Wednesday, April 10, 2013

The Global Policy Actions Needed to Stay Ahead of the Crisis ---- Christine Lagarde


The Global Policy Actions Needed to Stay Ahead of the Crisis

By Christine Lagarde
Managing Director, International Monetary Fund
Economic Club of New York, New York, April 10, 2013
As prepared for delivery

Introduction: Status of the global economy
Good afternoon. Let me begin by thanking the Economic Club of New York—and especially
chairman Roger Ferguson and president Jan Hopkins—for inviting me today. I know that
Wendell Wilkie—a presidential candidate back in 1940—once described the Economic Club
as “the foremost non-partisan forum in this country”. When it comes to the cutting edge of
economic policy, I believe the same is true today. You provide an invaluable public service,
and I am delighted to be here.
Next week, the IMF holds its Spring Meetings, when we welcome economic policymakers from
188 countries—our global membership—to Washington. We will release our latest economic
forecasts at that time.
I will not provide those numbers today; but I will provide some sense of the major issues, here
in New York.
The big question, of course, is: where does the global economy stand? Five years after Lehman,
is the world finally getting back on a positive path? I wish I could give you a simple answer but,
unfortunately, the truth is a bit more complicated than that, and looks more like a mosaic.
The good news is that after a particularly volatile period, financial conditions are showing signs of
improvement. Thanks to the actions of policymakers, the economic world no longer looks quite as
dangerous as it did six months ago.
Yet we do not expect global growth to be much higher this year than last. We are seeing new risks
as well as old risks. In far too many countries, improvements in financial markets have not translated
into improvements in the real economy—and in the lives of people.
The differences between regions are also starker than ever. We are now seeing the
emergence of a “three-speed” global economy—those countries that are doing well, those that
are on the mend, and those that still have some distance to travel.
These three groups face different challenges, largely interconnected, but they share the need to put
in place policies that will repair the consequences of the crisis and prevent its recurrence.
Walt Whitman put it so well when he said:
“Keep your face always toward the sunshine, and shadows will fall behind you.”
So I would like to talk about two things today:
  • First, the policy requirements in the three groups of countries needed to stay ahead of the crisis.
  • Second, the overarching issues that transcend these different groups, and what they need to do together to stay ahead of the crisis.
I. Priorities for the “three-speed” global economy
Let me begin with the priorities for the three different groups.
(a) The first “speed” group includes the countries that are doing well.
This group includes, essentially, the emerging markets and developing countries. Because many
had grappled with crises in the past, they were well prepared, and entered the crisis from positions
of strength—with sound policies under their belts.
Think East Asia, for example.
In fact, for the past half decade, the emerging markets and developing economies have led the
world’s recovery—accounting for a remarkable three-quarters of global growth. After a slight
slowdown last year, they are bouncing back again. Today, developing Asia and Sub-Saharan Africa
are the two fastest-growing regions of the world. These countries will legitimately want to
consolidate their success.
At the same time, many emerging markets are looking at the advanced countries with
some serious concern. Many are worrying about the potential fallout from exceptionally loose
monetary policy, especially from unconventional easing.
Let me emphasize that, in present circumstances, it makes sense for monetary policy to do the
heavy lifting in this recovery by remaining accommodative. We know that inflation expectations are
well anchored today, giving central banks greater leeway to support growth.
But experience also tells us that this can have unintended consequences. Low interest rates push
people to take on more risk—some of which justified, some of which not.
Across the emerging economies, policymakers worry that exceptionally loose monetary policy will
affect exchange rates and capital flows, and threaten financial stability through high asset prices
and rapid credit growth. The greatest worry is that just like “what goes up comes down”, “what
comes in goes out”—a sudden reversal of large and volatile capital flows that can bring down the
economy with it.
Right now, these risks appear under control. Capital is flowing to emerging markets mainly because
of good policies and good prospects in these markets.
But we must be alert to any warning signs. Corporations in emerging markets, for example, are
taking on more debt and foreign exchange exposure. Over the past five years, foreign currency
borrowing by firms in emerging markets has risen by about 50 percent. Over the past year, bank
credit has increased by 13 percent in Latin America and 11 percent in Asia.
When the tide turns, and interest rates pick up again, these hidden dangers will be exposed
to the cold light of day.
So emerging markets will need to boost their defenses. This includes reconstituting fiscal policy space
that eroded during the crisis as well as stepping up banking regulation and supervision. The right
macroprudential policies obviously depend on different circumstances. They will include limiting credit
growth in rapidly-expanding areas, imposing capital requirements that move with the cycle, reinforcing
financial markets, and closely monitoring foreign exchange exposures.
The advanced economies also bear some responsibility here, in terms of delivering a better fiscal policy
and more financial repair—and thus relieving some of the burden on monetary policy.
With the right set of policies on both sides of the capital flow equation, the risks can be managed—and
