The International Monetary Fund (IMF) has acknowledged that it failed to give adequate warnings about the incipient dangers in the global financial system in the lead up to the financial meltdown.
The report, released by the IMF, highlights many of the criticisms that have been directed at the IMF in the months since the global financial crisis began to threaten the sustainability of the global economy.
The authors of the report acknowledge that “although there was some prescient analysis, in general the warnings were too scattered and unspecific to attract even domestic - let alone collective - policy reaction, nor was there any suggestion of dire macroeconomic consequences.”
The IMF underestimated the combined risks in the global financial system, the report states.
“The result was optimistic bottom line messages, especially on successful economies such as the US and UK. The fund warned about global imbalances but missed the key connection to the looming dangers in the shadow banking system,” says the report.
The report appears to be an attempt to secure a firm foothold in whatever new global financial architecture is created to deal with the crisis.
In the face of calls to create a powerful global regulatory body with the necessary financial resources, the IMF will need to restructure itself dramatically if it is to secure the necessary political and financial support to play this role.
At the World Economic Forum meeting in Davos earlier in 2009 there was much criticism from Asian politicians of the IMF's handling of the Asian financial crisis in 1997.
At that stage governments were forced to raise interest rates, cut back on spending and were told they could not prop up troubled banks.
In a media interview in February Chinese premier Wen Jiabao said that those earlier policies were not only radically different to what the IMF was supporting now but were also behind the global financial imbalances that significantly contributed to the crisis.
With regard to the often critical view held of the IMF in emerging markets, it is significant that the report suggests that the “tacit presumption that risks lie mainly in less mature markets should give way to surveillance of all sources of systemic risk, in advanced and emerging market countries alike”.
It also refers to the potential dangers of large capital flows and notes that with regard to the management of such flows “an attitude of benign neglect has proven to be a mistake”.
The report suggests the need for “constraints on the foreign exchange exposure of domestic institutions and other borrowers” as a means to reduce the systemic risk associated with large capital inflows.
Compensation practices within the global financial community are identified by the report as a factor that contributed to the crisis.