Latin American social philosopher George Santayana said that those who forget history are doomed to repeat it.
Why didn't the International Monetary Fund see this global crisis coming? This was the question posed by the Independent Evaluation Office of the IMF in its report published last month.
Some readers will remember that the office was established after the Asian financial crisis to evaluate independently where the IMF had gone wrong during that crisis. To the IMF's credit, it understood that it had to be transparent to be credible and the evaluators' specific mission is to provide independent feedback to the IMF board on the fund's effectiveness.
This time, the evaluation office focused not on the fund's handling of the crisis, but on its surveillance performance from 2004 to 2007.
The office should be commended on its methodical analysis. Since the IMF did not warn its members of the unfolding crisis, the study concentrated instead on whether the fund evaluated the proper risks and vulnerabilities before the crisis, what message the fund gave to its board and members, and what constraints the IMF had in conveying the difficult messages.
The facts are that, even up to April 2007, the IMF's main message was continued optimism. Even though it warned of the global imbalance, there was insufficient focus on the balance sheet fragilities, so it missed the key elements that underlay the crisis. For example, in the annual review of the United States, it did not discuss the mortgage problems until the crisis had already surfaced. In a 2006 study of Iceland, IMF staff concluded that 'hedging behaviour and generally sound balance sheets and asset-liability management made the financial system relatively robust to the recent shocks'. In the next year, the largest Irish banks failed.