💾 Archived View for gmi.noulin.net › mobileNews › 3317.gmi captured on 2023-06-16 at 19:34:30. Gemini links have been rewritten to link to archived content
⬅️ Previous capture (2023-01-29)
-=-=-=-=-=-=-
2011-08-30 12:33:45
Aug 28th 2011, 4:16 by Z.M.B. | JACKSON HOLE, WY
IT IS largely a gathering of central bankers; at the outset of her speech she
apologised for not being one. Yet by far the most hard-hitting words at this
year s Jackson Hole symposium came from Christine Lagarde, the former French
finance minister and new managing director of the IMF.
The world economy, she said, was entering a dangerous new phase driven by a
sense that policymakers do not have the conviction to take decisions that are
needed. That must change, and now. Ms Lagarde laid out a bold to-do list to
support growth, including a forced capital injection into Europe s banks,
aggressive new action to deal with America s foreclosure crisis, and a broad
rebalancing of fiscal priorities.
The most headline-grabbing prescription was for Europe s banks. More capital,
Ms Lagarde argued, was essential to cutting the chains of contagion in the
euro crisis. Without it there could easily be the further spread of economic
weakness to core countries, or even a debilitating liquidity crisis . She
called for what would essentially be a European version of America s policy for
its biggest banks in 2008 a mandatory capital increase using public funds if
necessary. Those funds could come from the European Financial Stability
Facility.
America, in turn, needed to do more to halt the downward spiral of
foreclosures, falling house prices and weak household spending. Ms Lagarde
suggested more aggressive schemes to reduce mortgage principal or help
home-owners refinance at lower rates.
Echoing a theme raised by Ben Bernanke, the Fed chairman, in his speech the
previous day, Ms Lagarde argued that fiscal policy should pivot, putting in
place policies to reduce future deficits while supporting growth today. This
was not a cop-out, she argued. Growth was necessary for fiscal credibility.
After all, who will believe that commitments to cut spending can survive a
lengthy stagnation with prolonged high unemployment and social dissatisfaction?
In America that pivot would require credible decisions on future deficit
reduction involving both tax increases and spending cuts, coupled with a focus
today on making a serious dent in long-term unemployment. In Europe, she
argued, this fiscal rebalancing, and the bigger short-term deficits it implied,
would mean more official financing for some countries. That ought to include
continued support from the ECB .
While most of Ms Lagarde s to-do list applied to Europe and America, the big
emerging economies were not let off the hook. Global rebalancing had not
advanced sufficiently , she argued, because some key emerging economies
(read China) had done too little to boost domestic demand and appreciate their
currencies. The lack of rebalancing hurts everyone , she said. Decoupling is
a myth.
All told, it was a feisty call to action around a largely sensible agenda.
Although European politicians will bristle at the thought of forced capital
injections, many European banks do need a lot more capital and, so far, have
done far too little to secure it themselves. Fiscal austerity should be
recalibrated on both sides of the Atlantic. But just as important as what Ms
Lagarde said was the fact that she said it. Her stern words for Europe assuaged
worries that a former French finance minister would be too cosy with her
erstwhile colleagues. No other top policymaker has spoken so bluntly about the
risks to the world economy or called so bluntly for a co-ordinated plan to
address them. Now the question is whether governments will listen to her.
(Picture credit: AFP)