## _081511 - 1. The International Monetary Fund has long been the queen of international ## Source details **Canonical URL:** [_081511 - 1. The International Monetary Fund has long been the queen of international](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_081511.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_081511.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_081511.pdf.json) --- ### Overview and central argument - The Fund is described as "the most influential, most respected and most professional" of international economic organisations but lacks the right and capacity "to steer the world economy" or to "dictate to governments, other than those in actual or imminent receipt of its loans." - Direct influence is "extremely limited" over two classes of states: creditors; and the world‟s principal debtor, the US, which is "the sole superpower" and issuer of the principal reserve currency. - The Fund's practical powers are compared to the Victorian constitutional monarch in Walter Bagehot's formulation: possessing "the right to be consulted, the right to encourage and the right to warn." - The author concludes the Fund did not effectively exercise those rights in the run-up to the global financial crisis. ### Diagnosis of surveillance failure - The Fund did not adequately warn of looming dangers before the crisis that began to manifest in mid-2007 and reached systemic proportions in September 2008. - Independent Evaluation Office (IEO) assessment finds: - During 2004-07, IMF surveillance was characterized by "overconfidence in the soundness and resiliency of large financial institutions" and endorsement of prevailing financial practices. - Risks associated with housing booms, financial innovations, and the need for stronger regulation were downplayed. - The IMF's ability to identify mounting risks was hindered by "a high degree of groupthink; intellectual capture; and a general mindset that a major financial crisis in large advanced economies was unlikely." - Specific internal example: Raghuram Rajan warned of dangers pre-crisis (paper presented August 27, 2005), but his warnings had little effect within the Fund. ### How crises and forecasting interact - Crises are characterized as to a high degree unexpected; if anticipated forcefully enough they are less likely to occur ("self-denying prophecy"). - Trade-off posited: the better the Fund's surveillance, the rarer crises will be, but authoritative surveillance is fundamentally constrained by ignorance and complexity. ### Impediments to effective surveillance — the six "I"s - Ignorance - Economists (including those at the Fund) are "ignorant" in both broad and deep senses; models are grossly simplified and cannot capture the complexity of human motivations or the adaptive economic system. - Available data are "incomplete, unreliable and, by definition, about the past." Steering the world economy is likened to "driving with only a distorted rear mirror." - Authoritative surveillance is "impossible" in an absolute sense; analysts must "accept ignorance" and explicitly state assumptions and blind spots. - Ideology - Simplifying assumptions that "liberalized markets cannot go wrong" and orthodoxies such as rational expectations and efficient markets led to downplaying real risks. - Such orthodoxies made it possible to ignore warnings about incentives, asymmetric information, adverse selection, and moral hazard. - Insularity - Five levels of insularity among Fund economists: 1. General economist disdain for non-economists. 2. Orthodox economists' disdain for fringe thinkers (post-Keynesians, Hyman Minsky, Wynne Godley; Austrians on the other side). 3. Policy economists' disdain for market practitioners' perspectives. 4. Institutional insularity from other institutions (e.g., World Bank). 5. Internal institutional insularity, notably poor integration of macroeconomists with financial specialists. - Incentives - Individual incentives discourage challenging institutional orthodoxies; desire for peer approval narrows acceptable discourse. - Institutional incentives penalize the Fund for confronting important players, risking being ignored, budget cuts, or legitimacy erosion. - Intimidation - Powerful member governments may cajole or bully Fund staff into desired assessments; discretion often prevails over public confrontation with powerful members. - Impotence - The Fund's power over powerful members is "only of its voice"; advice and warnings have the character of courtly counsel rather than sovereign command. - This impotence can incentivize private criticism over public warning, losing influence on public debate. - For long-run credibility the Fund must gain a reputation for being "fair, honest and, above all, right," which requires intellectual and political risk-taking. ### Directions for improving systemic surveillance (policy recommendations) - Acknowledge ignorance - Be "intellectually honest" about limits of knowledge and admit how and why preferred conclusions might be wrong. - Example: while aligning with calls for fiscal tightening, the Fund should admit that the policy "carries risks" and assess credibility, timing, and potential social and economic costs of austerity. - Before the crisis, the Fund should have been more circumspect about financial liberalization and challenged its orthodox assumptions. - Welcome unorthodoxy - The Fund should "welcome unorthodox ideas" (post-Keynesians, Austrians, Wynne Godley, Hyman Minsky) and systematically expose itself to them; it need not accept them but must understand them. - The Bank for International Settlements is cited