US treasury secretary Tim Geithner called last week for the lending power of the International Monetary Fund to be trebled. For those of us who were hoping that institution would expire of long-term neglect, this was a disquieting development. Can it be that the Bretton Woods institutions, which have played a largely pointless and occasionally baleful part in the world economy for six decades, have now found a genuine purpose in life?

The World Bank and the International Monetary Fund were set up through the 1944 Bretton Woods Agreement, drafted by the ineffable Maynard Keynes and the soviet spy and Assistant US Treasury Secretary Harry Dexter White. For sixty years they have presided over the process of international development, driving the London merchant banks out of the business of emerging markets advice and ensuring that only intellectually fashionable development nostrums get financing.

In the middle 2000s, with George W. Bush appointees at the World Bank and the sensible Spanish ex-finance minister Rodrigo Rato at the IMF, it appeared that the Bretton Woods institutions might be purged of their more damaging policy preferences. Better still, the IMF, loss-making since it had very few loan assets after Argentina paid it back, might be put out of its misery. No such luck. The battle against corruption at the World Bank was effectively abandoned after Robert Zoellick took over from the embattled Paul Wolfowitz, while Rato resigned in frustration from the IMF to re-enter Spanish politics, leaving it under the control of the sinister French socialist Dominique Strauss-Kahn.

The financial crisis has given the Bretton Woods institutions a new lease of life. Private finance sources for developing countries have shrunk to around a fifth of their 2007 level, while the World Bank remains moderately liquid and the IMF extraordinarily liquid, because of the lack of demand for their services in recent years. Consequently, they have been enabled to push back against their growing irrelevance, increasing their role in global finance.

To the extent their balance sheets were simply standing idle, this might be thought to be a good thing – who objects to free money? However, when the Bretton Woods institutions borrow heavily, they produce the same problem of “crowding out” emerging markets and the private sector as results from hugely increased Western budget deficits. Furthermore, their increasing involvement produces increased traction for their current policy nostrums, which are generally damaging.

In the past year, the IMF has committed SDR33.2 billion ($49 billion) of facilities to countries in difficulty from the global economic crisis, only one third of which has been drawn. The US has proposed that the IMF should have access to a further $500 billion of resources. It is however worth examining the IMF’s track record with the money it has so far deployed.

The IMF’s largest single commitment, made last November, was $16 billion to Ukraine, but only $4.5 billion of this amount has been drawn. The IMF’s attempts to impose further conditionality on Ukraine drawing the rest of the amount have been unsuccessful, and the delay has driven the country close to bankruptcy. Tight IMF conditionality in this case will merely prevent the shaky pro-Western government of Julia Tymoshenko from winning the upcoming election, delivering the country back into the welcoming hands of the communists and Russia’s Vladimir Putin.

The IMF’s second largest commitment, for $15.5 billion, is to Hungary, a country that since 2002 has been run by an irresponsible socialist government whose prime minister Ferenc Gyurcsany himself admitted in 2006 that “No European government has done anything as bone-headed as we have.” Hungary’s bone-headed policies have continued since 2006; in the last five years the country has enjoyed almost no economic growth even as its Eastern European neighbors surged ahead. Hungary needs a general election and a new non-socialist government; providing it with money before that event is simply reinforcing failure.

The third largest commitment, of about $7.5 billion is to Pakistan, a country that has sharply regressed from the apparently promising economic state it had reached under former president Pervez Musharraf. Again, the IMF is propping up failure, though to be fair in this case it may have little alternative.

The IMF’s fourth largest commitment, of $2.3 billion, is to the wholly unreformed communist dictatorship of Belarus. Money down the drain.

The fifth largest commitment, of $2.2 billion, is to Latvia, a more or less market economy that has enjoyed considerable success in the last decade. The IMF released a third of the package in December; its failure to release the other two thirds caused the Latvian government to collapse in February. The new prime minister has said IMF conditions are “not viable” and the country faces bankruptcy by June.

The IMF’s sixth largest commitment, of $2.1 billion, is to Iceland. That’s $10,000 per Icelander, on top of a morass of other debts the country has incurred. Nice place, but bust.

