Question

You are the chair of an IMF task force. Your job is to reevaluate the policy of bailing out national governments that suffer major losses in the private sector in the name of protecting the value of the currency. Taxpayers in industrial countries typically foot the bill for IMF activities, with loans typically running into the many billions of dollars. Some critics call this system a kind of “remnant socialism” that rescues financial institutions and investors from their own mistakes with taxpayer money. Financial crises often originate as private-sector affairs, but then central banks step in and pledge foreign exchange reserves to shore up the currency.

1. Do you agree with the belief that the current system privatizes profits and then socializes losses if the government steps in with a bailout?
2. What sort of alternative can you envision to replace the current system, which often involves an IMF bailout?

Answer 1

I agree with the belief that the current system privatizes profits as capitalism is increasingly being proliferated to showcase that limited government intervention in the markets leads to efficient market economy, wherein capitalists seek profits and excessive profit making ultimately leads to excessive amounts of debt being undertaken by firms, leading to high risk taking. The government thus has to ultimately bail out such firms and banks as firms borrow from banks, banks have deposits which are ultimately of the common public and governments can't afford to jeopardise national savings, thus it has to provide a bailout by seeking credit from IMF and spending tax revenues collected from tax paying individuals. This has occurred in several instances such as during the great recession, when America tried to bailout major banks and also in developing economies such as Pakistan, where it perfectly correlates with this statement.

An alternative wherein banks have to setup bailout funds aside in order to tide over when the crisis hits them or the firms, so that even if the firms fail, the banks which have national savings have the buffer. The debt levels have to reduce, wherein to enhance profitability firms keep on borrowing to increase their capacity and production levels, this leads to substantial losses when growth rates decline because of slowdown in demand, keeping enough funds aside can act as a buffer. Thus countries won't have to seek IMF's help under such circumstances. The privatized profits bail themselves out without relying on social money.