SYNOPSIS: The IMF isn't allowing investors to remove risk, but it is trying to do too much

t's perfectly O.K. to bash the International Monetary Fund -- some of the best people do it. But it's important to bash it for the right reasons. Quite a few of the I.M.F.'s most vociferous critics attack it because they believe it is in the business of rescuing financial fat cats. The idea that the I.M.F. creates "moral hazard" -- that international lenders are careless because they count on the I.M.F. to bail them out if something goes wrong -- has become virtual dogma among right-wingers, many of whom seem to think that if we abolished the I.M.F. we would also abolish financial crises.

But this is a fantasy. There is not a shred of evidence, for example, that the investors who poured money into Asia before its recent crisis thought at all about the possibility of future I.M.F. bailouts. They simply suffered from irrational exuberance -- and would have done the same regardless. (The exception that proves the rule is Russia, which investors thought of -- wrongly, as it happens -- as "too nuclear to fail.") A more cogent line of criticism, associated in particular with Harvard's Jeffrey Sachs, attacks the I.M.F. for overplaying its hand. Mr. Sachs and others complain that when countries go to the fund for help, it demands drastic and often inappropriate changes in their economic policies, undermining investor confidence and actually worsening the situation. This view doesn't suggest that the I.M.F. should go away; it suggests instead that it should lend faster, with fewer conditions.

This critique, unlike the moral-hazard view, has quite a lot going for it. In Asia, in particular, the I.M.F. seemed to want to restructure whole societies from the ground up, in the process feeding rather than countering the ongoing crisis of confidence. While some say that the region's rapid recovery vindicates that policy, others more plausibly argue that the rebound mainly suggests just how excessive the I.M.F.'s demands were and how gratuitous the crisis was in the first place.

But granted that the I.M.F.'s performance has been unsatisfactory, what do you do about it? That was one of the questions addressed by the International Financial Institutions Advisory Commission, a Congressionally appointed panel whose much-awaited report will be released today. (The other was what to do about the World Bank -- but let me leave that for some other day.)

All members of the commission agreed that the I.M.F. needed to return to its original, narrow mission of providing emergency lending. But only 8 of the 11 were willing to sign the full report, and even this majority vote hides a deep divergence of views.

Here's the problem: The Republican-appointed members of the commission, including its chairman, Allan Meltzer, are still committed to the moral-hazard argument. The draft of the report that came into my hands declares that "The importance of the moral hazard problem cannot be overstated." (Oh, yes it can.) And while the report did not in so many words call for abolition of the I.M.F., it suggested restrictions that would in effect make even emergency lending impossible. For example, the report wants I.M.F. loans to be repaid after only 120 days, with at most one rollover. To get a sense of what that means: Thailand, which only started to emerge from its crisis late last year, would have had to repay its loans in March 1998.

Nonetheless, Mr. Sachs, who was one of the Democratic appointees, signed the report, giving it at least an appearance of bipartisanship. Why?

My understanding, after communicating with Mr. Sachs, is that he believes that you need to hit the I.M.F. with a two-by-four just to get its attention, and that the specifics can be fixed later. And anyone who has listened to smug I.M.F. officials (not all of them, but too many) rationalize their decisions can see his point.

But the commission members who refused to sign the report had a different view: They regarded the report as an attempt not to fix the I.M.F., but to gut it -- which for all the fund's flaws would make the world a considerably more dangerous place. And anyone who has read the anti-I.M.F. literature of the right-wing think tanks that support several of the commission's members can see their point, too. It all comes down to a question of who's using whom. And the truth is that I don't know.

Originally published in The New York Times, 3.8.00