Tag Archives: imf

Is Larry Summers The Next Gordon Brown?

Gordon Brown, the British Prime Minister, is in big trouble.  It turns out that a medium-sized industrialized democracy like the UK can be run in pretty much the same way as a traditional emerging market – fiscal irresponsibility (cyclically-adjusted general government deficit now forecast at 12.2 percent of GDP for 2010) gives you a boom for a while, but the eventual day of reckoning is economically painful and politically disastrous.  If you also need to deal with an oversized bubble finance sector, that makes the adjustment even more painful.

It is of course sensible to use fiscal stimulus to offset a fall in private demand, and to some extent this can be effective – with a lag.  But if you lose control over public spending and borrow too heavily (helped by the fact people like to hold your currency), it ends badly.

From the beginning, we’ve expressed concern here that the entire Summers Plan was overweight fiscal, i.e., not enough resources for recapitalizing banks and addressing housing directly (for the context of this assessment, see our full baseline view).  Back in December/January, this was a strategic choice worth arguing about; now it’s a done deal and following the (very) limited recapitalization outcome of the bank stress tests, it seems likely that household and firm spending will remain sluggish.  If that is the case, the Administration’s logic implies throwing another big fiscal stimulus into the mix – and the Summers’ team is already preparing the groundwork.

The IMF is now warning against the risks of this approach, albeit using carefully worded language. Continue reading

IMF Emerging Markets Veteran on the U.S.

One of the central themes of our Atlantic article was that the current crisis in the U.S. is very similar to the crises typically seen in emerging markets, and that resolving the crisis will require (some of) the measures often prescribed for emerging markets. This, Simon said, would be the assessment of IMF veterans who had worked on emerging markets crises.

At the exact same time that we were writing that article, Desmond Lachman – who worked at the IMF for 24 years, and then worked on emerging markets for Salomon Smith Barney for another seven years – was writing an article for the Washington Post saying many of the same things.* Here are the first three paragraphs:

Back in the spring of 1998, when Boris Yeltsin was still at Russia’s helm, I led a group of global investors to Moscow to find out firsthand where the Russian economy was headed. My long career with the International Monetary Fund and on Wall Street had taken me to “emerging markets” throughout Asia, Eastern Europe and Latin America, and I thought I’d seen it all. Yet I still recall the shock I felt at a meeting in Russia’s dingy Ministry of Finance, where I finally realized how a handful of young oligarchs were bringing Russia’s economy to ruin in the pursuit of their own selfish interests, despite the supposed brilliance of Anatoly Chubais, Russia’s economic czar at the time.

Continue reading

Mandelson Moment

If you want an unusual insight into our potential future, take a look at Channel 4′s interview on Thursday with Peter Mandelson (UK’s Business Secretary, very close to Gordon Brown and a key person around the G20 summit).

In this clip, Mandelson comes on around the 12:48 mark (after Peer Steinbruck, the German finance minister, provides some complacent sound bites.)

But the surprising statement comes after the short interview with me (I start at 17:40 approx; Mandelson comes back around 21:38).  I have no idea if Mandelson knew this could happen, but Jon Snow (the anchor) goes back to him and asks if he agrees with me that the UK could borrow from the IMF. Continue reading

Obama Wins At G20: Europeans Lose Control of IMF

The big news at the G20 was obviously about the IMF, with the Americans pulling out an impressive deal on funding (compare with our predictions…). But the money is not the biggest achivement. The big move was in terms of who will run the IMF in the near future – as I explain my NYT.com column this morning, there is an implicit and almost immediate shift towards emerging markets.

President Obama had just the right tone yesterday.  Admittedly, he was helped by the fact that we no longer have anything to be arrogant about, but still the way he reached out to other countries – while also pointing out that they made big mistakes and are currently in trouble – conveyed exactly the right message.  The US will do much better if it lets emerging markets and developing countries have a serious and permanent place at the big table. 

Among other things, this will fundamentally change the way the IMF operates.  As a symbol and for its potential impact on the international economy moving forward, yesterday’s final loss of European control over the IMF really matters.

