

The Quiet Coup: IMF advice on the US economy - moonpolysoft
http://www.theatlantic.com/doc/200905/imf-advice

======
kqr2
This reminds me of a recent HN thread : How Rich Countries Die

<http://news.ycombinator.com/item?id=518776>

Over time special interest groups work to reduce a society’s efficiency and
GDP by enriching themselves -- in this case it's the financial industry.

Another common idea is regulatory capture:

<http://en.wikipedia.org/wiki/Regulatory_capture>

 _Regulatory capture is a term used to refer to situations in which a
government regulatory agency created to act in the public interest instead
acts in favor of the commercial or special interests that dominate in the
industry or sector it is charged with regulating._

The SEC and other government posts like the Secretary of Treasury are unduly
influenced by the finance industry. In fact, as the article points out, those
government positions are often filled with alumni from the finance industry.

------
christofd
This is the first good article I've found that shows parallels between
corruption or monopolistic/oligopolistic behavior in developing nations and
the current U.S. system, written by an old IMF practitioner:

-banks too big in size

-banks influence policy (treasury officials are often former bankers)

-advice on what happens when developing nations wreck their financial system and what is usually necessary to heal

-argument for why nationalization of banks makes sense

Who could provide better advice than an organization that routinely deals with
these kinds of failures? It turns out, this kind of stuff happens all the
time... just not here in the U.S.

~~~
anamax
> Who could provide better advice than an organization that routinely deals
> with these kinds of failures?

How about an organization that SUCCESSFULLY deals with these kinds of
failures?

> -banks too big in size

When/where did the IMF dealt with any banks approaching the size of Wachovia,
let alone Citigroup?

> -banks influence policy (treasury officials are often former bankers)

Since the IMF is filled with bankers....

I note that the current Treasury Secretary was IMF. I've heard that his
Indonesian work caused horrific damage.

~~~
christofd
Granted, I don't know enough about the track record of the IMF. Them sort of
being the 'Emergency Room' staff for failed nations does give them insights
into typical reasons for malfunction. I don't really have a grip (and most
people don't) on how these huge sums here in the U.S., e.g. 4-5 trillion
dollars estimated in bad assets on the books, add up. Reading Krugman/ de
Long/ Cowen/ Kedrovsky etc. still hasn't given me enough perspective. So I'd
like to see some input from people that know all the angles on how crooks get
away with money! Their experience from developing nations is helpful.

~~~
anamax
> Them sort of being the 'Emergency Room' staff for failed nations does give
> them insights into typical reasons for malfunction.

Which doesn't help, and may hurt, because we're not failing for "typical
reasons".

> So I'd like to see some input from people that know all the angles on how
> crooks get away with money! Their experience from developing nations is
> helpful.

If that's your reason for thinking that the IMF will help, it's almost
certainly wrong.

Think of it this way. Does skill at catching shoplifters help if you're trying
to stop murderers?

Note that the bulk of the IMF's activities are "development", which often ends
up bankrupting the country.... That's not to say that such countries wouldn't
have failed anyway or that contries don't fail without IMF help, just that IMF
involvement doesn't necessarily end up with ponies and kittens.

Don't take my criticism of the IMF as support for the current batch of US
folks - it isn't. (Pretty much every one of Fed Chairman Bernake's predictions
has been horrifically wrong.) I'm just pointing out that it's quite possible
for the IMF to be even worse.

Remember, that it's always possible to make things worse. (Better and worse
are both changes.)

~~~
joe_the_user
Anamax, your point about the IMF failing developing nations is very good.
There is really no evidence that IMF has ever helped anyone.

I am less sure about your point that the US not failing for typical reasons.
The finance industry has influence policy to excessive degree over the last
ten years and the resulting deregulation played a part in the bubble and the
collapse. It is hardly the only factor but it was a factor. It's different
from Third World cronyism but the article has a point that it might be
considered just a variation on theme.

So I'd challenge the statement that the US did not fail in a typical fashion.
The thing that's A-typical is the US wasn't just rolling out wasteful
production and unjustified debt but that it has been driving the world's
economy over the last twenty years while doing this.

I'd agree that IMF doesn't have any track record of helping countries - it's
just a bureaucracy which has more or less required belt tightening thus
forcing countries to become export oriented.

The ironic thing is that as many nations have belt-tightened and become export
oriented over the last twenty years, they came to rely on the debt-rolling US
to buy their products. So the final failure of the US bubble may result in
world where no one drives demand, where "beggar thy neighbor" through
competative devalue is the only tool left to the exporting nations which every
nation will be forced to be.

