The IMF gave itself a scathing review for its mistakes in spotting the roots of the global crisis and acknowledged it fell short in its job as the world's main financial system supervisor.
In a series of papers that look at the initial lessons from the crisis, the IMF said a patchwork of uncoordinated oversight and ineffective messaging failed to spot and call attention to the risk that a global credit boom could burst spectacularly, triggering the worst global slump in decades.
The IMF said warnings before the crisis, including its own, were too scattered and unspecific to force policy-makers to act, let alone prompt collective policy action.
In the long list of its failings, the IMF acknowledged its surveillance either missed or underestimated risks, while complacency was encouraged by its optimistic bottom-line assessments and hedged messages.
"This crisis has been a wake-up call for reassessing the effectiveness of international financial architecture and in particular for mechanisms to head off systemic risks," Reza Moghadam, director of the IMF's strategy, policy and review department, told a news conference.
Several countries, including emerging market economies, have long called for an overhaul of the IMF's surveillance, saying its oversight can only be effective when it is willing to speak its mind on issues affecting both industrialized and emerging economies.
Moghadam said the crisis revealed flaws not only in global surveillance but also policy coordination and cross-border financial regulation.
"To be sure, there was some prescient bell ringing about the build-up of risks in the U.S. banking model and housing market," the IMF said. "However, official warnings both within and outside the Fund were insufficiently specific, detailed, or dire to gain traction with policy-makers."
The IMF said the policy debate as the crisis built was fragmented and scattered among numerous fora, including the IMF, the Bank for International Settelments and the Financial Stability Forum, each with their own missions.
The Fund said while it had identified many potential risks in its cacophony of research and reports on the state of the global economy, its messages were often coded and embedded in lengthy discussions or lists of concerns.
It also said it underestimated the links between macroeconomic risks and development in domestic and financial markets. While it was not alone, its surveillance underrated the combined threat of new complex financial instruments and rising leverage.
SKEPTICS 'MISSING IN ACTION'
It said its optimistic bottom-line assessments encouraged a generally rosy view on advanced countries and financial innovation.
Emerging market economies, including China, have long complained about the IMF's lack of evenhandedness when it comes to dishing out advice to advanced economies, which all too often have ignored its advice. They want the IMF to be just as assertive in pointing out policy shortcomings in rich nations as they are in emerging economies.
The IMF said its surveillance mirrored the conventional view that advanced countries with relatively low and stable inflation and well-capitalized banking sectors could withstand the unwinding of any froth in housing and capital markets.
"While this is understandable, more time should have been spent on 'tail risks' from these domestic vulnerabilities," the IMF said.
It also noted that it did, however, repeatedly warn about the risks of global imbalances, although it acknowledged as the economic imbalances rose, the message became more muted rather than louder.
"However, this analysis missed the key connection to the looming dangers in the shadow banking system," it added.
The IMF also admitted there was not enough follow-through, especially when risks it identified were ignored by governments. Instead of speaking up about its concerns, the IMF acknowledged that it backed off and downplayed the message.
(Editing by Jan Paschal)