Wednesday, October 29, 2008

Meaningful Announcements

. Wednesday, October 29, 2008

If lowering the Fed funds rate doesn't matter much at present, it doesn't mean that institutions don't have an important role in the financial crisis. Today the IMF announced a new short-term lending facility for emerging markets, which will provide quick liquidity with "no conditions attached once a loan has been approved". And the Fed announced temporary lending to four EMs: South Korea, Mexico, Brazil, and Singapore. It remains to be seen whether these actions will be sufficient, but they were necessary and are a step in the right direction.

Even better, these organizations were able to quickly enact these new policies because they are not constrained by domestic politics. Contrast that to the drawn-out legislative wrangling required before the modified Paulson plan was passed in the U.S. Congress. The resulting bill was a bloated, bastardized mess. The IMF and Fed, however, are able to move swiftly and relatively cleanly when they deem intervention necessary. International institutions are often criticized because their leaders are not democratically elected and so a lack of accountability exists. In normal times this criticism carries some weight. In crisis situations, however, it is unclear whether the circumvention of politics is a bug or a feature. There is some trade-off between transparency and flexibility, and in a crisis the appropriate margin may skew towards greater flexibility.

(ht: Dani Rodrik)

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