In Defense of Free Capital Markets: The Case Against a New International Financial Architecture

Does the International Monetary Fund Create Financial Stability?

Thanks partly to Enron and Arthur Andersen, “financial reform” is in the air. Grab your wallet. Indeed, the entire global financial market is under threat of tighter regulation. How come?

Well, look to recent experience, from the Mexican peso crisis to the collapse of the Asian financial markets to the Russian devaluation of the ruble (which President Boris Yeltsin promised on bended knee he would never permit) to the faltering Euro to the decade-old sick Japanese yen or the roller-coaster currencies of Argentina, Brazil, and Venezuela.

Look then to the storms and meltdowns that mark the last dozen years or so in the international capital market, a market in which some $1.5 trillion of funds daily race across the world seeking the opposite goals of yield and safety.

So, ask a number of “experts,” why not let us simply re-regulate the system and rid ourselves of financial turbulence? Were it only that simple. Yet pontificates one dyed-in-the-wool regulator, billionaire currency trader George Soros: “There is an urgent need to recognize that financial markets, far from tending towards equilibrium, are inherently unstable. . . . Thus, in finding a remedy, ‘market discipline’ may not be enough. There is also the need to maintain stability in the financial markets.”

Amazingly, the tool Soros would use for stability is none other than the disaster-prone International Monetary Fund (IMF) itself.

Hence this book’s rightfully worrying subtitle, “the case against a new international financial architecture.” The author, himself a professional currency trader, an adjunct professor of finance at the Yale School of Management, and a thrice-weekly columnist for Bloomberg News, wins dust-jacket blurbs for his well-mounted case from the respected likes of Milton Friedman and Johns Hopkins’s Steve Hanke. DeRosa argues firmly against those like Soros who want to “restructure” international financial markets.

DeRosa acknowledges that recent currency markets have indeed been rocky and costly in terms of damaged global growth and loss of taxpayer funds via bankrupt investments in the IMF. But he holds that a cure of a strengthened IMF with authority over a new bureaucracy, an “International Credit Insurance Corporation,” would be worse than the disease.

Undoubtedly, centralized control of money and credit is no better than centralized control of any other aspect of the economy. But isn’t this disease at base the nationalization of virtually every currency in the world? And can’t this disease be greatly eased if not cured by currency privatization or the restoration of the gold standard? Sadly, DeRosa does not pursue that question to its logical conclusion, but contents himself with the immediate question of aggrandizing the IMF’s powers.

DeRosa asks: Can IMF bureaucrats, even armed with a giant insurance stabilization fund, be any more successful in stabilizing the international currency regime than they were in stabilizing the Russian ruble or the Malaysian ringgit or the Indonesian rupiah or the Argentine peso, or scores of other debacles in which IMF officials have prescribed precisely the wrong medicine for mending battered welfare-state-based currencies? Merely to ask that question is sufficient: No. The IMF has a miserable track record and is able to continue wasting money precisely because it itself suffers no harm or loss from its blunders.

DeRosa sees as the common denominator in almost every currency crisis an experiment with a newly fixed exchange rate, followed by the propping up of a wobbly currency with IMF loans and “conditionalities” that ignore the underlying flaws of an interventionist state. Fixed exchange rates are the problem; and the IMF doesn’t solve that, but only engages in costly and wasteful diversions.

Should we have the IMF at all? Joseph Stiglitz, Nobel laureate economist at Stanford and chief economist at the World Bank from 1997 to 2000 declared: “Every recession eventually ends. All the IMF did was make East Asia’s recession deeper, longer, and harder.” And George Shultz, secretary of state under President Reagan, treasury secretary under President Nixon, and distinguished fellow at the Hoover Institution, goes farther and asks that the IMF be abolished. Period.

Unfortunately, DeRosa seems unready to call for a death-blow to the benighted IMF, to declare openly: “End it, don’t mend it.” A clarion call for the termination of U.S. support for this meddlesome institution would have made the book truly useful, but the call never sounds.

That said, his book still makes a good read on the basic illogic and politicized vaccilation in national or IMF currency interventionism.

Contributing editor William Peterson is an adjunct scholar at the Heritage Foundation.