Counterparties: International Monetary Fail

By Ben Walsh
June 6, 2013

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The International Monetary Fund is now on record saying what everyone realizes about the Greek bailout: it didn’t work very well.

Market confidence was not restored, the banking system lost 30% of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment.

The full report, which for unknown reasons was originally internal and marked “strictly confidential”, is now public; Joseph Cotterill has the best roundup of the key findings.

The report is interesting not only because of its authorship. It’s a well-written and informative read, and Pawel Morski points out that stands to reason: self-flagellation is “turning into a bit of a habit” at the IMF. (See the Argentine and Asian editions.)

The European Commission is defending policies that have become plainly indefensible. Choosing to restructure Greece’s debt earlier would have led to a “systemic contagion”, a commission spokesman said, failing to note the impact of delaying a restructuring. Mario Draghi offered an odd dismissal that simply characterized the report in Rumsfeldian terms: “These mea culpas are a mistake of historical projection. You judge things that happen yesterday with today’s eyes”.

The IMF has gone through policy course corrections before. It was a long-time supporter of austerity and anti-inflation measures. In April, the IMF published its World Economic Outlook, and became, as Neil Irwin puts it, “among the strongest voices against excessive fiscal austerity and tight money”. (Although the Fund is still asking France to cut government spending.) It supported the initial Cyprus rescue plan, and then, in the face of widespread domestic and international criticism, worked to create a small depositor-friendly plan. Additionally, despite producing top-notch research on the negative effects of income inequality, the Fund doesn’t really take them to heart in terms of policy.

Mohamed El-Erian concludes a fault line lies between the Fund’s respected analysis, on the one hand, and policy execution that bows “to pressure from its political masters in advanced economies”. — Ben Walsh

On to today’s links:

Tax Arcana
The IRS slaps HP’s former chairman Ray Lane with $100 million tax bill – Bloomberg

New Normal
The “anti-intellectual moment”: college students shun the humanities – WSJ

Thanks to a booming stock market, CEO pay keeps rising – AP

Big Brother
The NSA can hear you now – Glenn Greenwald
The full court order authorizing collection of “metadata” from millions of Verizon users – Guardian

Financial Arcana
For the first time since its inception, high-frequency trading is in retreat – Bloomberg Businessweek

Central Banking
“It is almost as if the Fed is trying to force a fire hose of policy through a garden hose” – Tim Duy

Even more TBTF
John Thain says the Too Big to Fail problem is worse today than it was before the crisis – WSJ

Investment tips from Elizabeth Warren: don’t buy gold, collectibles, or prepaid funerals – Mother Jones

Welcome to Adulthood
Discouragement for young writers – Freddie deBoer

A tour of the zany, probably useless world of hedge fund index ETFs – Bloomberg

And, of course, there are many more links at Counterparties.


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For whatever reason commenting is not set up on the Ferro homeownership piece. Anyway, if the graphs are a fair representation of that paper, color me dubious that it proves anything.

These studies may suggest that there is no correlation between homeownership and unemployment rates, but the evidence for negative correlation looks awfully weak. In the international comparison, it sure looks like the trend line is driven by the two outliers at the top with 80+ percent homeownership and 25+ percent unemployment. (Spain is one. Is Greece the other?)

As for the U.S. data, I am not sure why they chose differing periods for home ownership versus unemployment rate (ending in 2000 as opposed to 2010). I’m also skeptical about choosing single years as endpoints, particularly for unemployment rate, as opposed to a multi-year average. I grow even more skeptical when 2010 is selected as the endpoint, which was a year of elevated unemployment. Even with all that, the correlation is barely positive (R2 is 0.11).

I’m all in favor of eliminating the mortgage interest deduction over time and loosening zoning restrictions – a bit different than simply “rezoning the suburbs”, but probably not far off – but that support stems from basic economic principles, and I don’t see that this paper contributes much if any to the debate.

Posted by realist50 | Report as abusive

The piece was frankly terrible. It doesn’t show anything it is preporting to show, and I generally agree with the authors on policy.

Posted by QCIC | Report as abusive