The IMF and the world: Unsteady as she goes

 
Christine Lagarde Christine Lagarde was at the annual meeting of the IMF and World Bank in Tokyo

If you knew nothing of what had happened in the global economy over the past five years you would have found Christine Lagarde's opening press conference at the World Bank and IMF meetings in Tokyo on Thursday morning distinctly peculiar.

Why? Because she was saying some quite scary things about the outlook for the world, but she didn't sound like she wanted to raise the alarm. She sounded like it was pretty much business as usual.

A good example was financial sector reform, which came top of her list of policy priorities for governments. She said: "if you ask... supervisors around the world whether the financial sector is safer than it was five years ago, many will say: 'no, not yet'. And we tend to concur with that."

When you think about it, that's quite alarming. After all, five years ago the financial sector turned out to be less safe than it has been since at least the 1920s, maybe ever.

Since then, trillions of dollars have been ploughed into the global financial system and thousands of pages of new regulations and supervisory requirements have been drawn up to make the financial system stronger.

But Madame Managing Director is saying that the Fund doesn't think we're any safer than we were five years ago. And nor, apparently, do many regulators.

Top priorities

Funnily enough, no-one in the room thought this judgement was worth exploring further in the question and answer session.

The many international journalists present seemed equally untroubled by her other three priorities, which were: governments establishing credible programmes to bring down some of the biggest sovereign debt piles we have ever seen; creating jobs for the 48 million plus unemployed in the advanced economies, many of which have seen joblessness rise higher, for longer, than anyone expected; and, finally, that old favourite, tackling global imbalances.

On this last point, Madame Lagarde said the massive current account surpluses and deficits that we saw in the lead-up to the crisis had receded lately, but that was only because of the "conjunctural state of things".

In other words, deficits and surpluses had gone down, but mainly because people in the big deficit countries had less money now to buy stuff from abroad and the big surplus countries are having to pay a lot for their commodity imports.

Imbalances have probably also been helped by the drying up of global trade flows in the past few months, due to worries about the eurozone and the US economy, which could end up hitting the world's banks. These are not very encouraging reasons.

When growth picks up, the managing director said, "imbalances are likely to widen again".

This, too, might be considered worrying. After all, hasn't Sir Mervyn King told us, again and again, that those same high imbalances were the ultimate cause of the crisis and our economy won't properly recover until this big international problem is addressed?

Perhaps. But we didn't get any more on that subject either. None of the journalists present asked a question about it.

Big uncertainties

None of this is to berate the people sitting in that conference hall. If I were in Tokyo, I might not have asked about these things either; not because they aren't important, but because (a) we have heard them so many times before and (b) it is even less obvious than usual that these IMF and World Bank meetings can do anything about them.

Everyone agrees that the biggest short-term uncertainties hanging over the global economy are US fiscal policy and the crisis in the eurozone.

One month before a presidential election, neither the IMF nor anyone else can have much influence on US policy. And in discussing the rest of the world, US officials in Tokyo are likely to be somewhat distracted, at best.

What about Europe? Surely the IMF still has plenty to play for in Europe? Except, the limited influence the Fund might have had in the eurozone is in danger of ebbing away. True, the European Central Bank (ECB) has asked it to advise on any Spanish support programme going forward, but it is not expected to make a financial contribution to any future bailout.

If you're sitting in Spain - or Greece - the Fund's influence in Europe matters because its view on matters fiscal has now moved quite far from Germany, the European Commission and the ECB.

As I have mentioned several times before, Fund officials have been privately lobbying for a slower pace of fiscal adjustment in the periphery countries for well over a year. But that came more fully into the open this week with the release of the chief economist's new research on the economic impact of fiscal austerity programmes since 2009. I reported on the UK implications of this research into the 'fiscal multiplier' for Radio 4 and BBC1 on 9 October.