Neither the IMF nor the free market would be able to get us out of that one.

~~~
anamax
> resulting deregulation played a part in the bubble and the collapse.

One small problem - deregulation didn't play a part in the collapse. It's the
regulated institutions and the regulated parts of mixed organizations that
failed.

Subprime mortages were a creation of regulation and were overvalued as US
regulatory policy.

Regulation and tax policy encouraged US banks to hold more Fannie and Freddie
stock than they would have otherwise, which guaranteed that they'd all take a
hit at the same time.

The only "lack of regulation" was the US Congress protecting Fannie and
Freddie. The active players here were almost all Dems. Most Repubs ignored the
problem and a few got their teeth kicked in when they suggested that Fannie
and Freddie should be regulated.

The Obama adminstration, starting with his Chief of staff, is full of folks
who used to be Fannie or Freddie execs or board members.

That's not to let foreign regulators off the hook. Their banks and insurance
companies are also failing.

In many cases, such as AIG, both US and foreign regulators were involved.

That's why the US is trying to get the unregulated institutions to bail out
the regulated ones - they're the only ones left with significant assets.

Yes, I know what Fed Chief Bernake said about AIG's London operations. He was
wrong about that, which shouldn't be much of a surprise given the accuracy of
his predictions.

~~~
joe_the_user
Despite considerable disagree, I always enjoy your arguments anamax

Again, I need to clarify. The various institutions of course never became
absolutely unregulated but particular, symbolically important regulations were
removed.

It is true that regulations like the distinction between savings banks and
investment banks might not prevented similar banks maneuvers were the banks
determined to engage in them.

However, it is actually important to keep in mind that a good deal of state's
symbolic action toward private institutions are crucial for its limiting or
not-limiting their behavior.

Throughout the financial industry, "Greenspanism", the idea that the market
knows best, became the watchword of the regulators and the regulated, meaning
that the regulators often failed to take action around worrisome trends. The
Federal Reserve, for example, could have punctured the housing bubble at any
time by saying _loudly and forcefully_ "this is a bubble, you have to stop
now". The results might not have been pretty then but they even uglier now...

Also

> Subprime mortgages were a creation of regulation and were overvalued as US
> regulatory policy.

I would love see documentation of _this_...

> Regulation and tax policy encouraged US banks to hold more Fannie and
> Freddie stock than they would have otherwise, which guaranteed that they'd
> all take a hit at the same time.

Actually, I'd see Fannie and Freddie as "poorly regulated but guarantee"
institutions. Certainly the worst kind.

I certainly don't view the state as automatically good and the private sector
as automatically bad. But not I also wouldn't see all state actions as good
regulation or even regulation in any sense. The Post Office is owned by
government and maybe regulated by the EPA. The US military, is controlled by
the state but can tell the EPA to __* itself and often does.

~~~
anamax
> Throughout the financial industry, "Greenspanism", the idea that the market
> knows best, became the watchword of the regulators and the regulated,
> meaning that the regulators often failed to take action around worrisome
> trends.

While that's commonly believed, the office of thrift supervision (the US
agency that regulates banks - the name is historical), vehemently disagrees
and says that the insurance regulators do as well.

I note that the chairman of the fed doesn't know what's regulated.

> The Federal Reserve, for example, could have punctured the housing bubble at
> any time by saying loudly and forcefully "this is a bubble, you have to stop
> now". The results might not have been pretty then but they even uglier
> now...

The fed isn't a regulator of financial institutions. Instead, it is supposed
to handle monetary issues.

Note that crashing the market (via raising interest rates) wasn't politically
possible, and regulators only do what is politically possible.

And, to the extent that bogus-type transactions were occurring, crashing the
market wouldn't have stopped that. They'd have just gone down in proportion.

~~~
joe_the_user
>> The Federal Reserve, for example, could have punctured the housing bubble
at any time by saying loudly and forcefully "this is a bubble, you have to
stop now". The results might not have been pretty then but they even uglier
now...

> The fed isn't a regulator of financial institutions. Instead, it is supposed
> to handle monetary issues.

Whatever its official duties, the Fed is considered a central bank. Centrals
banks as a rule have been considered to have wide latitude for action on the
economy in general, by policy makers, by their heads, by the financial
community and by the public at large. Certainly, we can see the Fed taking
wide action today.

Just consider - I'm sure you know the William McChesney Martin quote that the
job of the Fed is "to take away the punch bowl just as the party gets going".
This means looking at the economy as a whole.

> Note that crashing the market (via raising interest rates) wasn't
> politically possible, and regulators only do what is politically possible.

This is indeed true. Politicians may sink to the point that they only follow
immediate popular options. CEOs may lie, cheap and steal due their
pathological greed. Doctor may do a bad job due to habitual incompetence. In
each case, it might indeed be true that nothing was possible at the time that
it happened. One nonetheless must point out what these people _ought_ to have
done, whether they really could have done it or not.

I would note that the rise Greenspanism/"market fundamentalism" itself,
starting in the 1990's, certainly made it much more politically difficult to
stand against Wall Street's further partying in the 2000's.

