The ILLR in Theory and Practice

The funds available to the IMF are wholly inadequate for it to play the role of an international lender of last resort.

Mervyn King, Deputy Governor of the Bank of England (2001)

I am sure the IMF would like ... to become a world bank lender of last resort. That is about the last resort I should think for anything.

Federal Reserve Chairman Alan Greenspan (FOMC meeting, 1995)

Because this project turns on the concept of the international lender of last resort (ILLR), I begin this chapter with a brief intellectual history of the concept. Looking first to the work of Walter Bagehot and others, I consider the nineteenth-century origins of the classic lender of last resort mechanism. Then I quickly turn to the work of the American economist Charles Kindleberger, who in the 1970s applied Bagehot’s ideas to the international financial system and attributed the role of global financial stabilizer to the "hegemon”—the world’s leading economy and global financial center. By the 1990s, however, the analytical focus of scholars shifted as the IMF took on a more prominent role in international financial crisis management. As researchers became increasingly focused on the IMF as an ILLR, analyses of direct lending between states outside of that institution fell by the wayside. Yet as the Fund took on a more prominent role in stabilizing the international financial system, a handful of scholars raised doubts about the IMF’s ILLR capabilities. Building on these critiques, I next explain how the problems of unresponsiveness and resource insufficiency were woven into the IMF’s institutional fabric at Bretton Woods followed by a closer look at each of these shortcomings. Finally, I end with an overview of the key US ILLR mechanism at the Federal Reserve and Treasury: emergency loans via reciprocal currency swaps with foreign central banks. Besides discussing how this works in practice, I consider why the unilateral provision of liquidity via these channels more closely approximates Bagehot’s ideal-type lender of last resort for the global economy. In particular, I point to the independence of the Fed and the Treasury’s Exchange Stabilization Fund (ESF) from Congress. This autonomy enables swift action. Additionally, I argue the Fed has the ability to provide virtually unlimited international liquidity by creating dollars, the closest thing the world economy has to truly global tender.

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