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17 Cato J. 275 (1997-1998)
The IMF's Imprudent Role as Lender of Last Resort

handle is hein.journals/catoj17 and id is 281 raw text is: THE IMF's IMPRUDENT ROLE As LENDER OF LAST RESORT Charles W. Calomiris Throughout history, financial collapses have been defining moments for public policy. Crises promote action, embodied in new financial institutions or policy doctrines. The motives that underlie such policies are sometimes short-sighted-driven by short-run pressures rather than long-run principles-and it is easier to enact unwise policy in the midst of crisis than to reverse course after the crisis has passed, after policies become embodied in institutions or statutes. The responses by the IMF and the U.S. government to the Mexican crisis of 1994-1995 and the recent Asian crises are examples of danger- ous short-sightedness. In the wake of those crises, the Clinton Adminis- tration is promoting a new doctrine of global financial bailouts, admin- istered through IMF largesse and conditions. If the IMF and U.S. Treasury are permitted to prevail, the efficiency of global capital markets will suffer, and the incidence and severity of financial crises will grow. The Mexican and Asian collapses follow a pattern dating back to 1982, and are the byproduct of fundamental flaws in the incentives facing bankers in developing countries. Incentives to assume excessive risk result from the unhealthy partnerships between government and business in many countries, which manifest themselves in taxpayer bailouts of insolvent banks. International support for bank bailouts will deepen that unhealthy partnership, and thus make the preexisting problems in these countries even worse. The uses of IMF assistance and the U.S. Treasury Department's Exchange Stabilization Fund to bail out insolvent emerging market Cato jourmal, Vol. 17, No. 3 (Winter 1998). Copyright @ Cato Institute. All rights reserved. Charles W. Calomiris is Paul M. Montrone Professor of Finance and Economics at Columbia Business School and Director of the American Enterprise Institute Project on Financial Deregulation. This article is based on his testimony before the Joint Economic Committee, February 24, 1998. He thanks Michael Bordo, Gerard Caprio, Clenn Hubbard, and Allan Meltzer for comments on an earlier draft. 275

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