Posted on 01/28/2008 6:03:56 AM PST by TigerLikesRooster
IMF head in shock fiscal warning
By Chris Giles and Gillian Tett in Davos
Published: January 27 2008 23:03 | Last updated: January 27 2008 23:03
The intensifying credit crunch is so severe that lower interest rates alone will not be enough “to get out of the turmoil we are in”, Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warned at the weekend.
In a dramatic volte face for an international body that as recently as the autumn called for “continued fiscal consolidation” in the US, Dominique Strauss-Kahn, the new IMF head, gave a green light for the proposed US fiscal stimulus package and called for other countries to follow suit. “I don’t think we would get rid of the crisis with just monetary tools,” he said, adding “a new fiscal policy is probably today an accurate way to answer the crisis”.
Mr Strauss-Kahn’s words rip apart a long-standing global consensus that fiscal retrenchment in the US and Japan is needed to help reduce huge trade imbalances.
It comes as the IMF is due to release new economic forecasts this week which, he said, would show a “serious slowdown and it needs a serious response”.
The US Federal Reserve starts a regular meeting tomorrow and markets expect another half-point cut on top of the 0.75 percentage-point cut last week.
Mr Strauss-Kahn’s dramatic change in stance amazed Larry Summers, the former US Treasury secretary. He is known for saying that the IMF stands for “It’s Mostly Fiscal” because the organisation has to be tough with countries’ budgetary laxity.
But such is his concern about economic prospects if the US slows and other countries do not pick up the slack in world demand that he supported Mr Strauss-Kahn. “This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face,” said Mr Summers.
The dark economic mood in Davos was reinforced at the weekend by John Thain, the new chief executive of Merrill Lynch, who predicted the problems in subprime mortgage markets would spread to credit card and consumer loans. “It will be a while before you see a return to normality in the banking system,” he said.
Thomas Russo, vice-chairman of Lehman Brothers, said: “Absent government intervention, the economic picture is very grey but with government intervention you have a decent chance of stabilising the picture.”
The IMF’s call for countries with strong fiscal positions to loosen their budgets gained approval from Christine Lagarde, the French finance minister, and Palaniappan Chidambaram, the Indian finance minister.
Ms Lagarde suggested Germany would be a prime candidate for fiscal loosening, while Mr Chidambaram said: “India may have some room, if necessary, for some fiscal stimulus.”
But in a rare direct reference to China, he called on Beijing to play its part. “China has huge headroom to stimulate domestic consumption.”
However, it is the global community’s lack of confidence that China will play ball in offsetting a slowing US consumer that makes greater fiscal laxity in many countries appear suddenly appealing.
But amid a sudden enthusiasm for fiscal stimulus packages, some voiced caution. Professor Ken Rogoff of Harvard University and a former chief economist of the IMF said aggressive fiscal easing generates “more harm than good in most cases”, leading to unsustainable budgetary position that require painful correction in the longer term.
I guess he was humoring us.:-)
All of the big shot bankers have been consistently wrong.
No way the US and big banks can seriously expect us to spend our way out of this with an already 9.2 trillion dollar debt tag.
Seems Strauss-Kahn is shilling for the further devaluation of the dollar and foreign fiscal buy-outs of US owned domestic businesses and properties.
These people are idiots. The subprime crisis was BECAUSE of artificially low interest rates. Lower rates will do absolutely nothing. The only thing that could work would be tax cuts and spending cuts coupled with hands off the banks till they clean up their own mess.
Yep - they want inflation, not deflation.
That tells me even the elites are more fully invested in debt instruments than they have ever been, and would be burned by deflation right along with Joe 6-pack.
Reducing the size of our Nanny government and operating in the black with debt pay down is the ticket to reviving the economy.
Increase tax write offs of capital equipment investments and research while at the same time reducing the corporate taxes....then watch things take off and the standard of living increase.
Subprime had nothing to do with artificially low interest rates. Low interest rates given to people who put money down and have at least decent credit allows for more capital to be put back into the economy besides their mortgage. The subprime crap happened because anyone with a SSN could get a mortgage with 0% (and sometimes with negative 1-3% down with closing costs wrapped in). If people needed 10% down and at least a 620 credit score to get a mortgage, the subprime fiasco that is currently happening would never have happened even if mortgages rates were 1-2%.
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