The Fund that Cried Wolf?

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.”

But the most remarkable misjudgment appears in the discussion of credit risk transfer. The IMF concluded that “a wider dispersion of credit risk has derisked the financial sector.” As a result, “banks should become more resilient and financially stable,” the consequences of which “should be seen in fewer bank failures and more consistent credit provision.” We have entered an era in which “commercial banks may be less vulnerable to credit or economic shocks.”