The G-20 has in a sense "re-capitalized" the International Monetary Fund, which many in the press, blogs, etc. have noted (See the NY Times, though I inclluded most of their article below.).  Questions have come up after classes and on the street about the International Monetary Fund and how it operates.  First, some information from the G20 meeting:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

London - April 5, 2009: Last week, the leaders of the world’s most powerful nations effectively passed the buck — along with hundreds of billions of bucks — to the International Monetary Fund.

But in doing so, they left unanswered a crucial question: Can the I.M.F., an institution known for requiring stringent antispending policies as the price for extending aid to countries in trouble, quite suddenly disburse public monies to spur growth and at the same time ensure that they are used responsibly?

You see the IMF, even though created to provide liquidity, has taken on a dictator of capitalist anti-spending, anti-big government policies of the Western Economies - most notably the U.S.A.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

“This is the I.M.F.’s biggest challenge since Bretton Woods,” said Simon Johnson, a former economist at the fund who teaches at the Massachusetts Institute of Technology. “Throwing money at the problem is certainly not the answer, but on the other hand if you don’t force austerity on a Belarus, you are not credible.”

The I.M.F. was created in 1944 at a New Hampshire resort, Bretton Woods, where the United States and Britain led other nations in creating the first of a group of international organizations that became pillars of the postwar international system.

Of the $1.1 trillion in additional support for the global economy trumpeted as the core accomplishment of the Group of 20 summit meeting here, $750 billion consists of new lending commitments and credit guarantees for the I.M.F. That hand-off to the fund was a tacit admission that fundamental differences between the United States and Continental Europe over encouraging major industrial countries to expand their own stimulus programs could not be bridged.

The escalation of the I.M.F.’s responsibility comes at a time when the fund itself is struggling to redefine its mission.

Criticism of the fund has long focused on its image as a hectoring policy scold pushing for deep budget cuts, privatizations and other market-friendly measures more in tune with the demands of foreign investors than the needs of the local population. That focus, supporters and critics agree, has branded the fund an enforcer of what they call the “Washington consensus” — the creed of free markets and fiscal discipline.

For many experts inside and outside the fund, that emphasis seems too narrow for the challenges facing today’s global economy, and possibly hypocritical. It is hard to demand fiscal discipline of borrowers when governments in the United States and Britain, at the epicenter of the collapse, are running some of the largest budget deficits and most expansive monetary policies as they try to spend and borrow their way out of trouble.

As Prime Minister Gordon Brown of Britain declared Thursday, “The old Washington consensus is over.”

For the fund’s managers, the move away from that consensus — and from 20 years of preaching fiscal caution — poses some very practical questions. Most important is whether they can find a way to ensure that donors’ funds are not squandered while nursing borrowers through a wrenching global recession for which they bear little responsibility.

To do that, experts say, the I.M.F. will need to revert to the mission it was given at its birth, when it was less a monitor of good policy behavior than the anchor of a nascent post-World War II global financial system.

“This goes back to the idea of the I.M.F. as a source of liquidity, not a shadow government looking over the shoulders of finance ministers,” said Philip Lane, an international economist at Trinity College in Dublin.

There have already been signs of change.

Late last month, the I.M.F. announced a revamp of its lending criteria so that less emphasis is placed on evaluating a borrower’s ability to meet “structural performance criteria,” the fund’s jargon for such measures as spending cuts and tax increases.

The long inclusion is because I found it helpful and informative at the same time so left the article to explain.