In calling for $18 billion to finance the International Monetary Fund, U.S. treasury secretary Robert Rubin claimed that “the IMF has not cost the taxpayer one dime.” The number-two man at the IMF, Stanley Fischer, concurs, asserting that “contributions to the IMF are not fundamentally an expense to the taxpayer; rather, they are investments.” Those appeals are thoroughly disingenuous.
Only in Washington can one simultaneously plead for more money and insist with a straight face that the contribution is cost free. U.S. payments to the IMF are said to be costless because they earn interest at the fund and can in theory be withdrawn if the United States so chooses. Of course, Washington has never chosen that route, a move that would allow us to test the quality of our “investments.” Instead, Washington and the IMF regularly demand and receive more cash from U.S. taxpayers to make high-risk loans at subsidized rates.
In any event, it is untrue that the IMF does not cost U.S. taxpayers a dime. The interest the United States earns at the IMF is below the rate of U.S. Treasury bonds — in other words, it doesn’t cover the cost of borrowing. By funding the IMF, the United States is actually losing money because it borrows cash at one rate (bonds) and invests it at a lower rate (IMF). The Congressional Research Service has calculated that in this way the IMF has added at least $4.6 billion to the national debt. It will add more if the current funding requests are approved.
Columbia University professor Charles Calomiris notes that the fund’s programs “in Mexico and Asia are now microeconomic bailouts that restore the solvency of clearly insolvent financial institutions.” IMF credit is unfortunately discouraging much-needed bankruptcy proceedings and corporate restructuring.
The costs of supporting the fund are, of course, much greater than the monetary outlays. Financing the IMF and its ability to bail out countries only perpetuates the perverse set of incentives that rewards governments and investors for imprudent behavior and ensures that larger crises will occur in the future. It unfortunately also delays market reforms that market conditions would have forced governments to undertake.
Proponents of the IMF deny or downplay these very real costs and argue that the agency is indispensable for preventing the otherwise uncontrollable spread of crises. Clinton’s former chief economic adviser, Laura D’Andrea Tyson, raises the specter of the 1930s and global deflation to proclaim that if the fund did not exist, we would have to invent it. The IMF, she tells us, has brought “Asia, and the world, back from the brink of a full-fledged financial collapse.”
Sensational statements of that kind stem from the belief that, however flawed the IMF may be, the world needs it as a lender of last resort. In times of crisis, such a lender provides funds to solvent banks that are threatened by panic, thereby containing financial turmoil. But the fund is not actually performing that function today. MIT economist Rudi Dornbusch points out that the IMF “has become a lender of daily resort,” dispensing emergency loans in almost undiscriminating fashion.
A real lender of last resort acts quite differently. It charges a penalty rate for its loans — in contrast to the IMF’s subsidized credit. It also provides funds only to temporarily threatened institutions that are solvent, not broke. Here again, the IMF errs. Columbia University professor Charles Calomiris notes that the fund’s programs “in Mexico and Asia are now microeconomic bailouts that restore the solvency of clearly insolvent financial institutions.” IMF credit is unfortunately discouraging much-needed bankruptcy proceedings and corporate restructuring.
Even if it changed its ways, the fund should not provide such aid. As Calomiris explains, “There is no reason to believe that legitimate lender of last resort protection to stem financial panics would be best achieved via IMF or U.S. government intervention.” If a country experiences a threat to its financial system, its own central bank should be the lender of last resort. If the U.S. financial system ever did come under pressure, the Federal Reserve could provide it liquidity directly. The failure of the Federal Reserve to do so after the October 1929 stock market crash caused the Great Depression, an experience that could only occur today if the Fed improbably repeated the same monumental mistakes.
Fortunately, Asia’s turmoil does not even come close to threatening the solvency of U.S. banks. That would be true even if the crisis spread to other countries, including Japan; Tokyo has enough resources to deal with those problems on its own. Unfortunately, because IMF intervention delays reforms, a greater crisis is now more likely. We in the United States can at least take heart that the “contagion” has only affected fundamentally flawed economies. “Random, irrational attacks on financial systems,” Calomiris observes, “are not evident in financial history.”
It would be a mistake to increase the IMF’s funding based on a misreading of history and the myths it has generated. It would also be tremendously costly for Americans and foreigners alike.