Tuesday, March 10, 2015

Former IMF Peter Doyle: Don't Expect any Early Warning from the IMF

Peter Doyle is a former IMF senior economist who worked there for 20 years. In 2012 he resigned from the IMF and has turned into an IMF critic on many issues. This Wall Street Journal article describes why he left.

Whenever we have someone who has worked inside the system for years and is willing to talk publicly, it is probably useful to hear what they have to say. Mr. Doyle wrote a lengthy article last fall that details his concerns about how the IMF is organized and currently functions. The article is too long to explore in depth here. You can read the full article here. The title of the article is "Global Early-Warning and the IMF." The introductory paragraph of the article tells you immediately that Mr. Doyle does not feel the IMF can be relied on to provide an early warning before the next global financial crisis. He even suggests the IMF may need to be replaced with a new global entity dedicated to providing early warning:

"The IMF failed to provide warnings of the long-latent global vulnerabilities which resulted in the global financial and Euro Area crises. This reflected systematic shortcomings in its early warning work, requiring specific fixes. If those fixes are not made, a new institution is proposed to provide global early-warnings."

Below are a few selected quotes from this article and then a few added comments.

"Advanced anniversaries are customarily occasions for much varnished story-telling. The International Monetary Fund's 70th this year has followed form. But that milestone occurs in the shadows of Lehman's and the Euro Area crises. Prior IMF analysis of the world economy—known as "surveillance"—not only failed to contemplate either possibility, but celebrated the circumstances which led to both, right up to the eve of eruption.

Given these global and generational catastrophes, something closer to truth—rather than varnished-story—telling seems appropriate on the anniversary of the institution, the IMF, which was summoned into existence 70 years ago, in the wake of the Great Depression, precisely to prevent recurrence of such disasters."

"My vantage point on this is almost unique: a Fund staff member for 20 years, the latter half as senior staff, working in its European Department from 1998 onwards i.e, from near the genesis of securitization and the Euro right through to OMT and beyond, in the engine room where IMF analysis of these matters went awry. I did not see the disasters coming, and I have learned much from that fact. But there is much more to be learned from the failure of the Fund to see them coming than has been recognized. And those lessons need to be learned if the IMF's surveillance mandate is to be better realized in future."

"In their wake, the IMF has issued a string of apologies of sorts—for groupthink, for "overly optimistic" Greek and "overly pessimistic" British projections, and for wholesale miscalculation of fiscal multipliers. But these apologies dissemble and distract; there are much bigger issues at stake."
At this point in the article, Mr. Doyle goes into detail about why he thinks the IMF missed its projections and failed to provide early warnings for the 2008 financial crisis. He lists some IMF problems including making alibis, hubris, naivety, and a determination to preserve power within the organization. To summarize, he says the IMF is not well suited to provide an early warning of a new financial crisis because of how it currently operates and the fact that the IMF tends to try and please the major powers that fund it (the US, the EU, etc). 

Mr. Doyle states there is intense political pressure on the IMF to make rosy forecasts and to downplay risks. He suggests IMF reports mention risks to cover themselves, but do not ever suggest the risks will spin out of control into a major crisis. To some extent, the IMF fears that projecting a crisis might actually contribute to triggering a crisis. He says this environment prevents them from ever giving an early warning. 

Mr. Doyle also says the G20 and the new FSB (Financial Stability Board) have pushed the IMF to the sidelines now. Therefore, he says don't expect to get any early warning before the next global crisis from the IMF. Here is a concluding quote from this section of the article.

"The unchastened and unloved IMF is a reflection, rightly lamented by Martin Wolf, of the failure of global policy elites to restore their effectiveness and legitimacy after the two crises. This sets the stage for further IMF global early-warning failures, the costs of which will, again, be borne by the most ordinary of people, worldwide."


In the last part of the article, Mr. Doyle recommends several "fixes" to restore the IMF so that it can be in a position to detect a coming crisis and be able to report it without political interference. He says that if the IMF cannot be "fixed" then a new global crisis detection and warning entity needs to be set up. He calls it a "Global Macrofinancial Risk Council". He says it should  be privately funded and report directly to the media and the public to avoid political interference. Here is a quote from the article where he describes it:

"This body would be a Global Macrofinancial Risk Council—a sort of global CBO or OBR. It would be funded so as to shield it from the heavy hand of political interference from the major powers, perhaps by one or more of the great private foundations, amongst other sources. It would have independent country-level financial supervisors and fiscal councils as members, learning from them and feeding its work via them directly into their regular work back home.   . . . . . . . . .

Thus, its task would be to provide early-warning of global economic tectonic shifts— in whatever country or country grouping, exchange rate regime, strategic aspiration, asset class, trend, institution, law, innovation, interaction, good intention or malfeasance they may lie, and—however long it might take for them to erupt.       . . . . .      it would owe its primary loyalty to its mandate and the world public at large, not to their representatives in government or at the UN."

He adds this concluding comment:

"Perhaps after 70 years, it simply is time to give the main job for which IMF surveillance was originally created, global early-warning, to someone else."

My added comments:

This is a long and detailed article. If you want the full context and all the details, you should read the entire article. For those only looking for a summary, the main point I take from this article is that we should not expect that the IMF is going to provide any kind of early warning before the next global financial crisis. Even though the IMF does regularly issue warnings (which we have documented here), these are not forecasts of a new global financial crisis or any kind of time sensitive early warning. They are mostly just the IMF making sure they point out the risks in the present system. That way, if a new crisis does unfold, they will have mentioned the risk somewhere ahead of time.

I don't think Mr. Doyle's suggestion of replacing the IMF with some new entity will go anywhere. The very global political structure he talks about that supports the IMF is not going to be interested in some new entity at this point in the game. Especially one that would be independent of their influence and control.

If we do get another global crisis, I would expect that the major political powers will support the IMF as the entity to resolve the crisis. The question will be if the public is willing to go along with that or not. Either way, Mr. Doyle says don't hold your breath waiting for the IMF to warn you ahead of time before the next major global financial crisis.

Added note: As you can see from these two links below, the IMF is the institution of choice for influential groups like The Bretton Woods Committee. I don't see that changing.

Bretton Woods Rountable - Reassessing the IMF's Role in Sovereign Debt Crises

Bretton Woods Congressional Seminar - US Leadership in International Financial Institutions

Added note 8-6-15: A full list of systemic risk warnings can be found on this blog page 

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