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IMF: Influential and Manipulative Financing?

Posted by Larry Doyle on March 31, 2009 8:19 AM |

Could American banking regulators and the Federal Reserve itself work under the purview of the International Monetary Fund? With the G-20 getting ready to meet later this week in London, increased global financial regulation is a major topic on the agenda. French Prime Minister Sarkozy is leading the charge. The WSJ reports An Empowered IMF Faces Pivotal Test:

The IMF is about to gain more power. Thursday’s summit of leaders of the Group of 20 industrialized and developing nations is poised to elevate the IMF by promising to pump more than $250 billion into the fund, and asking it to issue “early warnings” about countries in peril.

“Everyone sees the need for a rejuvenated IMF,” says Egyptian Finance Minister Youssef Boutros-Ghali, who heads a policy-making group that oversees the IMF.

The IMF’s track record around the globe is decidedly mixed. In certain countries, such as Ukraine and Belarus, economic conditions worsened despite IMF aid.

The IMF last played a major role on the world stage in the late ’90s.

The 185-member IMF was last at center of the action a decade ago when it put together multibillion-dollar packages to stem a financial crisis that started in Asia in 1997 and spread to Russia and Brazil. The fund insisted on tough changes in domestic economic policy as the price for loans, provoking deep resentment, and in some cases, bloody riots. Still, the nations under IMF care rebounded fairly quickly. The IMF prescription — cut spending, devalue currencies, fix financial institutions, open markets — helped many countries export more to the U.S. and Europe.

Did that prescription actually play a major role in setting this stage for the crisis we are experiencing today? Many people believe so. Devalued currencies promoted massive exports and capital surpluses. That capital financed a large percentage of the undisciplined and imprudent lending here in America and around the world.

In its  wake, the IMF has not typically left a mountain of goodwill. A number of Asian nations repaid IMF loans ahead of schedule to compel the IMF to exit their economies.  Some nations have rejected the IMF’s overtures for more aid.

When South Korea said no to the IMF credit line, Lee Hyoung-ryoul, a Korean Finance Ministry official explained: “South Koreans tremble and financial markets turn sensitive whenever they hear the word ‘IMF.'”

The IMF knows that it needs to further engage China, which currently has limited voting power in the organization. While China is positioning itself for greater influence in the IMF, it also has some reluctance as the topic of its undervalued currency will be a major sticking point.

IMF officials are also wooing China, whose relations with the fund have been icy. Since 2007, China has blocked IMF reviews of its economy because it knows its exchange-rate policy is bound to come up.

Does the IMF have the manpower, capital, gravitas, and independence to be the world’s banker? Is it possible for one institution or authority to properly balance competing needs?  Should the IMF be both referee and commissioner?

Are President Obama, Fed chair Bernanke, Treasury Secretary Geithner, and Congressional leaders about to acquiesce to global economic pressures which are truly not in America’s interests? While the markets need strong referees, are we about to move too far in the other direction?

What do you think? For those with impressions or experience, please share them.


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