ShareThisThe International Monetary Fund is proposing that governments guard against a deepening of the financial crisis by providing insurance against "extreme" recessions.
Policy makers should approach the crisis the same way that mortgage companies deal with the risk of floods and other natural disasters, a team of IMF economists suggested in a report released this week in Washington.
The idea stands out for its novelty among the free advice being offered to policy makers from Canada to India to France who are preparing stimulus programs that will cost hundreds of billions of dollars.
The problem that the IMF proposal seeks to address is the uncertainty that risks paralyzing the global economy. Consumers are afraid to spend because they fear losing their jobs, companies are afraid to invest because they fear profits will disappear, and banks are afraid to lend because they fear defaults.
A certain amount of confidence could be restored if governments offered insurance against the effects of gross domestic product growth collapsing past a defined threshold, according to the IMF report.
Such insurance contracts would be attractive to companies, but governments could also extend them to individuals, the IMF report says. Banks would be more at ease because they could make buying such insurance a condition of loan approvals. The program would promote economic stability in the same way employment insurance and other automatic stabilizers prop up demand when output drops.
"Widespread use of such contracts would provide an additional automatic stabilizer because payments would be made when they are most needed, namely in bad times," the IMF economists wrote. "Such a market would also provide a market-based view of future output and the likelihood of severe shocks."
Analysts outside the IMF were skeptical that extreme-recession insurance would work.
John Curtis, a distinguished fellow at the Canadian think-tank Center for International Governance Innovation, said downturns are a natural part of the business cycle, and governments risk skewing markets by offering insurance against slowdowns.
Such a policy also would have little chance of reversing the current crisis, another economist said.
"You don't offer fire insurance for someone's house that's already burning," said Nicholas Rowe, an economics professor at Carleton University in Ottawa.
The idea is worth considering over the longer term, but "as a policy to help us right now, this sounds pointless," Rowe said.
The recession insurance scheme is one of several proposals to receive the IMF's stamp of approval in a 36-page report called "Fiscal Policy for the Crisis," a document that reads like a guide to fighting the financial crisis.
Other suggestions include favoring direct government spending on infrastructure programs that can be started quickly over tax cuts, because there's more certainty the money will be spent.
"The solution to the current financial and macroeconomic crisis requires bold initiatives aimed at rescuing the financial sector and increasing demand," the IMF report concludes.
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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