> And, to the extent that bogus-type transactions were occurring, crashing the
> market wouldn't have stopped that. They'd have just gone down in proportion.

This is pure speculation on your part. I could equally speculate that they
would have gone down as a proportion given that the total supply of loans was
now down and honest deals are more desirable than dishonest deal. Further,
actual bogus loans were only the final straw which broke the back of house
price inflation. At wasn't the fundamental problem. We can see a huge number
of ordinary loans which are coming undone at the moment (and without the
massive intervention of the Fed, there would be even more).

~~~
anamax
Yes, the fed is considered a central bank. However, it actually doesn't have
any regulatory authority over financial institutions. It only has monetary
powers.

No one in govt wanted the Fed to crash or slow down the housing market, so
it's unclear how one can conclude that different regulations would have caused
the Fed to do so.

> One nonetheless must point out what these people ought to have done, whether
> they really could have done it or not.

That depends on what said "pointing out" accomplishes. If it fuels bad
policy/giving further power to the people who failed, it's a bad idea.

> I would note that the rise Greenspanism/"market fundamentalism" itself,
> starting in the 1990's, certainly made it much more politically difficult to
> stand against Wall Street's further partying in the 2000's.

If you're going to argue that the President and Congress weren't going to do
anything, then it's unclear who you think would have done something.

I will note that McCain tried to get Fannie and Freddie under significant
regulation during Bush's first term. He got a little support from some Repubs,
no support from the rest, and kicked in the teeth by all the Dems who are
currently screaming for more regulation and about how Bush screwed things up.

------
Xichekolas
> _Yet the principal characteristics of the government’s response to the
> financial crisis have been delay, lack of transparency, and an unwillingness
> to upset the financial sector.

The challenges the United States faces are familiar territory to the people at
the IMF. If you hid the name of the country and just showed them the numbers,
there is no doubt what old IMF hands would say: nationalize troubled banks and
break them up as necessary.

Nationalization would not imply permanent state ownership. The IMF’s advice
would be, essentially: scale up the standard Federal Deposit Insurance
Corporation process. An FDIC intervention is basically a government-managed
bankruptcy procedure for banks. It would allow the government to wipe out bank
shareholders, replace failed management, clean up the balance sheets, and then
sell the banks back to the private sector. The main advantage is immediate
recognition of the problem so that it can be solved before it grows worse._

Finally someone said it, and better than I ever could have.

------
cousin_it
Here in Russia a lot of people sighed freely some years ago when our debt to
the IMF finally was repaid, early and in full. The organization has a very bad
name here for advocating drastic reforms that led to social shock and, yes,
many deaths. It might be more a fault of our own government, but still it
feels better to be debt-free.

~~~
rjurney
The man speaks so much sense that its easy to forget IMF/WB/USAid debacles in
eastern Europe. Even under his watch?

------
rjurney
I don't know what else to say about this article except that it is the finest
explanation of the banking crisis that I have yet encountered.

Seriously, this is a must-read for everyone. Sobering.

~~~
jonnycoder
Rolling Stone has an outstanding article explaining the current crisis. I
think you'll love it:
[http://www.rollingstone.com/politics/story/26793903/the_big_...](http://www.rollingstone.com/politics/story/26793903/the_big_takeover/)

------
biohacker42
The us will get through this, a year, or two, probably not 3, from now we'll
start growing again and get high inflation.

Then the fed will raise rates to kill inflation, economic growth will slow
down to a crawl and we'll begin paying off our debts.

This will last 10 to 20, just like Japan.

~~~
asmithmd1
exactly right. And the system will be the same as before - nothing will have
been done to address the heart of the problem - banks that are "too big to
fail".

Anything that is too big to fail is just too big.

We have successfully broken-up companies that were too big before - AT&T comes
to mind. Do you think we would have an open internet if one company controlled
all access to long distance communication like AT&T did before 1984?
<http://en.wikipedia.org/wiki/Bell_System_divestiture>

~~~
randallsquared
Entities that are that big have big lobbies. Big lobbies give effective
control of governing bodies (at least, in their limited scope); this is known
as regulatory capture. AT&T was broken up by judge, not by Congress, so it is
not a good counterexample.

~~~
silentOpen
I don't think the parent cares how AT&T was broken up.

Why not break up financial institutions through the judiciary? Oh, because the
anti-trust laws are crippled...

------
berntb
I think the banking crisis was milder in Sweden because of the handling of the
crisis in the beginning of the 1990s. Then, the shareholders of the Swedish
banks were hurt to save the banks, so the banks knew they would not get _free_
money from the state in the next crisis (which makes the banks a bit of an
exception in Sweden, but that is another discussion.)

After reading the article, it seems both more complex and simpler than that.
Really good.

