End the IMF
By David Henderson
Various bloggers are talking about who should be the new managing director of the International Monetary Fund. Here’s my nominee: nobody. The IMF should be abolished. I came across an article I wrote in Canada’s Financial Post in 1999. I think it still holds up. Some excerpts:
Even if the Mexican bailout had been a success in this broader sense, the IMF subsidy sent, and other bailouts are sending, two bad signals. First: If you’re a government official who screws up your economy enough, the IMF will bail you out. Just this week, for example, the IMF loaned another $4.5-billion to the Russian government, $1.9-billion of which will be used to pay back an earlier IMF loan. The new loan was made contingent on Russian parliamentary approval of a package of new laws. Some of the laws, ironically, will increase taxes on Russians, as if what a formerly communist country needs to get its house in order is to tax its people more. The second signal the IMF bailouts send is to investors, who will make much riskier investments than otherwise because the downside is covered. Investors are saying, in essence, “heads I win, tails I break even.” Neither foreign governments nor investors are missing that signal.
In a recent Fortune article, MIT economist Paul Krugman minimized the IMF’s harmful effect because it has “very little actual money.” But apply that same reasoning to the 1980s U.S. savings and loan crisis. Just as the IMF subsidizes investors’ downside risk, the Federal Savings and Loan Insurance Corp.’s (FSLIC) deposit insurance gave depositors zero incentive to monitor the S&Ls’ loan portfolios. In 1983, shortly before the S&L crisis was at its worst (in the end, it cost more than $175-billion in present-value terms), the FSLIC had only about $6.4-billion in the kitty. By Mr. Krugman’s reasoning, the S&L crisis didn’t happen. Think of the IMF as a giant FSLIC. The crucial factor is not the IMF’s funds at any point in time, but how much more it can get. Just recently, the U.S. government gave it $18-billion.
Last year, when Russian official Anatoly Chubais bragged to the Russian press that he had “conned” the IMF and its chief negotiator, Stanley Fischer, none of us taxpayers who paid the price could legally take action against Mr. Fischer. He wasn’t fired, and he and the IMF have continued to make loans. An even greater “moral hazard” than is implicit in IMF loans is the moral hazard in giving such power to a small group of people. Their power must end.