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'overconfident' Imf Downplayed Risks In Run-Up To Financial Crisis

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http://www.guardian.co.uk/business/2011/feb/09/imf-downplayed-risks-financial-crisis-report?INTCMP=SRCH

A damning report on the International Monetary Fund's failings in the run-up to the global financial crisis has blamed "groupthink" and "intellectual capture" for the inability of the Washington-based organisation to spot Britain's looming banking crash.

The body set up to monitor the IMF's performance said risks were downplayed, light-touch regulation lauded and overconfidence displayed in the resilience of banks in the City and on Wall Street that proved to be vulnerable when the mood turned sour in the summer of 2007.

In a 50-page assessment peppered with harsh criticism, the IMF's independent evaluation office (IEO) said few clear warnings had been provided about the risks and vulnerabilities of the global financial system in the years from 2004 to 2007. It highlighted a health check on the UK in 2006 that said banks were in good shape, praised City regulation and expressed few concerns about the mortgage market.

"During the run-up to the crisis, the banner message of IMF surveillance was characterised by overconfidence in the soundness and resiliency of large financial institutions, and endorsement of the financial practices in the main financial centres. The risks associated with housing booms and financial innovations were downplayed, as was the need for stronger regulation to address these risks."

Noting that oversight of the US and Britain had been particularly weak, the IEO "found that the IMF's ability to identify the mounting risks was hindered by a number of factors, including a high degree of groupthink; intellectual capture; and a general mindset that a major financial crisis in large advanced economies was unlikely. Weak internal governance and an institutional culture that discourages contrarian views also played an important role."

Dominique Strauss-Kahn, the IMF's managing director, said: "The failure of the fund to warn about a systemic crisis in a sufficiently early, pointed, and effective way is a humbling fact that the institution has been frank about acknowledging and prompt about responding to."

Strauss-Kahn, who was not at the IMF between 2004 and 2007, said a number of reforms had been implemented, including a new early warning exercise; vulnerability tests for advanced economies; mandatory financial stability assessments for systemic countries; and cross-country and spillover reports. "We should think about doing more," he said, including consideration of how to bring in a greater diversity of views and dissenting voices. Moises Schwartz, the IEO's director, said the IMF had already taken some steps to enhance surveillance, but stressed that improvements were needed to the organisation's "culture, governance and practices" so that it was better prepared to confront future challenges.

The IEO called for changes to the IMF's "institutional structures and incentives to foster better assessment of risks, internal collaboration, candour and clarity in messages, and the ability to "speak truth to power".

It said that when studying the policies of the US and the UK in the years leading up to the crash, the IMF had "largely endorsed policies and financial practices that were seen as fostering rapid innovation and growth". The belief that financial markets were fundamentally sound and that the big banks could cope with any likely problem lessened the sense of urgency to assess risks or worry about how things might go wrong. The IEO said the fund's report on Iceland in 2007, the year before the country went bust, had not made the ballooning of the banking sector to 1,000% of GDP the focal point of discussions.

"Bilateral surveillance in the US and UK, the systemic financial centres most directly at the core of the crisis, failed to highlight relevant vulnerabilities," the IEO said. It added that the IMF's financial assessment of Britain in 2006 had noted risks caused from the increasing reliance of banks on wholesale funding from the global money markets, deteriorating asset quality and increased sub-prime lending. "But the bottom line was that financial innovation and regulation were praised, the banking sector was regarded as robust, and the overall message was reassuring. Quoting from the report, the IEO said the IMF had praised the UK banking system as "one of the strongest among advanced economies", said the mortgage books of banks did not "appear to be a significant source of vulnerability" and accepted that "overall, the financial sector is well regulated".

Noting that the IMF praised the US for its "light-touch" approach to financial regulation, the IEO added: "Moreover, the IMF recommended to other advanced countries to follow the US-UK approaches to the financial sector as a means to help them foster greater financial innovation. The IMF did not sufficiently analyse what was driving the housing bubble or what roles monetary and financial policies might have played in this process. Furthermore, the IMF did not see the similarities between developments in the US and UK and the experience of other advanced economies and emerging markets that had previously faced financial crises."

The IEO blaming the IMF? I thought the blame was directed towards Labour & the treasury?

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The IEO blaming the IMF? I thought the blame was directed towards Labour & the treasury?

The Guardian needs to pander to its target demographic,

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The Guardian needs to pander to its target demographic,

Exactly.

But what about the BBC? Weren't they supposed to be "above" all that?

BTW, did the BBC ever warned the nation about the mounting credit debt? Evident since at least 2003 or 04?

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The report still seems to be claiming that they were conned, led up the garden path and not given all the information necessary to do their job.

Edited by billybong

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The IMF lacks credibility. In the last year it has endorsed Darling's 50% deficit reduction plan and Osborne's 100% deficit reduction plan.

Which one of them is right? Well the IMF don't have a flooking clue that is for sure.

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I think most people here saw a "financial crisis" coming! :o

A colleaugue at work had a few BTL flats (about three).

When the tennants moved on he sold up! That was 2004-2005 ish!

I guess storms are invisible, if you are in the eye of it! :blink:

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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