Weekend in Washington: Cooperating Our Way Out of Crisis

By Dominique Strauss-Kahn

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This past weekend in Washington DC, as the economic leaders of 187 countries gathered for the Annual Meetings of the IMF and World Bank, the mood was tense. The world’s finance ministers and central bank governors were concerned because the global recovery is fragile. And uneven. And it is fragile because it is so uneven.

In the emerging markets of Asia, Latin America, and the Middle East, things are going pretty well. Even in Africa, many countries have returned to growth much faster than in previous recessions. In Europe, however, the recovery is sluggish. And in the United States, it remains subdued. The IMF’s latest economic outlook, released during the meetings, does not anticipate a “double dip.” But there are risks.

High debt levels

The first risk is the very high levels of public debt in the advanced economies—the highest since World War Two. What is needed to restore fiscal balance depends, of course, on the situation facing each country. In the medium term, they all need to restore fiscal sustainability. In the short-term, however—and while the recovery is still fragile—it is a case of consolidate as much as you have to, and stimulate as much as you can. The greatest risk to fiscal sustainability at this point is that growth stalls.

A second and related risk is jobs. The world lost 30 million jobs during the crisis; and 450 million more people will enter the labor market over the next decade. So we need growth, but we need growth with jobs. This crisis will not be over until we see unemployment levels begin to go down.

The third risk is linked to the financial sector. We all know how this crisis began. We all know that a lot of promises have been made to fix the financial sector so it will not happen again. And while there has been progress in a number of countries and new regulations from the recent Basel III process, it is not enough. We need to ensure that those new rules are implemented. And we need better tools to resolve financial crises when they occur. The financial system is not yet safe enough.

On top of all this, there is concern that the strong international cooperation that was shown during the crisis is in danger of receding. After Lehman collapsed, we avoided a second Great Depression because the leaders and nations of the world came together and coordinated their response. We saw this when the leaders of the Group of Twenty industrialized and emerging market economies (G-20) met in London and Pittsburgh, for example. The most concrete action was the coordinated fiscal stimulus. And it worked.

Now, as we move into post-crisis mode, that spirit of cooperation seems not to be as strong. Perhaps the clearest indication of this were the headlines over the past week about “currency wars” and some countries seeking to devalue to gain competitive edge over others. And yet, we know that beggar-thy-neighbor policies do not work. There are no solely domestic solutions to global problems.

So, coming out of the weekend—after the meetings—was the atmosphere less tense? Yes…and no.

Common ground

On the plus side, the economic leaders represented in the IMF’s governing body—the International Monetary and Financial Committee—found common ground on several important things.

  • There was a strong commitment to “the rejection of protectionism in all its forms.” And an equally strong statement about the importance of “working collaboratively”—to ensure growth and to create jobs.
  • There was a recognition of the need to go further on financial sector reform. And there was a call—which I welcome—for the IMF to contribute to this agenda in collaboration with other international bodies already at work in this crucial area.
  • Also on the IMF, our membership asked that we focus our economic analysis even more on “spillover” issues—that is, the effect that one country’s policies might have on others. I believe that by doing this, bringing our unique cross-country experience to bear, we can contribute to helping resolve the tensions we have seen among countries, and to the global rebalancing that is so important for a sustainable recovery.
  • It was also reiterated over the weekend that the voice and representation of the emerging market and developing countries in the IMF should be enhanced to reflect better their standing in the new global economy. We did not come to final agreement on these “quota and governance” reforms over the weekend, but we are not far off.

So the bottom line is that the world made some progress over the weekend. But we shouldn’t be too self-congratulatory. We are not yet out of the woods.

Keep pushing

As I said earlier, we still have a long way to go to achieve sustainable and balanced growth, to bring back employment, and to make the changes necessary to reduce financial sector risks. Above all, we need to keep pushing, keep fighting, for cooperation. Why?

The IMF’s analysis indicates that improved economic policy coordination, over the next five years, could increase global growth by 2.5 percent, create or save 30 million jobs, and lift 33 million more out of poverty. With such high potential returns, can we really afford each to go our own way?

That question will be high on the agenda for the next G-20 leaders meeting to be held in Korea in November. So all eyes now turn from Washington this weekend to Seoul next month….

