Last March the Meltzer Commission--established by the U.S.
Congress as part and parcel of the legislation adding $18 billion
to the U.S.'s capital contribution to the IMF--issued its Report.
The press registered that the Commission had called for thorough-going
reforms of the World Bank and IMF. But it quickly dropped from
sight: the Report was more than 100 pages long. Much of
it was written in economese, that peculiar language that only
academic economists speak with fluency.
This is too bad, but not because the Report gave a
clear description of the current flaws in the IMF and World Bank
and laid out a straightforward roadmap for their reform--far
from it, for the Report is a confused document, riddled
with internal contradictions. But the Report's internal
contradictions mirror the dilemmas of global financial, monetary,
and development funding management. Understand the contradictions
within the Meltzer Commission Report, and you have a keen
grasp of the inevitable tradeoffs and unresolvable dilemmas placed
on global managers by our highly idiosyncratic and vastly imperfect
global economic structure.
What are these contradictions? Consider the Report:
First, the Commission approves of the overall principle of
lending to solvent but illiquid governments--governments that
will repay their loans in the long run but cannot borrow private-sector
money in the short run, yet condemns the IMF's 1995 loans to
Mexico, the most recent clear example of this practice.
Second, the Commission assigns the IMF the role of lender
of last resort in international financial crises, but fails to
give it the resources needed to fulfill such a role (in fact,
the Commission strongly recommends againt any increases in the
Third, the Commission urges that the IMF and World Bank forgive
their loans to heavily indebted poor countries, but also proposes
that neither ever again lend on a scale that could ever make
debt relief important.
Fourth, the Commission urges that the international financial
institutions should not be tools of US policy and playthings
of US government, yet also urges that these institutions be decisively
reformed according to their recommendations--the recommendations
of a US-only Commission.
It is possible to confidently speculate on the reasons for
these contradictions. Consider a Commission with a chairman--Allan
Meltzer--sufficiently hostile to our international financial
institutions to have called in 1998 at a Brookings Institution
conference for the abolition of the IMF. But to repeat the 1998
vintage of Meltzer would not get a majority of Commission members
to sign on. So make concessions to Commission members interested
in key issues in order to approach consensus, even if in the
process intellectual coherence is lost. And the resulting contradictions
trace the fault lines in the Commission's internal debates.
The first contradiction shows the split between those who
believe that international financial markets work well in the
absence of public intervention, and those who believe that public
authorities have the role that Walter Bagehot prescribed more
than a century ago--to guard against a collapse of liquidity
by lending freely to organizations that would be solvent if there
were no crisis and will be solvent if the crisis is successfully
resolved. For the first group, the fact that private-sector lenders
were unwilling to roll over Mexico's debts in early 1995 means
that no one should have loaned to Mexico in early 1995--even
though the U.S. Treasury and IMF that did lend to Mexico earned
very healthy profits on their loans, even though the loans did
not lead the Mexican government to adopt unsustainable inflationary
policies, even though after the fact the private-sector lenders
cannot give coherent reasons for their panicked flight from Mexico.
For the second group the Mexican crisis was handled properly--or,
rather, would have been handled properly had loans to Mexico
been larger, made for longer periods of time with less conditionality,
and had the U.S. Treasury not felt under so much pressure from
then-Senator D'Amato to prematurely demand repayment and so slow
For the first group, the fact of the Mexican rescue package
must have created "moral hazard"--induced overspeculation
and overlending--and thus set the stage for the East Asian financial
crisis (never mind that "moral hazard" can be generated
only when someone pays out and never gets paid back, and that
the IMF gets paid back). For the second group, the absence of
pre-1997 forecasts of an East Asian financial crisis is convincing
proof that an expectation of bailouts could not have induced
the East Asian crisis--for if there is no expectation of a crisis,
what would happen if there were a crisis has no effect on anyone's
The second contradiction shows a split between those who understand
that a lender of last resort's actions must be decisive
and must end all doubt about whether a lent-to organization will
in turn meet all of its obligations--and hence know that when
a lender of last resort intervenes it must have the potential
to do so on a nearly-unlimited scale--and those who want to keep
public institutions lean out of the fear that large-scale government
failure will lead to mammoth wastes of resources. The Meltzer
Commission's report tries to bridge this gap by calling for the
IMF to be a "quasi" lender of last resort, and tries
to avoid facing the possibility that such a "quasi"
organization may lack sufficient resources to restore confidence
in a crisis yet still waste enormous amount of money.
The third contradiction finds the Commission stuck between
its realization that demanding repayment from heavily-indebted
poor countries where loans have been corruptly stolen and bureaucratically
wasted imposes an extraordinary degree of inhumane misery on
such countries' citizens, and its fear that forgiving loans--allowing
policy makers to gain access to IMF and World Bank loan money
and never repay it--does induce "moral hazard" and
lead to bad borrowing policies. The solution is to close down
the possibility that truly-poor countries will ever be able to
borrow on a large scale from the IMF and the World Bank again.
But this solution in turn ignores the fact that the poorest countries
are the most capital-scarce countries, and hence the ones where
the social benefits from financing that is well-used to promote
investment are the highest.
The fourth contradiction is one of governance. Members of
the Meltzer Commission are uneasy that the technocratic economic
mission of the IMF was distorted in the 1990s by the wish on
the part of the Executive Branch of the U.S. government to make
a few high-stakes bets on Russian reformers, and on the U.S.
Executive Branch and Federal Reserve's willingness to use the
IMF to undertake a Mexican peso-support program that the Congress
was unwilling to explicitly approve. They wish for an IMF that
is less politicized--and they want to use one final act of politicization
in order to attain their goal, just as in the past Presidents
have confidently undertaken the war to end all wars or colonels
have lauched the coup that will be the last coup.
I don't have clear and convincing arguments to demonstrate
the proof of my own views of which side of these fault lines
is the right one--or rather of where the proper points are that
do the best job of balancing vital concerns. (I do, however,
recommend Barry Eichengreen's _Toward a New International Financial
Architecture: A Practical Post-Asia Agenda_ for the most clear
and convincing arguments that there are.) I do think that the
final positions of the Meltzer Commission that paper over these
fault lines are clearly faulty. Yet I also wish more people would
read the Commission's Report and think about the issues. There
is now no international financial crisis: it is sunny, and hence
there seems to be no urgency about fixing the roof. But the worst
possible time to try to fix a roof is in the rainstorm.