NEW YORK – Before the crisis of 2008, the International Monetary Fund was in decline. Demand for loans was low, leaving it short of revenue. Asia remained leery of the Fund a full ten years after the currency crises of the late 1990’s. Its analytical talents remained high but downsizing placed them at risk.
The crisis changed all that. It became clear that the IMF has a crucial role to play in dealing with crisis-induced instability. Moreover, because of the Fund’s broad and deeply embedded multinational expertise, its activities are central to achieving globally cooperative solutions to economic and financial problems. Without such solutions, the system will tend to become periodically unstable, and to go off on unsustainable paths that end destructively. We have just lived through one of these episodes.
The IMF is needed for several key purposes. One involves crisis response. In a global financial upheaval like our most recent one, capital flows shift abruptly and dramatically, causing credit, financing, and balance-of-payments problems, as well as volatile exchange rates. Left unattended, these problems can cause widespread damage in a wide range of countries, many of which are innocent bystanders.
The system needs circuit-breakers in the form of loans and capital flows that dampen the volatility and maintain access to financing across the system. A well capitalized IMF, much better capitalized than pre-crisis, should be able to fill this backstop – similar to what central banks do (and did in the crisis) to prevent a credit freeze and the inevitable and excessive economic damage that would result.