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The IMF and Moral Hazard

Today’s Washington Post Book World offers this review of Paul Blustein’s And the Money Kept Rolling In (and Out). The book is about the 2000-2001 economic crisis in Argentina.

I was struck by this comment about the International Monetary Fund:

Yet for many observers — including most Argentines — the main culprit in this tragedy is the International Monetary Fund. The IMF is widely seen — and not just in Argentina — as a powerful, unaccountable institution that does the bidding of rich countries and their bankers by forcing less-developed countries to adopt one-size-fits-all economic-austerity measures that inevitably hurt the poor.

And the Money Kept Rolling In (and Out) convincingly shows that, at least in this case, this interpretation is not only wrong but precisely backward: It was Argentina that cunningly manipulated the IMF into giving it large financial rescue packages that the IMF knew would probably not save it from crashing.

This interpretation of the IMF’s role in Argentina likely is correct. When I read these lines I recalled Allan Meltzer’s clear-eyed recognition, from this 1998 article in the Cato Journal, of what the IMF is up to:

Since 1971, the IMF has been looking for new things to do. It has now solved its problem by creating moral hazard, allowing international banks to avoid the risks they undertake by imprudent lending. The IMF encourages the behavior that creates the problems.


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