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The IMF’s False Confession

PRINCETON – “Do I have to go on my knees?” the International Monetary Fund’s managing director, Christine Lagarde, asked the BBC’s Andrew Marr. Lagarde was apologizing for the IMF’s poor forecasting of the United Kingdom’s recent economic performance, and, more seriously, for the Fund’s longer-standing criticism of the fiscal austerity pursued by Prime Minister David Cameron’s government. Now endorsing British austerity, Lagarde said that it had increased confidence in the UK’s economic prospects, thereby spurring the recent recovery.

Lagarde’s apology was unprecedented, courageous, and wrong. By issuing it, the IMF compromised on an economic principle that enjoys overwhelming academic support: The confidence “fairy” does not exist. And, by bowing to the UK’s pressure, the Fund undermined its only real asset – its independence.

The IMF has dodged responsibility for far more serious forecasting errors, including its failure to anticipate every major crisis of the last generation, from Mexico in 1994-1995 to the near-collapse of the global financial system in 2008. Indeed, in the 6-12 months prior to every crisis, the IMF’s forecasts implied business as usual.

Some claim that the Fund counsels countries in private, lest public warnings trigger the very crisis that is to be avoided. But, with the possible exception of Thailand in 1997, the IMF’s long-time resident historian, James Boughton, finds little evidence for that view in internal documents. The IMF’s Internal Evaluation Office is more directly scathing in its assessment of the Fund’s obliviousness to the US subprime crisis as it emerged.