Frequency and Severity of Recent

frequency and severity of recent financial crises raise doubts about the effectiveness of the IMF's supervision and crisis management policies. Discuss with reference to emerging market crises or the sub-prime crisis of 2008-2009.

The International Monetary Fund (IMF) and the global credit crisis of 2008-2009

The International Monetary Fund (IMF) has three different roles, all of which serve the purpose of fostering financial stability in the world. The first "is to try to provide early warnings of impending crises," a duty which the IMF failed prior to the credit crisis of 2008-2009 ("Interview," Der Spiegel, 2009). According to the admission of the IMF managing director Dominique Strauss-Kahn, "we were not as good as we should have been on that score. We were not vocal enough," before the crisis happened ("Interview," Der Spiegel, 2009). However, he adds that to be fair to the IMF, the organization "was the first institution among all the central banks and think tanks worldwide to warn that this crisis would be very wide-ranging and very severe," and the IMF was, at the time, criticized for its pessimism and contributing to the magnitude of the crisis ("Interview," Der Spiegel, 2009).

The second job of the IMF is its advisory capacity. It has tried to fulfill this duty by advocating greater oversight and restructuring of the banking and financial sector since the crisis. In some countries it has advocated nationalizing the banks and government-sponsored economic stimulation. These stimulus packages "were very controversial because they were costly" although the IMF believes that its support of these market interventions was correct, and the wisdom of its actions is manifest in the improvement of the world economy and particularly in the revitalization of financial markets after the collapse ("Interview," Der Spiegel, 2009).

The third role of the IMF is its most important one, to "provide resources to countries in financial crisis" ("Interview," Der Spiegel, 2009). The IMF has become intimately involved in crisis management because, although the world financial crisis of 2008 began in America, the entire world was affected. Indeed, the developing world, as it had less of a cushion of prosperity than the developed world, suffered the most financial fall-out. It was the old example of the world catching a financial cold, when America sneezed. The IMF, in response to the crisis, has been trying to extend aid to nations suffering the effects of the financial downturn. It has introduced new or expanded bilateral borrowing arrangements with nations such as Norway and Japan, and will soon begin issuing its first interest-bearing promissory notes to supplement its available funds. "Under the framework, member countries with strong external positions, and central banks of such members, may sign agreements to purchase these notes up to individually agreed maximum levels. The actual notes would be issued when needed by the Fund to finance loan disbursements to another member" ("IMF moves to boost resources," IMF Survey Online, 2009). The IMF has also increased its concessional loans and will begin using funds from the sale of gold reserves to extend aid to poorer nations.

In assessing the damage done to the credit markets, the director of the IMF has been heavily critical of American lending policies, particularly the use of the phrase 'perfect storm' to describe the crisis: "Human society is not a force of nature. The financial crisis was a catastrophic event, but one created by human hand[s]. The lesson we all need to learn is that even a free market economy needs some regulation, otherwise it cannot function. All these ideas about deregulation -- that more deregulation is always better and that the market can solve every problem -- are fine on paper but they do not work in reality"(Interview, Der Spiegel, 2009). Economics have criticized the own IMF's expansion of its lending as 'more of the same' as well -- that is, more of the same ineffectual policies pursued by the IMF (as well as many world governments, such as America) that lead to crisis and failure in the lending industry.

Criticism of the IMF centers upon the issue of moral hazard. Lending to failed governments and financial institutions simply because they are too big to fail simply encourages a repeat of the same bad behaviors, including deregulation and risky lending. How can the IMF criticize America when it acts as an enabler to other nations, to pursue similar policies? "Isn't the current response to the crisis creating new risks? Bankers now know that the government will ultimately come to the rescue when all goes terribly wrong. Economists call this 'moral hazard,' where individuals have an incentive to behave recklessly because they know they will not be punished for their mistakes" (Interview, Der Spiegel, 2009).

The obvious response to such allegations is that the failure of Lehman Brothers which precipitated the collapse of the world's markets indicates what can transpire when something that people expected to be backed by a government is allowed to flounder. Lehman felt certain that the U.S. government would and could bail it out, just as it had similar companies in the past. Now the government is afraid NOT to extend aid to failing institutions, given what transpired post-Lehman.

So the cycle continues -- assurance of no need to suffer moral hazard results in a collapse of an industry (or government), the institution is shored up because it is too dangerous to let it fail, which results in the revivification of a dangerously reckless organization that goes back to its old ways, once regulatory constraints are removed after its financial recovery. But the IMF defends its policies "From a moral hazard perspective, it may be the right decision to allow a bank to fail. But the systemic consequences have to be taken into account and in this case they have been severe. I think most people today would say that letting Lehman go down was not a good idea," as the damage can be so catastrophic to innocent workers and citizens who had nothing to do with the machinations behind the crisis (Interview, Der Spiegel, 2009).