The Indisepensable IMF

[Louis Proyect <lnp3@xxxxxxxxx>]

The New York Times
May 15, 1998, Friday, Late Edition - Final
The Indispensable I.M.F.

By Paul Krugman,  CAMBRIDGE, Mass.;  Paul Krugman is a professor of
economics at M.I.T.

Suppose a group of prominent experts declared that the Federal Reserve
should no longer be allowed to lend money during bank runs. Far from
helping prevent financial panics, they say, such lending actually
fosters them by encouraging the public to be careless; if we returned to
the good old days when banks were free to fail, depositors would make
sure that a bank was sound before placing money in its care.

Most sensible people would reject this view as irresponsible, no matter
how eminent the authors. As Charles Kindleberger showed in his classic
study "Manias, Panics and Crashes," those good old days were marked by
frequent and often devastating panics, in which even people who thought
their money was in safe hands could be wiped out.

Both theory and evidence suggest that no matter how much due diligence
individual investors may exercise, financial markets are vulnerable to
self-reinforcing collapses of confidence unless there is a "lender of
last resort": some institution like the Fed that can provide emergency
cash to threatened banks and companies. The Fed makes mistakes,
sometimes grievous ones; nonetheless, we all sleep better knowing that
Alan Greenspan has the power and resources to help fight whatever crises
may arise.

Some people who should know better have waged a campaign to prevent the
International Monetary Fund from fulfilling that same role in an
international crisis. Congress has effectively blocked consideration of
a potentially crucial $18 billion increase in the I.M.F.'s financing,
motivated in large part by the anti-fund views of people like George
Shultz, the former Secretary of State.

Mr. Shultz has argued that the fund should withdraw from its role as the
"self-appointed lender of last resort." When faced with a crisis, he
says, the "private parties most involved" should share the pain and
resolve the problems themselves. To see how irresponsible that view is,
try the same argument on a purely domestic crisis.

Suppose that, worried by tales of bad management, depositors began
trying en masse to withdraw money from Citibank -- and that the bank,
unable to raise that much cash on short notice, was about to be forced
to close. Would you really want the Fed to stand on principle and refuse
to supply the needed cash, leaving it instead for the "private parties
most involved" -- the bank and its depositors -- to work it out
themselves? Not likely. Even those who do not have money at Citibank
would be concerned that a bank run would spread, perhaps engulfing many
banks and companies that would otherwise have been perfectly sound.

If we need a domestic lender of last resort to deal with domestic
financial crises, doesn't the globalization of financial markets mean
that now, more than ever, we need a lender of last resort to cope with
international crises?

You can argue that the I.M.F. is not ideally suited to be that backstop.
Unlike the Fed, which can regulate banks on a continuing basis, the
I.M.F. has little power until a country plunges into crisis. That means
that sometimes its efforts to save a country from financial collapse
also end up providing a safety net for the undeserving -- careless
international bankers, even corrupt local politicians. The I.M.F. also
makes mistakes; its programs in Asia have been bitterly criticized
(although the critics seem to disagree as much with each other as with
the I.M.F.).

But the International Monetary Fund is all that we have, and it is a lot
better than nothing at all. To hobble the I.M.F. in the belief that
world financial markets will take care of themselves is to gamble the
stability of those markets on a speculative theory -- a theory that even
most of the theorists think is refuted by the lessons of history.


--

The Marxism list: www.marxmail.org