Simon Johnson's fascinating article about the financial crisis has been making the rounds; in it, Johnson draws on his experience as former Chief Economist of the International Monetary Fund to compare the U.S. financial crisis to similar events in emerging markets and comes up with a lot of disconcerting similarities. He concludes that the U.S. political system has been captured by the financiers and free market ideology, and lacks the incentives that would allow politicians to sacrifice banks and rebuild the economic system. I've got some quibbles with that conclusion, but here's a question: When did the IMF's ideas become so valued, especially on the left? I'm no expert on the IMF, but looking over the list of successful IMF interventions in the nineties that Johnson sees as models for the America's current quandary, I see a list of events that have been roundly criticized by many left-leaning economists, perhaps most famously by Joseph Stiglitz and Dani Rodrik. The central critique, ironically enough, is that the IMF was captured by the free-market ideology of Wall Street financiers and run in such a way as to benefit Western economic elites, and that their policy making was characterized by little regard for the citizens of countries that received IMF attentions. In fact, typical IMF policy called for austerity measures that liberals roundly reject now as contributing to the recession, and the list of free market measures that Johnson decries in his piece could have come have been lifted from a list of IMF recommendations to an emerging market economy in crisis. It's also my understanding, though, that the IMF has evolved in recent years, and Johnson worked there only in 2007 and 2008, so perhaps things have changed. But the increasing common meme that if only the U.S. policymakers adopted an IMF-style approach to the economic crisis, we'd be fine, seems to be overly reductive and not really in keeping with the IMF's record. Johnson recommends nationalizing troubled banks in his piece, but he doesn't offer any examples of the IMF actually having client governments nationalize banks and what the consequences of those decisions were. A key insight that Stiglitz offered in his commentary on the IMF is that the institution tends to impose the same solution on every economic crisis without carefully considering underlying complexities. Johnson concedes that early in his piece, and proceeds to offer a general solution. But a wiser idea would be to approach these problems as unique events and tailor the solution to them. Johnson's first suggestion -- government seizure of insolvent banks that leads to receivership -- is in theory a good idea, but also a $1.5 trillion idea and one that will likely come with a lot of unintended consequences that remain unconsidered in the piece. His other idea, breaking up the big banks, is wise and will hopefully gain a constituency in the wake of the crisis, but it speaks to long-term concerns, not short-term recovery. Johnson's forecasts rely on some substantial generalizations. He conflates the policy making of the lame duck Bush administration with that of the first months of the Obama administration, and fails to recognize, as others have, that the U.S. is moving relatively quickly, especially compared to the Japanese example, to take action in the financial sector. The administration is trying to put in place a systematic approach to the crisis to prevent the bail-out muddle Johnson predicts. What the policy now looks like is steady movement towards getting assets moving again and identifying the specific solvency problems that will require more aggressive intervention. Johnson doesn't believe that deliberate and decisive can go hand in hand, but the only way for the government to enact his suggested policies is to get legal authority from congress, which takes time, and demonstrate that programs like the Public-Private Investment Program aren't enough to pull the economy in line. The piece's value, then, isn't as a short-term analysis, but instead in its depiction of how we got where we are, and especially the dangers of an over-large financial sector that will have to be dealt with in order to prevent a future crisis. Smart Comment Update: Do read nadezhda in the comments for some useful observations and clarification.
-- Tim Fernholz
