'Groupthink' blocked IMF's foresight of crisis

A Best Buy official said pricing-strategy talks are at an early stage.
A Best Buy official said pricing-strategy talks are at an early stage. (Dec. 24 Photo By Bill O'leary)
Thursday, February 10, 2011

The International Monetary Fund was hobbled by a "groupthink" that put too much trust in markets and the oversight of regulators in developed nations such as the United States, undercutting its ability to foresee the recent financial crisis, the agency's outside watchdog concluded in a new report.

The IMF's Independent Evaluation Office reviewed public comments and reports issued by the agency's staff between 2004 and 2007, a period when big financial firms expanded the use of complex financial investments and tethered themselves to the fate of a U.S. and European housing boom that was doomed to collapse.

Dominique Strauss-Kahn, the IMF's managing director, noted in his response to the study that his agency had acknowledged its failure to raise the proper warnings "in a sufficiently early, pointed, and effective way." He said some changes have already been made, including requiring his staff to conduct an analysis of all major economies - the United States, until recently, did not allow the IMF to gain access to private information about its financial system - and involving his agency in efforts by major countries to monitor each other.

During the run-up to the financial crisis, the warning signs were plentiful, the report concluded. But the IMF opted to discount the worst outcomes and promote the vision of a healthy world economy benefiting from an era known then as the "great moderation," for its combination of strong growth, low unemployment and low inflation.

The boom was built on a dubious foundation, but "the IMF's ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mind-set that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches," the report concluded.

Staff members interviewed for the study portrayed an institution afraid to offend its member governments, particularly its largest shareholders, creating a culture of self-censorship. Even when staff members wanted to highlight potential problems, they "believed there were limits as to how critical they could be."

The agency at the time was going through its own crisis - cutting staff at a time when some conjectured it would become irrelevant in a crisis-free world. The IMF was formed after World War II to oversee the existing system of fixed world exchange rates, but in recent decades it has evolved more into a crisis lender for distressed countries.

- Howard Schneider


Best Buy looking at Wal-Mart pricing model

Best Buy Co., the world's largest consumer electronics retailer, may curtail three decades of tactical discounting and move instead to its own version of the everyday prices pioneered by Wal-Mart Stores.

With Americans increasingly using their smartphones to comparison-shop, consumers are unwilling to wait for sales if they find better deals elsewhere, said Mike Vitelli, executive vice president and co-head of Best Buy's North America division.

"We have to move rapidly in recognizing the transparency of pricing," Vitelli, 55, said in a Monday interview at Best Buy's headquarters in Richfield, Minn. Internal discussions about making the switch are at an early stage, he said.

In December, Best Buy cut its profit outlook for the year ending this month to between $3.20 and $3.40 a share, down from $3.55 to $3.70, citing falling domestic demand for televisions, notebook computers and gaming software.

- Bloomberg News

In other Business

Deutsche Boerse in talks to buy NYSE Euronext: Deutsche Boerse is in advanced talks to buy NYSE Euronext in a deal that would create the world's largest trading powerhouse and put a bastion of U.S. capitalism in foreign hands. Wednesday's announcement on discussions came hours after the London Stock Exchange said it had agreed to buy Canadian stock market operator TMX, marking a shake-up for an industry under cost pressure from upstart electronic rivals but one that offers new opportunities after the financial crisis in on-exchange derivatives trading.

Few details on Wells Fargo ATM outages: The cause of one of the largest ATM outages in U.S. history became the topic of widespread speculation as cyber-experts scrambled to figure out why most of Wells Fargo's 12,000 ATMs went dark for several hours Monday. The San Francisco-based bank stayed largely mum on the nationwide outage. Thousands of Wells Fargo customers were unable to get their cash until the automated teller machines were fixed late Monday. It's unclear what happened. The bank would say only that the outage was caused by "an internal systems issue" and was not related to a cyber-attack or security breach.

- From news services

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