Time to Rein in Global Finance
The public dialogue among establishment figures started on a hopeful note, with sober pleas for "a new architecture" from Bill Clinton, Treasury Secretary Robert Rubin, Tony Blair of Britain and many other influentials. Since then, the discussion has steadily narrowed and is now reduced to a single question: how to reform the International Monetary Fund and the World Bank, as if those international financial institutions (the so-called IFIs) are the only problems to fix. What's left aside is the private, deregulated marketplace of global investing, lending and speculation that actually generates the instabilities and gross injustices. There are a couple of significant exceptions I will mention, but the general drift of respectable opinion is toward doing as little as possible--and doing nothing that might upset the bankers and financiers.
In Washington, the reform debate has been hijacked by the free-market right-wingers in Congress and elsewhere, who propose to eviscerate the IMF and the World Bank, severely reducing the scope of their lending and their authority to intervene in crises. The loan windows would be effectively closed to most poor nations, and discretionary decision-making would be replaced with fixed and very conservative rules. The right portrays the fund and the bank as out-of-control bureaucracies that have stealthily accumulated functions far beyond the original purposes of the Bretton Woods agreement that created them a half-century ago. In the reconstruction following World War II, the IMF's initial role was to be the mediating agency that insured stable, fixed currencies. The World Bank did investment lending to rebuild war-devastated economies and to help poor countries begin development. It is certainly true that in recent decades, both institutions have been transformed and both often make things worse for countries they are supposedly helping, imposing on them the conservative economic dogma known as the "Washington consensus."
But the right-wingers make an additional complaint: The IMF actually causes financial crises--by encouraging investors to take imprudent risks in the belief that the IMF will come to their rescue with a bailout--and its functions must be sharply limited. Among their fanciful claims, the right-wingers promise that if another major financial collapse does occur, the IMF will be prohibited from executing the kind of big-package bailouts employed for Mexico in 1995 and Southeast Asia in 1997.
The right-wingers' anti-IFI message appeals to many social activists on the left, and some have signed on to the conservative agenda on the assumption that anything that weakens the IMF and the World Bank is a big step in the right direction. I share their critique of the IFIs, but their logic seems to me quite naïve about the actual power relationships in the global system. I suspect they may come to regret making common cause with the likes of Senator Phil Gramm, who, as conservative chairman of the Senate banking committee, can do great damage under the banner of reform.
The right wing's prescriptions are contained in the recent report from the International Financial Institution Advisory Commission, created by Congress in 1998 to critique the IFIs and recommend changes (the chairman is Professor Allan Meltzer of Carnegie Mellon, a hard-money disciple of Milton Friedman who regularly scolds the Federal Reserve for being too lax). Treasury Secretary Lawrence Summers, perhaps anticipating the right's line of attack, has called for a moderate scaling back, but Harvard economist Jeffrey Sachs is providing liberal cover for the right-wingers. A leading IMF critic and Democratic appointee to the IFI commission, Sachs enthusiastically endorsed the conservative recommendations (while privately assuring friends that he disagrees with the more odious elements).
At the risk of sounding soft on the IFIs, I observe that the right has grossly rewritten recent history in order to blame them and absolve private capital. The IMF and the World Bank have indeed expanded and contorted their purpose enormously over the past two decades, but in every important instance they've done so at the behest of the US Treasury, responding to urgent demands from private banking and finance, mainly the major US banks and brokerages. In the Third World debt crisis of the eighties, IFI lending assisted the massive, silent bailout of leading banks like Chase and Citicorp (now Citigroup), which allowed private banks to back out of huge portfolios of failed loans yet left the indebted countries of Latin America in even worse shape (a negative wealth transfer, from poor to rich, totaling $116 billion). In the nineties the $50 billion bailout of Mexico was engineered by Rubin and Summers, not the IMF, which as always followed Treasury's orders (a rescue for the customers at Merrill Lynch and Goldman Sachs, among other firms). The Asia and Russia bailouts were likewise driven by US policy-makers and financiers. The IFIs are agents of global capital, not the masters.
If the two Bretton Woods institutions were abolished tomorrow, the punishing chaos and inequities in global finance would continue--and might be amplified by panicky investors--since these disorders originate in financial markets, driven by powerful private interests and their self-serving doctrine of lawless free markets. The right-wingers, along with Jeffrey Sachs, are being cute when they pretend to recommend no more bailouts. As they well know, if the next crisis is large and threatening enough, the IMF, World Bank, Fed and other major central banks will again intervene as lenders of last resort--regardless of anybody's promises--since "letting nature take its course" might risk a total meltdown.