10 Responses

  1. Hey, I have this concern – or let’s say constant suspect: Is IMF really an organization that helps countries to develop? Or an organization which reaps profit from opportunities whenever possible…
    Like the Haiti earthquake, IMF did render so much financial aid to help the rehabilitation of this devastated country, but who has ever noticed the interest rate of this so-called “financial aid”? And down to the very bone of IMF, who is/are the real controller(s)? I don’t believe that IMF was founded for lending money to poor countries without expecting returns…

  2. Mr. Strauss-Kahn:

    I hear loud and clear your welcoming of the call the IMF received at its AGM to help in the work needed to complete the work of urgent financial sector reform.

    And perhaps you have been hearing some of my contributions to this blog (and in media such as the Financial Times, the Wall Street Journal, the Economist, and the New York Times) which call for examination to those aspects of a financial transactions tax that will assist regulators and central banks in harnessing the profit drive of financial intermediaries for the benefit of the world as a whole.

    Currently it seems to me and my associates that the existence of a derivatives market with outstanding amounts totalling approximately $600 trillion, of which very significant but insufficiently identified chunks of which are widely expected to prove worthless, is a very serious factor in your decision as to how to respond. It means to us that the first order of the IMF’s response to this call must be to advise how the initiation of further derivative contracts of what can all too easily be expected to cumulate into precipitators of another credit crisis can effectively and urgently be curbed. Our belief is that an effective curb that does not inhibit healthy capital flows can be done most practically and economically by a G20-wide agreement at Seoul to proceed at speed with a smart financial transactions tax (FTT).

    I hope therefore that you will be able to explain in Seoul how a smart FTT can be tailored to restore the focus of financial derivatives contractors and traders on capital flows that serve the real economy rather better than they have for the past ten years or so.

    For those participants in this blog who are unfamiliar with how features of an FTT can be used to direct capital flows in ways beneficial to all of us rather than some of us, a paper on the subject is available at the following URL:


    • The Fund’s thoughts on financial sector taxation can be found at:

      • Thank you for letting us know of the existence of the IMF’s assembly of backround data on the subject of financial sector taxation, including the subject of FTT’s, although none mentioned were “smart”. I note Mr. Lipsky’s conclusion in his Foreword:

        “Our goal in assembling this material is to encourage and support further analysis of financial sector tax issues. While the subject remains challenging, it merits sustained study. We hope that our contribution will be useful.”

        Mr. Lipsky clearly recognizes the importance and challenge of what his report team was producing. Can we now hope that he and his team are working flat out to provide Mr. Strauss-Kahn with clarity as to how to support people like Mr. Sarkozy in Seoul. As we all know, Mr Sarkozy, along with his German and British counterparts, has pledged to senior European representatives his determination to see an FTT on the G20 Agenda, and he was visibly disappointed with the efforts made on that front in Toronto.

        I note here that the IMF Financial Sector Team does not yet appear to have studied smart FTTs nor to have access to definitively clear empirical research on the capability of an FTT to play a powerful part in containing the danger to the world economy of any tendency for the $600 trillion of derivatives to grow further. Those would be issues that, if I were any of the G20 leaders, I would be exceedingly grateful in Seoul to receive the best possible judgment, in lieu of empirical data, from the Managing Director of the IMF, on both those subjects, and at the earliest possible opportunity.

  3. I hear and agree with your point, Per, about the current regulatory paradigm emanating from Basel not focusing our bankers to be taking intelligently sustainable risks and loaning to sustaining ventures on behalf of the economy as an organic whole.

    Indeed, coupled with the compensation structures reigning in the more risk-oriented departments of banks, whence all the problematic derivative contracts originate, Basel III appears not, in my opinion, to be solving problems so much as enabling bigger banks to export their costs, via a $600 trillion derivative asset melange of questionable constituents, to the general public.

    It is for that reason that I feel sure we need what I might describe as an intelligently calibrateable species of financial transactions tax.

    I invite you, Per, and also an IMF person monitoring this blog conversation to comment on the 7-point scenario outlined in a paper my associates and I have drafted on this subject at the following URL:


  4. We need adequate African representation on the Bretton Woods institutions. That is when we have truly democratic financial institutions.

