Tuesday, 20 April 2010

Has the IMF gone populist?

The BBC reports that "Banks and other financial institutions face paying two new taxes to fund future bail-outs." This proposal comes from the International Monetary Fund (IMF), which was "beefed up" after the G20 summit in London early last year.

According to the executive summary from its April 2010 report (PDF);
The focus of countries’ attention is now shifting to measures to reduce and address the fiscal costs of future financial failures, both through regulatory changes and through imposing levies and taxes on financial institutions. Measures related to levies and taxes should: ensure that the financial sector meets the direct fiscal cost of any future support; make failures less likely and less damaging, most importantly by facilitating an effective resolution scheme; address any existing tax distortions at odds with financial stability concerns; be easy to implement, including in the degree of international coordination required; and, to the extent desired, require an additional fiscal contribution from the financial sector in recognition of the fact that the costs to countries of crises exceed the fiscal cost of direct support. A package of measures may be needed to attain these objectives.
This comes as "the general government debt of the G-20 advanced economies is projected to increase by almost 40 percentage points of GDP over 2008–15, an increase in large part related to the crisis." In other words, public debt is going to increase considerably across the globe and the IMF wants to put an insurance package again to ensure that the world economy cannot be dragged down under the weight of this debt.

Then there are the report's two key objectives to "pay for and contain" the cost of any future crisis;
  • Ensure that the financial sector pays for the expected net fiscal costs of direct support (in present value terms). Expecting taxpayers to support the sector during bad times while allowing owners, managers, and/or creditors of financial institutions to enjoy the full gains of good times misallocates resources and undermines long-term growth. The unfairness is not only objectionable, but may also jeopardize the political ability to provide needed government support to the financial sector in the future.
  • Reduce the probability and the costliness of crises. Measures should reduce the incentives for financial institutions to become too systemically important to be permitted to fail. This requires, importantly, the adoption of improved and effective resolution regimes—to resolve weak institutions in a prompt and orderly manner, including through a process such as official administration. Such regimes are emphatically not for bail outs: the crisis has shown that they are essential to reduce the likelihood that governments will be forced to provide fiscal support to shareholders and unsecured creditors. Moreover, taxes and contributions can supplement regulation in addressing the adverse externalities from financial sector decisions, such as the creation of systemic risks and excessive risk taking.
Is this really what it appears to be?

I remain skeptical as to whether the most prominent institution of global capitalism has responded to public opinion worldwide - summed up in the slogan "we won't pay for their crisis" - positively. But it does appear that the IMF has realised the inherent instability of markets built upon money that doesn't really exist and has proposed measures to address this whilst maintaining the incumbent balance of power and privilege.

All further press releases from the IMF on this will have to be scrutinised very closely in order to offer a fuller analysis of what is going on. But whatever the case, it remains an extremely interesting development.