By Simon Johnson

What the IMF Would Tell the United States, If It Could

From 1945 until around 1980, the financial sector was one industry among many in the United States. Then something happened.

compensation4

People in finance started making more money,* jobs in finance became more desirable, financial institutions became more influential, and the linkages between the financial sector and the political establishment became stronger. At the same time that our financial sector became more leveraged and more risky, it also became more powerful. The result was a confluence of interests between Wall Street and Washington – one more normally found behind the scenes of emerging market crises, the kind the IMF is called on to resolve.

Simon and I tell this story – and the story of what happened next – in “The Quiet Coup,” an article in the May issue of The Atlantic. (Many thanks to The Atlantic for putting the online copy up as early as they did.) The working title of the article was, “What the IMF Would Tell the United States, If It Could.” Enjoy.

* The data in that chart are from Table 6.6 of the National Income and Product Accounts tables available from the Bureau of Economic Analysis.

Update: Henry Seggerman recently sent us an article he wrote in 2007, comparing the Korean crisis of 2007 to the then-current situation in the United States. He discusses not only the economic similarities, but also some of the political ones.

Update 2: A reader sent us an article about Mark Patterson, formerly Goldman’s chief lobbyist and now Tim Geithner’s chief of staff. Unfortunately, the article was published too late for us to use any of it in our Atlantic article.

By James Kwak

Rahm Emanuel’s and David Axelrod’s New Dilemma

The President’s top political counselors face the following dilemma.  They want to be tough on banks because that makes sense politically and, presumably, because it fits how they – with considerable relevant experience - would like to address the deeper underlying problems in the financial system.

But at least some prominent economic counselors to the President strongly disagree.  The Treasury Secretary, in particular, articulates the view that being tough on the banks and top bankers would further worsen credit markets and thus deepen/prolong the recession.  Mr Geithner wants to try other routes, and while he does not rule out imposing policies that banks would not like, it is not in his Plan A or likely a feature of his Plan B.

The President has evidently sided with Treasury, either because he decided they have superior technical competence, or because Emanuel and Axelrod themselves gave way when the experts stared them down.

The dilemma is this.  Continue reading

The IMF Sends A Message

The IMF communicates its view of the world economy in two ways.  The first is quite explicit, in the form of a World Economic Outlook with specific growth forecasts.  The latest update to the Outlook, published last week, recognized that world growth is slowing down, but anticipated a V-shaped recovery (there is a reassuring V in their Figure 1, or you can look at the Q4 on Q4 numbers for 2009 in the pdf version - the US does not contract during the coming year, according to this view.)

According to the forecast – which factors in only actual policies in place; no assumed miracles allowed – this is not much of a global crisis, particularly for emerging markets (e.g., emerging market growth dips to 3.3% for 2009 and then pops back up to 5% for 2010 in the annual average data; China’s growth will accelerate from now through end of 2010, etc.)  Given that, among other things, the IMF is the point organization for emerging market troubles, the message seems to be a soothing one.

But the IMF also communicates with both its lending to countries in difficulties, and with statements on and around this lending.  Here the news is in striking contrast to the forecast.  Continue reading

Global Fiscal Stimulus: Should It Be An Obama Administration Priority?

The US has the opportunity – and perhaps the responsibility – to immediately retake a leadership role in global economic policy thinking, with the pressing priority of preventing the world’s recession from becoming something more serious.  But what should be Mr Obama’s priorities in this regard, for example in the run-up to the G20 summit in early April – which, given the timetable for these things, will have an unofficial dry run of sorts at the Davos meetings next week?

The obvious message could be: a large US fiscal stimulus is coming, but the rest of the world needs to do more.  In this option, Mr Obama could devote considerable effort to encouraging others to expand their government spending and/or cut taxes.

While worldwide cooperation of this form may have been a constructive thought last year at Davos, when the idea was first broached publicly by the IMF, a joint global fiscal stimulus is a glorious idea whose time has for now passed. Continue reading

Causes: Hank Paulson

Other posts in this occasional series.

I generally prefer systemic explanations for events, but it is obviously worthwhile to complement this with a careful study of key individuals. And in the current crisis, no individual is as interesting or as puzzling as Hank Paulson.

The big question must be: How could a person with so much market experience be repeatedly at the center of such major misunderstandings regarding the markets, and how could his team – stuffed full of people like him – struggle so much to communicate what they were doing and why?

