It’s puzzling that Timothy Geithner has asked the International Monetary Fund (IMF) to be the world’s economic watchdog for signs of the next investment bubble.
That’s because the IMF completely missed the last one.
To make matters worse, according to a recent paper from The centre for Economic Policy and Research (CEPR), they even mismanaged their policy towards developing countries at the height of the financial crisis.
This despite the organisation having one of the largest economic research departments in the world.
CEPR: In many cases the Fund’s pro-cyclical policies were based on over-optimistic assumptions about economic growth. For example, of the 26 countries that have had at least one review, 11 IMF reports had to lower previous forecasts of real GDP growth by at least 3 percentage points, and three of those had to correct forecasts that were at least 7 percentage points overestimated. Most likely there will be more downward revisions to come.
Thus the IMF promoted overly restrictive policies in many developing countries due to over-estimating future economic growth. We wish the IMF could have done the same for the U.S., where restrictive policy seems to be light years away.
While the CEPR’s criticism may be a bit harsh, since most organisations missed the timing of the crisis, highlighting the IMF’s failings raises a broader point.
We shouldn’t expect any large organisation to save us from the next bubble, since even the largest institutions missed the last one. Hopefully Mr. Geithner was just being polite.
CNBC: “The IMF will need to be a truth-teller,” Geithner said in the remarks, which were to be delivered by Treasury Acting Assistant Secretary Mark Sobel.
“For the IMF, this means that rigorous surveillance must help us shed light on trends that could lead to the next unsustainable boom,” Geithner said.