Editorial

This selection was originally published in the Wall Street Journal on 6 April 1998.

To listen to President Clinton and Treasury secretary Rubin, the safety of world markets hangs these days on whether the United States provides $18 billion in fresh money to the International Monetary Fund. "We need this money as quickly as possible, because right now the IMF does not have sufficient funds to deal with a truly major crisis," Mr. Rubin testified last month [March 1998].

Congress, unimpressed, listened to a couple of weeks of this kind of stuff and then recessed for Easter. Before lawmakers left, they had in various versions freighted Mr. Clinton's IMF funding request with such extraneous issues as abortion policy, dolphin conservation, and ways of preventing South Korea from plying U.S. consumers with cheap ladies' apparel.

Such casual reaction should surprise no one, least of all Messrs. Clinton and Rubin or even the IMF. This is what happens when institutions created to discharge serious responsibilities--like the IMF--depart from their basic missions and start using taxpayer money to restructure the known universe. House majority leader Dick Armey, in a memorandum Friday protesting any more money for the IMF, called the syndrome "mission creep."

Spelling out the precise mission of the IMF is a project that by now badly needs doing. We'd like to suggest that buried somewhere under all the frills and turf grabs, there might be one valid reason for the IMF to exist: that is, to act as genuine lender of last resort. By this we mean a fund that would step in only when a mismatch between short-term liabilities and long-run value of assets might threaten to wreck some sizable piece of the world's financial machinery. An example would be the fund's backing for the Argentine banking system during the 1995 crisis in which interest rates briefly skyrocketed while Argentina held fast its peso link to the dollar. It is on the role of lender of last resort that the IMF debate needs to focus.

Paring back the fund's goal to that point will take some doing--though Mr. Armey's memo may help spur debate. To see just how far the IMF's mission has crept, it helps to recall that the IMF was founded at the end of World War II solely to help defend the Bretton Woods system of fixed exchange rates. The fund's role was to step in only as needed to adjust temporary payment imbalances that threatened the overall fixed-rate system. It worked fine.

Then the United States in 1971 took the dollar off the gold standard. Bretton Woods collapsed. The IMF lived on and began devising new reasons for its existence. So inventive did the fund become that it now deploys a capital base of some $205 billion--some $37 billion of that already supplied by the United States. The fund's managing director, Michel Camdessus, is now asking the IMF's 182 member nations for a 45 percent increase, subject of the current Clinton request.

Increasingly the fund has drawn on these billions to reorganize and often subsidize growing chunks of economic life, lending to member governments at below market rates, with conditions attached. Along with deciding which banks should be shut down here, or intimating which dictator deposed there, the fund these days likes to "fine-tune" exchange rates not according to some clear, fixed system--as with Bretton Woods--but according to some incantation which Mr. Camdessus keeps to himself.

One result of this micromanagement is that the fund has by now crept into direct contravention of its own Articles of Agreement. These state that among the IMF's purposes is "To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation." That's a far cry from the IMF's backing last year [1997] for what turned into the damaging spiral of competitive devaluations in East Asia. These still threaten the larger world economy. To cope with the Asian wreckage caused at least in solid part by its own love of depreciating currencies, the IMF then employed itself putting together bailouts totaling some $120 billion for Thailand, Indonesia, and South Korea.

Treasury deputy secretary Larry Summers has further been urging that the IMF work harder on things like health care and "needs of the poor." Because the IMF operates as one of the world's most secretive multilateral institutions, the issue of who decides just what gets cared for, or at what cost, is left to the confidential debates of folks like Mr. Summers and the IMF staff. The only thing clear is that, whatever they're planning, they think it needs $18 billion in U.S. funding--which Mr. Rubin says could be leveraged by the IMF into some $90 billion in "usable resources." This policy enlarges the risk that some day the IMF will be hit with a very large default.

The hazard of IMF bailouts goes beyond the problem that bad IMF conditions such as higher taxes harm client countries. Worse, bailouts don't actually bail out troubled nations or their poorest citizens. Rather, bailouts tend chiefly to reduce losses to large investors who made bad bets. And the scope of bailing has been expanding fast.

Time was when IMF bailouts dealt with creditors holding sovereign debt, as in the 1994 Mexico crisis. With the fast growth of global markets, the IMF in Asia has found itself a new, much bigger niche, bailing out loans in which both lender and borrower are from the private sector. All this invites fresh, overly risky lending, which will lead to new bankruptcies and bigger bailouts--until the world finds itself facing that "truly major crisis" Mr. Rubin so fears.

For now, IMF funding has devolved into another of those issues--like global warming, or that budget surplus Mr. Clinton wants to spend before he's even got it--where any genuine policy needs have been lost to the government craving to spend and grow. The beginning of a solution lies in refocusing the debate on what it would mean for the IMF to act not as a creature of infinite resources but solely as a lender of last resort.