Don’t say IMF, it’s IMF Squared!

In the boom decade of the 2000s, corporate rebranding and renaming was all the rage.  Some were successful.  Others are best forgotten, like PWC’s proposal to bestow the name of Monday on its consulting arm.  But as the world’s economic recovery gathers momentum, perhaps it is time to revive the practice.

A prime candidate is our old favourite, the International Monetary Fund.  The brand has global reach, so why not intensify it to IMFSquared, or IMFF to make it clear.  But a change of initial by itself doesn’t get us very far in the rebranding stakes. So IMFF could stand for Intellectually Massive Flip-Flops.

The Fund is once again up to its old tricks of changing its mind completely.  Having backed austerity enthusiastically, its economists are altering tack.  The latest IMF World Economic Outlook claims that the impact of changes to fiscal policy has been very substantially underestimated.  In short, keeping a tight grip on the public sector deficit does not work, according to the latest from the Fund.  More, not less, spending is what is needed to boost the economy.

The IMF economists have serious form on this matter.  In August 2008, their chief economist, Oliver Blanchard, published an MIT working paper on the state of academic macroeconomics.  This is what he had to say: ‘For a long while after the explosion of macroeconomics in the 1970s, the field looked like a battlefield. Over time however, largely because facts do not go away, a largely shared vision both of fluctuations and of methodology has emerged…… The state of macro is good.’

The shared vision Blanchard referred to are the superbly named, but wholly useless, dynamic stochastic general equilibrium models.  Mainstream economics in academia and central banks had reverted during the 1990s and 2000s to the old idea that economies have an in-built tendency to move towards equilibrium.  On this basis, the Fund’s Chief Economist believed that ‘the state of macro is good’.  In August 2008!  Just a few weeks later, the collapse of Lehman Brothers shattered both these illusions.

To be fair to Blanchard, the terrifying events of the autumn of 2008 made him change his mind.  By January 2009, he was writing that the crisis was caused by ‘Financial institutions financing their portfolios with less and less capital, thus increasing the rate of return on that capital. What were the reasons behind it? Surely, optimism, and the underestimation of risk, was again part of it’.

So instead of a theoretical world in which rational decision makers moved effortlessly towards equilibrium, we had the reality in 2007 and 2008 of expectations about the future which were grossly optimistic, and of risks which were completely mispriced.

This sounds a pretty plausible story.  But only a few months’ previously, the IMF economists believed that re-embracing the vision of equilibrium had led to ‘macroeconomics going through a period of great progress.’  Until just now, they thought fiscal tightening did not have much impact.  But now they think it is wrong.  IMFF rules OK!

As published in City AM on Wednesday 17th October

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