Today the U.S. Department of the Treasury released the “concluding statement by the staff of the International Monetary Fund (IMF) following this year's Article IV Consultation with the United States.” The statement is based upon an “independent judgment and assessment by IMF staff of U.S. economic performance and policies.” The IMF statement provides a general outlook of the U.S. economy and identifies some inherent risks, while offering comprehensive recommendations.
The Article IV consultation was conducted against the backdrop of the present U.S. financial crisis, which, the report notes, has revealed “major weaknesses in the U.S. regulatory and resolution frameworks.” The report acknowledges that the U.S. government has adopted strong comprehensive policies to combat the crisis, including the implementation of “large monetary and fiscal stimulus” and several measures designed to “restore financial stability.” The statement also credited the U.S. government for its transparency in implementing such measures. Although current data suggests that the “sharp fall in output may be ending,” the report notes that economic activity for the most part still remains relatively weak and that “[t]he combination of financial strains and ongoing adjustments in the housing and labor markets is expected to restrain growth for some time, with a solid recovery projected to emerge only in mid-2010,” with U.S. GDP anticipated “to contract by 2½ percent in 2009, followed by a modest ¾ percent expansion in 2010 on a year-average basis.” The report also notes that the adoption of strong policy measures may lead, in the United States’ case, “to a more typical rapid recovery, with an emerging virtuous circle of rising confidence and strengthening financial conditions.” However, the report cautions that there still remain considerable residual risks, including continued foreclosures and further declines in the value of housing prices, which, coupled with rising unemployment, could increase deflationary risks and cause further deterioration in the commercial real estate market.
The report notes that the U.S. government faces the following three “interdependent challenges” in moving towards economic recovery:
- reaching “near-term economic and financial stabilization to set the stage for sustained recovery;”
- adopting “strategies for unwinding massive public interventions, coordinating with other countries;” and
- facing and “addressing the longer term legacies of the crisis— a reshaped financial system, worsened fiscal imbalances, and damaged household balance sheets.”
Reaching “near-term economic and financial stabilization to set the stage for sustained recovery.”
The statement notes that recent measures adopted under the auspices of Treasury's “Financial Stability Plan, along with the FDIC’s and Federal Reserve’s initiatives, have done much to stabilize financial conditions.” The report also notes that “[a]mong such measures, the SCAP, the Temporary Liquidity Guarantee Program, and bank capital injections have contributed to a substantial improvement in confidence in the stability of major financial institutions.” As the U.S. markets continue to stabilize, the report states that the Public Private Investment Program (PPIP) “will provide a tool for cleaning bank balance sheets.”
Adopting “strategies for unwinding massive public interventions, coordinating with other countries.
Undoubtedly, the U.S. government’s response to the crisis has led to a substantial “increase in the public role in the economy.” Although interventions of such magnitude may have been necessary to stabilize depressed financial conditions, “[g]oing forward, unwinding interventions will pose major challenges, and—given the high level of cross-border competition in the financial sector—will need to be coordinated internationally to facilitate a smooth exit.” The report also notes that, while some short-term government liquidity facilities may naturally “unwind,” the "recent ramping up" of the “Term Asset-Backed Securities Loan Facility (TALF) and ongoing purchases of Treasury debt and mortgage-backed securities (MBS) could inflate the balance sheet substantially, largely with long duration assets which—depending on future financial market conditions—may take time to unwind to avoid market disruption.”
Facing and “addressing the longer term legacies of the crisis— a reshaped financial system, worsened fiscal imbalances, and damaged household balance sheets.”
The report welcomes the present Administration’s "proposal for a systemic risk regulator, which should be given an explicit mandate and accountability for systemic stability, and armed with the information and powers necessary to manage macro-prudential risks.” The report also stresses that “[s]ystemic institutions should be subject to a more rigorous regulatory, supervisory and resolution regime, to discourage size, complexity and interconnectedness.” The report further emphasizes that “[m]easures to address procyclicality and other issues thrown up by the crisis, as relevant recommendations emerge from the G-20 and other international fora, would further underpin financial stability.”
Article IV consultations generally take place once a year and are complied based on information gathered by IMF economists that visit the member country. After compiling the information, the IMF Mission submits a report to the IMF’s executive board for discussion and review. Participation in these consultations is a condition of IMF membership.