April 8, 2008 | posted by Michael Baxter in Gold, credit crunch | comments (0) |

There can be no shortage of people out there who think it is poetic justice. The International Monetary Fund, that once seemingly-almighty financial institution, is short of money. Even more poetically, it could be argued it is down to the arrogance of its policy moves during the last decade.

Bank mangers used to be unpopular individuals. How many failed businesses blamed their bank? How many individuals felt tempted to put a picture of their bank manger on the wall and throw darts at it? It is not to say that bank mangers were necessarily wrong, but to the individuals who were turned down for loans it must have seemed that way. But, during that era of plentifully available credit, which may or may not be coming to an end, bank managers appeared to have been replaced by salesmen. No longer were we required to go cap in hand to the banks if we wanted money, they were coming to us.

A similar principle applied to the IMF. But this time, it was countries that had to get the begging bowl out, and no doubt many finance ministers were made to feel two inches tall in the process. The UK was not immune, and in 1976, under the chancellorship of Dennis Healey and Prime Minister James Callaghan, the IMF bailed out the UK, or more precisely the pound, enforcing its austere regime upon the UK, and leaving the high and mighty at the Treasury with egg all over their face. In fact, Mr Healey must have felt like even more of a silly Billy in the years that followed, after the pound surged, thanks to North Sea oil. Maybe the embarrassing IMF rescue was not, in hindsight, necessary after all.

In the late 1990s though, the IMF seemed to get it wrong. When the economies of East Asia, and then Russia, hit crisis, the IMF rode in over the horizon, and, just like John Wayne, insisted everything was done its way. So that was less government expenditure and higher interest rates. Curiously, the IMF’s remedy for East Asia and Russia was the exact opposite of the approach taken by Ben Bernanke in the US right now.

The result of the IMF policy was this. Western banks by and large got their money back, and nasty crisis in the West was avoided. But many countries of East Asia, with Malaysia heading the list, and then the following year, Russia, suffered very nasty recession as a result.

The most famous critic of the IMF policy during this period is Joseph Stiglitz, winner of the Nobel memorial prize for economics.

The IMF did not mange to endear itself to the governments and people of that region; its action created a great deal of mistrust for western financial institutions. Many blamed the IMF as being solely responsible for the economic hardship that followed in those countries – and according to Stiglitz some even refer to events in their countries as either pre- or post-IMF. That’s how strongly people in the region feel about its support during that period.

Ironically though, while a Western financial crisis was avoided – even with the failure of Long Term Capital Management, which was partially caused by the Russian crisis – it could be argued that the roots of today’s credit crunch were laid.

Certainly China and Russia have gone to great lengths to ensure they never need IMF help in the future. In Russia, Western resentment grew – which explains much of the current friction between Russia and the West, while China ensured its economic boom was fuelled by savings.

China is possibly unique in the history of economics in developing while maintaining balance of payments surpluses. Its booming economy has also helped contribute to a global glut of savings – which helped underpin the borrowing boom in the US and UK.

It is a complicated web we weave, but if you squint a bit, and take a look at the current economic crisis from a certain angle, from the angle of Chinese savings and trade surpluses, you could even make a case for saying the credit crunch is down to the IMF policy decisions of 1997 and 1998.

And that brings us back to the poetic justice. For the IMF makes its money from interest payments on its loans to countries. And ever since the debacles of 1997 and 1998, customers have been thin on the ground.

Banks have changed their spots, and shed their images of being run by bank managers in the mould of Captain Mainwaring, from Dad’s Army, to a dynamic hub of financial salesmen – maybe that has also contributed to the credit crunch too, but that is another story. The IMF, on the other hand, is perhaps suffering from decades of not being sufficiently customer focused, and is now running short of money.

The solution is simple enough, though. The IMF is selling some of its gold. In all, around $6bn of gold is going to be coming up for grabs, that’s around 12 per cent of its total holdings.

As you know, gold hit its all-time high earlier this year, and although it has fallen slightly since, it still is up on the price a year ago, which itself was up on the price a year before that. It would appear that if you are going to sell gold, now is a good time.

No doubt Gordon Brown is wishing his timing had been fortuitous. He sold gold from the UK’s vaults when the price was much lower than today – bringing in much criticism – although we are not sure he could possibly have foreseen how prices were going to rise.

Interestingly, Gordon Brown has often called for the IMF to sell its gold. But Brown wanted the proceeds to be used to write-off some Third World debt – we are not sure that the IMF, which wants to generate revenue, will see it quite like that.