the world will be growing at a nice pace.
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*From Wikipedia "Under the Hoover Moratorium of June 1931 issued by the American president Herbert Hoover, which was designed to deal with the world-wide financial crisis caused by the bankruptcy of the Creditanstalt in May 1931, Germany ceased paying reparations." Creditanstalt was the largest bank of Austria-Hungary and the Lehman Brothers of the Great Depression.

Vampire Prejudice

Ezra Klein has an excellent post on Simon Johnson who was a former chief economist at the IMF and has now become a prominent analyst of the Great Recession.

Ezra believes he deserves this prominence as do I and Johnson's definitely doing the country a service by trying to help everyone understand what is going on.

When reading the prolific Johnson's analysis of the G-20 conference or the Geithner Plan or whatever, my mind inevitably recalls that great quote Doug Henwood made early on:

The IMF, which was off the scene for many years, is, like a vampire salivating at sunset, returning to action. It's already developed a program for Iceland, which is being put through the austerity wringer; apparently being white and Nordic doesn’t earn you an exemption. It's likely to lend some money to some countries that it deems virtuous on easy terms - among them Brazil but not Argentina. More on all this in the coming weeks. (emphasis added)

The IMF pushes bankrupt nations to enact Structural Adjustment Programs (SAPs) in return for loans. Critics say SAPs often involve austerity measures which are very hard on the average citizen and rather lenient on foreign investors and local oligarchs.

Johnson touches on this in his Atlantic piece:

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or-here's a classic Kremlin bailout technique-the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk-at least until the riots grow too large.

Klein provides a link to an IMF critic, Dani Rodrik, who rightly notes:

And I find it astonishing that Simon would present the IMF as the voice of wisdom on these matters--the same IMF which until recently advocated capital-account liberalization for some of the poorest countries in the world and which was totally tone deaf when it came to the cost of fiscal stringency in countries going through similar upheavals (as during the Asian financial crisis).

Simon's account is based on a very simple, and I believe misguided, theory of politics and economics. It is an odd marriage of populist and technocratic visions. Countries fail because political elites always end up in bed with economic elites. The solution, apparently, is to let the technocrats (read the IMF) run your affairs.

But perhaps the IMF can learn and change as Bill Compton did in True Blood.