The Challenge of Monetary Stability

We live in a world of unbelievable global interconnection, this exchange of

information has allowed us to not only communicate with other people around
the globe instantly but also has extend to financial markets. Governments and
Institutions have increased their lending and borrowing activities liquidity is
available and many are ready to take it to purse their goals; individuals can
now simply establish a relationship with a financial intermediary, turn on their
computers and have full access to the financial marketsin the past this was
limited to only a few. Today financial markets are been populated with new
economic actors. This context presents a wide set of opportunities and an
increasing amount of potential risks, a context like this presents an immense
challenge for an institution whose sole purpose is avoiding another great
depression and to ensure the development of financial markets avoiding the
risk of turmoil, this institution is the International Monetary Fund.
The International Monetary Fund (IMF) is born under a context of reconstruction
and fear to the shadows of the past, the IMF was created on the 27 th of
December 1945 with one goal and one goal only: Ensure the stability in the
international monetary system through the surveillance of its members and the
global economy, how? Through economic policy advisory and lending. The first
important step that the IMF gave into the building of a new economic order was
the famous Bretton Woods System which basically stated that the US Dollar
was the new gold and all currencies would need to be value against it, and
finally the US Dollar against gold. Stability was the only purpose of the Bretton
Woods System, global exchange rate stability. The IMF (And the world) believed
that by fixing their exchange rates stability was going to be achieved but soon
they found out that countries are different and that monetary stability looked
more complex than what they thought.
On the 70s President Nixon announced the suspension of the Bretton Woods
system to battle inflation and countries were allowed to choose their own
monetary policy paths. Now the task had spread to identifying the key players
on the global financial chees game. During those years countries and
institutions increased their lending activities, this exchange of assets expanded
the financial networks and the shadow of interdependence was present. The
uncontrolled exchange of financial assets resulted on a number of countries
over-borrowing triggering what was defined as the underdeveloped world debt
crisis (today we have a developed world debt crisis but we will talk about it
later). The 90s debt crisis found its battle ground at Asia, where countries were
experiencing debt to GDP ratios of over 150% while maintaining fixed exchange
rates, Why was this a problem? Imagine a person who is overspending using its
credit card, every month the borrowed amount increases but its income is the
same, this individual is not willing to make any expenditure changes in order to
balance his credit card commitments, soon it will find he is in trouble, big
trouble. The Asian crisis was a problem because the reality of financial
contagion appeared stronger than ever. The IMF course of action was to lend
money to the trouble countries to continue paying to its borrowers, this would

reduce fear of contagion, and in exchange for this support the IMF asked these
group of countries to submit themselves to a set policy changes. The IMF acted
but acted late, this reconfirmed the fact that the new global scenario was more
complex than what was expected.
From the Asian crisis we learned that a good indicator of a financial crisis is the
existence of an economic bubble. A bubble is created when prices do not
represent the real value of assets, the IMF believes that bubbles are often
caused by excess of monetary intervention, and here is where its task is key.
The 2008 subprime crisis (a consequence of a bubble on the US Housing
Market) has been one of the greatest failures of financial institutions around the
globe, only a few saw it coming but the decision makers never acted to prevent
it. The subprime crisis affected the most developed economies and many claim
that the IMF failed to see it coming but after avoiding a new great depression
like Neo dodging a bullet on the movie The Matrix we need to accept that the
IMF surveillance task is more important than ever.
The panorama is difficult, to tackle the crisis countries took extraordinary
monetary policy measures to re-start their economies engines, governments
had to also accept and extra fiscal burden to avoid the default of key private
financial institutions (Remember the word: Bailout?). And even with all that
central banking intervention and government bailouts we have regions like
Europe where inflation is not improving (1% to 3% pre-crisis levels, 0.2% by the
end of 2015), confidence is not close to be reestablished, and Monetary Policy
may no longer have more bullets (Interest rate almost zero); we have countries
like Japan where they are not even close to exit the crisis, with a GDP flirting
with zero since 2012; the United States were unemployment has improved but
the current Chinese economic situation is threating the world with a new
subprime level situation limiting the actions of the Federal Reserve.
The Asian giant has always been a cause of headache for the IMF, they are
constantly intervening to their best interests not thinking about the potential
consequences of their actions. Their constant interference (not only on
exchange rate but also in financial markets) created the foundations of a
financial bubble that exploded on June 2015. China doesnt listen to institutions
like the IMF maybe because of ideological differences, but on an interconnected
world like ours where we all depend from each other working together is in the
best interests of everyone.
Last year the Greek crisis was one that created fears of a European Union
fragmentation, on the negotiation tables everyone was seeking their own
interests (including the IMF) but in the end everyone worked together to find a
solution (even if it seems temporary). The lesson from the Greek Crisis should
not focus on to whose convenience the solution was structured but the reality
that to avoid a major situation many actors needed to be involved with the IMF
playing a very important role. The European Union can be seen as the perfect
example of a futuristic monetary order where a fixed exchange rate in the form
of one single currency been shared by countries with very different fiscal and

economic realities. The success of a monetary stability under a framework like

that requires the work of everyone, and institutions like the IMF as a key
economic agent are important to maintain the stability of it.
Today were are looking at a world economy suffering of a major slowdown,
where its most important agents have an over-borrowing situation (with over
100% Debt/GDP ratios) that happened with the idea of a brighter economic
futurevision that now looks more like a dream. The challenge is enormous
and differences need to be set aside to find solutions, the IMF may need to
admit that old answers are no longer valid and may need to re-think its goals
and its mission. Monetary stability is possible but we live in a changing world
and adaptation is required for success that is the biggest challenge of all.