  5. It’s really great to believe in yourself, and in the work you do. And sometimes that belief can instill confidence in those who you are asking to also believe in your work, and to accept your work, and to sign on to your work by giving up their own ability to solve their very serious economic problems.

    So, if we look back at why the world’s economies bought into the EMU on steroids, a.k.a. transnational, macro-prudential, hyper-monetary regulation, we know the answer seems to be annual half-percent growth in the global economy for five years, and some 60 million people who would make more money.

    While that would seem somewhat egalitarian compared to the unprecedented disparity of benefits between the rich and the working class today, it leaves open the question of what other benefits could be available from alternative monetary policy structures and operations.

    In this regard, Prof. Kaoru Yamaguchi of the Systems Dynamics Branch at Doshisha University in Kyoto has modeled a change to the monetary-financial structure as outlined in the American Monetary Act proposal(www.monetary.org). Dr. Yamaguchi presented the results of his analysis first at the Systems Dynamics Annual Conference in Seoul and again earlier this month at the American Monetary Institute’s Annual Conference.

    The results of the change to a public-money model using debt-free at issuance currency were phenomenal in many respects.
    The first was the elimination of national debt over a very reasonable period of time.
    The second was the achievement of potential GDP growth with neither inflation nor deflation.
    Dr. Yamaguchi’s paper on his model and these results is here:

    An interview where he discusses the results of his work is available here:

    So, it seems to boil down to at least two choices.
    One, based on a promise to cooperate on something as yet undefined that might result in a small increase in jobs, wages and growth.

    A second choice would provide for economic growth at the potential GDP level, eliminate government debt as we know it, and remove the pro-cyclical causes of inflation and deflation.

    Is this what we’re talking about here?

    Joe Bongiovanni
    Harborton, Virginia
    The Kettle Pond Institute

  6. At the Civil Society Town-hall Meeting I had the opportunity to ask Dominique Strauss-Kahn:

    “Right now, when a bank lends money to a small business or an entrepreneur (100%-risk-weight) it needs to put up 5 TIMES more capital than when lending to a triple-A rated clients (20%-risk-weight. When is the World Bank and the IMF speak out against such odious discrimination that so affects development and job creation; and all for no particular good reason, since bank and financial crisis have never occurred because of excessive investments or lending to clients perceived as risky?”

    I believe Dominique Strauss-Kahn went with his intuitions when he answered in no uncertain terms that “capital requirement discrimination has no reason to be”.

    I appreciated immensely his candor and I can guarantee him his intuitions took him in the absolute right direction. I now hope he follows up on the problem with the only tool in the toolbox of the Basel Committee, the capital requirements based on risk, being so counterfactual and causing so much damage.

    • I have watched the video of your exchange with Mr. Strauss-Kahn, Per, and I concur with your interpretation of it; and I therefore want to add my strong appreciation for Mr. Strauss-Kahn’s candour to yours.

      It seems to me that you and he and I are all indicating that the architects of Basel III have some deeper thinking to do if Basel guidelines are to reflect the world’s desire for bank loans to be in employment-generating activity rather than in bank executive bonus-generating activity.

      • Thank you for your comment, but let me assure you that my opinion about an odious discrimination based on perceived risk has nothing to do with bank bonuses (at least if earned well) and all to do with the need of fully understanding that financial risk-taking is nothing that a society can afford to impose a regulatory tax on … unless of course it wants to become a submerging country.

        The willingness to take risks is one of the most powerful sources of energy. If we do not channel risk-taking into the construction of society, it will inevitably flow into the destruction of society.

        The current regulatory paradigm imposed by the Basel Committee on Banking Supervision on the banks, and to which most of the world has agreed to, does not promote our bankers to be intelligent risk-takers in their fundamental role of satisfying the financial needs of all those other risk-takers like small businesses and entrepreneurs.

        On the contrary, what these regulations do is to stimulate plain dumb risk-adverseness among the bankers by increasing the returns to banks on what is perceived by some credit rating agencies as being, ex-ante, of very low risk… and which is also precisely the terrain where excessive lending or investments that lead to a systemic crisis always bloom.

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