I needn't go over my longstanding objections concerning the misappropriation of emergency funds meant for balance of payments crises going towards bailouts of troubled European peripheral states not primarily suffering from such problems. Moreover, think of how various regions of the world are coming up with their own bailout funds expressly designed to make IMF borrowing superfluous to a certain extent: Europe has its European Financial Stability Facility (EFSF). Asia has its Chiang Mai Initiative Multilateralization (CMIM). Meanwhile, Latin American countries have mooted a Banco del Sur. It is not inconceivable that every key global region will soon have its own rainy day fund. You also have to consider the mounds of reserves individual developing countries have accumulated since the Asian financial crisis.
For this post, though, let's focus on one of the most annoying things the IMF does which is peddle rather poor, hypocritical advice. Alike with questions of succession tilted towards Europeans and what it means for emergency lending, the IMF being headquartered in DC also has deleterious consequences. For, it has continually been the case that the IMF has prescribed austerity...except for "special cases" (like its host country). From a recent Lagarde speech I am pained to hear this refrain once more:
For the advanced economies, there is no question that fiscal sustainability must be restored through credible consolidation plans. But we also know that consolidating too quickly will hurt the recovery and worsen job prospects. So the challenge is to find the pace of adjustment that is neither too fast, nor too slow.Lagarde repeats this common story that near-term stimulus--for those who markets haven't punished--can accompany medium-term consolidation for the best of both worlds. Bah humbug. Take the case of the IMF's darling America. To be perfectly accurate, once federal expenditures increase, they tend not to decrease. Nominally, the last time US federal outlays went down year-on-year was 1965--nearly 46 years ago. This fiction that federal spending is like a tap whose floodgates can unleash a torrent and then be made to drip soon thereafter is highly unlikely. There's no saying that it can't be done, but the weight of history is certainly against doing so.
The precise path of fiscal consolidation will differ by country. Those that are facing considerable market pressure, or could face it in the absence of upfront adjustment, must press ahead with fiscal consolidation now. But in others, there is scope for a slower pace of consolidation, combined with policies to support growth [my emphasis]. The key is to clarify a credible medium-term strategy to first stabilize, and then lower debt ratios. Within this strategy, fiscal measures that reliably deliver savings tomorrow will help create space for supporting growth today—by permitting a slower pace of consolidation.
Another qualifier here is the judiciousness of embarking on expansionary policies while not currently "facing considerable market pressure." Sure, such a situation may hold for now, but for how long? This point is not a churlish one from my point of view. Consider the market for Euro-denominated sovereign debt in the aftermath of the implosion of Lehman Brothers. Well into 2009, spreads of troubled PIIGS economies' bonds over their German equivalents were nugatory. If they had followed the Lagarde prescription, they'd have borrowed freely alike in years past at this point. Which they of course did and suffered from in the months to come. The idea is that markets are flighty, and we cannot really know if and when they will take flight. I for one certainly didn't expect such a harsh reaction to the likes of Greece et al. or I would be a very wealthy man by now instead of a mere blogger.Who's to say when a similar fate will not befall America? I say stick on the safe side and just stop drinking that Kool-Aid. With IMF "advice" like this, who the heck needs to watch CNBC to delude oneself to no end? To paraphrase John Bolton, if the IMF was done away with overnight, I don't think there will be many lamenting its disappearance since, well, sixty-five odd years are probably enough.
