- The Washington Times - Thursday, February 24, 2000

Congress has a well-earned reputation for acting only in response to an immediate crisis. Sometimes, this tendency is a good one; it avoids precipitous action when matters would best be left well enough alone. But in other times and with other issues, the right time for action can only be when there is no crisis. Such is the case with the International Monetary Fund.

Congress tends to deal with the IMF only reactively, when an expensive loan package is being debated. Government officials confidently assert the need for the United States to deliver its share of urgently needed rescue money. Taxpayers grumble over the apparent cost and have no way of verifying that the action serves their interests. Congress questions and complains, but ultimately accedes to the request, and little in the way of long-term reform is accomplished.

This is a dangerous cycle. Ultimately it will lead to a time when the public and Congress simply say "no" to a bailout request, with unpredictable results. Therefore, the time is now to take steps to ensure that the IMF functions in a way that best meets the objectives of international financial stability, while at the same time being sufficiently accountable to U.S. taxpayers.

Recently, the Council on Foreign Relations issued a report ("Safeguarding Prosperity in a Global Financial System") on this issue that is worth the attention of Congress. The CFR is the furthest thing from an "isolationist" body. But its report makes a series of striking recommendations for streamlining IMF operations that Congress would do well to heed.

One is that the IMF should significantly scale back the size of the loan packages that it provides, excepting instances of a systemic international currency crisis. As the report put it: "Rescue packages should not be so large as to provide covers for holders of short-term external debt to escape the consequences of poor lending decisions… We are not persuaded that smaller rescue packages would necessarily make it more difficult for emerging economies to regain the confidence of investors."

The CFR report also finds that the burden of bailouts should not all be placed at the foot of taxpayers. "Too often, large rescue packages allow private creditors… to escape from bad lending decisions at relatively little cost. In the rescues for Mexico, Thailand, Indonesia, and South Korea, some groups of private creditors got off far too lightly." The report also notes that in Russia, despite serious underlying weaknesses investors were prepared to purchase large amounts of high-yielding government securities, presumably under the expectation that should conditions worsen, geopolitical and security concerns would prompt G-7 governments and the IMF to bail them out.

These "moral hazard" problems are not the only concern. The threat to the aims of the IMF is political as well as economic. Every time a bailout occurs amid the perception that "Main Street" is bailing out "Wall Street," we take one step closer to the day when "Main Street" will no longer provide adequate political support. If this happens at a time of a genuinely contagious financial crisis, the results could be disastrous.

Now is the time for Congress and the administration to work together to consider how best to implement these and other recommendations by the CFR. The IMF should be required to more closely follow its own guidelines and restrictions upon the size of bailout packages. Moreover, Congress should insist that any rescue package be contingent upon recipient countries forcing private creditors to take the same debt-rescheduling "hit" that potentially faces taxpayers in debtor and creditor countries whenever there is a bailout.

These measures reduce market distortions at the same time that they provide for greater accountability. If it is perceived that the United States will no longer offer tacit guarantees for speculative investment, private capital markets will not be induced away from prudent decision-making, as they too often are by current practices.

There is no time like the present to reconfigure the IMF to increase its efficacy while also reducing the size and scope of interventions. We should use this time of relative stability to place the appropriate conditions upon future IMF bailouts, and thereby reduce the chances of inadvertently subsidizing a future financial crisis.

Sen. Judd Gregg, New Hampshire Republican, is a member of the Appropriations Subcommittee on Foreign Operations.

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