Chris has already pointed out the failure of the core European institutions in their response to the global financial crisis. One excuse that can be made for these institutions is that they are still in the process of development, and were ill-prepared, intellectually and institutionally, for an event so far outside their experience. The ECB and EC developed in a period when controlling inflation and stabilizing government debt were the key imperatives, and they responded to the crisis accordingly.

No such excuse can be made for the third member of the Troika, the International Monetary Fund. The IMF has understood from the start that the austerity policies it has imposed are economically unsound and a repetition of past failures. And yet it has been unwilling and unable to do anything else.

The Asian financial crisis of the late 1990s was a near-perfect dry run for the GFC. Speculation arising from rapidly expanding and weakly regulated financial systems produced a string of failures and capital flight in countries that had previously been regarded as having ‘miracle’ economies. Governments inevitably ran into financial difficulties. The IMF, used to dealing with debt crises arising from public profligacy, came in with its standard package of ‘reform’ measures, privatisation, spending cuts and so on. These measures were totally inappropriate to deal with a crisis originating in the private sector, and only made matters worse. The most successful performer in the region was Malaysia where the government ignored the IMF, and imposed capital controls. After the event, everyone agreed that the IMF had learned its lesson, and would handle things differently in future. As the GFC has shown, the truth is that the IMF has learned nothing and forgotten nothing.

The institutional failure is made worse by the fact that the IMF’s Research Department, arguably the strongest group of macroeconomic policy researchers anywhere, got their analysis right almost from the start. In 2010, the IMF chief economist Olivier Blanchard (with two colleagues) recognising the limitations of a low inflation policy, proposed raising inflation targets to 4 per cent. In the same year, the IMF World Economic Outlook presented a refutation of the idea of “expansionary austerity”, based on the now-discredited work of Alesina and Ardagna. Subsequent IMF research has reconfirmed the Keynesian view that contractionary fiscal policy will worsen a depression.

I don’t have any insight into the factors that cause the IMF to push for austerity in season and out[^1]. In particular, I’m not clear whether the problems arise from internal dynamics or from external pressures. But I can’t see any prospect of change, or any promising program for reform. The only policy conclusion I can draw is that, given the inevitability of a disastrous IMF response, financial system failures are even more dangerous than they would be otherwise. The corollary would appear to be financial repression of the type practised in the Bretton Woods era, with such success that the IMF never had to handle a crisis originating in the financial sector

[^1]: I should note that whereas I assumed that the combination of past experience and analysis would lead the IMF to break with austerity in the Greek crisis, Daniel pointed out last time we discussed this that the IMF was at least as hardline as the EC and ECB.

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