NPR, the IMF, and the Global Savings Glut
The Obama administration is having a tough time getting its request for $108 billion for the IMF through Congress. Bank bailouts are rapidly losing popularity. And bailouts of foreign banks are probably even less popular than bailouts of U.S. banks.
But, NPR is rushing to the rescue. It had a piece this morning telling listeners that it was important to get the IMF more money to help the poor countries of the world. The piece never mentions the fact that the bulk of the IMF lending at present is going to East European countries, not the developing world.
The basic problem is simple. The West European bankers proved to be every bit as stupid as the Robert Rubin-Citigroup crew in dishing out loans. The main outlet for their bad loans was Eastern Europe, where they made enormous loans denominated in euros.
It is very difficult for the countries of Eastern Europe to maintain their exchange rates against the euro without large amounts of assistance. However, if they let their currencies fall against the euro, then the default rates on the loans from Western European banks will explode.
Of course West Europe is rich enough to bail out its own banks, but the governments in countries like France and Germany know that their people will not stand for this sort of handout. In steps the IMF, with a big assist from NPR, which managed to not even mention East Europe in the piece.
NPR made one major misrepresentation that is worth noting. It referred to a "global savings glut" which it attributes to developing countries' fears that the IMF won't have enough resources to bail them out in a crisis, and therefore their need to self-insure. WRONG!!!!!!
Developing countries only began to accumulate massive amounts of foreign exchange (i.e. savings) after the East Asian financial crisis in 1997. There was no talk at the time about the IMF not having enough money. Rather, the explicit motive of most of these countries was to accumulate enough reserves that they would never need to turn to the IMF for a bailout.
The conditions that the IMF imposed on the East Asian countries, who had previously been the superstars of the developing world, were seen as being so onerous that other countries wanted to make sure that they never were forced to turn to the IMF for help. Therefore they deliberately kept their exchange rates under-valued so that they would run huge trade surpluses, which let them rapidly build reserves.
In short, the IMF's conduct was a major cause of the global imbalances that led to the current economic crisis. NPR turns history on its head in telling listeners that more support for the IMF is the solution.
I have to disagree with you on one point: eastern europe is decidedly part of the "developing world." Living standards are proof enough of that.
Still, not sure now is the best time for us to be sending a hundred billion overseas. Get me healthcare first.
June 16, 2009 9:00 AM | Reply | Permalink
June 16, 2009 9:35 AM | Reply | Permalink
Even when I disagree with Dean I don't think it's fair to characterize him as "making stuff up." Sometimes it's contrarian analysis, sometimes he sees what others don't (and sometimes he's wrong) but he's not pulling this stuff out of the air.
June 16, 2009 10:59 AM | Reply | Permalink
Maybe you're right. He can easily clarify matters by citing his sources. I could have asked him to do so in my first post, but I've had run-ins with him before and am less charitably disposed than you are.
June 16, 2009 11:07 AM | Reply | Permalink
Dean's assertion is a view commonly held by almost all economists.
The IMF's slavish implementation of the so-called Washington Consensus policies in response to the 1997 Asian Flu under pressure from Summers, principally (but Geithner, too) was seen by economically emerging countries as damaging to their economies. And yet, without adequate currency reserves they were unable to protect their capital markets and had to acquiesce to the IMF's procrustean demands (exception: Mahathir bin Mohamad).
After experiencing IMF "generosity" in 1997 it's unsurprising that the affected countries said to themselves "Never again!" and chose the path to make that hope a reality -- the acquisition of large current account surpluses.
June 16, 2009 3:48 PM | Reply | Permalink
Then I'm wrong.
I was aware of the criticism of the IMF. Stiglitz had very little affection for it. But I do like the writings of Simon Johnson.
How have the East Asians gone about acquiring large current account surpluses, or, putting it another way, what have they done differently post 1997?
June 16, 2009 4:56 PM | Reply | Permalink
Sorry, but your article does not justify that conclusion at all.
"WRONG!!!!!!"
It's quite possible that NPR put the wrong emphasis on a marginal issue. It does seem the article is supportive of funding the IMF. But what I see is that NPR says, "The current problems came about in part" when it should have said "The current *situation* came about in part" because the context is talking about why the IMF was being used less, becoming marginalized:
I think your beef with the IMF is that it is going to bail out Western European banks who own the debt of Eastern European countries denominated in Euros. If the EEs devalue the WE banks are screwed. So if the IMF supports the EEs it saves WE from having to further support WE banks.
The question you should ask and attempt to answer (you're a professional after all) is whether one or the other approaches (or a third option) is better overall.
And, do you agree that there is a savings glut? If there is such a glut, where is it invested?
June 16, 2009 4:16 PM | Reply | Permalink
A "savings glut" is Fed-speak for global trade imbalances, namely, exporters vendor-financing their importers.
Since the importing countries don't spend the entire moneys loaned them on further imports, it permits those importing countries to invest the difference in "malinvestments" which don't generate the income to pay back the loan and eventually, default.
Theoretically, the way out of the "savings glut" is for exporters to 1) let their currencies float upward (that is, become less globally competitive) and 2) redirect their profits toward investment in their own domestic economies.
June 16, 2009 8:08 PM | Reply | Permalink
Well...
"To be more specific, I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today. The prospect of dramatic increases in the ratio of retirees to workers in a number of major industrial economies is one important reason for the high level of global saving. However, as I will discuss, a particularly interesting aspect of the global saving glut has been a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders."
That doesn't quite agree with your assessment as I understand it. Yes, one can view situations from more than one perspective.
He seems to treat the current account deficit as if it's the trade deficit. Is that kosher here?
His "made in the U.S.A." exposition is pathetic. It seems to me that he was trying hard to use a lot of words to complicate something simple.
"one well-understood source of the saving glut is the strong saving motive of rich countries with aging populations"
Sure. Like the USA.
"This remarkable change in the current account balances of developing countries raises at least three questions. First, what events or factors induced this change?"
Sheesh. Those countries don't just decide to export capital, they are accumulating capital due to positive trade balances.
I gave up about there.
June 16, 2009 10:17 PM | Reply | Permalink