For the past few years the chief role of the International Monetary Fund (IMF) has been to act as praise-singer for global capitalism. Its traditional job of bullying governments into implementing policies of economic austerity had become harder to perform.
The huge flows of private capital to so-called “emergent market economies” meant that Third World states no longer had to go cap in hand to the IMF or the World Bank for loans. So the IMF was reduced to acting as a cheerleader.
As recently as last October, when the current credit crisis was well under way, it claimed that “the global economy has recently displayed greater stability than observed even in the 1960s – the last golden age of strong and stable growth”.
It didn’t take it long for the IMF to eat its words. Its latest six monthly World Economic Outlook, according to the Financial Times, “offer[s] a much gloomier view of the outlook for the world economy than the consensus of private sector economists and economic policymakers”.
The IMF predicts that the US economy will barely grow this year and next. More generally, the growth rate of the advanced economies as a whole will halve, from 2.7 percent in 2007 to 1.3 percent in 2008 and 2009. Germany and Japan, both heavily dependent on exports, would be hit hard by any slowdown in world trade.
The fundamental force driving this slowdown is the credit squeeze, described by the IMF as “the largest financial shock since the Great Depression [of the 1930s], inflicting heavy damage on markets and institutions at the core of the financial system”.
This, incidentally, is one of the key features of the present financial crisis.
Earlier panics of the neoliberal era started outside the core of the system – for example, Mexico 1994, South East Asia 1997, Russia 1998. But this credit crisis has spread out from the US itself.
Many mainstream commentators hope that it will be the bigger economies in the Global South – the so-called BRICs of Brazil, Russia, India, and China – that will come to the North’s rescue.
The story is that China and India in particular have “decoupled” themselves from the US and will carry on growing, pulling the world economy along behind them.
The IMF argues that the BRICs are less dependent on markets in the US and Europe than they used to be. Nevertheless, “spillovers [from North to South] remain substantial” and are “mild during advanced economy slowdowns but more severe during recessions”.
So everything turns on how severe the US recession turns out to be. The IMF constructs an alternative “downside scenario”. This more pessimistic forecast predicts the US economy shrinking by 2 percent in 2009, the eurozone also experiencing negative growth in 2008-9, and the world as a whole undergoing a recession.
One of the factors that could precipitate such a serious economic slump would be if the credit squeeze develops into a full scale credit crunch. The IMF defines this as a situation where the banks don’t just cut borrowing but run out of capital.
As it is, the IMF estimates that banks have lost nearly $1 trillion in bad loans. Hence the savage cutback in lending, as the banks struggle to rebuild their finances. The British Council of Mortgage Lenders warns that lending may halve this year.
Some establishment figures have announced that the worst is over. Stanley Fischer, who used to be deputy managing director of the IMF and is now governor of the Bank of Israel, says that last month’s rescue of the Wall Street investment bank Bear Stearns might prove “a turning point” in the crisis.
It’s certainly true that the takeover of Bear Stearns by JP Morgan Chase, with the backing of the Federal Reserve Board, stemmed the panic that had been spreading through global stock markets.
But the stock markets have never been the heart of the problem.
That lies with the bad loans that banks made during the era of easy credit in the mid-2000s. These are poisoning and paralysing the global financial system. If the IMF is worried, then maybe we really are facing a bad crisis.