The Moral Hazard of IMF Expansion

Mr. Speaker, today the President called for a further expansion of the International Monetary Fund. He repeated his audacious request that Congress provide $18 billion to the IMF with no conditions and without first requiring IMF reform.

It’s time for some presidential accountability–in this area as much as others. We need to recognize that it was the Clinton Administration’s own policies that accelerated the financial collapse overseas that is threatening the US economy today.

For Congress to simply endorse those policies through the full funding of an unreformed IMF would be recklessly irresponsible. If the President will not — or, as yet another consequence of his diminished leadership, cannot — bring about real changes in international financial institutions — then Congress must supply leadership in his place.

The IMF proposal actually serves to illuminate a major policy departure that has developed largely unnoticed by Congress, press, and public — unnoticed, that is, until it was too late. I call it the Clinton Doctrine.

It is a policy under which virtually any groupings of bankruptcies anywhere in the world is eligible for a bailout by American taxpayers.

This has inflamed what economists call “moral hazard.” By covering bad investments, the Administration has encouraged irresponsible behavior. The financial disasters overseas are in large part a direct consequence of this.

To make matters worse, once the financial collapses occurred, the IMF — presumably with the President’s blessing — imposed catastrophic contractionary policies on the affected countries. Even Keynesians know that you don’t raise taxes in a recession, and yet that’s exactly what the Clinton-guided IMF often proposed. As Larry Lindsey put it, these policies have become our own era’s equivalent of the Smoot-Hawley Tariff.

In fairness to the President, he did not initiate this policy of global bailout, which we’ve been drifting towards for some time. His role has been to sanction it, legitimize it and take it to new and unprecedented levels.

Beginning with the 1995 bailout of Mexico, continuing with the multiple bailouts of Asia, and reaching its inevitable culmination in the farcical bailout of Russia this summer, the Administration has undermined market discipline and helped to create the very crises it was ostensibly trying to prevent.

The IMF under the direction of the Clinton Administration helped cause the problem. Then the IMF made it worse. Now it is making it more difficult for the world to recover.

The IMF has the Midas touch in reverse — virtually every country it tried to help has become worse off from the experience.

In Korea today, children made homeless by the continuing recession are bitterly referred to as “IMF Orphans.” Our friends in Korea know, as many in the Clinton Administration do not, that the IMF is largely responsible for their continuing economic difficulties.

Congress must reverse this Clinton Doctrine that has helped bring the world economy to its current state.

A positive step would be to restrain the IMF by deferring a decision on providing the huge $14.5 billion quota increase. This is essentially the House position contained in the Foreign Operations Appropriations bill. Delaying a decision on the IMF money would allow us time to hold an international conference and other meetings to improve the world financial system. The disasters we see overseas are clear evidence that the current arrangements have failed. Rather than pump more money into them, we need to redesign them. We need nothing less than a New Bretton Woods conference. Only then can we make an informed decision on giving away $14.5 billion of our taxpayers’ money for these purposes.

Now, many — including many in this House–say that we should give the IMF money upfront in exchange for “real IMF reforms.”

What they don’t understand is that the Administration and the IMF are adamantly against any US-imposed reform. As the French director of the IMF arrogantly put it last week, “The US must bring its contribution and no country is entitled to impose conditions.”

The most the Administration and other IMF supporters will accept are weak suggestions from us. The reform provisions in pending IMF bills, for instance, are little more than sense-of-Congress resolutions.

So–if Members are serious about doing a money-for-reform trade, I suggest they adopt this principle to start with:

No IMF reform is real IMF reform unless the IMF adopts it before it receives any additional money from the US.

This, in my judgment, is plain common sense. We don’t give away $18 billion of our taxpayers money on the strength of a promises or assurances. Any reform provisions that don’t meet this principle should be rejected out of hand.

What should those reforms involve? If our aim is to reverse the destabilizing influence that the IMF has on the world’s financial system, we should insist on these:

  1. Real Transparency Requirements. This will allow us to open the IMF books and judge the value of its advice and the effectiveness of its programs.
  2. A ban on the IMF offering below market interest rates. This will address the moral hazard problem. Countries that need liquidity would still be able to get loans from the IMF, but they would not be able to get them at heavily subsidized rates.
  3. A one-year limit on all IMF loans. This will return the IMF to its original role as a lender of last resort and will move it away from restructuring entire economies. Countries facing currency exchange problems will still be able to get needed cash. But the IMF will no longer offer five-year plans full of Herbert Hoover economic policies.

I’m not naïve, Mr. Speaker. I can count votes and I know this is an uphill fight. But it’s one we must make even in the waning days of this Congress.

In the end, Mr. Speaker, it comes down to first principles. My Party believes in Freedom and Responsibility. Guided by those values, we have resisted the statist temptation and instead led America into this era of limited government and broad prosperity. How can we then acquiesce in a plan to vastly expand an international agency that covers other peoples’ bad debts and undermines free market processes the world over?

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