Having failed to forecast or stop the crash of 2008, the International Monetary Fund (IMF) is seeking leadership of efforts to prevent world depression through co-ordinated global action.

It is a welcome development, but probably too late to reverse the decline in the fund’s reputation and relevance. The IMF did raise questions about the way financial markets were regulated, but it was at least as concerned about inflation as it was about the possibility of a slump until well into September.

The fund employs the greatest number of top economic thinkers on earth, but it has been almost as surprised by the financial crisis as ordinary mortals.

If economists are incapable of helping us when we need them most, you have to wonder what they are for.

All the people most blamed for the collapse in investor confidence can be found in one place, Washington, this week. Practically every finance minister and central bank governor on earth will attend the IMF and World Bank annual meetings, as well as many of the leaders of the world’s biggest banks.


For American politicians aiming to win votes by scoring points against fat cat bankers and useless regulators, it will be like shooting fish in a barrel. Delegates would be wise to avoid the lavish parties that are usually a feature of the meetings.

Founded with the laudable objective of preventing a repetition of the Great Depression, by the end of the 1980s the IMF had become the cheerleader for banking’s triumph over every other industry.

People move seamlessly between the IMF and the World Bank and big investment houses: all three IMF deputy managing directors have previously worked for banks. At times, they seem to be part of the same organisation.

Having authored the present shambles, the banking industry will not have much to say that anyone will want to listen to this year or, perhaps, for a long time to come.

The people who matter most are not in Washington. Heads of government, not finance ministers and bank regulators, are the key players in the world banking bail-out. Avoiding guilt by association, they will be as far as possible from the IMF and World Bank conference hall.

This does not mean that their actions will do much long-term good. Driven by fear of the wrath of voters who have lost their savings, governments are dealing with the challenges today by borrowing from the future. There is no guarantee that they will not eventually do more harm than good.

New service economy

The fundamental problem is that business leaders and economists have failed to come to grips with the reality that services have displaced manufacturing, mining and farming as the principal source of wealth. What matters is not tangible assets, but the value created by the people who use them productively.

The mortgages that banks secure are worthless if a borrower is unwilling to continue paying for them. Real estate assets on the balance sheet are not a building or an office block. They are the future streams of income promised by borrowers. If they walk away from the liabilities they have incurred, book entries have the market value of thin air.

This is perhaps the first financial crisis of the new service economy. The response so far is inadequate. The banks are refusing to lend, but this is hindering production. Governments are planning to provide money instead, but this will tend to reward fecklessness. No wonder doubt is the dominant emotion in the world economy.

The answer lies in the way that communities create value through services – something that banks and governments, fixated by tangibles, have little power to influence. A policy agenda is needed for a new era where services rule.

For the moment, however, it seems that everyone is getting it wrong. So if you are confused, you are not the only one.