the emerging markets and developing countries can expect to continue their forward momentum in the
“first speed” group of economies.
(b) Let us turn to the second group of the three “speeds”—countries on the mend.
This group of countries consists of those that have come to grips with some fundamental policy issues.
This includes the United States, but also other countries like Sweden and Switzerland, for example.
Let me dwell on the United States for a moment: the crisis began here, a result of financial excess.
Since then, the United States has made rapid and substantial progress in repairing its financial system, as well
as the household debt situation. This is paying off: credit conditions, housing markets, and employment have
begun to tilt up. We are seeing steady growth underpinned by solid private demand.
This does not mean that everything is settled. Far from it. An outstanding issue is that public finances appear
unbalanced. Adjustment is too aggressive in the short term, and too timid in the medium term. This adds to
uncertainty and casts a shadow on the recovery.
Yes, the fiscal cliff has been avoided. But this year, fiscal adjustment is still outsized, at 1¾ percent of GDP.
Sequestration alone—if not reversed—could cut a half percent of GDP from growth. This risks throwing away
needed growth, especially at a time when too many people are still out of work. It is also an extremely blunt
instrument, imposing deep cuts in many vital programs—including those that help the most vulnerable—while
leaving untouched the key drivers of long-term spending.
Turning to these longer-term issues: yes, progress has been made, with the deficit falling over 5 percentage
points of GDP since 2009. Despite this reduction, it is still among the highest of the advanced economies.
In fact, government debt is expected to hit 108 percent of GDP this year. Without policy action, the trajectory
is unsustainable.
At this point in the recovery, it is more important than ever to put in place a credible, medium-term roadmap
to bring down the debt—a balanced plan made up of savings in entitlement spending plus additional revenues.
Such a plan would support the recovery in private demand. This is the major policy challenge facing the United
States today and it must be met. Otherwise, the substantial gains that have been made can be too easily lost.
(c) Let us now turn to the “third speed” group of the global economy—
the countries that still have some distance to travel. These include the Euro Area and Japan.
Starting with the Euro Area, European policymakers have accomplished a lot over the past year or so—
including the European Stability Mechanism, the ECB’s Outright Monetary Transactions, the single supervisory
mechanism, and the agreement to help relieve the debt burden of Greece. We should applaud this—it is not
easy for 17 countries to agree to and implement such major policy initiatives in such a relatively short time.
At the same time there is still a lot to do. Especially in the periphery, many banks are still in an early stage
of repair—not enough capital and too many bad loans on their books. Even outside the periphery, there is a
need to shrink balance sheets, reduce reliance on wholesale funding, and improve business models.
Because of insufficient financial repair, monetary policy is “spinning its wheels”—meaning that low interest
rates are not translating into affordable credit for people who need it. The plumbing is clogged up, and we
are seeing more financial fragmentation. Across the European periphery, credit has contracted by 5 percent
since the onset of the crisis, hitting small and medium-sized enterprises particularly hard.
So the priority must be to continue to clean up the banking system by recapitalizing, restructuring, or—
where necessary—shutting down banks.
In an economic and monetary union, financial problems are common problems. So the Euro Area needs
more collective policy solutions. One option is direct recapitalization by the European Stability Mechanism
of troubled banks that have systemic implications.
Beyond this, the Euro Area needs a real banking union to strengthen the foundations of monetary
union.
This means complementing the single supervisory mechanism with a single resolution authority, and deposit
insurance backed by a common fiscal backstop. Only then can the poisoned chord between weak banks
and weak sovereigns be forcefully cut. Only then can monetary policy be fully effective. Only then
can financial stability be fully assured.
The Euro Area countries are prominent among those that still have some distance to travel. So is Japan.
The priority here, however, is to finally break free of the deflation trap and restore economic vitality. In this
vein, the recently-announced framework of ambitious monetary easing—geared toward achieving a higher
inflation target—is a positive step. Japan needs to rely more on monetary policy to kickstart growth.
For this to succeed, however, Japan must also move ahead in other areas—including in fiscal policy, which looks
increasingly unsustainable. Japan’s public debt is now approaching 245 percent of GDP. As an urgent priority,
therefore, Japan needs a clear and credible plan to lower public debt over the medium term. It also needs
comprehensive structural reforms to shift the economy into higher gear.
***
So these are the major policy challenges that need to be met to stay ahead of the crisis, for each group of
countries in the “three-speed global economy”.
II. Global priorities to stay ahead of the crisis
There is another set of overarching issues that affects them all. These issues have been with us since the
beginning of the crisis, they are familiar, but have not yet been fully resolved. There are three of them as well:
financial sector reform; more balanced global demand; and more emphasis on growth, jobs, and equity. Let me
turn to these issues, to these “old risks”.
(a) Financial sector reform
The bottom line is that we need a global financial system that supports stability and growth.