Money-wise, the Fund has been a minority partner in eurozone bailout programmes to date. By and large, it has simply gone along with what the rest of the Troika wanted. If it is now to move to a more advisory role, some say that will embolden its officials to speak more openly about what they would call a more growth-friendly solution to the eurozone crisis, with more expansionary policies in the core countries and a slower pace of adjustment in Spain and the rest.

Others inside the Fund take exactly the opposite view: with less "skin in the game", they say, the Fund will have even less capacity to make its voice heard.

Here's what we do know: it is hard to envisage any long-term resolution to the eurozone crisis that does not include a moderate level of growth in the periphery economies, and the Fund now takes a rather different view on how to achieve that growth than the powers-that-be in Brussels or Frankfurt.

The IMF's latest World Economic Outlook has some of the same disconnect between scary content and hum-drum tone that we saw in Christine Lagarde's press conference. Nearly every growth forecast for this year and next was revised down, financial vulnerabilities were "even higher than in the spring" and the downside risks to the forecast were "much higher" as well.

Yet, for all that, Olivier Blanchard allowed himself to suggest, in the foreword, that the "worst might be behind us".

The world is still a scary place, but for the Fund - and for governments - scary is becoming all too normal. The more normal it seems, the less scope there may be for the IMF to make much of a difference.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    +4

    Comment number 31.

    Try starting with the existing (& relatively new) system is broken beyond repair - way Too Bust To Save

    Then think what else we can do to start again - eg Steve Keen's sovereign debt w/o

    The only solution the financially illiterate & utterly bust rigged casino bunch has is to pretend they will drive new success after impoverishing 99% of the population - what could they have to gain eh?

  • rate this
    0

    Comment number 30.

    Averagejoe,
    It wasn't just Steve Keen, Warren Mosler, Bill Mitchell, Randalph Wray and the rest of the MMT economists also predicted it. Back in 1999 they also predicted with uncanny accuracy and detail, the problems that would happen in the EZ due to the faulty construction of the Euro.

    Modern Monetary Theory has been consistantly correct.

  • rate this
    +2

    Comment number 29.

    "The many international journalists present seemed equally untroubled by her other three priorities"
    - Since Legarde's arrival at the IMF its view point has, as you have hinted at, become increasingly partisan to that of the Paris Ecole, and thus its word is lacking in credibility at the moment. It is also causing concern to interested parties from other parts of the world.

  • rate this
    +2

    Comment number 28.

    SF: "Everyone agrees that the biggest short-term uncertainties hanging over the global economy are US fiscal policy and the crisis in the eurozone”


    With one big difference: changing US fiscal policy will require merely a change of its administration, while EZ's problems are SYSTEMIC in nature with nobody there accepting that denial is not a river in Egypt.

    Btw. US still has ca 2% growth.

  • rate this
    +9

    Comment number 27.

    The ordinary man in the street, is not familiar with the IMF, but he is aware that things are bad and getting worse. My son-in-law works for a large national retail company in mid management. He works 70 plus hours a week and has not had an increase in pay for 5 years.

    Inflation has reduced his take home pay by at least 25%. What are the Govr. doing to help. "Are we still all in this together".

  • rate this
    +5

    Comment number 26.

    They dont know what to do, they are making it up as they go along. And thats because the stick with conventional economics which has been totally debunked by Steve Keen, the only economist to predict this crisis. About time you read the book Steph.

  • rate this
    -1

    Comment number 25.

    You will remember that both Cameron & Osborne went out of their way to ensure that Gordon Brown did not get the job as MD at the IMF. Well now they have their choice in place and no leadership: it is just a cosy relationship between the members. Despite what you may think of Brown he certainly had the experience and played a leading role in rescuing the Banks in the EU. Politics is the problem.

  • rate this
    +2

    Comment number 24.

    With the IMF finally realising that their assessment of the fiscal multipliers was too low, this inevitably means that there assessments of country's structural deficits must also be way too high. The evidence has been pointing to that for the last two decades.

  • rate this
    0

    Comment number 23.

