An Easily-Answered Question

Alex Tabarrok finds this question remarkable: "can market transactions generate institutional arrangements that impair the market economy?" That question was asked in 2006 by Richard Wagner, one of Tabarrok's colleagues at George Mason University. I guess the point was the question foresaw the current financial crisis (Wagner mentioned the securitization of debt earlier in his question), but students of IPE should be well aware of market transactions that can end up causing more damage than good: large volatility in capital flows, especially from the developed to less-developed countries, often generate boom-and-bust cycles that can decimate entire economies. Countries that borrow in foreign currencies sometimes leave themselves open to currency crises that have similarly devastating effects.

I'm not sure why Tabarrok (or Wagner) should be surprised that the result of market transactions can sometimes "impair the market economy". In my mind, a quick glance at history demonstrates that Wagner's question is easily answered in the affirmative.

IMF Rising

Another phase of the global credit crisis has begun; developing nations are running to the IMF for emergency aid.   And finance ministers across the world don't see many other options for how to survive a crisis created by developed credit markets.  Capital flight, wide-swinging currency fluctuations, tightening private market credit - we've seen this all before.  

Now the IMF has begun talks to increase their lending capabilities to as much as $1 trillon.  Considering the bank has $200 million in collateral, they'll need quite a bit of supplemental cash.  Perhaps most telling of how weak the US economy is, the IMF has failed to even approach the Fed for support.  Instead, the bank is in talks with Japan and oil-producing companies.

So, is the IMF poised for a renaissance?  Gordon Brown certainly hopes so (interesting that Brown chaired the IMF's policymaking committee for several years).  The IMF's leader, Dominique Strauss-Kahn, stresses that the Fund will eliminate many of the loan conditions that made leaders such as Hosni Mubarak of Egypt refer to the IMF as the International Misery Fund.  However, new conditions have not yet been outlined and a recent study in the Harvard Medical Review found that IMF lending in the post-communist European Bloc directly led to decreased health conditions in recipient nations.  

Check out this map of Eastern European Countries and their debt load (source: www.economist.com):