Comments, interventions, and things I wish I'd said.

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Back when I started out as an economist there were several years during which it seemed that most of the articles I wanted to write had, I discovered, already been written in the previous decade by Barry Eichengreen. He reports that when he started out he found himself subject to the same phenomenon--only with respect to Charlie Kindleberger. So I spent part of last weekend rereading Kindleberger's (1978) _Manias, Panics, and Crashes_, looking for places where Kindleberger had already said what I think before I thought it, and had expressed it better than I can.

I found a number of such places: Kindleberger's declaration that in the last analysis the making of international economic policy under such circumstances "is an art" and that that "says nothing--and everything." And there was Kindleberger's summary that the rescuer of the system, the "lender of last resort", "should exist... but his presence should be doubted.... This is a neat trick: always come to the rescue in order to prevent needless deflation, but always leave it uncertain whether rescue will arrive in time or at all, so as to instill caution in other speculators, banks, cities, or countries.... some sleight of hand, some trick with mirrors... because monetarist fundamentalism has such unhappy consequences for the economic system" when expectations converge on the "unfavorable" equilibrium.

Kindleberger's declaration that he does not wish to "contravert" the claim that the "presence of a lender of last resort weakens the self-reliance of the banking system and increases its likelihood of falling into excesses of overtrading, revulsion, and discredit," even though this argument "has overtones... that there is no use providing the poor with housing since they will only keep coal in the bathtub" and the possibility that the known existence of a lender of last resort causes expectations to converge on the favorable equilibrium: that it does not "increase speculation and overtrading" but "calms anxieties when overtrading occurs."

That finding the point of balance for all these conflicting issues and concerns is very difficult, and keeping the point of balance is almost impossible, is very clear in Kindleberger's "on the one hand... on the other hand" argument. That finding the point of balance is very difficult was also my thought on listening to Allan Meltzer this afternoon. This afternoon we have heard the Meltzer Commission Meltzer: the Meltzer who fears the growth of moral hazard, who thinks that large-scale lenders of last resort create by their very existence the crises they then are forced to handle, the one who believes that a lean IMF is a good IMF and that it is important that speculators fear mightily that they might get burned.

But if you read your _Financial Times_ last May 10, you would have heard a different Allan Meltzer, one who seeks a much larger and stronger IMF with enhanced powers. He proposed that the IMF commit in a crisis to buy any and all government bonds that private investors wish to sell, albeit at a discount to the IMF's estimate of their post-crisis market value. Sooner or later, however, in some crisis or other, the IMF's discounted estimate is going to turn out to be higher than the market's estimate. The IMF is going to need the resources to make good its commitment. And not even Stanley Fischer has asked for the IMF's funding to be topped up to the point where it could buy the entire national and provincial government debt of Argentina and Turkey, plus Brazil, Indonesia, and Korea--even at fire sale prices.

Meltzer's hope is that the commitment to buy will be enough, and so the last resort will never come. But history teaches us that when economies wish they wander off the subgame-perfect equilibrium paths that we economists love so dearly. The major financial institutions of New York had every economic incentive to carefully monitor and supervise what Long Term Capital Management, geared at 25-1, was doing with its portfolio in 1998: yet they did not do so. Those who bailed out of Mexican Tesebonos at the end of 1994 abandoned what turned out to be very attractive returns. And money managers who can explain today why they were selling Asian assets in January 1998 are hard to find.

So on the one hand we have Allan Meltzer of the Meltzer Commission, which believes that too many resources are devoted to crisis intervention and too much micromanagement of economies in the form of conditionality is imposed. On the other hand we have Allan Meltzer of the _Financial Times_, who wants many more resources at the disposal of the IMF so it can credibly commit to the mother of all rescue packages, and who calls for an IMF powerful enough to impose conditions on whom a government can repay and limit the contractual obligations a government can assume vis-a-vis its creditors. The _Financial Times_ IMF is a different organization than the current IMF, using different procedures to achieve the same goals, but it is also a much stronger IMF exercising more control over national governments that borrow from it than the IMF we have now. There is some intellectual schizophrenia here.

Now let me be clear: I am not criticizing this intellectual schizophrenia. I understand it. I share it. It is a necessary and inevitable consequence of any serious thought about this issue.

You are asking for trouble if investors in emerging markets begin talking about the "moral hazard play" or if investors in the S&P begin talking about the "Greenspan put." But it is desperately important to have a lender of last resort to put the situation right when the reasons that the economy has settled at the "unfavorable" equilibrium have less to do with economic fundamentals than with panic, revulsion, and discredit.

And the point of balance? It is an art, and that says nothing--and everything.

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