Stiglitz and his Discontents

Brad DeLong expresses his discontent with Joseph Stiglitz's new book.

As I understand it, two types of countries come to the IMF for help. The first group are countries that have long been running unsustainable fiscal policies....

The second group are countries whose fiscal policies may or may not be in intertemporal balance, but which are in trouble because of a large currency or maturity mismatch somewhere in their economy...

Here the issues are harder. IMF money gets you a better set of short-term options, and you have to hope to god that the IMF money will open up the sweet spot at which interest rates can be high enough to avoid the large-scale devaluations that in combination with mismatch trigger the collapse of the financial system, and yet low enough not to derange domestic investment through the pure cost-of-capital channel. Whether such a sweet spot exists is an empirical matter.

...It's not that Joe believes that bankruptcy across national borders is quickly resolved. What is it that causes him to believe that financial market failures--adverse selection and moral hazard--are not to be feared when the home-currency value of foreign debt rises rapidly?

DeLong's two types of countries correspond to what I call insolvency (his first type) and illiquidity (his second type). You should not lend money when a country is insolvent--although outright gifts may be appropriate if they will not be wasted. You might want to lend to an illiquid country.

Discussion Question. Stiglitz argues that the IMF faces conflicts between the interests of banks and the interests of countries that are in difficulty, and that the IMF is too friendly to the banks. What could the IMF do differently to help the countries?