Thursday, April 16, 2015

Christine Lagarde Unplugged - Atlantic Monthly Article

The IMF wields a lot of power and influence in the current global financial system. Proponents of the IMF believe that it provides more stability in the global financial system by providing a forum for member nations to hash out differences and coordinate policies. Critics feel the IMF is a threat to national sovereignty and/or that it has failed in its global mission on too many occasions. 

No matter how you feel about the IMF, it is likely to play a key role in however the global financial system changes in the future. In this Atlantic Monthly article, IMF Managing Director Christine Lagarde goes unplugged and talks openly about a number of controversial topics. You can get a feel for what she really believes by reading this article. Below are some quotes from the article.

"When politicians, business titans, journalists, and colleagues describe Christine Lagarde, the head of the IMF since 2011, they tend to use the same words—words like “smart,” “charming,” “tough,” “attractive,” and “ambitious.” She is often mentioned, along with German Chancellor Angela Merkel and U.S. Federal Reserve Chair Janet Yellen, as one of the most powerful women in the world."

. . . . .

I asked Lagarde whether the world has entered into a prolonged period of slow economic growth—what economists call “secular stagnation.” She said that she prefers to describe the situation as the “new mediocre,” and explained that global economic growth over the past two years, and again this year, has averaged about 3.5 percent—the same average rate at which the world economy has grown over the last two decades. What has changed, Lagarde noted with concern, is the nature of that growth: “It is not creating the jobs that are needed and job creation is spread out in a way that does not respond to the needs. It is also not sufficiently boosting productivity and, surprisingly, emerging markets, which have the potential to grow at a much faster pace, are not doing so.”

. . . .

"I asked if she agreed with the French economist Thomas Piketty, who posits that growing economic inequality is driven by forces deeply embedded in the capitalist system. “I am one of those who believes that the capitalist system leaves enough room for innovation and who values the forces of markets, but within a regulatory environment that provides governments the tools to respond to inequality,” she responded. What’s the primary cause of this inequality: freer trade, technological advancements, the financial system, government policies that favor the rich? “Technology,” she said, “but also finance, which concentrates vast resources on a small group. And I would also add culture as a factor. Especially when culture limits opportunities for women. And corruption, of course.”  

. . . . 

"She said it bothered her that the burdens of the financial crisis have fallen disproportionately on the backs of the poor and middle class rather than the bankers and financiers who made many of the decisions at the root of the crash. But she claimed that this dynamic is changing, referencing new regulatory institutions and stricter capital requirements and government supervision for the financial sector in the United States and Europe: “Before, when a bank got in trouble and needed to be bailed out, it was done with taxpayers’ money. Now we have created a system that puts the burden on the shareholders of the financial institutions that get in trouble.”

"Is the global financial system now safer than it was before 2008? “Yes. Governments now have the legal grounds, the reach, and the authority to act more effectively,” she said. Does the high concentration of financial assets in a few large institutions worry her? “Yes, for two reasons. As a young lawyer I was trained in competition law and I learned that concentration limits competition—and that is a bad thing. My second concern is that, having been in management positions, I think that organizations that grow very large and complicated become exceedingly difficult to manage and can also become unaccountable.”

Click here to read the full article

My added comments:

When you read this article you get a sense of how those who are running the present financial system look at things. They admit that there are still problems and risks to the system. But they believe they have created the tools to manage the risks and do NOT believe we will see another major financial crisis any time soon.

In the next 2-3 years, we will find out who has all this right. Either those in charge of the system now are right and all the risks to the present system can be managed to avoid another major crisis  OR those who contend that another crisis is inevitable will be proven correct. We (the average person) can't know who will get it right so we have to be prepared to deal with either outcome. One key is to stay informed. We must follow both what the IMF says and also what it's critics say to determine who has it right.

Added note: Here is a link to a press briefing Christine Lagarde held today at the start of the IMF Spring Meetings. We will explore this more in depth in a later blog post. She provides some new comments on inclusion of the Renminbi in the SDR basket later this year.

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