[OPE] IMF and the lessons of the financial crisis

The IMF has recently published interesting reports on the financial crisis,
if you're interested in the data. These include the Global Financial
Stability Report 2009 (a sort of policy manual), and the World Economic
Outlook Oct 2009 which surveys bubble history. In the understatement of the
year, the IMF makes the following comment:

"This chapter makes the case that putting more emphasis on macrofinancial
risk could bring stabilization benefits. Simulations suggest that using a
macroprudential instrument designed specifically to dampen credit market
cycles would help counter accelerator mechanisms that inflate credit growth
and asset prices. In addition, a stronger monetary reaction to signs of
overheating or of a credit or asset price bubble could also be useful. Such
a broader approach to monetary policy might require that concern for
macrofinancial stability be explicitly included in central banks' mandates.
However, expectations should be realistic. It is difficult to discern
whether credit and asset price booms or surging current account deficits are
driven by benign or malign developments. Even the best leading indicators of
financial vulnerability are noisy, sometimes sending false signals and
raising the risk of policy errors."
http://www.imf.org/external/pubs/ft/weo/2009/02/pdf/c3.pdf

Neoliberal ideology nowadays has it, that the only proper function of the
Reserve Banks (Central Banks) is to ensure price stability, by keeping price
inflation below or close to 2% at any point in the conjuncture (the full
employment idea of Keynesian times has dropped off the agenda, since, if you
are unemployed, it's your own fault according to this theory and nobody
else's).

What they are now saying is that the central banks should, and should have,
proactively intervened in the markets to curb excess credit growth and risky
credit growth, mopping up excess money and taking it out of the market,
presumably by raising interest rates and blocking dubious lending practices.
The criticisms are recognized that monetary policy 2002-2006 was "too loose"
and policymakers were obsessed with a simpleminded restriction of price
inflation, ignoring "unsustainable asset prices". Thus, some neo-Keynesian
interventionist moderation is suggested by the IMF, although the main policy
agenda is unchanged.

The scientific question about these apologetic "could-have, should-have"
stories then is, why didn't the banks intervene? This should be probed much
more than the IMF does. The presumptions are, among other things, that:

- you can accurately estimate the credit volumes, risk levels and asset
pricings that are "sustainable", when nobody even knew what many of the
securitized assets were worth, except perhaps in terms of their likely
future earnings potential extrapolated from the past ("banking by bluffing"
since there was no precedent).
- that the Central Banks can really control the issuing of credit, beyond
influencing this, given that capital transits easily from one country to
another, and non-bank corporations also engage in their own credit schemes.
- that the Central Banks in capitalist societies might have the clout,
during a boom when everybody is making good money, to close down a whole
field of activity that causes traders and citizens to lose business,
effectively telling everybody they should not be making the money they are
making.
- that "unsustainable asset prices" are somehow not a case of price
inflation.

The IMF concludes empiricistically that "monetary policy was not the main or
systematic source of the recent asset price booms" because monetary policy
remained a constant factor vis-a-vis output ratios and inflation rates, but
hell that just depends on how you define monetary policy!

Anyway, since the warped financial ideology prevents drawing scientifically
objective lessons from the past, we can expect more financial crises in the
future.

Jurriaan

_______________________________________________
ope mailing list
ope@lists.csuchico.edu
https://lists.csuchico.edu/mailman/listinfo/ope
Received on Sat Sep 26 17:33:33 2009