Until now, this has been lacking. In too many cases—from the United States in 2008 to Cyprus today—we
have seen what happens when a banking sector chooses the quick buck over the lasting benefit, backing a
business model that ultimately destabilizes the economy.
We simply cannot have pre-crisis banking in a post-crisis world. We need reform, even in the face of intense
pushback from an industry sometimes reluctant to abandon lucrative lines of business.
Global policymakers have certainly made significant progress on more stringent capital and liquidity requirements
and capital surcharges for global megabanks, as well as clear standards for supervision and resolution.
To stay ahead of the crisis, we need to see more progress in other important dimensions.
What do I mean? For a start, the “oversize banking” model of too-big-to-fail is more dangerous than
ever.
We must get to the root of the problem with comprehensive and clear regulation, more intensive and intrusive
supervision, as well as frameworks for orderly failure and resolution—including across borders, and with authorities
empowered to oversee the process.
In terms of other issues: derivatives are still the dark matter of the financial system—as of last September, only
one in ten credit default swaps were cleared through central counterparties.
Shadow banking is still a shady corner toward which risk appears to be gravitating. This is true in
advanced as well as in emerging economies.
Financial sector reform efforts must also be coordinated internationally. We are already seeing countries pulling
in different directions in some areas, such as in calculating the riskiness of assets and curbing banking excesses.
We need more focus on consistent global regulation and implementation, including in key areas such as bank
resolution.
So: completing financial sector reform is the first overarching issue to be faced.
(b) More balanced global demand
The second issue: more balanced global demand. For too long, the pattern of global growth has been a high-wire
act between regions with large current account surpluses and those with large current account deficits. The good
news is that a sense of balance is returning. However, too much of it is one-sided, and comes from lower demand
in deficit countries.
So there is a need for higher demand in surplus regions. This means different things for different countries.
For countries in Northern Europe, like Germany, it means doing more to boost investment. For China, it means doing
more to boost consumption and moving further toward a services-oriented consumer-based economy—a path upon
which it has already embarked.
In addition, China’s rebalancing strategy depends crucially on its financial sector. Reform in this field
serves numerous goals—supporting more balanced growth, more inclusive growth, and a safer financial system that
helps the real economy, especially the dynamic private sector. Priorities here include continued interest rate
liberalization, improving risk management, and strengthening regulation and supervision of shadow banking.
(c) Growth, jobs, and equity
The third issue: all countries need to emphasize more growth, jobs—and more equity. In other words,
more attention to the issues that really matter to people. This is something we take very seriously at
the IMF.
With over 200 million people out of work today, job creation is an urgent priority.
A high level of employment is the best guarantee of a vibrant economy and a healthy society. Without this, we risk
a wilderness of wasted potential and ruined ambition—especially for a generation of young people.
The best way to create jobs is through growth. This must come first, with the right balance of demand-side and
supply-side policies. But policymakers can also deploy labor market policies to spur job creation more directly,
while keeping fiscal policy sustainable. Options include education and training programs, hiring and wage subsidies,
public works programs, child care subsidies, and lower taxes on labor.
Besides more growth and jobs, there must be equity and inclusion.
Equity matters because a more balanced distribution of income leads to more sustained growth and
greater economic stability, underpinned by stronger bonds of social trust. Let’s face it: inequality is too high in
too many countries, and has been growing in most countries during the crisis.
Equity also matters because, as tough times continue, we see signs of adjustment fatigue and rising social tensions.
This is not primarily because of the adjustment itself—people understand that they cannot live beyond their means
indefinitely. It is because of perceived unfairness in the burden of adjustment.
Just as the pains of adjustment must be shared, so should the gains from growth.
This matters for the people in crisis countries bearing a heavy burden. For the people in the Arab transition
countries seeking a new departure based on dignity and justice. For the two and a half billion people struggling
to survive on less than $2 a day.
There is no magic bullet here, but there are still options. Most urgently, we should protect people most affected
by crisis and make sure adjustment is as fair as possible—by protecting basic social services, assuring progressivity
in taxation, and combating tax evasion.
Subsidy reform can also help.
Take energy subsidies, for example. Not only do they hurt the planet, they help the rich at the expense of
the poor.
The IMF has estimated that these subsidies, including tax subsidies, ate up almost $2 trillion in 2011—a whopping
2½ percent of global GDP. Clearly, these are resources that could have been put to much better use—to improve the
economy and improve people’s lives.
Conclusion
Let me conclude. This crisis has been long, bitter, and hard. The priority now is to take advantage of any
financial breathing space, and put it to good use. This is such a moment. We cannot afford to let up.
We know the future we want. We know the path to get there. The task before us now is to act, to make that
future a reality, to get ahead—and stay ahead—of the crisis.
Thank you.

