EghtesadOnline: Since 2008, when the upheaval of the financial crisis descended on global markets, the International Monetary fund, among other global institutions, scrambled to help governments avert a more disastrous outcome–and as the IMF's second-in-command, David Lipton puts it, to avoid another much-feared Great Depression.
While the world economy is still reeling from the jitters–a fact reflected in slow global growth, especially in the rich world, China's slowdown and depressed commodity prices such as oil – the IMF says with more coordination among big economies, the challenges underling the global economic scene will look more solvable.
On the sidelines of the joint annual meeting of the IMF and the World Bank held this month in Washington, DC, Lipton sat down with the Financial Tribune for an exclusive talk. What follows is the first part of the interview. The second and final part, related to Iran's economy, will be published in the coming days.
Financial Tribune: Milton Friedman always said that if the Fed had implemented more expansionary monetary policies during the 1930's, the Great Depression would not have happened. It was the lesson from his legacy and I think in 2008 all central banks, especially the Fed accepted this view and implemented expansionary monetary policies even with unorthodox instruments. But eight years on it seems that it did not work.
Lipton: I think the scholarly world has decided that the Great Depression was caused by two kinds of macro-economic mistakes; one was hesitant monetary policies rather than extraordinary monetary policies, and you identified that one. The maintenance of the gold standard at the time and under the circumstances was inappropriate. I think it is right that in the 2008 crisis, these lessons were learned and we saw very aggressive monetary policies and the use of flexible exchange rates widely in the world. When we say that the monetary policy was successful, we mean that the world avoided another Great Depression.
The lesson of Keynes is that while monetary policy can play a role, there are limits on how much monetary policy can do to restore growth. So the main message that we at the IMF have been putting out at these meetings is that in restoring growth, which is a very different challenge than avoiding depression, one needs what we call a "three-pronged approach". One needs to continue using monetary policy, which has been indispensable, but bolster it with supportive fiscal and structural policy approaches. That has been our lesson. The world is not in depression, it is growing and it should be growing more rapidly. To accomplish that, this three-pronged approach is required.
But why did the IMF not emphasize on fiscal policy in 2008?
It did. In fact, back in 2008 the previous managing director launched an international initiative calling for a 2% of GDP fiscal stimulus, which most of the countries in the G20 did and I think that helped. It may not have been big enough and it may not have been sustained long enough.
The first big G20 summit that called to action was in April of 2009. The G20 also agreed to provide more funding for the IMF and at that point the crisis turned around. In 2010, at the Toronto summit, the G20 called for fiscal adjustment out of concern for the rising levels of debt and in different ways and to different extents countries implemented that in the period 2010-11-12. The challenge of restoring growth in the world has been harder than expected and the legacy of the crisis has been heavier and onerous. Where we are today is in recognition of that strong negative legacy. We are now calling for a strengthening of the three-pronged approach in order to try to get an acceleration of growth, reports Financial Tribune.
How long do you think this recovery period described by Ms. Lagarde as "too long, too low and benefiting few" will continue? How many years?
I think that it is very hard to predict. We have our baseline predictions in the World Economic Outlook (WEO) that you can look at, but the answer is that it really depends on how forceful the policy approaches are in the member countries and that is something that we give advice on, but that individual countries will have to decide to take action on.
You have told governments that they need these reforms and embark upon fiscal policy stimulation. But the point is that maybe they too know it. They know it but they cannot do it. They have to know how to do these reforms.
That is a fair point. We have looked at that and we have tried to address it in our analyses and it’s what we have been saying and writing in a number of respects. We have tried to point out what we call "synergies" of combining appropriate packages of monetary, fiscal and structural policies, and highlight that if many countries across the G20 act, as committed in Brisbane and Antalya, there will be synergies from their mutual action that will lead to more positive result than a minister might expect when looking just at the question "how much better will my country do if I act alone?" Because this has not yet resonated as we hoped among policymakers, we recently published a paper that explores the answer to your question in much more detail, looking at the various synergies that come from comprehensive consistent and coordinated policy approaches.
So, I think you are right and in the coming year we will try to work with individual countries on what is the right mix for them, and I hope that can lead to some better outcomes.
When one sees some recommendations from the IMF, for example in the press briefing for the Global Financial Stability Report, one of your colleagues said European banks do not work efficiently and they have to reduce their costs, reduce their branches and staff. Banks are private firms, so if they see that an employee is not needed or that a branch is not good for profit they are going to ignore them. Are you implying that you see better than the banks themselves and private firms about their profitability?
Banks often know more about their own performance and prospects than anyone else and they will take action. But there are certain subjects where perhaps it is a matter of public policy rather than a private decision. We have noted that there are three categories among the banks in Europe that are having difficulty with profitability. The first are banks left with a lot of non-performing loans after the crisis. The second is those where there have been nationalizations or interventions by governments, and are still working their way through. The third are banks that have a business model that may have worked well before the crisis but not under present circumstances.
In the first category the problem is that under the current supervisory rules, there may not be incentives for banks to do something with their NPLs, maybe by actually selling an NPL the accounting and regulatory consequences are quite adverse. We are eager to see authorities work with banks to come up with and create a setting in which there is an incentive to free up balance sheets that are heavily burdened by NPLs, so that those balance sheets have the space for new lending that can be a stronger transmitter of the monetary policy and support.
In the second case, the workouts are under the supervision of governments or supervisory agencies, so the work has to be done and accelerated. There are some banks in the third category that can address their business model issues but they may also suffer from not having enough capital and the question of how much capital a bank has at any given moment is also a supervisory and regulatory matter. So there is a question of whether supervisors and regulators are pushing banks hard enough to get into healthy positions. It is our judgment that that process proceeded more rapidly in the United States than in Europe and in that sense we are asking to make sure that Europe does not stay behind.
Lastly, there is another aspect of this. If you have any one bank it will look at its situation given the marketplace, but if all of Europe is in some sense over-banked, there are too many banks competing for the business and so their profits have been depleted down and the whole industry needs consolidation.
I think you are right that most of the work will have to be done by individual institutions based on their assessments, but I think there is a role for public policy in trying to improve the health of the banking system.