Those six commitments account for more than 90% of the IMF’s closed deals in the last year. The total sum disbursed, about $17 billion, is less than 10% of the IMF’s lending capacity, let alone the trebling thereof that Geithner has called for. In a couple of cases, the IMF may have done some good, but most of its commitments have either reinforced a failed regime that should be removed or caused huge instability through the IMF bureaucracy’s unrealistic and dictatorial demands.

There must be a better way.

In a truly free-market system, there is. Countries that get into difficulties can reasonably get funding from two sources: the private sector banking system, which will want to be paid back, and their geopolitical friends, which may not need to be paid back.

Countries with rich friends have no need of the IMF. Belarus can prop up its dictatorship using Russian taxpayers’ money and oil revenues. Latvia and Iceland can reasonably expect modest amounts of help from their neighbors in Scandinavia and Germany. If the EU socialists in Brussels want to prop up the corrupt socialists in Budapest, they can do so, though in a well-run Europe Hungary would be cut off from funding until it has held fresh elections. Pakistan is a strategic interest of the United States and NATO as a whole; its economic condition has very little to do with this. Only Ukraine has no close friends with lots of money to spare, but the IMF assistance to Ukraine may well be doing more harm than good.

In the post-1980 global financing system, private funding is not readily available for countries in difficulties. Too many such countries, like Argentina in 2001, have stiffed their private sector creditors, while remaining in good international standing by discriminating in favor of the IMF and the World Bank. In any case, a financing system run off bank trading desks on the basis of credit ratings has no mechanism for dealing with the highly labor- and skill-intensive problems of assisting countries to emerge from economic difficulties.

Before 1914, there was a simple mechanism to deal with this problem. London merchant banks were appointed as advisors to emerging markets, stationing skilled staff in the country’s capital to provide advice on government finance, economic development and infrastructure investment. They made their money by arranging the majority of financings for the country; other banks generally did not compete with the in-house advisor for those financings. If a country got in difficulties, financial and economic policies would be structured to get out of those difficulties.

In the short term the local government had little alternative but to accept the advice given, since default would cut the country off from sources of international finance altogether. In the long term, it was possible to switch advisors and get access to a different but equally sound menu of policies.

The system broke down in the 1920s because the newly powerful New York houses disregarded existing advisory relationships, particularly in Latin America, and proceeded to lend indiscriminately, thus creating a credit bubble followed by a collapse. Then after World War II the merchant banks had no international financing capability for a generation, after which they found that their advisory roles had been usurped by the World Bank and the IMF. In the 1980s and 1990s the merchant banks sold out for the best prices they could get, and were replaced by the trading-desk behemoths.

In the world of financial meltdown, the behemoths in their previous form are history. Banks that are “too big to fail” will (and should) be hedged around by a thicket of regulations, forcing them to become too stupid to take gigantic risks with taxpayers’ money. Their place will be taken by medium sized houses, similar to the old London merchant banks if their role is primarily advisory and to hedge funds if their role is primarily trading and investment. Already “boutiques” such as Greenhill Partners are taking over many of the advisory roles that would previously have gone to the big houses.

In an ideal international financing system, such advisory “boutiques” would advise emerging market countries, assisting them on arranging financing in the international markets. Private sector banks and investment institutions would take the majority of emerging market debt, while hedge funds and private equity funds would provide project finance and corporate equity where needed. During periods of financial stress such as the present, the boutiques would advise on the fiscal, monetary and other policies needed to return to economic growth and creditworthiness. Boutiques would be hired based on their track record in assisting other countries and the attractiveness of their recommendations in general.

Countries that hired over-aggressive houses would be unable to get finance, and would be forced to replace them with turnaround specialists. There would be no conflicts of interest. The boutiques would place their clients’ economic interests ahead of other considerations. The clients would know that they were getting the best possible market-oriented advice from an untainted source. The international banks and institutions would know they were providing finance to a country whose economic and financial policies were designed by grownups.

The behemoths are history, or can be made so. All that is needed to produce this superior international financial architecture is to arrange the disappearance of those 1940s dinosaurs, the World Bank and the IMF. Shoot them, Mr. Geithner, don’t prolong their life.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)