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Greece Is Right to Beware an IMF Bearing Gifts

By Alain Sherter

Updated on: June 21, 2011 / 2:23 PM EDT / MoneyWatch

The IMF wants debt-burdened Greece to open wide and swallow a $112 billion package of spending cuts and tax hikes. The only problem with that, notes economist Dean Baker, is that the fund doesn't know what it's doing:

The IMF economists obviously did not understand the implications of asset bubbles that were building up in the United States, the United Kingdom, Spain and other wealthy countries. The financial and economic crisis caused by the collapse of these bubbles caught them by surprise....
Is there any reason to believe that the same people who were so completely clueless in their understanding of the economy just four years ago are now qualified to be giving advice to governments around the world?

He has a point. The IMF has a habit of:

Failing to spot financial crises whipping up on the horizon;
Downplaying the severity of the storm when it makes landfall;
Worsening the destruction with misguided economic policies.

It is, of course, worse than that. Over the last three decades, the fund itself has destabilized the global financial system by demanding that countries open their capital markets to investors while eliminating regulations. That led to a string of crises in Asia, Latin America and Russia.

The question is whether the IMF has learned anything from these debacles. Baker fears not. Browbeating Greece and other debt-laden European economies into accepting austerity measures will further sap economic growth. Meanwhile, another bailout will put the country even further in debt.

What should the IMF instead? Train its fire on unemployment in Greece, which he says would mean urging the European Central Bank to raise its target inflation rate to 3-4 percent. Here's what that would do:

If the eurozone maintained a moderate rate of inflation, it would allow the Greek economy to become competitive without experiencing a wrenching process of wage deflation. It would also erode the real value of debt alleviating the burden on both heavily indebted countries and homeowners throughout the euro zone.

That reasoning also happens to apply to another indebted country preparing to swallow its austerity medicine -- the U.S. As in Greece, there's little reason to think that deep cuts will do a thing to kick-start growth. Meet you at the barricades.

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