Is the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF) independent enough?

In October 2014, the Independent Evaluation Office of the International Monetary Fund presents a report titled: “IMF responses to the financial and economic crisis: An IEO Assessment”

And it does not mention what I am convinced is the primary cause of the 2007-08 crisis; and also what most obstructs our way out of it. 

I refer to the Basel Committee for Banking Supervision’s credit-risk-weighted capital/equity requirements for banks.

These allowed banks to hold assets perceived as “absolutely safe” against extremely small capital (equity) requirements, which translated into extremely high leverages of equity (62.5 times to 1 and more). 

That allowed banks to earn much higher expected risk-adjusted returns on equity when lending to what was perceived as “absolutely safe” than when lending to what was perceived as “risky”, which translated, naturally, into dangerously high exposures to what was perceived as absolutely safe”.

And any simple observation of the crisis makes clear the direct relation that existed between bank assets in problem, and bank assets with low risk-weights. For instance: i. AAA rated securities backed with mortgages to the subprime sector in the US. ii. Real estate backed financing, like that in Spain. iii. Loans to “infallible sovereigns”, like to Greece.

And we have not been able to get out of that crisis because banks still need to hold much more equity when lending to what is perceived as “risky”, like to medium and small businesses, entrepreneurs and start-ups… and that has of course impeded the liquidity provided by central banks to reach where it is needed the most.

And this regulatory risk aversion that so much distorts the allocation of bank credit to the real economy, and is dooming our economies to stall and fall, is not even part of the IMF discussions on what to do.

And so those criticizing IMF for “austerity” are not addressing the worst one of these, namely the risk-taking austerity regulatory virus that has invaded our banks... slaying the animal spirit of our economies.

And so how do you think I feel about IEO. I have to doubt its real independency… I must suspect it is also into the pockets of a groupthink incapable of understanding, or not daring to consider the possibility that bank regulators could have been so utterly mistaken. Not daring to lay the blame for the crisis more on regulators than on the bankers.

It is in bank regulations, where the animal spirit is being slayed, where Keynes is most needed

John Maynard Keynes argued: One family whose breadwinner loses a job can and should cut back on spending to make ends meet. But everyone can’t do it at once when there’s generalized weakness because one person’s spending is another’s income.

But the same goes for risk-taking. The risk-taking by the few creates the opportunities for the many. In other words, nothing can be as risky as excessive risk-aversion.

Unfortunately bank regulators, with their credit-risk-weighted capital/equity requirements, have effectively instructed banks:

“Stop taking the risk of financing the ‘risky’!”… the medium and small businesses, the entrepreneurs and start ups… 

“Finance only the ‘infallible’!”… the sovereigns, the housing sector and the AAAristocracy.

Keynes stated: “If the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.”

And so today, it is clearly in the Basel Committee for Banking Supervision, in the Financial Stability Board and in the IMF where Keynes is most needed; in order to demolish the obstacles that distort the normal risk-taking that should take place in our banks.