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IMF Asia Crisis Blogging: Bringing Liquidity to a Liquidity Panic Is a Good Idea!

Pigs take wing and soar high above the earth! Brad DeLong defends New York Times against academic criticism!

Dani Rodrik writes:

Dani Rodrik's weblog: IMF, the guardian hero: Today's NYT carries a story by Steven Weisman on the IMF and its search for a new mission for itself. There is nothing new in it, but the opening paragraph is certainly eye-caching:

A decade ago, the International Monetary Fund helped to stabilize the world economy after markets collapsed in Latin America, Russia and Asia. Though critics often have rued its interventionism, the fund was widely hailed as a heroic guardian of the global financial system.

Well, I was around a decade ago, and I do not recall anyone (possibly other than someone on 19th Street) hailing the IMF as a heroic guardian of anything in the wake of the Asian financial crisis. Instead the debate was about whether the IMF got it just a little bit wrong (the IMF's own post-mortem evaluation) or a whole lot wrong. I don't imagine that Joe Stiglitz and Marty Feldstein see eye to eye on many things, but both thought (along with many others) that the IMF's policies in East Asia had been grossly inappropriate...

Well, I was around a decade ago too, and I hailed and still hail the IMF as a heroic guardian in the wake of the Asian financial crisis. There are two questions:

  1. Did the IMF do a first-class job?
  2. Would the situation have turned out better had the IMF not existed?

The answer to the first question is "no." Joe Stiglitz says the answer is "no" because he thinks the IMF worried too much about moral hazard and fiscal prudence, did not intervene on a large enough scale quickly enough, and required some policies in recipient countries that were counterproductive. Marty Feldstein thinks the answer is "no" because he thinks the IMF worried too little about moral hazard and fiscal prudence, intervened on too large a scale too rapidly, and did not require enough in terms of financial restructuring in recipient countries. The fact that they agree that the answer is "no" does not mean that either of them is right (although I think Joe Stiglitz is). And because Stiglitz and Feldstein disagree about what the IMF got wrong Dani should not use the fact that Stiglitz and Feldstein agree that it got something wrong as proof that the IMF got something wrong. He would need to show that they agree on what the IMF got wrong. And he can't. Because they don't.

The answer to the second question is also "no." The IMF showed up to a liquidity panic with a lot of liquidity, and did so at a time when other potential lenders of last resort like the U.S. Treasury were hamstrung by Senator Al d'Amato's willingness to do Robert Dole's bidding even when it conflicted with the interests of his contributors, or his constituents, of the nation, and of the world. Showing up at a liquidity panic with lots of liquidity is a good thing to do. It greatly reduces the chain of bankruptcy, unemployment, and depression that follows.

Weisman's first paragraph is, I think, completely appropriate.

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