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IMF head in shock fiscal warning
By Chris Giles and Gillian Tett in Davos
28/01/08 "Financial
Times " -- - 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.
Copyright The Financial Times Limited 2008
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