The IMF Put

The Baseline Scenario is a fine new economics blog albeit coming at things from the perspective of “The Ivory Tower.” It is great they put their thoughts out there though because those working in the markets can help them see things from the perspective of “The Markets” (and vice versa). That’s not to say either side has all the answers, but it is always good when smart people from different backgrounds interact with a common goal.

In a recent article, Simon Johnson points to an interview where he discusses the G20’s pledge of over $1 trillion to the IMF.

Here are some relevant quotes with my highlights in bold:

Johnson: The idea is that IMF loans are different from the past. In the past, you got an IMF loan when you were absolutely desperate. As the UK was in the middle of the 1970s. Now, the IMF is trying to reach out to countries with very very big loans. Ok. Much bigger than before. Before you get into trouble. And the point is, that’s the time to turn your policies around. And with all respect to Gordon Brown and his ministers, they need some help right now. Your economy, the UK economy, is in big trouble. I’m not saying the IMF is the magic bullet, but I think the IMF, the G20 is saying, and the G20, of course, a force mobilized by Gordon Brown for early warnings for coming in before it is too late, the IMF is telling you, the IMF is offering, let’s say, to be part of the solution rather than part of the problem. For all countries, and Europe is the place which really needs this assistance right now.

Snow: Previously, the IMF has moved in when countries go bust. This seems to presume, in some way the IMF could be proactive. Spot trouble in the early lines, and say, right, we’re coming in.

Johnson: Well, the IMF always spots trouble early on, I can assure you. Those messages are not well received by the people in power and the IMF is not welcomed. What the G20 is trying to do, and I think this is very much an initiative from the Obama administration, is give the IMF so much money, so much financial firepower, they can actually come in and give you a really big loan, not on a zero conditions basis, but on some pretty reasonable conditions that will give you some breathing space that allow you to ride through a big housing price collapse, for example, and some fiscal adjustment you’re going to have to make. So these won’t be the tough programs of the IMF of the old days which didn’t have that much cash so they had to really force you or help you force a fast adjustment. This can be a gentler, easier IMF, different strategy, a lot more money, but you still have got to get serious about sorting out your own economic house.

Snow: Simon Johnson, thank you very much indeed for talking to us. As you’re still here, Lord Mandleson, I don’t mean to bounce you, but he did say, I mean some of it can even come here.

Mandleson: Well, I don’t think we’re going to be top of the queue for IMF resources, but I think he makes an incredibly important point here. We are de-stigmatizing going to the IMF…

Snow: De-Callahan-izing.

Mandleson: Well, we’ve already heard Mexico today say they are going to draw on these reserves, these special drawing rights that are being created. Now, previously…

Snow: There is no shame going to the IMF anymore.

Mandleson: Previously, it was a bit embarrassing. It was slightly shameful to be going to the IMF. That I think is being eliminated from the new approach that is being put in place today and I think it is very very…

Snow: So there would be no shame in Gordon Brown going if it had to be done.

Mandleson: John, I don’t think we’re going to be at the top of the queue as I’ve said.

Snow: But you didn’t say we wouldn’t be in the queue, though.

Mandleson: I don’t think we’ll be in the queue either. But look, look at the seriousness of this. I mean, it’s absolutely right, in some countries in central and eastern Europe there is quite some distress. And it is true that some of the resources that are now being invested in the IMF will need to be targetted in Europe, but not Europe alone.

This is worrisome. Paulson’s Bazooka turned out not to be big enough to fix the US financial crisis, so now they are giving the IMF an ICBM. There should be stigma when getting bailed out. There should be punitive terms. Just because the IMF now has “a lot of money” doesn’t mean they should loosen their standards and loosen the terms and conditions. Just the opposite. They should treasure the new $1 trillion as if it was the last stack of ammunition remaining on the planet, as it may soon be. Easy credit was one of the primary causes of the current financial crisis and now we are about to offer easy credit on an international scale.

We need to let failed households feel the pain of over consumption, we need to let failed corporations feel the pain of overdependence on easy credit, and we need to let countries suffer for irresponsible policies. The IMF should be there, as it always has been, to impose harsh terms and conditions on any salvage mission. Just because they’ve been given a huge increase on their credit card limit does not mean they should reduce punitive lending conditions.

The Greenspan Put, became the Bernanke-Paulson Put, and when that was not good enough, we now have the IMF Put. When is it going to end?