Hank Paulson’s exit interview with the Financial Times contains some potential answers but also generates some new puzzles.

Continue reading

IMF Speaks

On Monday, the IMF released a new research “note” entitled “Fiscal Policy for the Crisis,” which sets out recommendations for fiscal policy to address the global economic downturn. The premises of the note are, first, that the financial system must be fixed before it is possible to increase demand and, second, that there is limited scope for monetary policy, leaving fiscal policy as the main weapon. The executive summary provides the main recommendation in short form:

The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived probability of another “Great Depression” requires a commitment to do more, if needed; collective, since each country that has fiscal space should contribute; and sustainable, so as not to lead to a debt explosion and adverse reactions of financial markets.

Continue reading

Too Small To Fail

By now you probably know all you need to know about Too Large To Fail (Citigroup), Too Interconnected To Fail (AIG), and Too Many Potential Job Losses To Fail Before A New Administration Takes Office (GM).  Almost all the bailout cases we have seen recently were some combination of the above and they generally shared the characteristic of being large relative to the US and perhaps global financial system.  We have become accustomed to bailout increments in the hundreds of billions of dollars, and to periodically reassessing how many trillions have been committed by the Federal Reserve and others.

Today we received confirmation of something quite different: a bailout package for Latvia.  Latvia is a small country (2.2m people) and it is receiving a loan of just $2.35bn from the IMF.  The loan is obviously tiny compared with other bailouts (Citigroup received at least 10 times as much in November), but it is big in relation to Latvia’s economy – in IMF parlance, the loan is 1,200 percent (or 12x) Latvia’s quota.  Quotas are based on the size of your economy, among other things, and it used to be that 3x quota was a big loan and 5x quota really raised eyebrows.  (Iceland recently broke some records in this regard (official numbers here), and perhaps we are now in a brave new world where borrowing over 10x quota becomes more standard.)

We can scrutinize the full details of the program when it becomes public, but the press release already makes the key point quite clear,

Continue reading

Forecasting the Official Forecasts

The IMF is signalling that it will further revise down its global growth forecast.  This is after cutting the forecast sharply in October and again in November.  Their latest published view is growth in 2009 will be 2.2% year-on-year, and 2.4% fourth quarter on fourth quarter.  This view is dated November 6, 2008, so you should think of it as reflecting what the IMF knew at the end of October.

I obviously can’t predict exactly what the next forecast will look like, as there is a lot of economic ground to cover between now and mid-January.  But here are some considerations to keep in mind. Continue reading

Global Fiscal Stimulus: Will This Save Weaker Eurozone Countries?

Finally, the global economic policy ship begins to turn.  We are now seeing fiscal stimulus package announcements every week, if not every day.  And packages that we previously knew about are re-announced for emphasis and with an expanded mandate.  In all likelihood, we are looking at a fiscal stimulus in the order of 1-2 percent of world GDP, which is exactly what the IMF has been calling for.  Is this a modern miracle of international policy coordination?

The problem is – the IMF started calling for this in January 2008 when, with the benefit of hindsight, it would really have made a difference.  Fiscal policy is slow.  Even when everyone wants to move fast, when you can get the legislation through right away, and when there are “ready to go” projects, infrastructure spending will take at least 6-9 months to have perceptible effects in most economies. 

In the US we have some additional ways to boost spending, most notably as support to local and state governments, extending food stamps and the like (see my recent testimony to the Senate Budget Committee for further illustrations), and in most other countries that kind of government activity comes by way of “automatic stabilizers,” i.e., it happens without discretionary packages of the kinds that make headlines.  Still, the general point holds – the big fiscal stimulus package you put in place today is a bet on how the economy will be doing in a year or so.  And a year ago would have been a good time to start – remember that the NBER has just determined that the US recession actually started in December 2007 (but they were able to make the call only now, demonstrating how hard it is to forecast the present, let alone the future.)

My concern today, however, is not about the appropriateness of the overall package in the US, China or other emerging markets – in a crisis, erring on the side of “too much, too late” is better than “too little, too little.”  The problem is that in Europe we need not just a general fiscal stimulus (and more interest rate cuts), but also specific targeted measures that will provide appropriate, largely unconditional support to governments with weaker balance sheets (read: Greece, Ireland, Italy, but don’t exclude others from consideration). 