as having been "more daring" and "closer to the truth" in this respect. - Embrace outsiders - Systematically reach out to economists and financial analysts outside faculties, finance ministries, and central banks of powerful advanced countries. - Include views from economists in other countries, market practitioners (hedge funds, private equity), and non‑megabank actors, as well as trade unions. - Reward questioning - Encourage and reward internal questioning and contrarian views to avoid stultified top-down debate; maintain ability to form unified positions when decisions are reached. - Co‑ordinate better - Integrate analysis across scales: global balance of payments, domestic flow of funds, national and sectoral balance sheets, asset price movements, and exchange rates. - The Fund is positioned as the only institution with a realistic chance to deliver an integrated view of global and domestic flows and financial sector structures. - Speak truth - The Fund must be prepared to take "intellectual risks and political risks" if it is to make surveillance more effective and regain the capacity to influence public debate. *Content unit from _081511 - 1. The International Monetary Fund has long been the queen of international (PDF chapter/section).* ### 25. The fifth requirement is to dare to speak the truth, as the Fund perceives it, ### Public judgments and accountability - The Fund must "dare to speak the truth, as the Fund perceives it, however unpopular." - Debate exists over whether it is more effective to present judgments in private rather than publicly; "It is always easier to do so in this way." - Arguments for public judgments: - "Governments make policy. But they are ultimately accountable to the people." - Public documents and the discussions they create are the channels through which "the Fund will exercise its influence on policy." - Judgments by the Fund aim "to improve the ability of governments to exercise their duties on behalf of their people." - If "the people themselves do not know what the Fund is saying," the Fund's influence is limited. ### Admitting error and evaluation - "The final requirement is to admit error." - The Independent Evaluation Office is "an important innovation" and "has produced superb evaluations of what has happened." - Standard Fund documents (World Economic Outlook, the Global Financial Stability Report, Article IV consultations and Financial Sector Assessment Programs) should "look back, as a matter of course, at their earlier judgments, in order to assess how and why they went wrong." ### Mission and tasks of the Fund - Core mission: "the keeper of the flame of global macroeconomic stability within a co-operative and open global economy." - This task is "no less important, though perhaps even more difficult, in today‟s world of liberalized financial markets, global capital flows and upheavals in the relative economic weight of countries." - Mervyn King (Bank of England) outlined three tasks for the Fund in assisting national policy-makers: - "First, it should provide and share information about the balance sheets of all major countries, their composition and size, and the links between them. . . . That analysis should lead to an assessment of the risks to the world economy as a whole." - "The second task is to encourage countries to abide by their commitments to each other by promoting greater transparency about national policies. . . . And by making their national policy frameworks sufficiently transparent, countries will be making it possible for the IMF to hold them to account and to fulfill its role as an umpire." - "The third task is the provision of a forum for national authorities to discuss risks to the world economy. To build a common analysis of balance sheet positions and a shared understanding of the implications of that analysis for the world economy, a trusted, independent and expert secretariat is needed to facilitate those discussions." - Additional objective proposed by the author: "to give an authoritative alternative perspective to those of the authorities of the countries, or groups of countries, it is advising." - The Fund "does not only serve governments and central banks. It serves the peoples of these countries and so of the world." ### Lessons from the crisis and surveillance - Retrospective assessment: "the risks were much bigger and the instability far greater than most analysts imagined five years ago, when Mr King delivered his speech." - Major mistakes derived from "widely shared views of what we knew that were just not so" — described as "unknown knowns." - Intellectual complacency: "The widely shared hubris about the 'great moderation' proved to be another example of intellectual pride going before a fall." - Fund's response to the crisis: - "When the crisis hit, the Fund played an admirable role in promoting a powerful reaction, though this also meant going back to ideas that fell out of fashion 40 years ago." - It "would have been better if the Fund had played a better role in identifying the looming catastrophe or at least the risks of such a catastrophe." - Global systemic surveillance prescription: the Fund must be more humble and braver, "more open to outside ideas and yet more determined to put forward its own, more skeptical of orthodoxies and yet a central player in official discussions among and within the great powers." - Feasibility verdict: "Is this feasible? The answer is: probably not. But it would be far better for the Fund to fail trying than not to try at all." *Source: _081511 - 25. The fifth requirement is to dare to speak the truth, as the Fund perceives it (PDF chapter/section).