IMF Head Warns on Global Economy and Further Bank Bailouts

Whilst acknowledging that the global economy has moved closer to exiting the current recession Mr Strauss-Kahn told his audience in Central London that dangers remain and governments around the world must be very careful when it comes to ending the various stimulus packages that they implemented once the extent of the financial crisis became clear. According to the London Times Mr Strauss-Kahn, who became the 10th Managing Director of the IMF in September 2007, said in his speech to the U.K.'s business leaders that regarding the appropriate moment for governments to withdraw their support for their respective economies:

We recommend erring on the side of caution as exiting too early is costlier than exiting too late

Amongst the factors Mr Strauss-Kahn, a member of the Socialist Party in France, cited as providing a continuing threat to any sustained recovery were high unemployment, under-capitalized banking systems and bad loans. The growth of China and other Asian countries also drew comment from Mr Strauss-Kahn. He expressed concern that the flow of capital in to China might create a new asset price bubble throughout Asia, the London Times noting that economists have previously warned against allowing such a bubble to develop. However the 60-year-old former French Finance and Economy Minister added that going forward China was likely to be the country creating demand that in the past was driven by consumers in the West, particularly the U.S. The Guardian quotes him as saying:

Households in the United States and elsewhere propelled the global economy with their voracious appetite for consumption, soaking up imports from countries that relied heavily on exports to grow. In retrospect, this model had major fault lines – much of the consumption was financed by an addiction to cheap and easy credit, and this flow was turned off, cold-turkey style, by the financial crisis

And the possibility that the financial services sector, perhaps aided by lax regulation, might fail to learn from the current crisis and find itself in another precarious position in the not too distant future was raised by Mr Strauss-Kahn. Arguing that the "man in the street" was unlikely to support another round of bail-outs so soon, the time scale mentioned was four to five years, after those witnessed over the last 12 months the head of the IMF was fearful of the impact an adverse reaction from the public might have on democracy. Reference was made to the fierce debate that has taken place in the U.S. over various stimulus measures put in place there. Mr Strauss-Kahn asserted that "the financial sector needs to contribute both to the costs of the financial crisis and to reduce recourse to public funds in the future", and emphasized the need for a new regulatory system for banking that could do much to prevent a repetition of recent events. The Guardian says that he believes a failure to agree on a new regulatory system "might be encouraging a risk-taking culture - a Mardi Gras effect whereby institutions party now in expectation of lean times to come". Other subjects mentioned in Mr Strauss-Kahn's speech included "progressive tax systems" to assist the poorer members of society when stimulus programs cease and spending cuts become necessary, his belief that central banks should raise interest rates even before withdrawing stimulus programs, and his thoughts on the transaction tax on financial sector profits proposed by U.K. Prime Minister Gordon Brown. Initially opposed to Mr Brown's proposal Mr Strauss-Kahn has apparently now conceded that it is one of "many good ideas being floated – especially here in the United Kingdom".