Monetary policy was consolidated in Europe (i.e., there is one currency for the eurozone) but fiscal policy substantially was not.  This imbalance is going to be addressed, one way or another, and perhaps under great stress.  Much progress has been made towards sensible policies in the US and some parts of Europe over the past two months, and calamity can still be avoided.  Let us not fall at the final hurdle.

Update: I talked with Madeleine Brand of NPR about some of these issues earlier today; audio recording and transcript are here.

IMF Creates Special Boarding Lane for 1st-Class Countries

One of the subplots of the global financial crisis has been the return of the IMF to center stage: $15.7 billion for Hungary, $16.5 billion for Ukraine, and $2.1 billion for Iceland, with talks continuing with Pakistan and other countries. The Hungary bailout, for example, looks a bit like the old IMF, which insisted on higher interest rates and fiscal austerity in exchange for loans. These conditions attached to past bailouts have made many countries reluctant to turn to the IMF; in South Korea, for example, domestic hatred of the IMF (the emerging markets crisis of 1997-98 is known as the “IMF crisis” in Korea) makes accepting money from it politically impossible.

In order to loan money quickly to countries that need it, the IMF today announced a new $100 billion Short Term Loan Facility offering three-month loans to countries that are deemed to be financially sound (public and private debt at sustainable levels) but are being buffeted by the financial crisis anyway. These loans will have essentially no conditions, and can be used to bolster foreign currency reserves to protect against currency crises, to recapitalize financial institutions, or for other purposes.

This should be a step in the right direction, but raises two issues. First, the IMF only has about $200 billion in lending capacity, and with over $30 billion allocated to Iceland, Hungary, and Ukraine, and $100 billion for “healthy” countries, it could be approaching that limit fast. G7 countries have already committed trillions of dollars to their domestic economies; $200 billion for the rest of the world could run out quickly, and raising more money from member nations would be politically difficult right now. (The US in particular is never keen to help out international organizations.)

Second, the new lending facility draws another line between the haves and the have-nots of the global economy. (The first line was drawn by the Federal Reserve in deciding who got swap lines – and, by the way, the Fed just made $30 billion each available to Brazil, Mexico, South Korea and Singapore.) Countries with the IMF’s seal of approval get loans with no conditions; other countries get the conditions that have been so unpopular in the past. This is more than a normative issue: in a financial crisis, falling on the wrong side of the line can exacerbate the problems faced by a country or a bank, because it saps confidence further and accelerates capital flight. The IMF has promised not to reveal the names of countries that are rejected for its no-condition loans in order not to destabilize them further, but speculators will speculate. And countries that do not qualify will harbor the same resentments of the IMF (and the perceived global economic order) as ever.

(IMF for Beginners, by The Big Money (from Slate).)

When’s the Make-Up Test? Tomorrow.

Saturday, October 11, 10pm.

The world’s finance ministers sat for several tests this weekend, and it’s not yet clear how they did.  If we set the bar low enough (i.e., no public criticism of each other), they did OK.  The Italian finance minister did threaten not to sign the communique on Friday afternoon, but this was not particularly meaningful (think about it: if Italy walked out of the G7, how would the markets view Italian risks on Monday morning?)  Everyone else was reasonably polite.

But if we were hoping for specific steps to be announced, then Friday’s list of principles from the G7, and the ensuing vague statements of support from other sets of finance ministers on Saturday have really not taken us very far.

Still, there is time for a make-up test (or two) on Sunday.  The US Treasury is undoubtedly working on some detailed measures to shore up parts or, hopefully, all of the banking system.  Eurozone member countries will be meeting in France on Sunday afternoon, presumably to see how far along they can bring the Germans – particularly with regard to systematic bank recapitalization.  It remains unclear whether anyone in the eurozone will suport the British ideas of blanket bank guarantees at this point.  And it is far from clear if the British will introduce the kind of overall package that in our view could turn the corner, even in a local sense.

The goal, as you know, is to get a clear strategy in place and well communicated by the time the stock market in Tokyo opens at 8pm (US East Coast time) on Sunday.  Let’s see how they do.