On Oct. 3, Christine Lagarde, managing Director of the International Monetary Fund (IMF) spoke to an audience of mostly international relations students and faculty at George Washington University (GWU) on the eve of the annual meetings of the IMF and World Bank that will be held in Washington this coming week amidst the turmoil of the partial shutdown of the federal government and the posturing over the looming debt default.
GWU is located in Foggy Bottom, at short walk from the Federal Reserve, the State Department ("there's no 'American' desk at the State Department"), K Street law firms and, yes, the IMF and World Bank. The shutdown might actually make it a bit easier for the hundreds of limousines to ferry bankers and government officials around town to their parties, where they will ruminate over how to promote economic growth in developing countries.
Lagarde quipped that she can see the students from her office window, and she chided them to be sure to study hard, knowing that they are being watched. She explained that the IMF/World Bank campus is under major construction, so the agency will be using facilities at GWU for some of the meetings. Fifty or so students will be helping to make sure the bankers don't get lost, and these students will be offered some of the food.
Development experts might want to know that the U.S. economy has been plagued by the exploitation of students and other eager young people recruited for internships in which they are sometimes called upon to perform chores that might otherwise be done by employees. As a sovereign entity, the IMF doesn't have to worry about being sued, but someone could write an expose presenting the case that the students are being exploited by two powerful institutions — the IMF and GWU. This could be a missed opportunity for the IMF to set a good example by paying the students and giving them a chance to see tangible evidence that their work is valued.
The speech might be part of the arrangement the IMF made with GWU. If so, it presents another opportunity to hear Lagarde expound on the state of the world economy and financial system. She's an excellent speaker, much more interesting than most of the policymakers who hold forth in Washington.
This article will spare readers another rendition of Lagarde's bio, except to note that she worked for many years as the head of the international law firm Baker & McKenzie and served as France's Finance Minister beginning just as the global financial system started to blow up in the summer of 2007. When it comes to achievement, Lagarde is no laggard.
This first of three articles will cover Lagarde's review of the state of the world economy. The next two articles will consider her detailed observations regarding the developments in the financial sector in the years since the 2008 episode of the ongoing financial crisis.
Lagarde likes to sprinkle her speeches with strategically placed quotes. In this case, she moved immediately to establish her theme as one of "transition" by quoting Emerson: "Not in his goals, but in his transitions, is man great."
She declared with relief and satisfaction that the global economy escaped another Great Depression five years ago, thanks to extraordinary intervention by the Federal Reserve, and she evidently chose not to mention that the crisis itself was caused in large part by earlier excesses as the Fed kept interest rates too low for too long, stoking tech stock and housing bubbles that the Fed would disavow as not its job to preempt and unlikely to spread to the rest of the economy.
As former IMF consultant John Makin said on a recent panel at the American Enterprise Institute (AEI), the Fed needs to do something about the poor quality of its forecasting.
Observing that, "The fog of the crisis appears to be lifting, leaving multiple new transitions," Lagarde eschewed an opportunity to connect the theme of fog to the Foggy Bottom neighborhood, and her subsequent discussion of the confusion that attends decisions as to how the unwinding of loose monetary policy might proceed suggest that the fog is still pretty thick, especially since she also calls for the United States to adopt a combination of reductions in entitlement spending and increases in revenues, but to do this at just the right pace. U.S. policymakers who can't agree on anything are suddenly supposed to agree quickly to adopt just the right mix of measures and then implement them over an extended period of time. Good luck with that.
She repeated her earlier prediction that the forthcoming annual IMF forecast will show "too low" growth at under 2 percent for this year, improving by 1 percent next year. (Again, watch out for those overly optimistic official forecasts.) After 15 years of recession, Japan has adopted a stimulative monetary policy that is supposed to be accompanied by revenue measures under Abenomics.
Lagarde warned that withdrawal of stimulus by the United States must be done gradually, with communication and dialogue, over a long period, because this action would affect other economies around the world. (Thus, not only is the United States addicted to quantitative easing, the rest of the world is hopped up, too.)
After allowing earlier that the fog had begun to lift over U.S. policy, she zagged toward a more cautious view and complained that observers are "confused, bemused, but not amused" by the threat to global stability presented by the prospect of a continued stalemate in the United States, then she affirmed hopefully that she personally has "huge trust" in the U.S. authorities.
Completing her global survey, Lagarde foresaw a restoration of health for EU banks and corporations, with the eurozone showing sustained growth during the next five years.
However, she predicted that the fastest growth would come from the emerging countries that have contributed 80 percent of world GDP growth over the last five years. But their pace of growth has slowed somewhat since 2010, due not only to the economic cycle and the perception of "tapering," but also to structural impediments to growth.
She extended this hopeful outlook to the low-income countries, but warned that they will be buffeted by the uncertainties affecting both advanced and emerging economies, and she stressed the commitment of the IMF to stand with the countries managing the changes spawned by the Arab Spring.
The crucial point of the speech, the overriding caveat, was Lagarde's pronouncement that "If policymakers 'do it right,' there will be a positive transition; otherwise it could be derailed."
Readers are left to wonder how the same institutions, particularly in the United States and European Union that have created a chronic crisis in the global financial markets are going to switch to a sounder course and then implement it carefully over a long period of time.
The next two articles will look at these questions from the standpoint of the global financial system.
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