NPR, the IMF, and the Global Savings Glut

The Obama administration is having a tough time getting its request for $108 billion for the IMF through Congress. Bank bailouts are rapidly losing popularity. And bailouts of foreign banks are probably even less popular than bailouts of U.S. banks.

But, NPR is rushing to the rescue. It had a piece this morning telling listeners that it was important to get the IMF more money to help the poor countries of the world. The piece never mentions the fact that the bulk of the IMF lending at present is going to East European countries, not the developing world.

The basic problem is simple. The West European bankers proved to be every bit as stupid as the Robert Rubin-Citigroup crew in dishing out loans. The main outlet for their bad loans was Eastern Europe, where they made enormous loans denominated in euros.

It is very difficult for the countries of Eastern Europe to maintain their exchange rates against the euro without large amounts of assistance. However, if they let their currencies fall against the euro, then the default rates on the loans from Western European banks will explode.

Of course West Europe is rich enough to bail out its own banks, but the governments in countries like France and Germany know that their people will not stand for this sort of handout. In steps the IMF, with a big assist from NPR, which managed to not even mention East Europe in the piece.

NPR made one major misrepresentation that is worth noting. It referred to a "global savings glut" which it attributes to developing countries' fears that the IMF won't have enough resources to bail them out in a crisis, and therefore their need to self-insure. WRONG!!!!!!

Developing countries only began to accumulate massive amounts of foreign exchange (i.e. savings) after the East Asian financial crisis in 1997. There was no talk at the time about the IMF not having enough money. Rather, the explicit motive of most of these countries was to accumulate enough reserves that they would never need to turn to the IMF for a bailout.

The conditions that the IMF imposed on the East Asian countries, who had previously been the superstars of the developing world, were seen as being so onerous that other countries wanted to make sure that they never were forced to turn to the IMF for help. Therefore they deliberately kept their exchange rates under-valued so that they would run huge trade surpluses, which let them rapidly build reserves.

In short, the IMF's conduct was a major cause of the global imbalances that led to the current economic crisis. NPR turns history on its head in telling listeners that more support for the IMF is the solution.

--Dean Baker