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IMF Performance in the Run-Up to the Current Financial and Economic Crisis

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Sponsored by New Rules for Global Finance, Woodrow Wilson International Center for Scholars, Program on America and the Global Economy, and Heinrich Böll Stiftung-North America

Moderator: John Sewell, Senior Fellow, Wilson Center and Chair of the Board, New Rules for Global Finance

Speakers:

• Ruben Lamdany, Deputy Director, Independent Evaluation Office, International Monetary Fund
• Damon Silvers, Director, Policy Department, American Federation of Labor-Congress of Industrial Organizations
• Dean Baker, Co-Director, Center for Economic and Policy Research
• Ranjit Teja, Deputy Director, Strategy Planning and Review Department, International Monetary Fund
• Jo Marie Griesgraber, Executive Director, New Rules for Global Finance

IEO report can be found online at http://www.ieo-imf.org/eval/complete/eval_01102011.html.

It is currently available in Chinese, English, French and Spanish)

Event Summary

IMF Performance in the Run-Up to the Current Financial and Economic Crisis

            28 March 2011

The International Monetary Fund released on February 9^th a report by its Independent Evaluation Office on the Fund’s actions leading up the 2007-2009 global financial crisis.  On March 28, experts on international economics and finance gathered at the Woodrow Wilson International Center for Scholars to give their various reactions to the report.  The event was part of Program on America and the Global Economy’s Global Economic Initiative. 

John Sewell, Wilson Center Senior Scholar, chaired the session that started with welcoming remarks by Jo Marie Griesgraber, executive director of the New Rules for Global Finance Coalition.  Following brief introductory remarks by Sewell and Griesgraber, Ruben Lamdany, deputy director of the Independent Evaluation Office, discussed the report’s conclusions. Lamdany posed the rhetorical questions of whether factors leading up to the crisis could have been identified, and what prevented the IMF’s surveillance from detecting risk factors for the crisis.

Among the report’s key findings was that the IMF did not sound adequate warnings leading up to the financial crisis.  Lamdany pointed to errors in the IMF’s surveillance of global economic conditions leading up to the crisis, namely, a lack of appreciation of risk in the financial sector, the placement of too much faith in the markets, and a failure to question the Federal Reserve.  Underlying these issues, Lamdany argued, were deeply held cognitive deficiencies, such as the existence of a “group think” mentality and “blind spots” within the Fund.  According to Lamdany, these deficiencies prevented the IMF from identifying and addressing concerns- some of which were raised by outsiders, such as New York University professor Nuriel Roubini.  “There was a conviction that a major crisis was unlikely to happen in a major economy,” Lamdany said. These issues, coupled with a culture of avoiding dissenting views and the existence of “silos” and “turf battles,” made it difficult to foresee the crisis.  The report recommends that the IMF encourage the expression of views that “speak truth to power” while moving towards more wide-reaching thinking that avoids “silos.” 

A panel of commentators, responding to the report, offered further thoughts on the IMF’s performance and its role leading up to the financial crisis.  Damon Silver, director of the AFL-CIO’s Policy Department, echoed the report’s findings that the so-called “group think” mentality detracted from the IMF’s ability to foresee the crisis.  Silver credited the Fund, however, for being unique among financial organizations in completing a self-assessment process. Silver argued that no one at the Fund looked at the basic numbers that would have shown the housing bubble developing.  Silver contended that economists tend to favor “elegant theories” instead of examining data.  Noting that the impact of the crisis can still be seen in high unemployment and rising foreclosures, Silver questioned whether it is prudent to return to some of the same economic ideas that the IMF pursued in the years preceding the crisis.

Dean Baker, co-director of the Center for Economic and Policy Research, emphasized the role of the housing bubble in the crisis.  Baker argued that the crisis and the bubble should have been easy to predict, and he proposed firing of economists who failed to identify this phenomena.  “Who could have known?’ should not be acceptable,” Baker said.  Baker said that in the years leading up to the crisis, the Federal Reserve was right to keep interest rates low, but that it could have also released more data on the housing market to raise awareness of the rise in housing prices.

Finally, Ranjit Teja, deputy director of the Strategic Planning and Review Department at the IMF, described ways in which the Fund has responded to the financial crisis. Teja acknowledged that the IMF did not predict the crisis, and proposed a method to critique IMF performance in real time. Responding to criticism, Teja said that there are misconceptions regarding what data the fund has access to, with financial data remaining unavailable, preventing the creation of “risk maps.” [So was Teja letting the Fund at least partially off the hook?] 

By Rachel Barker

Kent Hughes, Program on America and the Global Economy Director