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Last Resorts and Just Desserts

At the American Economic Association luncheon: the IMF's Stanley Fischer, international lending and indefinable frozen fruit.

Eating Out

JACKSON HOLE, Wyo. -- One really mustn't pass up an opportunity to attend an

American Economic Association


Last year, in Chicago, it was


who spoke while the nerds munched. Your correspondent recalls it clearly because he was sitting close enough to know that, when it comes to artificial sweetener, G prefers the blue to the pink (he also eats lefty but drinks righty). And because, as your correspondent listened to the

remarks that would become known as the

Deflation Speech

, he carved the bloody D-word in the table every time G uttered it (16 etchings total).

And because of the lame opening remark from the sap tapped to introduce the featured speaker.

When Chairman Greenspan accepted my invitation to speak, I could only describe my reaction as one of irrational exuberance!


This year's speaker was much worse -- and owing only partly to the fact that, in the wake of G. Love, anyone's a weak draw -- but at least the introduction was better. A University of Chicago professor got up and surveyed the huge elevated table (one that stretched miles from either side of the dais) of fancy dignitaries he would have to introduce before he got to the main event, the


Stanley Fischer. Then he said, "Well, like any good Chicago economist must, I'll begin on the left."

(A note on the seating for the proletariat. The strategy one employs at things like this is the same tack one takes at a wedding: Try hard to (a) snare a seat at a table full of interesting people or (b) at least avoid the table with a high density of losers. And just like at a wedding, doing either proves impossible. Your correspondent's fellow diners included one cool chick from Finland (note that Finnish email addresses end in .fi); one cool guy from Ireland (your correspondent is now scheduled to visit Cork); one particularly big pain in the ass (even after geographical adjustment) from the Bay Area; two guys from a Japanese bank with their American liaison; and two Brits (one was cool, like


Peter Eavis

, but the other sparked a sudden and deep appreciation for the



Then Monsieur Fischer got up, stressed that the opinions he was about to voice did not necessarily reflect the official views of the


, and, for 60 solid minutes, he defended his employer against the charge that it's incapable of saving the world.

(A note on lunch. It consisted of salad, steamed vegetables, roasted new potatoes, the leg -- and an impressive portion of the body -- of an unidentifiable bird, and gelatinous, mostly-frozen fruit (pears? blueberries? raspberries?) atop cardboard masquerading as tart. All that, plus the privilege of hearing Stan speak: $60. No deflation here.)

The crises that erupted during the last two years, Stan argues, have prompted the most serious rethinking of the need for an international lending agency since

Bretton Woods

. And the questions being asked are these: Is there a need for a new international lender of last resort, or LLR? One that lends freely, at a penalty rate, against collateral? And is any agency playing that role now?

Yes, came the answer from Stan. There is surely a need -- international capital flows are fast, sizable and unstable -- and the IMF is playing the part.

Shouldn't the role of LLR be reserved for central banks? That's silly, counters Stan. The


has previously acted in such a capacity (leave aside the fact that the IMF and the Treasury are now effectively synonymous) and, as a matter of fact, so too has

J.P. Morgan

(at the beginning of the century). There's precedent for ya.

Shouldn't the LLR have the ability to create high-powered money? That would help, concedes Stan, but it's not entirely necessary. And besides, something called Article 18 allows IMFers to jack up country quotas (and hence IMF reserves) anytime they like; Stan says the IMF can raise all the money it needs. Hear that, Congress?

Shouldn't the LLR spell out lending conditions clearly and in advance, and shouldn't it lend only against collateral that is worth something during normal times?

Here Stan cites the birth of roughly 140 crises during the past 10 years as evidence that measures to guard against moral hazard do not work. And though there is no perfect solution to the moral hazard problem, there does exist an optimal one: It is "to try to control for it, and to live with it; that is the best we can hope for."

Are you there, God? It's me, Stanley.

So is it at all possible that the IMF can do -- and could have done -- a better job?

Perhaps, says Stan (the concession comes grudgingly, and with pain), but a lot of it is out of our hands. Blame the speculators for contagion. Blame other agencies and the private sector for not doing more. Blame the troubled countries themselves for not having sound financial structures and exchange-rate regimes to begin with.

And that about sums it up. Bang. Blame.

Fade (Away)

G appears before the

House Ways and Means Committee

tomorrow. This recent blurb from

The Economist

serves as a good backdrop.

If interest rates had been raised earlier to check the stock market and to curb the growth in consumer spending, America's economy might now be in better balance. True, the fragile state of the world economy argues against a rise in American rates right now; but in retrospect the Fed was probably wrong to cut rates so eagerly last year. The bubble will eventually burst anyway, but it would have been better to prick it sooner at the cost of a mild recession than to risk a deeper recession later.

And it would be a tragedy for Greenspan to prepare his testimony within any other framework.

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