nettimes_roving_reporter on Mon, 4 Oct 1999 03:19:50 +0200 (CEST)

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<nettime> US to IMF: "Thanks for the 'advice'..."

Subject: WSJ (fwd) US to IMF: "Thanks for the 'advice'..."

Wall Street Journal - September 30, 1999


By Michael M. Phillips
Staff Reporter Of The Wall Street Journal

WASHINGTON -- Which country has received the worst economic advice
from the International Monetary Fund over the past few years? South
Korea? Russia? Brazil?

Think again. It might be the U.S.

Just as they do for every member nation from Mozambique to Pakistan,
IMF experts give the U.S. economic team an annual once-over. Every
year IMF chief Michel Camdessus sits down to lunch in the Fed's
executive dining room and coaches U.S. Federal Reserve Chairman Alan
Greenspan on interest-rate policy. Time and again in recent years,
the IMF has laid out an aggressive game plan -- the Fed should boost
interest rates to stave off the threat of inflation.

Time and again, the Fed has nodded politely and, for the most part,
left interest rates alone. And for the last few years, the U.S.
economy has continued to hum along.

Diplomatic Terms

"I wouldn't say" IMF advice "has a heck of a lot of weight -- I
wouldn't say it's ignored either," one U.S. official observes

A less diplomatic version of the play: Camdessus to Greenspan to trash can.

The annual ritual highlights one reason the IMF, the international
financial fireman, is in such political trouble in Washington these
days. The IMF's track record, particularly in scandal-ridden Russia,
has made it an irresistible target for Republicans jostling for
position in the 2000 presidential race. Right or wrong, critics think
the IMF gives bad advice. And, they say, if it can't give sound
advice to the U.S., what hope is there for the poor countries that
count on the IMF's steady hand?

"The prescriptions they recommend are almost uniformly bad," says GOP
presidential hopeful Steve Forbes, who plans to call for the IMF's
abolition on Monday in Bretton Woods, N.H., where the institution was
born in 1944. "They're like Typhoid Mary. Wherever they go, riots and
depression seem to follow."

Certainly, that's hyperbole. To be fair, many economists think the
IMF has prescribed harsh, but necessary medicine, particularly during
the global financial crisis that started in 1997. And the IMF hasn't
been alone in urging the Fed to raise rates in recent years. Many
Wall Street economists also believed that tight labor markets would
eventually push up wages and prices and force the Fed's hand. At
times it has seemed as if Mr. Greenspan was in the minority in his
belief that technology had made workers so productive that companies
could raise wages without jacking up prices.

In fact, the IMF has hit its share of bull's-eyes. Like when Mr.
Camdessus pushed the U.S. Treasury -- as he began doing even when it
made the Clinton administration uncomfortable -- to get rid of the
federal budget deficit. And the Heritage Foundation, a conservative
think tank, just completed a study showing that the IMF's economic
forecasts for the U.S. have largely been on target.

"The advice with respect to the U.S. has been remarkably close to
what the policy has been," says Michael Mussa, the IMF's chief

Opposite Tracks

Perhaps. But at key junctures over the past few years, the IMF has
urged the Fed to move in one direction, and Mr. Greenspan, following
his instincts, has headed in the other.

Take July 1997, just weeks after the Thai baht collapsed and sparked
what was to balloon into a full-fledged global financial crisis. On
July 28, the IMF board of directors, including representatives of
Russia, China and Japan, gathered at their Washington headquarters to
discuss the U.S. economic outlook. Many of the directors advocated "a
further, moderate and pre-emptive tightening" of credit policy to
forestall inflation, according to an official summary of the meeting.

The Fed, which had already raised rates by one-quarter percentage
point in March, rejected their counsel and kept the federal-funds
rate steady at 5.50% for more than a year and a half.

The issue arose again in the first half of 1998, as the financial
crisis spread, threatening Russia. That May, Mr. Camdessus told an
audience in Australia that America would "have to move soon, rather
than later -- the question is to know when." Again, the Fed paid no

On Aug. 3, 1998, two weeks before Russia devalued the ruble and
defaulted on its domestic debt, sending financial markets into panic,
the bulk of the IMF board "noted that a tightening of monetary
policies could well be needed" in the U.S.

Fed policy makers again held their fire when they met on Aug. 18, a
decision that in retrospect looks almost Solomonic. After the Russian
implosion and the near-collapse of U.S. hedge fund Long-Term Capital
Management, credit markets in the U.S. and abroad seized up, and
officials feared that all but the most secure corporate borrowers
would be cut off from financing. The IMF quickly recognized the
danger and changed course, urging rapid interest-rate cuts in the
U.S. and Europe. This time, the Fed went along, and lowered rates
three times in quick succession.

Just last week, Mr. Mussa issued the IMF's latest advice: "Interest
rates probably will need to become a little bit firmer next year."

He will find out whether the Fed agrees with this assessment on
Tuesday, when the central bank's policy committee meets to discuss
interest rates.

But, if U.S. policy makers disregard the IMF's advice so often, why
does the IMF continue to offer it? The answer is that the
organization doesn't want to appear to give special treatment to any
one of its 182 member countries. If Ecuador has to sit through IMF
lectures, then the U.S. has to as well, the thinking goes.

Of course, small, poor countries that borrow money from the IMF don't
have the luxury of throwing its advice into the Dumpster. They have
to follow IMF advice or, like a tycoon dealing with a ne'er-dowell
heir, it will cut them off. And the U.S. Treasury, even though it
ignores the IMF's counsel itself, is usually first to insist that
developing countries toe the IMF line.

Wrongheaded Orthodoxy?

The IMF's missed calls haven't escaped the notice of its growing
phalanx of critics in Congress. The IMF leans toward wrongheaded
economic orthodoxy, Rep. Barney Frank told then Deputy Treasury
Secretary Lawrence Summers, when he cornered Mr. Summers on the issue
at a congressional hearing a few months back. And there's no better
example, the acerbic Massachusetts Democrat added, than the advice
the IMF has given the U.S.

"I'm glad the last two times the IMF told America to raise interest
rates, the Federal Reserve didn't pay attention," Mr. Frank said.
"You get a reputation for being responsible in the financial world by
the ease with which you bear the pain of others." That pretty much
sums up the IMF, he concluded.

Mr. Summers, who now is Treasury secretary, did some verbal
shuffling, then admitted: "I don't think that advice would
necessarily be judged to have been the best advice."

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