Why didn’t the IMF predict the financial crisis?
The International Monetary Fund was in many respects designed to be the guardian of the world’s economic and financial system. So why wasn’t it sounding the alarm before the 2008 financial crisis? That’s the question that’s been asked by the Fund’s Independent Evaluation Office, which was established in July 2001 to assess the Fund’s performance ...
The International Monetary Fund was in many respects designed to be the guardian of the world's economic and financial system. So why wasn't it sounding the alarm before the 2008 financial crisis? That's the question that's been asked by the Fund's Independent Evaluation Office, which was established in July 2001 to assess the Fund's performance and provide a greater degree of accountability.
The International Monetary Fund was in many respects designed to be the guardian of the world’s economic and financial system. So why wasn’t it sounding the alarm before the 2008 financial crisis? That’s the question that’s been asked by the Fund’s Independent Evaluation Office, which was established in July 2001 to assess the Fund’s performance and provide a greater degree of accountability.
The IEO has just released its report—and it’s a very tough critique of the IMF’s performance and internal culture:
The IMF’s ability to detect important vulnerabilities and risks and alert the membership was undermined by a complex interaction of factors, many of which had been flagged before but had not been fully addressed. The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches. Weak internal governance, lack of incentives to work across units and raise contrarian views, and a review process that did not “connect the dots” or ensure follow-up also played an important role, while political constraints may have also had some impact.
One key assertion is that the IMF’s staff was intellectually and psychologically unprepared to challenge the regulatory authorities in the most advanced economies.
IMF staff felt uncomfortable challenging the views of authorities in advanced economies on monetary and regulatory issues, given the authorities’ greater access to banking data and knowledge of their financial markets, and the large numbers of highly qualified economists working in their central banks. The IMF was overly influenced by (and sometimes in awe of) the authorities’ reputation and expertise; this is perhaps a case of intellectual capture.
This is a particularly stinging criticism for an institution that prides itself on its expertise and data analysis skills. The evaluation argues that the IMF has taken some steps to address these problems, but that there’s plenty more to do. Unsurprisingly, the report has created quite a stir at the Fund’s offices on 19th street. More soon on reactions and responses.
David Bosco is a professor at Indiana University’s Hamilton Lugar School of Global and International Studies. He is the author of The Poseidon Project: The Struggle to Govern the World’s Oceans. Twitter: @multilateralist
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