From the TUC

IMF’s Lagarde: getting closer to the right line

26 Sep 2011, by in Economics, International

It’s been a torrid weekend of meetings in Washington DC (autumn meetings of the IMF and World Bank and G20 Finance and Development Ministers meetings): perfectly timed to address the latest phase of the global crisis. But they failed to do so.

Today, IMF chief Christine Lagarde returned to the attack with an article calling for “collective action for global recovery.” It contains a lot to welcome such as a clear message to the UK to slow down the deficit reduction policy, and a commitment to regulate big finance. But it is only half right on what to do about deficits, and about how to stimulate demand. Boosting Chinese consumer spending is not a sufficient response to the crisis in the G8 economies. Europe and the USA need to boost domestic demand, too.Lagarde is right to say that “consolidating too quickly can hurt the recovery and worsen job prospects. …Credible measures that deliver and anchor savings in the medium term will help create space to accommodate growth today – by allowing a slower pace of consolidation.” Some countries “are under market pressure and have no choice, while others have more space.”

Clearly the UK is in the latter category, although so far George Osborne’s officials’ desperate appeals to Lagarde not to make that explicit have borne fruit.

She is also right to warn governments about ‘social tensions bubbling beneath the surface’, and to call for further regulation of the finance sector.

But either she is still placing too much stress on deficit reduction – possibly simply to avoid too much distance from the governments who pay her wages – or she is being too coded with calls for ‘medium term’ strategies when she really means ‘spend now, but set out how you will pay later’.

Her comments on the need to “relieve the balance-sheet pressures – on sovereigns, households, and banks – that risk smothering the recovery.” continue to suggest complacency about just how bad the global economy is.

Secondly, like too many western leaders, including the British government, she places too much reliance on China to re-boot global demand. She writes:

“a global demand switch from external-deficit countries to those running large current-account surpluses. With lower spending and higher savings in the advanced economies, key emerging markets must take up the slack and start providing the demand needed to power the global recovery.”

The Chinese, however, are not keen to play at International Rescue. They do indeed want to stimulate domestic demand, and the increased imports that would result would undoubtedly help the global economy. But it shouldn’t be – and can’t be – the sole component of global demand.

G8 countries – especially the USA and Europe – must expand domestic demand, for example through investment in public infrastructure or higher wages, rebalancing the returns of growth towards labour and away from capital.

So the IMF chief is moving in the right direction, but is still not advancing the urgent actions needed to create sustainable growth.

One Response to IMF’s Lagarde: getting closer to the right line

  1. Per Kurowski
    Nov 24th 2011, 8:25 pm

    I accuse the bank regulators… they caused the crisis!
    If risk models, credit ratings and market intuitions were perfect, then a bank would really not need any capital at all, since all risk considerations would have been correctly priced, in the interest rates, in the amounts and in the duration of the loans. But, since risk-models, credit ratings and market intuitions are often not perfect, the regulators needs to require the banks to hold some capital, to make sure that there is an adequate cushion provided by the shareholders who are profiting from the bank activity, before creditors and tax payers are called upon to help out.

    Unfortunately the current generation of bank regulators, stupidly, did not base their capital requirements for banks on the possibility of mistakes, but on precisely the same risk models, credit ratings and market intuitions… requiring for instance minimal equity when the perceived risk of default of a borrower seemed minimal.

    And it is precisely there, where the perceived risks of default seem minimal, where the risks for a systemic bank crisis resides, as what is ex-ante perceived as “risky” does never grow into a dangerously sized exposure.

    And so, instead of helping to cushion for the mistakes of the banks, the regulators, with their distortions, increased the probabilities of the mistakes being made, and their negative financial consequences.

    And that is why we got those monstrous large bank exposures to what was ex-ante officially perceived as not risky, like triple-A rated securities and sovereigns, and that have ex-post exploded in the whole Western World.

    And that is why the “risky” small businesses and entrepreneurs find access to bank lending so curtailed and expensive.

    The bank regulators need to be held fully accountable for what they did, because if we do not get to the bottom of this sad affair, neither won’t we get out of it.

    It was the bank regulators who did Europe in! Occupy Basel!