The IMFs Performance in the RunUp to the Current Financial and Economic Crisis Tentative FindingsRuben Lamdany Deputy Director Independent Evaluation Office of the IMF Presentation at CEPAL January 2010 12Objectives of IMF surveillance“to help head off risks to international monetary and financial stability, alert the institutions 186 member countries to potential risks and vulnerabilities, and advise them of needed policy adjustments.” (2007 Surveillance Decision)Structure of Presentation Background on the crisis Waves of Crisis Time line IEO Evaluation Scope Methods Preliminary findings Possible explanations3A Crisis in Several WavesMid2007: Increased defaults in US subprime market lead to: failure of some hedge funds and mortgage companies, liquidity problems in interbank markets, spikes in credit spreads, run on Northern Rock bank. Early 2008: Economic downturn in many advanced economies First half of 2008: Government supported rescue of Bear Stearns and Fannie/Freddie. September 2008: Lehman bankruptcy: Credit markets come close to collapse Rescue of AIG Second half of 2008: Emerging markets are no longer “decoupled.”4What caused the crisis? A number of factors have been cited as creating the “perfect storm”?Microeconomic Regulatory shortfalls Incentives in the financial industry Financial innovation creating difficult to understand and value structured instruments ?Macroeconomic Global imbalances Easy monetary policy52006 (January April) Asset Prices and Financial InnovationOil prices escalate from $25/barrel in 2003 to $75 by mid2006IMFIn March MD calls for integration of financial sector and balance sheet vulnerabilities analysis in surveillance analysis.WEO (April) : Focus on run up of commodity prices projects modest inflationary pressures and strong US growth. Points at risks in housing markets. GFSR (April): argues that derivatives disperse risk and enhance financial stabilityEc./Finan. Developments62006 (May December) Initial warnings by Academics and PressHome prices peak in Q2, doubling since 1997 Fed rates remain unchanged for first time in 2 years (August) Krugman on housing: “major bust, not soft landing” (Aug.) Economist: “biggest housing bubble in US history” (Aug.) Daily Telegraph (UK) predicts credit crunch (September) US housing starts slump to lowest in 6 years (November)IMFMFDICM departmental merger announced (August)WEO (Sept.) Inflationary concerns, tighter financial conditions; abrupt housing slowdown GFSR (Oct.) global markets strong; household credit growth in EMsEc./Finan. Developments72007 (January April) Further warnings IMF seems distractedFreddie Mac stops purchasing sub primes mortgage and related securities (February) Leading subprime mortgage company, New Century Financial Corp. announces Chapter 11 (April)Desmond Lachman (AEI) (April): “ the IMF has taken upon itself the role of the worlds economic cheerleader. It also assures us that a significant downturn in the United States will not spread to the rest of the global economy.”IMFBoard reviews: quota and voice reforms and 1977 Surveillance Decision (January June)Multilateral Consultations (April) focused on global imbalanced.WEO: financial sector “generally in good shape” (April) IMFC: Growth expected to remain strong in 2007 and 2008; but some Governors do not share this “sanguine outlook” (April)Ec./Finan. Developments82007 (May July) First signs of financial crisis IMF distractedMoodys downgrades 100 sub prime MBS (June)Bear Stearns suspends fund redemptions and liquidates two MBS hedge funds (June)S disturbances will have moderating effect (October) DSK takes over as MD in Nov, and focuses on downsizing at first town hall meetingEc./Finan. Developments102008 (January June) The crisis unfolds while the IMF reorganizesNorthern Rock taken over by UK Treasury (February)Federal Reserve term financing assists JPMorgan Chase to acquire Bear Stearns (March)IMFFDMD WG on Financial Crises of the Future (January) Board: New Income Model; IMF Downsizing (April) WEO: divergence, not decoupling; spreading crisis GFSR: Severe credit dislocations, systemic risk MD Work Plan JuneOct: food/fuel; and draw lessons from crisis (April) IMF initiates facilities for food and commodity price shocks (May)Ec./Finan. Developments112008 (July September) At the brinkOTS closes IndyMac (July) Oil peaks at $147/barrel (July)FOMC: “downside risks to growth have increased appreciably” (August) Fannie/Freddie government conservatorship (Sept. 7) Lehman Brothers (Sept. 15) AIG bailout (Sept. 16) Credit markets freeze (Sept. 17)IMFMDs statement on Board Work Plan noting shift from internal issues to focus on key global economic and financial concerns is published (July)2008 US Article IVSeptember 15: Board discusses GFSR; report notes stress, crisis; “US ben