Reflections on the Global Financial Crisis and the Role of the IMF Robert Weissman, Essential Action Washington, DC November 17, 2008 Robert Weissman, Essential Action Washington, DC November 17, 2008

Overview  Structural problems and responses to financial crisis: Definancialization  IMF Surveillance Record  Political Context  IMF Restrictions and Focus  Structural problems and responses to financial crisis: Definancialization  IMF Surveillance Record  Political Context  IMF Restrictions and Focus

Overfinancialization, not Just Under-Regulation  Financial Sector: ~35% of corporate profits in US from  Finance as a driver of economic policy. The hype of “innovation”  Industrialized countries  Developing countries encouraged to free up financial sector  Structure drives regulatory processes -- political influence  Financial Sector: ~35% of corporate profits in US from  Finance as a driver of economic policy. The hype of “innovation”  Industrialized countries  Developing countries encouraged to free up financial sector  Structure drives regulatory processes -- political influence

Structural Responses  De-financialize economies  Localize finance (relative, not absolute)  Finance for Development -- not development by finance  Capital controls  Tobin/financial transaction taxes  Public institutions, not just public regulation  Global regulatory floor, not ceiling  De-financialize economies  Localize finance (relative, not absolute)  Finance for Development -- not development by finance  Capital controls  Tobin/financial transaction taxes  Public institutions, not just public regulation  Global regulatory floor, not ceiling

Enter the IMF  IMF as possessing “universality”  IMF to redress balance-of-payments  Is the IMF changing … How can it be made to change?  IMF as possessing “universality”  IMF to redress balance-of-payments  Is the IMF changing … How can it be made to change?

IMF Surveillance Record is Poor  Crisis after crisis  Housing bubble?  Compensation incentives to excessive risk?  Crisis after crisis  Housing bubble?  Compensation incentives to excessive risk?

Although the U.S. housing market appears to be stabilizing, risks of further deterioration cannot be ruled out. Overall, the U.S. mortgage market has remained resilient, although the subprime segment has deteriorated a bit more rapidly than had been expected at this point in a housing downturn. — Global Financial Stability Report, April 2007 (p.2) Although the U.S. housing market appears to be stabilizing, risks of further deterioration cannot be ruled out. Overall, the U.S. mortgage market has remained resilient, although the subprime segment has deteriorated a bit more rapidly than had been expected at this point in a housing downturn. — Global Financial Stability Report, April 2007 (p.2)

Most observers agree that risk management practices have improved at regulated banks and brokers. — Global Financial Stability Report, April 2007 (p.60) Most observers agree that risk management practices have improved at regulated banks and brokers. — Global Financial Stability Report, April 2007 (p.60)

Industry observers and participants generally agree that any new initiatives related to hedge fund oversight should seek to preserve hedge funds’ contribution to financial stability against the new or emerging risks their activities pre- sent. Costs associated with new requirements (e.g., reporting systems, legal infrastructures, etc.) may drive some funds from the market and deter new funds from entering the market at the possible costs of reduced competition, innovation, market liquidity, and risk dispersion. — Global Financial Stability Report, April 2007 (p.61) Industry observers and participants generally agree that any new initiatives related to hedge fund oversight should seek to preserve hedge funds’ contribution to financial stability against the new or emerging risks their activities pre- sent. Costs associated with new requirements (e.g., reporting systems, legal infrastructures, etc.) may drive some funds from the market and deter new funds from entering the market at the possible costs of reduced competition, innovation, market liquidity, and risk dispersion. — Global Financial Stability Report, April 2007 (p.61)

Political Opportunities  G20 call for enhanced role for IMF  IMF seeking approval for gold sales  Permanent funding of administrative functions  Requires Congressional approval  Cong. interest in conditioning on IMF reform  Uncertain timetable – likely 2009  G20 call for enhanced role for IMF  IMF seeking approval for gold sales  Permanent funding of administrative functions  Requires Congressional approval  Cong. interest in conditioning on IMF reform  Uncertain timetable – likely 2009

If the IMF is to Get a Renewal on Life, Then …  IMF programs should not demand or encourage financial sector liberalization. Countries must be free to employ capital controls to buffer international shocks.  The IMF should not impose policy conditionalities or offer advice unrelated to ensuring balance-of-payments difficulties are resolved. Areas in which the IMF should not tread, for example, include privatization, labor market regulation and trade liberalization.  IMF programs should not demand or encourage financial sector liberalization. Countries must be free to employ capital controls to buffer international shocks.  The IMF should not impose policy conditionalities or offer advice unrelated to ensuring balance-of-payments difficulties are resolved. Areas in which the IMF should not tread, for example, include privatization, labor market regulation and trade liberalization.

A New IMF Lease on Life? …  Countries must be free to pursue expansionary economic policies.  Currency devaluation-related inflation not due to domestic policy  Fiscal deficits to build national demand and meet important social needs.  Freedom to expand government spending -- free from any overall budget caps -- on activities involving primarily domestic inputs. These include most importantly services such as healthcare and education.  Countries must be free to pursue expansionary economic policies.  Currency devaluation-related inflation not due to domestic policy  Fiscal deficits to build national demand and meet important social needs.  Freedom to expand government spending -- free from any overall budget caps -- on activities involving primarily domestic inputs. These include most importantly services such as healthcare and education.

A New IMF Lease on Life? …  The IMF should exit the development business. This means that PRGF and PSI should be closed. Aid should be channeled through appropriate development agencies.  Existing poor country debt should be cancelled immediately, without further PRSP-related monitoring.  The IMF should exit the development business. This means that PRGF and PSI should be closed. Aid should be channeled through appropriate development agencies.  Existing poor country debt should be cancelled immediately, without further PRSP-related monitoring.

A new lease for the IMF?  End to conditionality that undermines labor rights (ILO standard of Decent Work)  Transparency and Participation  End to conditionality that undermines labor rights (ILO standard of Decent Work)  Transparency and Participation

Robert Weissman Essential Action