Role Of The Imf During The 2008 Recession

ROLE OF THE IMF DURING THE 2008 RECESSION

PABLO SANZ RODRÍGUEZ Student no. 10059349 MNP090FE – GLOBAL CONTEXT OF BUSINESS March 2011

ABSTRACT This paper pretends to analyze in depth the actions taken by the International Monetary Fund (IMF) in order to help its members fight the current crisis. It also explores the successes and failures of the IMF detecting the signs of the events thatled the world to the situation of recession. The main conclusion is that the IMF has the necessary experience and support for becoming the global monitoring arbitrator that the world is missing. The analysis has been divided into 2 sections: the behavior of the IMF before the collapse of the financial system that led to the current economic recession, and its role after the beginning of the crisisfocusing on the future of the institution.

KEYWORDS: IMF, recession, corrective measures, monitoring functions, oil price, subprime mortgages

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TABLE OF CONTENTS 1. INTRODUCTION………………………………………………………………………....1 2. FORESEEING THE CRISIS: WHAT WENT WRONG……………..…………………...2 3. ROLE OF THE IMF DURING CRISIS PERIODS…………………...…………………...5 4. CONCLUSIONS………………………………………………………………..…..……….7REFERENCES….……………………………………………….……………………………..9

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1. INTRODUCTION The International Monetary Fund (IMF) was created in 1945 as one of the main successes from Bretton Woods, and this institution soon gained the respect of most countries. Nonetheless, the switch from fixed to variable exchange rates since 1971 and its role during the crisis of Mexico and Asia during the last 2 decades, butparticularly during the current financial and economic recession have raised some questions about its lack of vision to foresee what was coming, and specifically about the negative impact of its corrective measures. The current crisis has been compared by authors like Eichengreen and O’Rourke (2009) with the Great Depression of 1929. National Bureau of Economic Research (NBER) research associate and expertAnna. J. Schwartz (2008) even suggested that “The IMF is weak on crisis prevention. It says it warned Asian countries and Russia against bad policies, but they rejected its advice. If the moral authority of the IMF as a source of sound advice cannot win the respect of its client members, it is in the wrong business. Reform of the IMF is not the answer. It should be shut down.”

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2.FORESEEING THE CRISIS: WHAT WENT WRONG In an interview for IMF Survey in September 2008, months before the start of the financial crisis, chief economist of the IMF Olivier Blanchard answered the following when asked about the macroeconomic challenges affecting the global economy: “If the price of oil stabilizes, I believe we can weather the financial crisis at limited cost in terms of real activity” (IMF,2008). During the interview he expressed his certainty about the low risk of entering into an economic shrinking period. A look at graphic 2.1 shows that the price of oil did not fluctuate excessively during the end of 2008 and the beginning of 2009, yet his predictions failed to reflect the scope of the current recession.
Graphic 2.1 WTI crude oil price 2006-2011 (US dollars)

Source:OIL-PRICE.NET, 2011

A devastating report created by the Independent Evaluation Office of the IMF and published in January could not be clearer. The main conclusion reached is that the IMF failed to transmit a firm warning to its members even if the evidences found were enough to justify the alert. Vulnerability simulations were introduced after the Asian crisis, but they did not include any advancedeconomy, thus ignoring the risks of a worldwide recession (IEO, 2011). The official position was optimistic about the soundness of all major financial companies and institutions, and it was defended even weeks before the collapse of Lehman Brothers.

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Graphic 2.2 shows the percentage of countries that owed money during the last 200 years (from the Napoleonic Wars to the current recession)....