28 September 2011

IMF: More Pessimistic Than Ever and Moving In the Wrong Direction

It’s barely a surprise for anyone following the news that European banks are in trouble, that US economy has not really picked up, and that China and some other major emerging economies may have been overheated.  

Indeed, consider what IMF is telling us in its 24 September 2011 “Consolidated Multilateral Surveillance Report”:

* Point 1. Global activity has weakened and confidence has fallen sharply.

* Point 2. Mutually-reinforcing macrofinancial stresses have risen again, and sharply.

* Point 3. Against this backdrop, staff projects a weak, uneven, and bumpy recovery, subject to major downside risks.

* Point 4. Given a weak recovery, many economies will continue to struggle with very high unemployment.

* Point 5. Downside risks have increased and are severe.

* Point 6. Analysis of spillovers suggests that emerging economies would be hit severely by a further downturn in advanced economies.

* Point 7. Risks are closely linked — if one materializes, others are more likely to.

Realist or pessimist, but IMF looks more pessimistic about global finance and economy than ever before (usually its predictions have been rather optimistic, I think). What does it mean? The IMF’s suggested policy responses in the very same report could provide an answer:

* Point 8. Policy responses are urgently needed to decisively reduce rising uncertainty and fear.

* Point 9. Financial repair: strengthen capital buffers; restructure and resolve weak banks.

* Point 10. Fiscal repair: achieve sustainable balances, while supporting growth.

* Point 11. The composition of fiscal measures should be targeted at raising growth.

* Point 12. Household balance sheet repair needed, including supporting write-downs of unrecoverable loans (such as increased mortgage principal modifications, facilitated by the introduction of “cramdowns” into the personal bankruptcy regime).

* Point 13. Monetary policy: maintain accommodative conditions.

* Point 14. Emerging and low income economies: be nimble in dealing with potentially adverse spillovers from advanced economies, and continue to strengthen macroeconomic policy frameworks.

IMF’s answer to all of the above issues seems to be: collective actions, coordinated policies and global policy architecture. This is well exemplified by the points below (also taken from the above referred IMF report).

* Point 15: Collective action can set the stage for a return to strong, sustainable, and balanced growth.

* Point 16: External rebalancing requires collective action.

* Point 17: Coordinated policies could achieve impressive gains for the global economy.

* Point 18: Coordination is also essential to reduce the likelihood and impact of another crisis and alleviate regulatory uncertainty.

* Point 19: Progress is also needed on the global policy architecture and reform of global trade.

* Point 20: Act now (The path to recovery has narrowed, but the path is still open, if action is taken now.)!

Look from whichever angle you look at it, the direction can hardly be any clearer: towards global regulation and much more predictability. Someone (read: IMF) is basically telling us that it is able to control everything. The strategy includes the following steps:
* Collecting as much data and pieces of information as possible (indeed, data collection efforts of the regulators have intensified considerably)
* Extracting as much knowledge as possible from the collected data and pieces of information (indeed, analytical capabilities of the regulators have obviously improved and much more resources are being invested into it)
* Making oneself irreplaceable as the information provider (because of having more information than anyone else, right?)
* Defining key indicators to follow (e.g. credit-to-GDP ratio when monitoring systemic risks) and setting targets for the others based on these indicators
* Suggesting better coordination and starting to strongly recommend (read: prescribe) global policies.
Ironically, global control may be more easily achievable than we may think of. What asset managers and others directing capital flows now need to do is following policy makers. But is it desirable? Collection of more information, attempts to better understand what is going on and better co-ordination of policy makers seem to be good things, yet IMF prescribing global policies and (quietly) putting others into its service is a completely different story.

I think that it’s highly dangerous when someone starts acting like that. The primary aim of all this appears to be gaining more power and not really improving things; indeed, the essential parts of a sustainable monetary system starting from defining a reliable anchor for money are not even being discussed. Furthermore, regulators have turned out to be too unreliable for being given that much power. As an example, just take the conclusions of the EU-Wide Bank Stress Testing Exercise (according to which only eight banks failed and the suggested additional capital need of the European banking system was negligible compared to its size) and compare them with the current recommendation to recapitalise a large part of the European banking system. Can we trust what we are being told?

In short: I cannot agree with the chosen path for “solving” the current issues of global finance and economy. More energy and resources should be put into searching for viable alternatives (among others, the very same highly qualified people that are currently developing those models in the IMF’s Financial Stability Reports, could better work on the fundamental issues of the monetary and financial systems, and consider/propose alternative solutions).

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