IMF Gives Itself an F in Spotting Financial Crisis
By - March 09, 2009

The IMF gave itself a scathing review for its mistakes in spotting the roots of the global crisis and acknowledged it fell short in its job as the world's main financial system supervisor. In a series of papers that look at the initial lessons from the crisis, the IMF said a patchwork of uncoordinated oversight and ineffective messaging failed to spot and call attention to the risk that a global credit boom could burst spectacularly, triggering the worst global slump in decades. The IMF said warnings before the crisis, including its own, were too scattered and unspecific to force policy-makers to act, let alone prompt collective policy action. – IHT

Dominant Social Theme: The IMF hits itself hard. Even large multinational organizations can be honest.

Free-Market Analysis: Just in time for the upcoming G-20 summit in April, the International Monetary Fund has released a report that shows a number of failings as regards to the economic crisis. The leaders of the IMF, which is responsible for making loans to countries that are headed toward national bankruptcy, apparently believe that the IMF did not fulfill its stated role very well. In fact, the report seems to flagellate the IMF unmercifully. It is almost unprecedented that a major regulatory body would issue this kind of scathing critique about itself. Here's some more from the article:

In the long list of its failings, the IMF acknowledged its surveillance either missed or underestimated risks, while complacency was encouraged by its optimistic bottom-line assessments and hedged messages. "This crisis has been a wake-up call for reassessing the effectiveness of international financial architecture and in particular for mechanisms to head off systemic risks," Reza Moghadam, director of the IMF's strategy, policy and review department, told a news conference. Several countries, including emerging market economies, have long called for an overhaul of the IMF's surveillance, saying its oversight can only be effective when it is willing to speak its mind on issues affecting both industrialized and emerging economies. Moghadam said the crisis revealed flaws not only in global surveillance but also policy coordination and cross-border financial regulation.

What would make an organization such as the IMF provide a public recital of its failings? On reading more closely between the lines, one begins to detect a pattern that provides a logical explanation. At least some of the report indicates that the IMF is simply not well organized enough to do the job. It lacks the regulatory and technological resources to do what needs to be done. Reza Moghadam's statement (see above) in this regard is illuminating: "This crisis has been a wake-up call for reassessing the effectiveness of international financial architecture and in particular for mechanisms to head off systemic risks."

Very convenient, in fact. It comes on the heels of the following from UK Prime Minister, Gordon Brown, as reported in the Arab News:

The International Monetary Fund and the World Bank are not fit for purpose and need to change dramatically in the wake of the worst financial crisis in living memory, British Prime Minister Gordon Brown said yesterday. Speaking at a seminar to set out the agenda for April's G-20 leaders' summit in London, Brown told the assembled academics that a "bold leap forward" was now needed if future crises were to be prevented. "I believe the IMF and World Bank will have to change their role quite dramatically," he said. "These institutions were built for a world of local capital flows, not global capital flows. The institutions we have inherited are not equipped for the tasks we have to deal with in the future." Leaders of the G-20, which includes industrialized nations like the United States and Britain as well as emerging economies like India and China, will meet in London on April 2 to discuss the financial crisis that is sapping the world economy.

Brown, who is hosting, has billed the London summit – subtitled "Stability, Growth and Jobs" – as a new Bretton Woods after the 1944 conference of 44 nations that created the modern financial system. "I see a big argument about how the IMF and the World Bank are to be financed in the future, one that will require us to talk about the reserves in different countries, talk about what sort of loan or bond facility we can develop, perhaps with the Arab states, perhaps even with Sovereign Wealth Funds," he said.

There seems to be an obvious pattern. Brown calls for an institution like the IMF to receive a far greater and more cohesive international role – meanwhile the IMF releases a report that shows how incompetent it is. The IMF report is self-damning no doubt, but it is written within a context that shows the organization simply didn't have the necessary tools. The IMF needs to be retooled, according to the IMF, and most of all its sphere of authority needs to be substantially enlarged.

After Thoughts

The Interplay between Gordon Brown and the IMF has been repeated elsewhere. There are statements made by French, German, Italian and American leaders all leading to the same conclusion: Substantial additional regulation is needed as a result of the economic crisis and the current global structure of governance is to be expanded to provide it. Why the current global authorities need to gain additional power when they obviously have not done well with what they have is unclear. Perhaps they ought to receive these powers simply because they are there. And why is additional regulation what is needed? Did the economic crisis occur because there was not enough regulation? And if there is more regulation, will it be the right kind – and will the regulators who didn't prevent the last crisis prevent the next one? The unfolding governance in reaction to the current crisis seems to proceed in a strangely preordained way. The recent statements of the IMF, self-damning as they are, do little to relieve one of this perception.