* ### 1. The International Monetary Fund has long been the queen of international ### _081511 - 1. The International Monetary Fund has long been the queen of international ### Overview and central argument - The Fund is described as "the most influential, most respected and most professional" of international economic organisations but lacks the right and capacity "to steer the world economy" or to "dictate to governments, other than those in actual or imminent receipt of its loans." - Direct influence is "extremely limited" over two classes of states: creditors; and the world‟s principal debtor, the US, which is "the sole superpower" and issuer of the principal reserve currency. - The Fund's practical powers are compared to the Victorian constitutional monarch in Walter Bagehot's formulation: possessing "the right to be consulted, the right to encourage and the right to warn." - The author concludes the Fund did not effectively exercise those rights in the run-up to the global financial crisis. ### Diagnosis of surveillance failure - The Fund did not adequately warn of looming dangers before the crisis that began to manifest in mid-2007 and reached systemic proportions in September 2008. - Independent Evaluation Office (IEO) assessment (cited in the text) finds: - During 2004-07, IMF surveillance was characterized by "overconfidence in the soundness and resiliency of large financial institutions" and endorsement of prevailing financial practices. - Risks associated with housing booms, financial innovations, and the need for stronger regulation were downplayed. - The IMF's ability to identify mounting risks was hindered by "a high degree of groupthink; intellectual capture; and a general mindset that a major financial crisis in large advanced economies was unlikely." - Specific internal example: Raghuram Rajan warned of dangers pre-crisis (paper presented August 27, 2005), but his warnings had little effect within the Fund. ### How crises and forecasting interact - Crises are characterized as to a high degree unexpected; if anticipated forcefully enough they are less likely to occur (self-denying prophecy). - The author posits a trade-off: the better the Fund's surveillance, the rarer crises will be, but authoritative surveillance is fundamentally constrained by ignorance and complexity. ### Impediments to effective surveillance — the six "I"s - Ignorance - Economists (including those at the Fund) are "ignorant" in both broad and deep senses; models are grossly simplified and cannot capture the complexity of human motivations or the adaptive economic system. - Available data are "incomplete, unreliable and, by definition, about the past." Steering the world economy is likened to "driving with only a distorted rear mirror." - Authoritative surveillance is "impossible" in an absolute sense; analysts must "accept ignorance" and explicitly state assumptions and blind spots. - Ideology - Simplifying assumptions that "liberalized markets cannot go wrong" and orthodoxies such as rational expectations and efficient markets led to downplaying real risks. - Such orthodoxies made it possible to ignore warnings about incentives, asymmetric information, adverse selection, and moral hazard. - Insularity - Five levels of insularity among Fund economists: 1. General economist disdain for non-economists. 2. Orthodox economists' disdain for fringe thinkers (post-Keynesians, Hyman Minsky, Wynne Godley; Austrians on the other side). 3. Policy economists' disdain for market practitioners' perspectives. 4. Institutional insularity from other institutions (e.g., World Bank). 5. Internal institutional insularity, notably poor integration of macroeconomists with financial specialists. - Incentives - Individual incentives discourage challenging institutional orthodoxies; desire for peer approval narrows acceptable discourse. - Institutional incentives penalize the Fund for confronting important players, risking being ignored, budget cuts, or legitimacy erosion. - Intimidation - Powerful member governments may cajole or bully Fund staff into desired assessments; discretion often prevails over public confrontation with powerful members. - Impotence - The Fund's power over powerful members is "only of its voice"; advice and warnings have the character of courtly counsel rather than sovereign command. - This impotence can incentivize private criticism over public warning, losing influence on public debate. - For long-run credibility the Fund must gain a reputation for being "fair, honest and, above all, right," which requires intellectual and political risk-taking. ### Directions for improving systemic surveillance (policy recommendations) - Acknowledge ignorance - Be "intellectually honest" about limits of knowledge and admit how and why preferred conclusions might be wrong. - Example: while aligning with calls for fiscal tightening, the Fund should admit that the policy "carries risks" and assess credibility, timing, and potential social and economic costs of austerity. - Before the crisis, the Fund should have been more circumspect about financial liberalization and challenged its orthodox assumptions. - Welcome unorthodoxy - The Fund should "welcome unorthodox ideas" (post-Keynesians, Austrians, Wynne Godley, Hyman Minsky) and systematically expose itself to them; it need not accept them but must understand them. - The Bank for International Settlements is cited as having been "more daring" and "closer to the truth" in this respect. - Embrace outsiders - Systematically reach out to economists and financial analysts outside