Foreclosure Crisis and the International Monetary Fund

June 26th, 2009

The foreclosure crisis raging across USA has taken on global proportions posing questions about the role of the International Monetary Fund and how it can fit into a new financial system.

The present financial set up was the direct fallout of Pax Americana. Under its banner USA was responsible for stability in the money market and liquidity – its tool being the dollar. The nuclear cover allowed for world peace and safety. In return the countries opened trade doors and there was free flow of investments. The opening up of free trade dismantled British commercial hegemony and new rules of tariff and trade came into existence. The current crisis has highlighted the flaws and shortcomings of this post war system and is now begging for the setting up of another system.

There are suggestions coming up of the IMF playing the role of a central bank – something that Keynes had suggested at the end of World War II.

The functions of a national central bank are to issue currencies and to play a positive role in maintaining international monetary stability. But the recent crisis showed that it failed to maintain this stability. It did some surveillance operations on the international standards, gave advice to its member nations and signaled warnings about the crisis when it was brewing. But none paid heed and thus it cannot be regarded as a central global bank.

The IMF cannot be thought of to be the central bank of central banks. That role is played by Bank for International Settlements and is located in Basel. It is the secretariat for the operations for discussions by central banks, for the Financial Stability Forum/Board, the Basle Committee for Banking Supervision, the International Association of Insurance Supervisors and other related bodies.

The balance sheet of the IMF is US $350 billion. Its staff count is 2,600 and it is based primarily in Washington. It is to be noted that when the recession started in USA in 2007 it performed no lending functions and responded to the crisis by laying off a good number of its experienced personnel. In 2009 it is seen hurrying to lend to many ailing economies after the G20 made promises to increase its fund to DS $1 trillion. Although the additional resources are welcome it is hardly adequate considering the enormity of the problem.

The IMF was not the cause of the financial crisis but if properly restructured it can be useful in easing the pain and avoiding a rerun.