Question

Do international institutions make international financial crises worse? Please discuss this topic after reading “If the World Economy Is Looking So Great, Why Are Global Policymakers So Gloomy?”Preview the document by Neil Irwin and “Moral Hazard in IMF Loans: How Big a Concern?”Preview the document by Kenneth Rogoff.

Answer 1

The world bank and the IMF are international financial institutions which lend money to middle income countries each year for development purposes.The international financial crisis refers to extreme stress in financial market.

Even though there is growth in the global economy the global policy makers are worried and feel that the growth is short lived.The pessimist policy makers however believe that the growth will continue for some more time to come.They feel the financial markets are pretty good.The threats that the economists see are-they see tariffs to be a threat that would cause disruption to the supply chain and affect global commerce.More than trade, global policy makers also see a series of financial imbalances and risks.. Countries like Germany , China have current account surpluses and other countries like United states and Britain have current account deficits.These will lead to financial problems in due course.These conditions may put medium term growth at risk.Again public debts are rising in United states.This will leave the government with less money to deal with any financial crisis.Interest rates are low all over the world which is an important tool to fight recession.So in case of any recession the central bank and fiscal authorities will find difficult to deal with the situation.

Most of the financial crisis in recent years has been due to too much short term lending by IMF.The IMF always bails out a country in financial problem and that leads to moral hazard which had become prominent in the financial market crisis of 1990's.It is difficult to show moral hazard in IMF lending because almost all countries have repaid the loan except few who have gone into arrears.IMF loan does induce some moral hazard but it was not until loan crisis of 1980's that moral hazard had a fiscal cost.So the moral hazard involved with IMF loans is mixed and nothing can be stated precisely.