The most obvious choice for the job of providing global liquidity is the International Monetary Fund (IMF), also simply known as the Fund. Indeed, scholars writing on this subject often refer to the Fund as the world’s de facto ILLR. The IMF’s role in this regard is undeniable. The multilateral institution was designed for the very purpose of smoothing out temporary imbalances in member countries’ balance of payments. However, the scholarly emphasis on the role of the IMF has left us with an incomplete picture of how international financial crises are actually managed. As this book will show, the Fund is often not the only—or even the primary—source of liquidity during crises. For instance, when global credit markets seized after the major US investment bank Lehman Brothers filed for Chapter 11 bankruptcy protection in September 2008, financial institutions in Europe, Asia, and beyond faced a Bedford Falls- style liquidity crisis (albeit on a much larger scale). Amid the panic, their outstanding loans were being "called” by US-based lenders. Without sufficient dollar reserves to cover these debts, these foreign institutions faced the very real prospect of defaulting on substantial obligations to their major US creditors. What these institutions needed was a liquidity injection a la George and Mary Bailey. What the global financial system
Federal Reserve Swap Line Credits, 2007-2009
needed was an ILLR: an actor that is prepared to respond to international financial crises by providing credit to illiquid institutions in foreign jurisdictions when no other actor is willing or able. In the fall of 2008, that liquidity came from the United States. As global credit markets froze following the collapse of Lehman Brothers on September 15, 2008, the Federal Reserve (the Fed) stepped in to provide an unprecedented amount of dollars to 14 foreign central banks until market strains began to ease in the second half of2009. Figure 1.1 presents outstanding foreign central bank drawings on the Federal Reserve’s emergency credit lines (formally, these credit lines are called currency swap agreements, discussed in detail in the following chapter) during the 2008 global financial crisis. The figure also reports the total number of partner central banks that had access to a credit line. At the peak of their use, the US monetary authority provided almost $600 billion in emergency liquidity to a global economy starved for dollars.
Although this instance is without question the most consequential example ofthe United States acting as an ILLR, it is by no means an exception. In fact, following World War II, the United States has made a pretty regular habit of providing liquidity to foreign governments in an effort to manage foreign financial and monetary crises. The United States’ first significant foray into such activities began in the early 1960s. At that time, the Federal Reserve provided hundreds of millions of dollars in bilateral financial assistance to the "Paris Club” economies to help them deal with short-term balance-of-payments problems and to protect the stability of
Federal Reserve Swap Line Credits, 1962-1970
the Bretton Woods monetary order. In the 1980s and 1990s, as financial crises erupted and spread throughout Latin America, East Asia, and beyond, the United States repeatedly acted as an ILLR by providing direct bailout packages on roughly 40 different occasions to more than 20 countries facing financial ruin. These actions included, most famously, a $20 billion rescue package for an embattled Mexico in 1995. In such cases, the US Treasury generally provided the emergency liquidity by tapping a Depression-era funding source known as the Exchange Stabilization Fund (ESF). Nonetheless, the aim was the same: emergency, short-term liquidity provision to foreign jurisdictions in crisis. Figure 1.2 presents total foreign drawings from the Fed by quarter from 1962 through 1970. Figure 1.3 plots the net total of new ESF commitments by year as well as the total number of recipient countries to which those commitments were made from 1978 through 2007.
Although scholars of international financial crisis management have rightfully focused on the role of the IMF as an international financial crisis manager, they have largely overlooked the important role of ad hoc, emergency credits among states outside ofthe Fund. Following World War II, the United States has been the primary source of such funds. And yet it is puzzling why US economic policymakers would ever choose to put national resources at risk in order to "bail out” foreign governments and citizens to whom they are not beholden when they could convince the IMF to do
ESF Credits, 1978-2007 so. Neither the Federal Reserve nor the US Treasury has a mandate to stabilize foreign financial and monetary systems during times of crisis—yet, over and over again, they choose to do so. On the other hand, the IMF does have such a mandate and was created, in part, to manage just such problems. Indeed, there are at least three reasons why the United States should prefer multilateral lending via the Fund over providing bailouts on its own.
First, the United States holds considerable sway over IMF lending. It is true that the United States does not have direct control over IMF decisions and may have to compromise when its interests are not aligned with other powerful members within the Fund. Nonetheless, its status as a top shareholder gives it a considerable amount of influence over the decisions the IMF makes. Research has shown time and again that US economic and strategic interests are highly correlated with Fund lending decisions.11  Second, delegating the "dirty work” of financial rescues to a supranational institution like the Fund provides political cover for US policymakers. Conversely, providing bailouts directly can leave US economic policymakers vulnerable to domestic political backlashes and resentment. Third, IMF lending reduces the direct costs and risks of providing liquidity during times of crisis by distributing these across the Fund membership. The Fund is an institution built on the concept of burden sharing. By design, it prevents the rest of the world from free-riding on larger economies, like the United States, that may be compelled to act as an ILLR in its absence. Given the benefits of relying on multilateral action to manage international financial crises, US actions as an ILLR outside of the IMF appear all the more puzzling. Why not sit back and let the IMF manage crises? Put differently, why does the United States ever provide bailouts unilaterally when the IMF was designed (largely by the United States) to provide bailouts multilaterally?
-  Wallich (1977), Sachs (1995), Vreeland (1999), Boughton (2000), and Copelovitch(2010) all refer to the Fund as an ILLR. These are just a few examples of many.
-  While the IMF was not designed to be a true ILLR, as I discuss in chapter 2, the institution has evolved to fill this role over time.
-  Data were obtained by the author from the Federal Reserve’s website at http://www.ny.frb.org/markets/ quar_reports.html.
-  The Paris Club is also referred to as the Group of Ten (G-10).
-  Data were collected by the author from relevant historic Federal Reserve Monthly Reviewpublications available at http://www.ny.frb.org/research/monthly_review/ 1963.html.
-  Data were obtained by the author from a document on ESF credits obtained by requestfrom the US Treasury.
-  Copelovitch 2010.
-  Broz and Hawes 2006; Dreher and Jensen 2007; Dreher, Sturm, and Vreeland2009; Dreher and Vaubel 2004; Oatley and Yackee 2004; Stone 2004; Thacker 1999;Vreeland 2003.
-  Abbot and Snidal 1998; Dreher et al. 2009; Vaubel 1986, 1996.
-  Dreher et al. 2009; Eldar 2008.