faculties, finance ministries, and central banks of powerful advanced countries. - Include views from economists in other countries, market practitioners (hedge funds, private equity), and non‑megabank actors, as well as trade unions. - Reward questioning - Encourage and reward internal questioning and contrarian views to avoid stultified top-down debate; maintain ability to form unified positions when decisions are reached. - Co‑ordinate better - Integrate analysis across scales: global balance of payments, domestic flow of funds, national and sectoral balance sheets, asset price movements, and exchange rates. - The Fund is positioned as the only institution with a realistic chance to deliver an integrated view of global and domestic flows and financial sector structures. - Speak truth - The Fund must be prepared to take "intellectual risks and political risks" if it is to make surveillance more effective and regain the capacity to influence public debate. *Italic source attribution: Content unit from _081511 - 1. The International Monetary Fund has long been the queen of international (PDF chapter/section).* ### 25. The fifth requirement is to dare to speak the truth, as the Fund perceives it, ### 25. The fifth requirement is to dare to speak the truth, as the Fund perceives it, ### Public judgments and accountability - The Fund must "dare to speak the truth, as the Fund perceives it, however unpopular." - Debate: whether it is more effective to present judgments in private rather than publicly; "It is always easier to do so in this way." - Arguments for public judgments: - "Governments make policy. But they are ultimately accountable to the people." - Public documents and the discussions they create are the channels through which "the Fund will exercise its influence on policy." - Judgments by the Fund aim "to improve the ability of governments to exercise their duties on behalf of their people." - If "the people themselves do not know what the Fund is saying," the Fund's influence is limited. ### Admitting error and evaluation - "The final requirement is to admit error." - The Independent Evaluation Office is "an important innovation" and "has produced superb evaluations of what has happened." - Standard Fund documents (World Economic Outlook, the Global Financial Stability Report, Article IV consultations and Financial Sector Assessment Programs) should "look back, as a matter of course, at their earlier judgments, in order to assess how and why they went wrong." ### Mission and tasks of the Fund - Core mission: "the keeper of the flame of global macroeconomic stability within a co-operative and open global economy." - This task is "no less important, though perhaps even more difficult, in today‟s world of liberalized financial markets, global capital flows and upheavals in the relative economic weight of countries." - Mervyn King (Bank of England) outlined three tasks for the Fund in assisting national policy-makers: - "First, it should provide and share information about the balance sheets of all major countries, their composition and size, and the links between them. . . . That analysis should lead to an assessment of the risks to the world economy as a whole." - "The second task is to encourage countries to abide by their commitments to each other by promoting greater transparency about national policies. . . . And by making their national policy frameworks sufficiently transparent, countries will be making it possible for the IMF to hold them to account and to fulfill its role as an umpire." - "The third task is the provision of a forum for national authorities to discuss risks to the world economy. To build a common analysis of balance sheet positions and a shared understanding of the implications of that analysis for the world economy, a trusted, independent and expert secretariat is needed to facilitate those discussions." - Additional objective proposed by the author: "to give an authoritative alternative perspective to those of the authorities of the countries, or groups of countries, it is advising." - The Fund "does not only serve governments and central banks. It serves the peoples of these countries and so of the world." ### Lessons from the crisis and surveillance - Retrospective assessment: "the risks were much bigger and the instability far greater than most analysts imagined five years ago, when Mr King delivered his speech." - Major mistakes derived from "widely shared views of what we knew that were just not so" — described as "unknown knowns." - Intellectual complacency: "The widely shared hubris about the 'great moderation' proved to be another example of intellectual pride going before a fall." - Fund's response to the crisis: - "When the crisis hit, the Fund played an admirable role in promoting a powerful reaction, though this also meant going back to ideas that fell out of fashion 40 years ago." - It "would have been better if the Fund had played a better role in identifying the looming catastrophe or at least the risks of such a catastrophe." - Global systemic surveillance: the Fund must be more humble and braver, "more open to outside ideas and yet more determined to put forward its own, more skeptical of orthodoxies and yet a central player in official discussions among and within the great powers." - Feasibility verdict: "Is this feasible? The answer is: probably not. But it would be far better for the Fund to fail trying than not to try at all." *Source: _081511 - 25. The fifth requirement is to dare to speak the truth, as the Fund perceives it,* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_081511.pdf_