A Giant Step for Statism

Its opponents include liberals like Ralph Nader and the United Methodist Church and conservatives like Rep. Jack Kemp and the Conservative Caucus. The "it" in question is legislation to increase the US contribution to the International Monetary Fund by $8.4 billion. After easy sledding in the Senate, it passed the House by just six votes in August. But no funds will flow unless Congress passes an appropriations measure, still being debated at press time.

Before you nod off, consider that this measure may affect you directly. Proponents claim that it will avert collapse of the whole banking system (and worldwide depression); opponents call it a prescription for renewed inflation and a bail-out of big banks at your expense.

Advocates of increasing the IMF's resources, including leading bankers and Treasury Secretary Donald Regan, make three appeals to Americans' self-interest. First, loans to Third World countries help finance international trade, and this country depends heavily on trade; IMF loans are said to be essential to avoid many governments' defaulting and thereby being cut off by the banks. But Robert Weintraub, chief economist of the Joint Economic Committee, points out that only $22 billion of this country's $220 billion in exports last year went to Argentina, Brazil, Chile, Mexico, and Venezuela—the countries most in danger of default. Even in the unlikely event that they all defaulted, trade with them would only be reduced, not eliminated. Moreover, as William Simon has pointed out, extending more loans which cannot be repaid is like a shopkeeper giving away money in hopes that some of it will be spent in his shop.

More serious is the fear of a worldwide banking collapse if the IMF cannot make additional loans. Although a handful of our biggest banks are overexposed and could conceivably go under in the unlikely event of simultaneous Third World defaults, the collapse of individual banks is not equivalent to a collapse of the banking system. Once people realized that most banks were still relatively sound, they would either spend or save the money withdrawn from the unsound banks—which would place the money back into the banking system. As long as the Federal Reserve kept the money supply from contracting sharply (which it failed to do in the Depression), Weintraub sees no danger of a banking system collapse.

Perhaps the most seductive argument for the IMF is that it, alone, has the leverage to force profligate Third World governments to adopt sensible economic policies, because further IMF loans are "conditional" on adoption of austerity programs. While certain aspects of the IMF's conditions are commendable—for example, cutting government spending and subsidies for consumer goods—other aspects serve to increase state intervention. Exchange controls, wage and price controls, interest-rate controls, and tax increases—all these are among the conditions being forced on countries by the IMF. Moreover, the IMF's aim of forcing countries to slash imports while boosting exports ignores the fact that a large share of their trade is with each other.

The IMF's prescriptions ignore the lessons of the Third World's success stories (Hong Kong, Singapore, Taiwan, etc.). What IMF-aided countries need is free trade, free markets, and low taxes—not IMF-imposed "austerity" programs that stifle entrepreneurship and virtually ignore their bloated, inefficient state-owned industries.

The opponents of IMF bailouts have additional arguments on their side. Bailing out big banks—like any other government bailout—will send a clear message to those firms to continue their profligate ways, because Uncle Sam is always waiting in the wings. And, Third World governments will also be encouraged to go on living beyond their means.

Moreover, as William Simon has noted, the more the banks and the government get committed to the mountain of Third World debt, the greater their stake in rekindling world inflation—to pay off the debts in cheaper dollars. And because the Treasury would have to borrow the $8.4 billion for the IMF in the capital markets, the effect is equivalent to a further increase in the already elephantine federal deficit.

What's the alternative, then? For the big banks, the unpalatable but quite feasible alternative is simply to face the fact that many of their Third World loans are uncollectable—and properly account for this fact on their books, as urged by George Champion, former chairman of Chase Manhattan. It borders on fraud for banks to continue to value these loans at face value as if they were collectable. Of course, many banks would show years of losses instead of profits for their shareholders. But why should all of us be forced to share in these losses via a bailout?

As for the IMF, it's long past time to reexamine its role as both lender and credit-rater. As Fred Smith pointed out recently in the Wall Street Journal, if Standard & Poor's performed both functions—for example, rating New York City's creditworthiness while simultaneously loaning it money or buying its bonds—the conflict of interest would be clear to everyone. Yet this is precisely what is entailed by the IMF's dual role. As a partner of Argentina, Tanzania, and Zaire, it is subjected to intense political pressures to compromise its credit-rating assessments and give in on its economic conditions.

In sharp contrast, Standard & Poor's deals with city governments at arm's length. It imposes no conditions on municipal bond issues; it simply evaluates a city government's financial management and calls a spade a spade. Instead of the IMF's all-or-nothing rating of fiscal soundness, S&P uses a 20-level rating system that gives lenders considerably more information about the borrower's financial soundness. Stripped of its loanmaking power, the IMF could play a vital role as an international S&P.

Bailing out Third World governments, the IMF, and big banks would ignore such sensible reforms. It would constitute an endorsement of state-dominated Third World economies and of politicized international lending. And, like the Conrail, Lockheed, and Chrysler bailouts, it would insulate major companies from the consequences of poor management. In short, funding the IMF bailout would be a giant step for statism, both at home and abroad.