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The Bankrupt Theology of Financial Deregulation

The IMF is, or should be, the world's financial watchdog, and many believe that it failed to foresee the recent crisis because it was distracted or looking in the wrong places. But the real problem is that the IMF was too ideologically blinkered to be able to interpret the evidence sitting right under its nose.

GENEVA – Now that the global financial crisis is abating, it is time to take stock of our mistakes and ensure that they are not repeated. Beyond regulatory improvements, preventing payment incentives from rewarding reckless risk taking, and building Chinese walls between originators of securities and rating agencies, we need to discover what made this crisis so difficult to predict.

The International Monetary Fund is our global watchdog, and many believe that it failed to foresee the crisis because it was distracted or looking in the wrong places. I disagree. The problem is that the IMF was unable to interpret the evidence with which it was confronted.

I served on the IMF Board in June 2006 when it discussed its annual review of the United States. The staff “saw” the relaxation of lending standards in the US mortgage market, but noted that “borrowers at risk of significant mortgage payment increases remained a small minority, concentrated mostly among higher-income households that were aware of the attendant risks.”

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