IMF Head Says Low Rates Aren’t Enough

The International Monetary Fund’s managing director, Dominique Strauss-Kahn, stunned a great many people over the week-end when he said, “I don’t think we would get rid of the crisis with just monetary tools; a new fiscal policy is probably today an accurate way to answer the crisis.” Not only does he support the US government’s plan to rebate taxes to some people, he’s urging other countries to do the same.

Larry Summers, the former US Treasury secretary, noted, “This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face.” When guys like that start to sing new tunes, it’s time to take a deep breath because something significant is in the works, like deficit spending in countries with surpluses.

Looser fiscal policy may be possible in Germany, which would boost the EU’s economies. However, the Germans are extremely prudent when it comes to running deficits. It is not part of the political culture to run up a deficit for as long as it would likely be necessary to have a real effect.

The prime candidates for serious fiscal stimulus are India and China. Palaniappan Chidambaram, the Indian finance minister, “India may have some room, if necessary, for some fiscal stimulus.” That’s about as close to saying “we’re going to do it” as a finance minister should ever get.

The Chinese, though, have the best chance to turn things around given their huge reserves (mostly in dollars). They could readily turn on the fiscal gas without really doing their economy very much harm. The question is whether the Communist Party leadership is prepared to move beyond their current mercantilist trade policies. The jury is still out on that.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

Kensington Review Home