IMF Fesses to Sleeping On the Job (Far Too Late)

♠ Posted by Emmanuel in ,, at 3/06/2009 10:33:00 AM
[Updated below.] Current IMF Chief Economist Olivier Blanchard has some interesting things to say, not all of which I agree with, to put it mildly. While I will have more of his views to comment on in the near future, for now let us consider a forthcoming IMF publication concerning "lessons learned" from the current crisis. Interestingly, Blanchard & Co. lash out against the shadow banking system--the very same non-transparent web that enabled highly damaging speculation during the Asian financial crisis. At that time, the Washington Consensus agenda was in full swing at the IMF of liberalization, privatization, and deregulation. Interestingly, it has taken the IMF over a decade to figure out that the shadow banking system this agenda promotes is harmful. Plus, it now approves of stimulus mania--at least for Western nations.

The code words now being used by the IMF are increased "systemic risk" compared to way back when. Of course, there are shared dynamics between today's events and those of a decade ago, from construction bubbles to heavy share speculation. The IMF has never really escaped accusations that it is a rich country's club; Blanchard reinforces this notion by basically saying the shadow banking system is at issue now because it is hurting not just piddling LDCs but the Great White Master itself. What more can I say? These confessions would have had more force if the IMF made these admissions a decade or so ago. As things stand, it just gives LDCs more reason to be wary of the IMF given its heavily biased views. From the Financial Times:
Financial regulators must agree binding international codes of conduct to prevent chaos when crises hit banks operating across national borders, the International Monetary Fund has warned. In a major study of the lessons learned from the financial crisis, the IMF also accepted blame for missing the dangers arising from weakly regulated financial institutions and admitted it had failed to provide global leadership. But the fund argued that global economic imbalances, notably the huge current account deficit in the US and corresponding surplus in China, had played only a secondary role in creating the crisis.

The IMF stopped short of calling for a global financial supervisor, saying that mechanisms of information sharing and risk assessment between national regulators generally worked well in normal times. But it said that the response to the Icelandic bank runs and the collapse of Lehman Brothers showed the need for more cooperation and binding agreements on who would bear the burden when crises hit.

The IMF’s admission of blame focused on the damage wreaked by the so-called “shadow banking system” – a set of lightly regulated financial institutions including investment banks, hedge funds and mortgage companies that were not subject to strict banking regulation. “The Fund warned about global imbalances but missed the key connection to the looming dangers in the shadow banking system,” the study said.

Henceforth, it said, such institutions needed to be regulated by their function rather than their form, with companies that posed risks to the whole financial system brought within prudential rules that would cover bank-style capital and liquidity requirements. While rules were being tightened on institutions that were already regulated, “an extension to the regulatory perimeter still seems necessary,” the IMF said.

Many economists and ministers have pointed to the huge global current account imbalances as a key cause of the crisis, through encouraging the US to borrow heavily to fund its consumption. But Olivier Blanchard, the IMF’s chief economist, said that the reckless creation of risky assets could have occurred even without the imbalances. ”The macroeconomic causes of the crisis are a factor after the failure of market discipline and weaknesses in regulation,” Mr Blanchard said. “My view is that global imbalances contributed indirectly to the crisis.”
If they earnestly clamped down on the shadow banking system when it dramatically reared its head over a decade ago, then the current mess would've probably been headed off. Instead, it was allowed to grow as those at the IMF and other Temples of High Finance viewed the crisis as one involving half-witted East Asians who didn't know any better. I guess the Great White Master didn't know any better, either.