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Review of Krugman, The Return of Depression Economics

-- Bradford DeLong (, May 04, 2000


You are more right than Prof. Krugman on the IMF view in regards the lastest round of currency crises, that is I agree with you more than I agree with Prof. Krugman. Of course, "the IMF's first imperative is to make sure that it gets its money back." My opinion to that effect was published in a local newspaper two years ago. But, I disagree with your proposed new role for the IMF: "Refund the IMF. Boost its resources tenfold, so that it no longer has to worry so much about having one single large borrower fail to repay. Then the IMF could act more like a world central bank, and adopt policies aimed at minimizing unemployment and recession rather than policies aimed at maxmizing the short-term export surpluses of borrowers."

The problem with the crisis was not the lack of a global money printer but moral hazards, e.g carry trade and the like. The local (Thai, that is) bankers have already been proven wrong for having thought that there are such things as low risk high return investments.

When capital was stampeding into Thailand, it came mostly in form of cross-border interbank loans. When capital was stampeding out of Thailand, it went again mostly in form of cross-border interbank loans (or more precisely the repayment of the loans).

The local banks have paid dearly for their past imprudent practices. Hopefully the punishment will teach them against any future over-reliance of cheap short-term foreign capital. Unfortunately, the international banks who were lending imprudently the local banks have hardly suffered. Any suffering they may be enduring now is indirect. Some international banks are getting caught with problem on their long-term loans to non-bank companies which, as a consequence of the currency crisis, have been unable to continue servicing their debt.

The problem is those banks who got their hot capital back are not always the the same banks who got their cool capital stuck. So, the imprudent short-term cross-border interbank lending will continue.

I am not going to pretend that I know 'the' solution. Whatever the solution to the current global vulnerability toward currency crises must, however, keep the moral hazard of cross-border lending in check. A theoretical, but not so practical, solution is to do away with the IMF altogether. Hopefully, a gentler and kindler solution will come around. Libertarian doctrinairians, though, probably say "Bah! Humbug!".

Contributed by Visoot Phongsathorn ( on January 10, 2000.

-- Visoot Phongsathorn (, May 04, 2000.

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