The IMF on the Root Causes of the Global Economic Crisis
This blog is part of a short series of Oxfam blogs on the role of international financial institutions, and the fight against poverty.
The IMF has quietly issued a surprising piece of research that speaks directly to who and what is to blame for the global economic crisis: that is, US politicians at the national level who loosened regulation of mortgage lenders and on the rest of the US financial sector.
The working paper, “A Fistful of Dollars: Lobbying and the Financial Crisis,” caries the standard disclaimer that it should not be reported as representing the views of the IMF. However, the Fund’s willingness to produce such research – which candidly documents irresponsible, risky practices in rich countries – will be important as the debate on an expanded role for the institution begins to heat up this month.
An increase in the role and size of the IMF, including an expansion of its surveillance activities to provide early warning of future financial crises, will be a major agenda item during the upcoming World Bank-IMF Spring Meetings.
The IMF paper carefully documents the campaign contributions and lobbying expenditures of US mortgage companies and financial industry associations. For example, it reports that two of the largest mortgage lenders in the US, Ameriquest Mortgage and Countrywide Financial spent an astonishing $20.5 million and $8.7 million respectively in political donations, campaign contributions and lobbying activities in the run up to the crisis from 2002 through 2006.
Figure: The evolution of lobbying intensity (expenditures per firm) over time. Index 1998=100. Credit: Igan/Mishra/Tressel
The paper then finds that these and other US mortgage lenders, which were the most heavily involved in predatory lending activities, were also the most active in lobbying and paying campaign contributions to US politicians at the national level to loosen the existing regulatory framework and to defeat new regulations that would have curtailed their reckless behavior.
In the wake of the financial collapse in September 2008, the IMF took criticism for its failure to speak up about the lax US regulation of financial institutions. The Fund’s failure to issue candid reporting on the US was spectacular given that preventing financial crises – or at the very least providing early warning of them through its surveillance – is one of the primary functions of the IMF.
The Fund’s muted pre-crisis warnings raise questions about the institution’s willingness to treat developed and developing countries in an evenhanded way in its reporting, the IMF’s Independent Evaluation Office observes in this draft scoping paper. (A paper which mentions the negligent pre-crisis failure of the Fund to carry out a routine Financial Sector Assessment Program report on the risks associated with practices in the US financial sector.)
Let’s hope that the new paper’s no-nonsense willingness to speak candidly about rich countries is a sign that the Fund has finally firmed its backbone about risky wealthy country behavior.
First blog of the series: Tax Collection Stagnates in Low-Income Countries: What’s Been the IMF’s Role?