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The Fund that Cried Wolf?

It would not be surprising if, even a decade on, the IMF continues to be influenced by its failure to warn in good time that a global financial crisis – the worst in nearly 80 years – was a material risk. Maybe that's why the Fund's latest annual financial stability report sees serious risks that don't exist.

LONDON – If you ask Google to find the text of the International Monetary Fund’s Global Financial Stability Report for April 2006, it helpfully asks whether you are really looking for the April 2016 version. I am sure the IMF would never seek to manipulate a search engine, but I imagine that the Fund’s public affairs officials are happy if as few people as possible can access the 2006 version. It was not one of the IMF’s most prescient publications.

Issued just as the first doubts about the subprime mortgage market in the United States were emerging, it presented a rosy view of the present and the future. The authors did address whether global imbalances, derivatives, and subprime mortgages posed a threat to financial stability. But they liked what they saw.

In the mortgage market, the IMF saw prospects of a soft landing. It believed that global imbalances would unwind gradually. And it paid tribute to the ability of US markets and financial firms to create innovative instruments to “attract and sustain high levels of capital inflows.” Indeed, US markets were described as “deep, flexible, sophisticated, and by and large well-regulated.”

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