The Christine Lagarde, managing director of the International Monetary Fund (IMF), spoke to the U.S. Chamber of Commerce, which has become a feisty business lobby under the leadership of Thomas Donohue about issues facing the world economy, on the eve of the IMF's annual meetings in Washington.
Lagarde has 25 years of experience working in the United States, including as head of the international law firm Baker & McKenzie before serving as France's Minister of Finance and helped save the euro.
She quipped that she has an affinity for intellectual property law, but not for transactions, which is a bit surprising. Donohue introduced Lagarde as a former member of France's synchronized swimming team, which gives her experience with being underwater and upside down and having to coordinate complex maneuvers with her teammates. When Lagarde took the podium, she added that she also had to do these things while holding her breath.
Donohue extolled the importance of an ongoing dialogue among the G20 nations and the associated B20 and L20 groups that represent international business and labor. As a House Banking Committee staffer, I saw the IMF as an enabler of the "too big to fail" banks, as those banks would select one or another area of the world, such as Latin America or Asia, as hot for investment, put their clients into shaky deals, bring the IMF in to stabilize the mess they made long enough to get out and then leave the mess to be bailed out by taxpayers.
Also, an observer can be taken aback by the spectacle of IMF/World Bank meetings in Washington that require importation of limousines from as far away as Philadelphia and New York to ferry the too big to fail bankers to lavish parties around town in furtherance of the practice of channeling resources from poor people in rich countries to rich people in poor countries. More recently, the IMF itself has warned of the chronic insolvency of the too big to fail banks and of the excesses of U.S. fiscal policy, and Lagarde is almost uniquely qualified to carry that message.
On this occasion she proclaimed that the IMF owes its members accountability and has a commitment to expand economic growth and help to achieve human potential so that private enterprise can create jobs throughout the world. She referred to her 25 years of experience in the United States as putting her in touch with the general counsels of many of the companies in attendance at the Chamber and to understand the dynamics and the narratives of the business community.
Lagarde's speech focused on the interplay between the U.S. and global economies — the challenges and the opportunities. She posed the question of "how to bring business, policy and labor together to secure a lasting, balanced and widely shared growth, which is a precondition for economic and financial stability. This theme, in turn, raises three issues that she proceeded to discuss in turn: 1) the global economic outlook; 2) the role of the U.S. economy in the interconnected world; and 3) why the United States matters to the success of the global economy.
Speaking of the recently concluded G20 meetings in St. Petersburg, Russia, Lagarde took a shot at the media when she intimated that they were disappointed that the G20 did not produce the clear division between the advanced and emerging economies that many observers anticipated.
Rather, the meetings were marked by constructive discussion and recognition of the need to ensure an orderly and clearly communicated exit from the extraordinary monetary policies the industrialized countries are pursuing.
Moreover, she insisted on clear recognition that domestic issues have to be addressed by emerging market authorities themselves, in the interest of balanced outcomes and mutual consideration. She acknowledged the meetings that took place between the B20 and L20 as part of the effort to coordinate with the policymakers in response to the changing global environment.
The IMF is about to issue an updated economic forecast, but Lagarde ventured that while there are some signs of recovery, global growth remains subdued.
However, the story is more complex, because while six months ago one could distinguish three categories of strong, less strong and weak growth associated with emerging economies, industrialized countries and others, in the meantime countries have shown a multitude of growth speeds as they engage in a complex series of transitions.
It remains the case that the fruits of the growth are far from being shared widely. The advanced economies are doing a bit better than six months ago; the emerging markets are still in the lead, but at a slower pace, and some other countries have demonstrated strong fundamentals that are worthy of support.
She pointed with satisfaction to a five-fold growth in exports since 1980 and a tripling of global capital flows between 1995 and 2008. She called on the five largest countries to coordinate their policies so as to achieve 3 percent in global GDP growth, which an IMF study shows would have healthy "spillover" effects for the rest of the world. Currently the U.S. growth rate is below 2 percent, with the 1 percent shortfall accounted for by what is called "fiscal drag."
Lagarde's prescription for the United States has three components:
1. Fix U.S. public finance. She recommended that the United States "hasten slowly" by removing the sequester brake, adopting revenue measures and controlling entitlement spending.
2. Appropriately calibrate monetary policy. Exit from quantitative easing should be gradual, linked to progress in the recovery, and clearly communicated.
3. Reform the financial sector. Lagarde asserted that the United States has made progress by adopting stronger capital and liquidity standards, but importantly she stated explicitly that the U.S. financial system "is still not safe enough, and some of the players are just getting bigger." During the Q&A she added a reference to the vulnerability of the largest banks due to their reliance on short-term wholesale funding. She also mentioned the need for cross-border arrangements for the resolution of global systemically important financial institutions, financial institutions whose failure could jeopardize the global financial system.
As the speech wound down, Lagarde cited statistics that demonstrate the interconnections between the United States and Europe in banking and trade. She also reviewed the history of the IMF, which was founded by John Maynard Keynes and Harry Dexter White, and touted the IMF's role in supporting the transformation of Eastern Europe from centrally planned to market economies and in managing crises in Latin America in the 1980s, Asia in the 1990s and the Eurozone today. She concluded with stirring quotes from President Taft and Montesquieu on the salutary effects of international trade for global order.
In a more cynical and pessimistic vein, I would point to the experiences of Weimar and Argentina as examples of the disorder that results from a failure of governments to control the impulse to satisfy the demands of constituents to sponsor short-term, illusory bubbles. One is reminded of the desperate plea of Stan Freberg in his spoof of Lawrence Welk: "Somebody turn off the bubble machine!"
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