8 comments:

Anonymous said...

This woman is obviously living on a whole other planet than we are.

Anonymous said...

Tom Hennegan needs to answer for the erroneous intel he had giving us on this woman, Lagarde is not on the side of the people

Anonymous said...

This could be the speech that TK sooooo referred to as a pre cursor to the RV. Lets hope this is it.

Anonymous said...

That's because she knows what coming. A different world....a different mind set.

Anonymous said...

shes a white hat you idiot learn too READ....

Anonymous said...

This formatting is so hard to read.....
Its much easier to follow the link to the IMF site and read it there...

Anonymous said...

That is because she is a shape shifting reptilian and they are very slick creatures, pardon the pun.

At this moment in time everything must be presented to remain to appear status quo with little improvement for the seeing eyes and hearing ears of the mass public, until the very last minute - when it all of sudden doesn't appear that way anymore.

At which time, you will become more familiar with what that word change really means like never before.

How in the world else, do you think you are going to get the masses of peoples serious focused attention to accept the change no one cannot yet bother to tell you in advance in order to give you the choice to vote for it with your free will to say so.

You already voted for everything you have and it does not work, so the new crew isn't going to ask for your permission for the unexpected change you are totally and completely unprepared for, but you'll live through it.

You already had plenty of opportunity for your say so to vote and it does not work, so now you get the surprise for the shock value needed to get you to accept what you did not get to know in advance for the approval of your say so to choose..

Your free will say so brought the planet where it is today, on the verge of extinction. So no one is going to ask you what you would like anymore. It's time to move onward and upward out of your regularly scheduled bar coded mind controlled programming that undermines progress in the positive direction.

Someone else had to decide your better future for you, because you could not manage to come to a sensible conclusion to accomplish that great feat on your own. So you get shock treatment to help you move in a positive direction you could move before the shock occurred.

Anonymous said...

It is not helpful that the masses have been deliberately dumbed down by chemicals and EMT's, mass media Communistic socialization tactics, and deliberate withholding of truth to the people. Our children are taught to follow rules and prepare to work until they die, nothing else. This is NOT what Source planned for this planet. Free will only exists on a level playing field and this field has been everything but. I don't accept there are people who should make decisions FOR me but I do accept that through deceptive practices, we are at that junction now. I only hope that the future brings truth, transparency and absolute responsibility for those decisions that apply to ALL. We are all One and it's high time we understood that and acted accordingly.