    The big white elephant that nobody mentions in such economy gatherings is China, in specific, and Asia's rise in general. It's not random economic flows that created the situation. Most risk models assume a normal distribution to explain variations which is why they failed in 2008. Yet, if you like at US military/strategy pubs it's all about China and world resources which is telling.

  • rate this
    +2

    Comment number 22.

    "Funnily enough, no-one in the room thought this judgement was worth exploring further in the question and answer session."
    - I suspect that the reason for that is that the IMF is always behind the curve, and relies on others to bring home the home truths. The IMF's forecasting record is abysmal.

  • rate this
    +2

    Comment number 21.

    A good example was financial sector reform, which came top of her list of policy priorities for governments.

    Correct, 4 years on and we see our Governments have done .......errrr......oh yup nothing.

    The financial sector will never self regulate , its irrational to believe otherwise , our Governments have proven themselves impotent we need law makers who have no vested interests.

  • rate this
    +5

    Comment number 20.

    The current leadership of the IMF have reduced its role to being no more than a talking shop - they lean both ways: on the one hand commend austerity (cuts) on the other warn the World of things getting worse - so they can say "we told you so". Instead of setting out an agenda for getting Countries out of recession they are making matters worse - sending wrong signals to the Business world.

  • rate this
    +2

    Comment number 19.

    Tweaking and polishing the system won't work if it's all broken.
    The economy need a complete overhaul not a few new rules and regulations to satisfy the critics.

    They could adopt the Prosperity Plan instead, but in the last three years they've shown no interest in such an alternative strategy.

    The Emperor Has No Clothes.

  • rate this
    +14

    Comment number 18.

    A good example was financial sector reform, which came top of her list of policy priorities for governments. She said: "if you ask... supervisors around the world whether the financial sector is safer than it was five years ago, many will say: 'no, not yet'. And we tend to concur with that."

    In other words we still haven't addressed the cause of the financial disaster, it is still there.

  • rate this
    +3

    Comment number 17.

    Already last year
    >the notional amount outstanding in credit derivatives had increased significantly since the 2008 crisis

    >bank's reserves (due to Basel II's option to allow large banks to use their own risk models) were incredibly low

    >banks had replaced the risk from credit derivatives with that from high-yield eurozone sovereign bonds

    Save a gambler from his losses => riskier gambling

    Duh!

  • rate this
    +2

    Comment number 16.

    - Progress has been made, and the banks are now in a better position, but one factor that gives rise the above view is that the situation around the world has continued to deteriorate and the bar is having to be raised as we go forward. In particular, the depth of the problem is still not clear - e.g. Spain, Italy, and France.

  • rate this
    +1

    Comment number 15.

    12 random_thought
    "But the savings of the rich are protected while austerity is imposed on the poor - so inequality gets worse."

    This is why devaluation is the best method of adjustment. The rich can avoid tax, but they cannot avoid devaluation. The poor can be protected with tax breaks or welfare rises etc.

  • rate this
    +5

    Comment number 14.

    Well this about sums it - the crooked organisations who have overseen the theft of assets from poorer countries whilst imposing on them an outdated and inoperable, not to mention bankrupt financial system have finally fessed up they don't have a clue. Indirectly. Better Late Than Never!

  • rate this
    +12

    Comment number 13.

    We in UK do not worry about IMF. We have Mervin leading us to stagflation..
    We have BoE killing our savings, our pensions and our youth with hig inflation..

    We do no care what Lagarde says, we have enough Lagardes in our MPC committee and in every party.

    We only care what the inflation is doing to our lives.

    And sadly BoE and the goverment only care about house prices..

  • rate this
    +3

    Comment number 12.

    Imbalances between net savers and net debtors are certainly the cause, but that applies not just to international trade but also on an individual basis. Until inequality is significantly reduced, the crisis will not go away. High sovereign debt is a symptom of the imbalances, not a cause.

    But the savings of the rich are protected while austerity is imposed on the poor - so inequality gets worse.

 

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