The Danger of Trusting the International Monetary Fund Reports

When I researched the IMF the other day I was struck by its lack of any serious authority to act on its surveillance and monitoring roll.

The IMF got my attention when the Australian PM Kevin Rudd had a press conference a few days ago to tell the Australian people how well Australia is doing and how well it will weather the credit crisis.

He was quoting figures from the May 2008 Report of the IMF on how the Australian economy is likely to perform in the future.

My first concern was the report was from May 2008. That probably meant the data was a couple of months old. So just like company reports, by the time the report is printed it is out of date.

With the credit crisis running at lightning speed the report was virtually useless as a document being used to reassure Australians all is well.

The second concern I had was, where do they get the data that they use for the report. I didn’t recall IMF auditors landing in Canberra and looking at Australia’s Accounts.

I did not have time to research this further but it is funny how you can put things out in the ether and the answer finds its way to you.

In this case an article written by Annabel Crabb in the Weekend Edition of the Sydney Morning Herald provided me with the answers I was looking for.

She wrote, “… the IMF doesn’t have a network of purpose-built Australian spies to feed its impression of the Australian economy. Its World Economic Outlook report is written using information obtained from member states economies themselves; from the Commonwealth Treasury in our case.”

She goes on to say, “So in effect, when Kevin Rudd quotes from the IMF he is quoting himself, at the very least, he is quoting Wayne Swan.”

So there we have it. Not only is the data likely to be seriously out of date, it is not independent data, but data supplied by our government.

Let’s assume the data was provided to the IMF in March, the Report prepared in April and published in May.

In March 2008 Bear Stearns was sold to J P Morgan for a song with debts of $29B.

In July Indy Mac was ceased by the FIDC in the US after a run on the bank of $11B.

On around September 7th Fannie and Freddie were taken over by the FIDC. Merrill Lynch was bought by Bank of America for $50B and Lehman Bros was allowed to fail with mortgage backed security losses totaling $60B.

Then on September 16th The US Federal Reserve bailed out AIG with $85B and took an 80% stake in the company.

On September 17th Morgan Stanley and Goldman Sachs were being hit by short sellers so short selling was stopped.

Finally on September 21st Mr Paulson the Treasury Secretary proposes a $700B bailout. He said it has to be big enough to make a real difference.

Now I do not believe I should criticise Mr Rudd for trying to keep us all calm because that is what our leaders are supposed to do. And it can actually work in my favour. If he keeps everyone calm I can quietly panic and try to protect my money.

Between March when the data was likely to have been provided and October when Kevin Rudd said all was well, the world changed forever as we know it. There was a seismic shift in the financial landscape of mega-proportions. None of the cataclysmic events listed above would have been considered in the IMF May Report for the Australian Economic Outlook.

I think Kevin Rudd was lucky to get away with it. It may well have been that everyone was just so shell-shocked as they watched their retirement funds disappear before their eyes knowing there was nothing they could do about it.

The moral here is to always question the data source and how old it is before assuming the conclusions relate to the current period.

Baby Boomers would do well not to take any notice of government press conferences reassuring people in times of financial crisis. What they should be doing is getting their money to safe havens whilst the press conference is going on and everyone else is listening to it hoping all the problems will be fixed as if by magic.

If a Prime Minister or President says everything is alright then it is, isn’t it, until it isn’t?

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