Wednesday, October 7, 2009

Daily Hurriyet Column: Impressions from the Meetings

The unedited version of my fifth column covering The Meetings is below; you can read the final version at the Daily News web site. And for once, there is no cheesy title. As for the article itself: After a couple of strictly off-the-record conversations with IMF staff and what the Fund's top brass has been saying recently, I am now more confident that very profound changes are line up at the Fund. 2010 should be a year of Fund watching.

Now that the IMF-WB Meetings are almost over, it is time to summarize my impressions from the seminars I attended as well as interviews and casual chats with the attendees.

The Istanbul Consensus

An Istanbul consensus has emerged, but at the least expected of places: The economics outlook. Independent of the shape, almost all attendees expected a slow US recovery. They were more bearish on other developed countries and more on emerging markets, especially Asia. There was also agreement that the woes of the financial system are far from over. I could say that the views in IMF’s WEO and GFSR reports accurately reflect the median attendee opinion.

Most attendees did not see inflation as a threat in the short-run; if anything, a few voiced deflation worries. But there was serious concern on the timing of monetary and fiscal exit strategies. The nightmare scenario is that inability or unwillingness to unwind at the right time could lead to inflation and a rise in long-term yields in the US, leading to yet another recessionary spiral. Martin Wolf, Financial Times Chief Economics Commentator declared that in this scenario, the dollar would collapse, and he was not the only one. However, this doomsday is still far away; no one expects these issues to be a problem before 2011. Finally, I have not yet met anyone who thinks that markets are reflecting fundamentals, but there is unsurprisingly huge divergence of opinion on the timing or amount of the correction.

The Supervitory Challenge

The attendees were less sure on the direction of regulation and supervision. This was one most controversial and discussed issues, precisely because the attendees were aware of the challenges. For one thing, the implicit financial sector guarantees have been made explicit during the past year. Moreover, finance is too large, powerful and smart: Without more efficient regulation and supervision, there is the risk that officials will be captured by the sector or end up chasing their own tails rather than the tail risks they are supposed to look out for. There is also the risk of overregulation, which would kill off all the beneficiary aspects of finance without touching the real issues.

Then, there is the problem that everybody loves credit, especially politicians. And Chuck Prince was actually right: You have to dance as long as the music is playing. So if a party-crasher comes out waving flags, she’d better be right! Therefore, you need stronger and more independent central banks, but actually, the trend is towards the opposite direction in most countries. In any case, giving policymakers more targets than instruments will be not only politically, but also technically feasible. Finally, one of the main lessons of the crisis is the danger of contagion from international financial linkages, so a national agency might not be able to identify all risks.

There is then an unequivocal demand for an independent body that can monitor the world economy not be afraid to raise flags when required, but there can be no supply of this service at the national level because of political and technical constraints. I know I am in the minority, but that’s why I see life ahead for the IMF-FSB initiative that I outlined yesterday.

In fact, while it was already beefed up in the past year, the Fund is surely emerging even stronger compared to a week ago. I am sure many disregarded Dominique Strauss-Kahn’s comments that “these would be the meetings we would tell our children about” as PR, but an interview with Lorenzo Giorgianni of the Strategy, Policy and Review Department of the Fund and a few informal chats have convinced me to give the benefit of doubt to the self-described socialist managing director. In fact, I would not be surprised to see profound changes in a couple of years in not only the instruments and workings of the Fund, but also its building blocks that could go as far as changes to the Articles of Agreement.

This is all good news: If anything, the Fund is turning to its roots: Keynes’ main ideas in the process leading to the Bretton Woods was the creation of an international reserve currency, the Bancor, and a lender of last resort. Although even high-ranking Chinese officials were frank to admit that we are very far away from the former, the latter might be much closer than we think.

What does all this mean for Turkey? What were the main issues that came up regarding the Turkish economy? This is where I will pick up tomorrow, the last in my week-long daily coverage of the Meetings.

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