IMF stepping in to boost central banks
TEXT OF STORY
Kai Ryssdal:
The prime minister of Iceland said today the banking crisis could wind up costing his country $9.5 billion, or 85 percent of the entire value of its economy. The government’s trying to work out financing deals, so far without too much luck save a $2 billion package from the International Monetary Fund.
The IMF’s been almost as busy as Henry Paulson and Ben Bernanke have been as the U.S. credit crisis has gone global. Rhagu Rajan’s a professor of economics at the University of Chicago. And a former Chief Economist at the IMF.
Welcome to the program.
Rhagu Rajan: Nice to be here.
Ryssdal: So, for years now, the IMF has kind of burbled along, doing it’s thing in the global economy. And now all of a sudden with this crisis it is front and center. What has happened that’s made it so popular?
Rajan: Well, we’ve had a crisis and it’s a global crisis. We’ve had small, isolated crises before. In 1998, it was the big one, it was the Asian crisis. Since then, we’ve had a time of relative calm, so we haven’t had to call the IMF that often. Now we find we really need them again.
Ryssdal: Remind us, in a very short sentence or two, what the IMF was designed to do.
Rajan: Well, it was set up toward the end of World War II and the idea was to prevent the kind of bad policies that countries followed while trying to increase their own competitiveness at the expense of others. Typically, countries used to depreciate their exchange rate in an attempt to sell more than their neighbors, but then their neighbors would follow suit. And this kind of activity led to the Great Depression.
Ryssdal: And now, as you alluded to, a lot of people have gone knocking on the IMF’s door, looking for money to get them through this crisis. How do you, as a guy who used to be the chief economist there, how do you choose, who gets IMF assistance and who doesn’t?
Rajan: Well, you first look at the countries in need. Second, you look to see if they can have policies that will allow them to eventually be able to repay the loan. You’re far more tolerant of them than the private markets are. That’s why the IMF has a role. But, also, you want to see that they will alter their policies so that eventually they will become fully capable of repaying the loan and re-accessing international financial markets.
Ryssdal: Where is the IMF going to get this money, though, that it’s going to have to hand out?
Rajan: It’s typically from the member countries themselves. Each country has a quota. It puts in money into the fund. There are also countries that are willing to lend to the fund on short notice. So it can get money from its members and lend them to members in need.
Ryssdal: So, there is no worries that the IMF might run out of money to be able to do all these rescues and bailouts that the whole economy seems to be doing?
Rajan: Well, provided the member countries are willing to step up and increase how much they put into the fund, it is not going to run out of money. The real issue is how much is the fund willing to lend, how much is it willing to put at stake. Because it is possible that eventually countries get alarmed at the amount of money that is going out of the fund.
Ryssdal: How do you figure out what’s an appropriate amount to give?
Rajan: Well, that will depend on how long and deep this crisis is. We’ve already had $15 (billion) to $20 billion to Ukraine. We have $25 billion to Hungary. So, these things add up pretty quickly. Now the good news is that it’s not just the IMF which is lending here. There are other countries, there are other organizations that are following the lead of the IMF. The IMF is just the apex organization here. So, it is possible to lend out a fair amount, but yes, at some point we will start asking questions about the amounts that are going out.
Ryssdal: Rhagu Rajan, at the Graduate School of Business at the University of Chicago. Also a former chief economist at the International Monetary Fund. Professor thanks for your time.
Rajan: Thank you.
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