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Show International Monetary Fund Reform Corbin Cowley loans, it usually focuses on narrow accounting measures-currency devaluation, for example-that often bring borrowers' economies to a halt. Doug Bandow (1998), a senior fellow at the Cato Institute, feels that the IMF lends too easily. He says, "the Fund is shamelessly eager to lend; it responded to Indonesia's recalcitrance by promising 'considerable flexibility' and by constantly renegotiating its loan agreement." Calomiris (1998) adds to this, "if foreign investors are protected by the IMF, they will be less discriminating about where they place their funds and thus provide less of an incentive for reform in developing economies." The IMF is Not Acting as a True Lender of Last Resort The IMF seems to be acting more like a lender of first resort than of last resort. The IMF had financial arrangements worth over $38 billion with 58 countries as of January 31, 1998 (IMF 1998). The IMF is currently giving financial assistance to a third of its entire membership, which is a quarter of the world's nations. Fuelner asks if we are seriously to believe that every one of these 58 countries is in such dire financial straits that it is unable to secure private loans or investment, obtain foreign exchange through exports, or cut government expenditures sufficient to meet its debt obligations? Or that they are incapable of negotiating debt terms with their creditors? The very fact that they are in debt indicated that they were able to secure credit (Fuelner 1998, 8). Wolf (1998) says about the lender of last resort problem, the argument for an international lender of last resort and official supplier of liquidity in a panic rests on two pillars. That financial markets are prey to herd behavior that can create all sorts of outcomes, good or bad, generated by self-fulfilling expectations, and in a world of extreme exchange-rate variability, panics threaten whole countries, not just financial institutions within them. He also says that the lender of last resort is the obvious solution [to the current financial crises]. Such a lender would stand ready to provide liquidity in support of any country deemed structurally sound that was running out of reserves or was suffering a currency collapse. But if this is the demand, the IMF cannot meet it. IMF bailouts are small in relation to the sums that can rush into or out of countries without controls. The Fund also phases the release of its money in tranches [a series of installments the IMF lends through various financing facilities] in order to monitor conditionality. In consequence, the IMF cannot stop a panic. On the contrary, its arrival often signals crisis, while the small pot of money it offers is an inducement for creditors to rush for cash before it runs out (Wolf 1998). A Recent Case of IMF Failure The performance of IMF over the Russian package was poor at best. The IMF rushed to assemble a $22 billion package for Russia, supposedly conditional on the Russians suddenly discovering how to collect taxes to replace the $5-6 billion per month that they had been borrowing from the global financial markets. When the initial $5 billion tranche from the IMF was dispensed to Russia after July 13, 1998, Russian oligarchs, anxious to convert rubles into hard currency, immediately used the loan money for their own purposes. The Russians then expected to receive more funds from the IMF by threatening devaluation and default. Even the IMF saw that further funds would simply be consumed by the same clique moving funds out of Russia, and the Russians unilaterally devalued and defaulted (Makin 1998, 2). The Russian episode is hardly an example of free market operation and free and unfettered flows of capital. The IMF essentially expropriated resources provided by industrial countries and irresponsibly allocated those funds to a country that had absolutely no hope of meeting the conditions allegedly attached to the IMF program. Russian technocrats such as Anatoly Chubais openly chortled to the Russian press that they had "conned" the IMF and its chief negotiator, Stanley Fischer. The Russian episode, not to mention the IMF performance in South Korea, Indonesia, and Thailand, reflects the actions of people who face no accountability for their performance. If the IMF managing director and deputy managing director had been managing funds in the private sector in the same way, they would have long ago been bankrupt and forced out of business (Makin 1998, 2). In a luncheon that the author attended in Washington, DC on September 9,1998, Dr. Andrei Illarionov, the Director of the Institute of Economic Analysis, and Former Chief Economic Advisor to Former Russian Premier Victor Chernomyrdin, spoke on what happens when the IMF gives money to the Russian government. The government has ties to oligopolies, which are owned by corrupt individuals who end up getting the money. He said that the government consumes about 60 percent of the GDP. None of the money is used to boost the economy and help the people. "The shelves are almost empty in the stores. . . . There is an element of hunger," he said. He also mentioned that IMF packages are based on wrong economic information. Dr. Illarionov states that the IMF should not raise expenditures, but raise revenue instead. He ended his speech by saying very emphatically, "stop the financial system, the only thing that it is doing is spoiling the Russian leaders" (Illarionov 1998). Ideas for Reforming the IMF Many long term solutions are being proposed aimed at managing financial crises better. All focus on reducing the volatility present in the international capital markets, and establishing guidelines or conditions for unsound financial management before the onset of crisis and attendant need for IMF rescues. A major component that is absent from the global financial system, and hence the subject of numerous research efforts, is credible financial regulation. What makes the Federal Reserve System a viable lender of last resort in the 20 |