There must be something in the water in Cambridge. I'm certain you remember the Bush in Iraq-inspired shoe throwing incident when Chinese Premier Wen Jiabao visited that world-famous university. Now, the photo above is from an event held there commemorating the launch of George Soros' Institute for New Economic Thinking, where IMF Managing Director Dominique Strauss-Kahn was one of the keynote speakers. There's even footage of this fairly bourgeois hooliganism if you're interested.The more important point, however, is that Dominique Strauss-Kahn is also keen on distancing himself from Washington Consensus-style strictures. From the text of his Cambridge speech, here is his "that was then" part:
Let me begin with a brief description of the pre-crisis [read: Washington in plain language] consensus as it relates to monetary policy, fiscal policy, and financial regulation.And now here are the "lessons" he perceives. First, there are limits to deregulation:
First, monetary policy. Low and stable inflation was considered the primary, if not exclusive, mandate of central banks. After the high-inflation experience of the 1970s, central bankers were keen to establish their reputation as being “tough on inflation”. This position was given intellectual rigor by the New Keynesian model, which held that constant inflation is the optimal policy choice for keeping economic growth at the potential rate. So, keeping inflation low and stable was the best way to secure optimal economic performance.
Second, fiscal policy. In the decades preceding the crisis, fiscal policy had taken a back seat to monetary policy, for various reasons: skepticism about the effects of fiscal policy, based largely on Ricardian equivalence arguments; concerns about lags and political influences in the design and implementation of fiscal policy; and the need to stabilize and reduce typically high debt levels. In addition, automatic stabilizers were considered sufficient to allow fiscal policy to respond to changes in the economic cycle.
Third, financial regulation and supervision. Here, the focus was on the soundness of individual institutions and markets, and aimed at correcting market failures stemming from asymmetric information or limited liability. Broader macroeconomic implications of financial sector risks were largely ignored. Given the enthusiasm for financial deregulation, the use of prudential rules for cyclical purposes was generally considered an improper interference in the functioning of credit markets.
We have also learned that financial regulation can have a major macroeconomic impact. Regulatory weaknesses, including in the perimeter of regulation and supervision, allowed significant risks to build up, and enabled the bursting of the U.S. housing bubble to turn into a major global crisis. And, once the crisis started, rules aimed at guaranteeing the soundness of individual institutions worked against the stability of the system. For instance, mark-to-market rules, coupled with constant regulatory capital ratios, forced financial institutions into fire sales and deleveraging.Next, with a nod to the Gordon Brown of old and his "golden rule," he now reserves praise for countercyclical spending--provided that countries accumulate enough during fat times to spend during lean times.
Let me turn now to the lessons for fiscal policy. The crisis has placed countercyclical fiscal policy back at center stage. With monetary policy having reached its limits, a fiscal response was essential to tackle the downturn. In addition, because it was evident that the recession would last a long time, fiscal stimulus could have a powerful impact, despite implementation lags. Here, I am proud to say that the Fund played a pivotal role in its early call for a sizeable global fiscal stimulus.All I can say is, "fat chance of that." Demographic trends really work against greatly improved fiscal trajectories for wealthy countries. I think it's more likely that these countries will invariably copy the US example and flood the world with IOUs in typical American fashion. Boycotting patronage of this riffraff is the real solution, but I'll save that story for later. As before [1, 2, 3], I am also disconcerted by the still-unexplained change of heart from a time when mostly poor countries were in trouble alike during the Asian financial crisis to when developed ones are. Was Washington Consensus-style "fiscal austerity" and "belt-tightening" good enough for everybody else...except Washington itself? Bob Marley had this double talk sorted out long ago: See de 'ypocrites, them a-galang deh! It almost makes you mad enough to smoke ganja and grow dreadlocks.
A key lesson from the crisis is therefore that building up fiscal space in good times is very important, to allow sufficient space for fiscal stimulus in crisis times. What does this mean for fiscal adjustment in the period ahead? Unfortunately, the required adjustment is formidable. Public debt in the advanced economies is forecast to rise by about 35 percentage points on average, to about 110 percent of GDP in 2014. Reversing this increase will be a tremendous challenge—let alone reducing debt below pre-crisis levels, which may be needed to leave enough fiscal space to tackle future crises.
One thing that I, the protesters, and the IMF can ultimately agree on is this: the best thing is for countries to manage their finances well enough to avoid the Washington-based lender--kindler, gentler version or not.
UPDATE: Dominique Strauss-Kahn had this to say to the protesters:
His speech was interrupted by a handful of protestors, complaining that the IMF was exacerbating global economic problems. “That was the old IMF – haven’t you read the press,” Mr Strauss Kahn replied to the protestors before they were ushered out of the Great Hall at King’s College, referring to the Fund’s role in championing fiscal stimulus and expansionary policies during this crisis.Precisely, this is where both sides get it wrong. First, these protesters not being a particularly informed group, they weren't clear on who was suffering from what. Second, Strauss-Kahn once more fails to address the criticism of double standards and indeed buttresses it: the "old IMF" of the Washington Consensus for poor countries, and the "new IMF" of kinder, gentler advocacy for rich ones. Sorry, DSK, but I'll stick with Bob Marley.
