Correction to This Article
Earlier versions of this article, including in the print edition of The Washington Post, incorrectly identified Ceyla Pazarbasioglu as the director of the IMF's Monetary and Capital Markets Department. She is an assistant director. This version has been corrected.

IMF says response to global economic crisis may have deepened some problems

Washington Post Staff Writer
Thursday, March 10, 2011

Governments in the United States and Europe have failed to address some of the core problems that sparked the recent financial crisis and may have made some of them worse by taking such extensive steps to rescue ailing banks and other companies, the International Monetary Fund concluded in a study of how the developed world responded to the near-shutdown of the global economy.

The unprecedented levels of public spending and central bank support for the economy helped prevent an even worse short-term downturn, the IMF concluded after comparing the crisis response in the United States and Europe to the way Asian and Latin American countries responded to their financial crises in the 1990s.

However, that rapid and large financial triage has not been followed by the more fundamental sorts of changes needed to fully heal the financial system, the study found, and may have given a false sense of confidence that things are now all right.

In those earlier crises, more banks were allowed to fail or were forced to restructure, and more was done to clean bad loans and bad assets out of the financial system.

But more than two years after the collapse of Lehman Brothers, the IMF said much of the heavy lifting remains to be done - even though the political impetus behind reform seems to have flagged.

"There were these broad measures of fiscal and monetary stimulus, unprecedented in terms of scope and size," said Ceyla Pazarbasioglu, an assistant director of the IMF's Monetary and Capital Markets Department. "That propped up asset prices and made the institutions look actually good, so it ties your hands in terms of more structural measures" to let banks fail or overhaul them.

That issue is particularly noteworthy in Europe, where banks are still trying to restore confidence that they are not holding large amounts of real estate loans or government bonds that might be worth less than expected. A round of "stress test" studies last year failed to resolve those doubts, and an upcoming second round will be closely watched to see if they are more rigorous.

Among other problems, the IMF study noted, there still are no rules in place for identifying or regulating companies that are considered too big to fail; U.S. households remain burdened by high debt and lowered home values; and in some European countries, the banking system remains larger than the host economy, with no plan to try to make the system smaller, less complex or less likely to cause problems that could be global in scope.

Overall, the study concluded, the government response to the crisis increased the threat of "moral hazard" by granting widespread bailouts but not quickly making the changes needed to convince financial institutions that they would not get the same treatment again.

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