27 October 2008

International Monetary Farce

Where do you turn as national chancellor when your country is bankrupt? If you don't have a reserve currency to protect you this is a situation you are pretty likely to face in the coming months. Your only option is to hope that you get in while the IMF still has some funds.

The International Monetary Fund is the part of the global financial system that is supposed to support the occasional accident that results from over-exuberant capitalist enterprise. It is not in a position to support the whole global banking system. Its pot apparently only extends to $200bn, which, given the size of money flows we've seen recently, appears extremely modest.

So, it could be that the Fund will be coming to national governments, asking them, on our behalf, to put our hands in our pockets again. Now we will be expected to bail out not only our own banking system, but whole economies across the world. The countries themselves will be required to take on more debt - the last thing they actually need. Surely it would be better to cancel all these debts in one almighty jubilee and negotiate the whole system again from scratch?

Imagine yourself as that national chancellor. You have only done what you were advised by economic theory. You have no control over global capital flows, and is isn't really your fault that your rely heavily on oil, or steel, or that you are a country which financial speculators don't like the look of.

The IMF tends to make offers to people who are in no position to refuse, and the offers are usually in the neoliberal mode, requiring restraint on public spending, a contracting state, and more market liberalisation. Exactly the sorts of policies that got those countries into the mess in the first place.

Interestingly, in the past few years many of the poorer countries who have been the recipients (victims?) of IMF loans have wised up and chosen to repay (see stories on Argentina and a story of recent IMF politics). In the insane world of banking, without anybody to lend to, the IMF would have gone bankrupt. It does seem a strange coincidence that exactly at this point a whole new range of countries are being forced into bankruptcy and into crippling loans that will keep the IMF afloat for another few decades.

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