Monday, April 07, 2008

IMF calls for global action to address credit crisis

Source: IMF head calls for global action on turmoil
Dominque Strauss-Kahn, IMF managing director, has called for government action on a global level to address the credit crisis, warning that a failure to act may result in market turmoil that could seriously impact world growth. In an interview with the Financial Times Strauss-Kahn said “I really think that the need for public intervention is becoming more evident.” Strauss-Kahn described the need for government intervention as a “third line of defense” to support sound monetary and fiscal policies in the securities market, housing markets and banking sector.
This call to action comes only days before world finance ministers and central bank governors are scheduled to meet in Washington, D.C. for the spring meetings of the IMF and World Bank. Policymakers plan to discuss the credit crisis at these meetings. Until now, monetary authorities (including the US) have relied on increasingly aggressive measures to support market liquidity but not directly intervened in the financial system. The exception to this rule was the recent rescue of Bear Stearns last month.
In recent months, finance ministers and central banks have considered the possibility of increased intervention. Most policymakers, particularly those in the eurozone and the US, do not support broad intervention at this stage, but the comments of Mr. Strauss-Kahn promise to place pressure on them to act. Last week the Institute of International Finance, an association representing big banks, said that there is a “growing case” for government intervention.

Mr. Strauss-Kahn also silenced criticisms that the credit crisis is largely a US problem, noting that the “the crisis is global” and the “so-called decoupling theory is totally misleading.”

Later this week, the IMF plans to release its global economic forecasts. These forecasts are not optimistic, as the downside risks underlined in the last world economic outlook have now materialized. Mr. Strauss-Kahn attributed this downturn, in part, to the inability of central banks to combat the growth risks posed by high commodity prices. The analysis suggests that the US and other countries that account for an additional 20 to 20 percent of the world economy are in the position to provide fiscal stimulus if required. However, other countries, including most in Europe, are not in such a position.

Questions for Discussion
1. Is government intervention the way to correct the credit crisis?
2. In advocating for increased government intervention, Mr. Strauss-Kahn suggests that the 'decoupling theory' is misleading. Is this assessment correct?

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