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The End of Exceptionalism? IMF to Examine US Financial System

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Der Spiegel, in “The Shrinking Influence of the US Federal Reserve,” (hat tip reader Saboor) discusses how the US is submitting to a detailed, comprehensive investigation of it financial system under the Financial Sector Assessment Program.

While Der Spiegel claims that this program is a humiliation to the US, the real significance may be that this is another blow to American exceptionism. While the exam is far-reaching, which means intrusive, Canada, the UK, Italy, indeed 2/3 of the IMF members have participated in the program. However, the Bush Administration has resisted it strongly, and agreed only on the condition that it be completed after a new President is at the helm.

One has to wonder whether a president less dismissive of international organizations would have been this high-handed. The FSAP was created in 1999; it’s unlikely its sponsors, the IMF and the World Bank, would have wanted to road test a new program on a large, complex financial system like America’s. Thus it is unlikely any request would have been made under the Clinton Administration. However, there could well have been predecessor exams that went under different names, so this practice may be long-standing.

Similarly, a very quick check on Google raises some questions. Canada proudly announced in February 2008 that it was the first G-7 member to participate in the FSAP. Yet an FSAP report on the UK is dated 2003. Perhaps there are targeted and more comprehensive versions of the exam. If so, there may indeed be more to the politics of this than meets the eye.

From Der Spiegel:

No Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing.
This is partly down to circumstances,,,

After years of growth, the United States is now on the brink of a recession, one that is more likely to be deepened than softened by a tight money policy…

Some of Bernanke’s personal adversaries are also contributing significantly to his current humiliation. In the past, the chairman of the Federal Reserve was a pope among the priests of the financial elite. But unlike his predecessor Alan Greenspan, Bernanke is finding that his policies are not universally accepted, even within the Fed.

The last seven decisions reached by the Federal Open Market Committee, which sets monetary policy, were accompanied by a growing number of dissenting votes. Bernanke’s critics say that with his policy of cheap money — in other words, recurring rate reductions — he in fact helped fuel the inflation problem he is now trying to combat….

Officials with the International Monetary Fund (IMF) have informed Bernanke about a plan that would have been unheard-of in the past: a general examination of the US financial system. The IMF’s board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire US financial system.

As part of the assessment, the Fed, the Securities and Exchange Commission (SEC), the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests — worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar.

Under its bylaws, the IMF is charged with the supervision of the international monetary system. Roughly two-thirds of IMF members — but never the United States — have already endured this painful procedure.

For seven years, US President George W. Bush refused to allow the IMF to conduct its assessment. Even now, he has only given the IMF board his consent under one important condition. The review can begin in Bush’s last year in office, but it may not be completed until he has left the White House. This is bad news for the Fed chairman.

When the final report on the risks of the US financial system is released in 2010 — and it is likely to cause a stir internationally — only one of the people in positions of responsiblity today will still be in office: Ben Bernanke.

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10 comments

  1. RK

    I guess size (as in being the largest shareholder) has its privileges. Thanks for a story that not 1 in 10,000
    citizens will ever see in print in this country!

  2. Dan Duncan

    Hey, what do you guys think about the NBA draft trade last night—Kevin Love for OJ Mayo?

    What…the NBA is not relevant to this blog? Oh, I’m sorry…my mistake. See, I just thought that any blog which references the IMF could not possibly be concerned with relevance.

    Pick 3 letters at random out of a hat. I guarantee you’ll come up with an abbreviation concoction that has more relevance to ANY subject or issue than the IMF.

    Eric Estrada, still searching for that elusive encore… after his memorable role as “Ponch” on Chips…you know, the macho, rambunctious motorcyle cop back in the ’70s with the tight uniform and feathered back hair who was feared by the bad guys and adored by the good girls…especially when he went disco dancing after a particularly tough, but successful case….was asked about the IMF…and even “Ponch” said, “The IMF is, like, you know, totally irrelevant”.

  3. Anonymous

    Yes, if only the U.S. had signed up for an FSAP review earlier, it would have avoided the problems now affecting the UK!

    oh wait…

  4. Anonymous

    Yves — much as i dislike the Bush Administration and all it has done, i am not sure this is a product of Bush Administration anti-international institutionalism so much as a product of the traditional US view that the IMF’s limited resources are better directed at examining emerging economies ’cause the advanced economies are by definition well-run and their financial institutions well-supervised and the like.

    That though is no longer an accurate description of the world, as we have discovered. I think your title is very apt.

    Now let’s see if the same institution that argued that the United States comparative advantage in producing sophisticated financial engineering would assure funding for its external deficit will develop a more skeptical eye, and really dig into the US data.

    the FSAP’s I have seen have focused far too much on the perceived quality of supervisory institutions and too little on balance sheets — (argentina in 00 = prime example).

    bsetser

  5. Anonymous

    Bloomberg reporter Jonathan Weil wondered how the Federal Reserve is planning to value all the junk securities littering its trashed balance sheet — specifically, whether they intend to carry them at cost or market value.

    Weil innocently asked for a copy of the Fed’s accounting manual: DENIED. Then he filed an FOIA request. Result: “The Fed sent me a lightly redacted version 18 days later.”

    LIGHTLY REDACTED? What are they hiding?

    Let’s hope the FSAP audit sends an army of auditors into the Federal Reserve to clean out its Augean stables of secrecy and deceit.

  6. Anonymous

    As I say, “We’re all Third World now.”

    On a dollar basis, the level of corruption in U.S. military contracting is unprecedented in world history. People should be being hung for treason.

  7. tigris

    People should be being hung for treason.

    From your keyboard to God’s monitor, anonymous.

  8. Flow5

    The 1961 commission on Money & Credit recommended increased coordination of examining and supervisory authorities. At the federal level, it was recommended that there should be only one examining authority for commercial banks. The Comptroller of the Currency and his functions and the Federal Deposit Insurance Corporation should be transferred to the Federal Reserve System. The Commission on Money & Credit would leave the state supervisory agencies intact, but would coordinate their to a greater extent with the Federal Reserve in banks all federal regulation and supervision would be concentrated.

    After 47 years, Paulson is still talking the same talk, mergers, – eliminate the overlap,

  9. Anonymous

    I read the Der Spiegel article, and then I went looking for any source document on the IMF site about this coming FSAP for the US financial system. I can’t find anything. If someone has a source document from the IMF website or the Fed website, please post it so we can read the details. Otherwise I’m having a hard time believing this FSAP is coming to the US.

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