UNITED STATES: A New I.M.F.?

The International Monetary Fund was created to sustain a system of fixed exchange rates, providing temporary financing while member nations took more fundamental steps to protect their currencies when they came under speculative attack. Since the collapse of the Bretton Woods monetary system in 1971 and the advent of floating exchange rates, it has been trying to invent itself a new mission.

Treasury Secretary Lawrence Summers served up the latest version the other night, saying the IMF should stop making loans to developed countries, should pre-approve loans to countries that might need them, and provide emergency loans when it forgot to pre-approve them. Got it? What this is all about, of course, is U.S. taxpayer money for the IMF. The IMF has recently presided over debacles in Mexico and Asia, and currently wants a new infusion of cash for debt forgiveness of loans to the most hopeless economies. So the Treasury Secretary, who really runs the fund behind the scenes, has to talk a lot about reform to placate Congressional skeptics such as House Minority Leader Dick Armey. After all, serious men, former Secretary of State and Treasury George Shultz for example, have proposed to abolish the IMF outright, as swollen beyond any defensible purpose and doing more harm than good.

We ourselves don’t find reform entirely inconceivable. It should be humanly possible, after all, to stop giving bad advice and start giving good advice. A reformed IMF might stop telling lovelorn central banks that their currencies are “overvalued,” for example, and tell them that to defend their currency abroad they need to keep it sound at home. A reformed IMF might even recognize that money is fungible, and that money poured into Russia finances capital flight and wars in Chechnya.

These do not seem to be the kind of reforms Mr. Summers has in mind. He says, for example, that countries practicing a fixed exchange rate “should be expected to disclose the nature of their exit strategy.” This is precisely the advice that has caused such mischief around the world. Mr. Summers observed that Mexico in 1994 and Thailand in 1997 suffered “a sudden loss of confidence and large-scale withdrawal of capital,” until “a kind of bank run psychology took hold.” The confidence in question is confidence in a currency, and you lose it the moment investors start to whiff an “exit strategy.”

For all Mr. Summers’s talk, the only concrete sign of reform at the IMF is the departure of Michel Camdessus, who had repeatedly urged the Thai devaluation. The leading candidate to succeed him seems to be Caio Koch-Weser, deputy finance minister in Germany’s socialist regime and a long-time World Bank bureaucrat. We would be much more complacent about reform with our own original suggestion of Bank of France Governor Jean-Claude Trichet. But to judge by Mr. Summers’s speech, real reform may have to wait for a new Treasury.

Even sounder economics, though, would not solve the problem of a new role for the IMF. We have a suggestion. The most salient fact in the international economy is that the world now has three main currencies — the dollar, the euro and the yen — which among them account for more than 90% of cross-border international transactions. The euro began life nearly a year ago at a robust 1.18 to the dollar, but has lately been hovering around 1.00. The yen meanwhile is closing out the millennium in bullish fashion, trading at 103 to the dollar vs. a 12-month low of 124.

It occurs to us that the world could use a good debate on whether this amount of volatility actually reflects real-sector fundamentals or promotes good allocation of resources. On whether central banks ought to keep an eye on exchange rates, not in useless “intervention” in foreign exchange markets, but in setting basic monetary policy. At the moment, that is, whether it would be wise for the Bank of Japan to print more yen and/or the European Central Bank to print fewer euros.

These are the issues raised by Robert Mundell in his Nobel Prize lecture last week, and the IMF and for that matter the Treasury could probably do some good by offering some views of their own. Instead of rearranging deck chairs, at the very least they would be advancing reform by elevating the relevant issue.

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