The International Monetary Fund is desperate to change itself into the universal bankruptcy court for sovereign nations. The IMF needs a new gig, having failed at practically every other one it has tried.
The IMF was invented to help operate the Bretton Woods architecture of fixed exchange rates. The plan was that the IMF could extend special loans to member countries having trouble keeping their currencies pegged to the dollar under the auspices of the Bretton Woods Agreement. The IMF would lend the ammunition needed for currency-embattled nations to fire back at the foreign exchange market.
Bretton Woods ended in a series of spectacular currency crises in the early 1970s. IMF or no IMF, the system would have exploded. I blame not so much the IMF, but the concept of fixed exchange rates itself.
Blame the IMF for extending the time when the world was harnessed to the Bretton Woods system. Had the IMF never been invented, the Bretton Woods system would have disappeared much earlier. And a good riddance it would have been to have seen it go sooner.
Any way you look at it, the mission to create stability in world exchange rates via fixed exchange rates was a suicide mission right from before it started.
Mission number two began in 1995 when the IMF, prompted by the Clinton Administration, became the sovereign catastrophe ambulance service to the world. Mexico was the first client.
Others, namely Thailand, the Philippines, Indonesia, South Korea, Brazil, Argentina, Turkey and many others followed soon.
And that's the thing about becoming the lender of last resort: There is never any shortage of customers. You could measure the objective success of such a dubious function as the minimization of new cases. The only lender of last resort that is a success is the one that gives out no loans.
The IMF, as bailout king, has never had any problem finding new customers. For this reason I say the IMF has failed in its second incarnation. As when it played the role of bulwark to Bretton Woods, the IMF has failed in its attempt to eliminate or even ameliorate financial crisis.
Yet the task of lender of last resort may simply be beyond the IMF, or beyond the capacity of any organization.
No sympathy for the IMF, please, because it volunteers for impossible tasks. The playbill calls for the IMF to fail and then change itself to try another impossible task. The IMF is like a phoenix, the mythical bird that rises from its own ashes.
It's worse, actually. I can't resist borrowing a line from Saul Bellow. One of Bellow's characters describes himself as a "phoenix that chases after arsonists." And you didn't know Bellow wrote about international finance! The latest proposal for a new IMF comes from Deputy Managing Director Anne Krueger. Toward the end of last year Krueger made herself the bane -- if not ridicule -- of the international financial community by proposing that the IMF act as the bankruptcy court for sovereign nations.
Krueger seems stuck on the idea that the existing international courts are unable to handle bankruptcy on a national level. Hence she wants the IMF to step into the role.
According to Krueger, the Fund would even have the power to announce standstills on the payment of interest and principle. It would also have the power to enforce capital controls.
On April 1, Krueger stepped back a few feet by reducing the proposed role of the IMF. She said insolvent countries should work out their own terms with bondholders without -- as her original proposal had stipulated -- the IMF deciding when a country can't pay its creditors. Still, the IMF footprint would be large in the scale of things.
The IMF proposal calls for its 183 member nations to change their laws so a majority of creditors -- rather than all -- can agree on a restructuring agreement such as a debt swap. Excuse me but that is an abrogation of private property rights.
I have a far simpler idea. Rather than change the IMF, why not close it down? That's right, shut it down. Close the doors and give back the capital to the nations that are in effect the IMF's shareholders.
Probably can't get many nations to agree to that. So here is my second counter. If we can't directly shut the IMF down, then the US ought to withdraw as a member nation. And when that is done we should start to think about getting out of the World Bank.
David DeRosa, president of DeRosa Research & Trading, is also an adjunct finance professor at Yale School of Management and the author of In Defense of Free Capital Markets.
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