Be wary of bailing out the IMF

By Steve Forbes
Washington Times, 27 July 1998

When a doctor is guilty of malpractice, you don’t let patients’ worsening conditions justify
renewing the doctor’s license and raising his pay. Yet that is exactly what the Clinton
administration wants Congress to do with the International Monetary Fund: shovel over more
money ($18 billion to be exact) to the agency that helped instigate and deepen the very crisis the
White House is using as the chief justification for our ponying up more money. Rarely in modern
times is an agency to be so richly rewarded for such lethal incompetence.

The Republican Congress should not let itself be stampeded. At the very least, if Congress
votes the money, it should attach substantive conditions. It has an obligation to ask basic
questions: What is this money being used for? Are American taxpayers being asked to bailout
sophisticated lenders? Are we subsidizing disastrous policies that are beginning to hurt even the
mighty U.S.?

The administration and the IMF urged Thailand last year to devalue the bhat. When the
Thais
took this poisonous prescription, the Asia contagion began. The IMF routinely advises nations to
devalue. Trouble is, when markets realize a country won’t defend its currency, everyone heads for
the exits. We should have learned from the experience of Weimar, Germany, in the early 1920’s,
what happens when a currency collapses. Internally you get a rip-roaring inflation, which is what
is unfolding in Indonesia, South Korea and elsewhere. With a sudden, major inflation, workers
wake up and find their wages effectively cut in half or more and their savings destroyed; otherwise
solvent businesses are bankrupted and unemployment rises; political and ethnic tensions rise; and
trade patterns are distorted. In Indonesia, the collapse led to murderous pogroms against the
Chinese minority. Incredibly, in several countries, the IMF also advocated doing away with fuel
and food subsidies, just at the time when millions of people could no longer afford the necessities
of life. The IMF also pushes for tax increases which is like telling a pneumonia patient to sit in
the snow without a coat.

The Asia debacle not surprisingly has led to speculative currency attacks against Latin
American countries such as Brazil. To prevent an Indonesian-like disaster, Brazil and others are
being forced to tighten monetary policy. No wonder Russia, already in deep trouble, finds itself
under new assault. These countries face a terrible choice: defending their currencies will lead to
recessions; not defending them will lead to depressions.

The IMF’s supreme arrogance and recklessness came when it kiboshed Indonesia’s attempt
to
establish a currency board several months ago. The currency board concept has worked
wonderfully in Hong Kong, enabling that city to preserve its currency during the crisis. But it has
also worked well with once-troubled nations such as Estonia, Argentina and Bulgaria. When
Indonesia announced that it was considering a currency board, overnight the rupiah jumped 30
percent in value.

Like the proverbial Bourbons who remembered everything and learned nothing, the IMF
remains haughtily unhumbled by these disasters. In Russia, it did urge the Kremlin to defend the
ruble but it is still beating President Yeltsin and company over the head to “improve” tax
collections. If Moscow actually did collect all the taxes owed under its utterly convoluted “code”,
the government would be owed more money than the entire national income! Despite recent
blustering that it is cracking down on tax evaders, the Kremlin pretty much leaves alone
Mafia-controlled businesses and instead harasses and crushes honest entrepreneurs.

Why can’t the U.S. and IMF suggest tax simplification a la Hong Kong which has a
variation
of the flat tax? Sadly we know the answer: They couldn’t do it for American domestic political
reasons. Most of that money for Russia will end up in overseas bank accounts of Russian Mafiosi
and their allies. Russia will continue to deteriorate. The Kremlin shows no sign of real reform.

The latest Russian bailout also underscores another deplorable IMF practice — propping up
favored political leaders and routinely undercutting others. Indonesia’s Suharto was considered by
U.S. Treasury Department and IMF pooh-bahs to be unacceptable. The screws were tightened
until he was ousted.

The question is what should Congress do? There are four basic principles of economic
progress: sound money, low taxes, the rule of law (especially for property rights and commercial
contracts) and non-bureaucratic interference in setting up and running businesses. Simple,
time-tested concepts. Yet the U.S. and IMF witch doctors routinely violate them and practice
economic medicine around the globe.

A panic stricken Congress should not sign a blank check. Instead it should escrow that $18
billion until those four principles are translated into actual prescriptions for stricken nations. Thus
instead of devaluations, the IMF would now recommend Hong Kong-style currency boards.

In addition our national legislators should demand true transparency for this agency. Who
in
our Treasury Department and in that agency did what and when before the Asian crisis exploded a
year ago this summer?

Given the IMF penchant for higher taxes, Congress should stipulate that from now on IMF
employees, particularly Americans, should not be reimbursed for all the taxes they are liable for on
their incomes. Incredibly, the IMF routinely pays those people any money its people owe in
income taxes on their salaries. Why should these witch doctors be, in effect, given tax-free
incomes?

Finally Congress should force the IMF to practice the principle of being responsible for
one’s
own behavior. In other words, IMF Managing Director Michel Camdessus and Executive
Director Stanley Fisher should be asked to pursue new career opportunities. Also, by the way,
should Deputy Treasury Secretary Larry Summers who has also been a prime orchestrator of this
bloody debacle.

While Congress is at it, it should pass a resolution urging troubled Japan to do what Ronald
Reagan did nearly 20 years ago when America was suffering from malaise: wide, deep and
permanent tax cuts; deregulation and a more stable monetary policy.

Here at home the Federal Reserve should be advised to recognize that the dollar is an
international currency and therefore our central bank should cease its increasingly deflationary
monetary policies. Real, short-term interest rates are at extra high levels. As usual, farmers first
feel the brunt of a monetary deflation because commodity prices plummet.

This is no time for Congress to abdicate its responsibilities.

Steve Forbes is editor-in-chief of Forbes magazine and honorary chairman of
Americans for
Hope, Growth and Opportunity.