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LQD: Olivier Blanchard, IMF's Chief Economist

by Melanchthon Tue Dec 23rd, 2008 at 12:08:06 PM EST

"Il faut éviter que la récession ne se transforme en Grande Dépression" - L'économie en crise - Le Monde.fr"We must prevent the recession from turning into a Great Depression" - Economy in crisis - Le Monde.fr
Les mois qui viennent vont être très mauvais. Il est impératif de juguler cette perte de confiance, de relancer et, si nécessaire, de remplacer la demande privée, si l'on veut éviter que la récession ne se transforme en Grande Dépression. Bien sûr, en temps normal, nous aurions recommandé à l'Europe de diminuer ces déficits. Mais nous ne sommes pas en temps normal.The coming months will be very tough. It is imperative to curb the loss of confidence, to stimulate and, if necessary to replace private demand, if we want to avoid that the recession turns into a great depression. Fore sure, under normal circumstances, we would recommand to Europe to reduce these deficits. But we are not in normal times.
Y a-t-il d'autres mesures à prendre ? Are there any other measures which should be taken?
A ce stade, deux types de mesure sont nécessaires. D'abord les mesures dont on vient de parler pour rétablir la confiance, et relancer la demande. Cela implique d'utiliser les outils monétaires et budgétaires. Mais aussi, des mesures destinées à réparer le système financier. Les banques continuent à réduire leurs crédits aux particuliers comme aux entreprises ou aux pays émergents. Il n'y aura pas de redémarrage de la croissance sans que ce problème soit résorbé.At this stage, two types of measures are needed. First the measures mentioned above to really establish trust and boost demand. This means using monetary and budgetary tools. But also, measures aimed at repairing the financial system. Banks continue to reduce credit to individuals and businesses or emerging countries. If this problem is not solved, growth will not resume.
Que faire en matière financière ?

Il faut que les institutions financières reconnaissent leurs pertes et clarifient leurs bilans. Elles le font certes, mais trop lentement, ce qui introduit de l'incertitude et continue d'inquiéter les investisseurs. Les Etats doivent aider au processus, en incitant ou en forçant les banques à se séparer de leurs actifs douteux. Quand ceci sera fait, beaucoup de ces institutions seront clairement sous-capitalisées. Il faudra injecter de l'argent frais. Si les investisseurs privés ne le font pas, les Etats doivent le faire. Pas à fonds perdus, mais en prenant une participation, sous forme d'actions. Si réparer le marché du crédit privé prend trop de temps, il faut que les Etats soient prêts à se substituer, au moins partiellement et temporairement, au crédit privé. Par exemple, en rachetant du papier commercial comme le fait la Réserve fédérale américaine.
What should be done re: finance?
We need the financial institutions to acknowledge their losses and clarify their balance sheets. They are doing it, but too slowly, which introduces uncertainty and continues to worry investors. States must assist in the process, encouraging or forcing banks to get rid of their bad assets. When this is done, many of these institutions will be clearly under-capitalized. It will be necessary to inject new money. If private investors don't, states must do it. Not without strings attached, but by taking shares. If fixing the credit market takes too long, it is necessary that the states be ready to replace, at least partially and temporarily creates the private lending. For example, by buying commercial paper as the American Federal Reserve is doing.
On en voit mal les effets. Pourquoi ? It is hard to see the effects. Why?
Le principe de ces mesures a, en effet, été accepté par tous les pays depuis la réunion du G20 à Washington et le sommet européen de l'Elysée qui ont eu lieu à la mi-octobre. Malheureusement, elles sont mises en oeuvre trop lentement. Le comportement des autorités américaines a manqué de cohérence et de clarté. En Europe, les bilans des banques sont encore partiellement fictifs et le rachat d'actifs porte sur des quantités négligeables.The principle of these measures has indeed been accepted by all countries since the meeting of the G20 in Washington and the European Communities summit held at the Elysée in mid-October . Unfortunately, they are being implemented too slowly. The behavior of the US authorities lacked consistency and clarity. In Europe, the balance sheets of banks are still partly fictitious and the purchase of assets involves negligeable quantities.
Le résultat est que les banques continuent à liquider leurs positions. Non seulement chez elles, mais aussi à l'étranger. Elles rapatrient dans des proportions considérables les capitaux qu'elles avaient placés à l'étranger. On estime que leurs créances sur les pays émergents atteignaient 4000 milliards de dollars [2872milliards d'euros]. Mille milliards de dollars auraient quitté ces pays dans les derniers mois.The result is that banks continue to liquidate their positions. Not only at home but also abroad. They are repatriating capital they had invested abroad in considerable proportions. It is estimated that their financial claims on emerging countries reach 4000 billions of dollars [2872 billions euros] . A thousand billions of dollars could have left these countries in the last months.
Le FMI a parlé de la nécessité de consacrer 2 % du produit brut mondial à ces plans. Cela sera-t-il suffisant ?The IMF mentioned the necessity to devote 2% of the world's gross domestic product to these plans. Will this be enough?
Il faut que les gouvernements et les banques centrales indiquent clairement qu'ils sont prêts à tout faire pour éviter une nouvelle Grande Dépression. Pour le moment, une expansion budgétaire de 2 % paraît suffisante. Mais, si les circonstances l'exigent, il faut que les Etats soient prêts à faire plus, 3 % ou plus si nécessaire. Il faut y réfléchir dès maintenant, car ce n'est pas facile de dépenser efficacement de telles masses d'argent !It is necessary for the governments and central banks to indicate that they are clearly ready to do everything to avoid a new Great Depression. For now, a 2% budgetary expansion seems to be enough. But if circumstances require it, the states must be ready to do more, 3% or more if necessary. They must think about it right now, because it is not easy to spend effectively such amounts of money!
Quelles formes doit prendre cette relance budgétaire ? What forms must take this budgetary stimulus?
Il vaut mieux que la relance intervienne par l'augmentation des dépenses publiques que par la diminution des recettes publiques. Autrement dit, les constructions de ponts ou les rénovations d'écoles risquent d'avoir plus d'effets sur la demande que des réductions d'impôts que les ménages sont tentés de transformer en épargne de précaution.It is better that the stimulus intervene through increasing government spending than by declining revenues. In other words, the construction of bridges or modernisation of schools may have a bigger effect on demand that tax cuts that households are tempted to convert into savings.

Si on diminue les impôts ou si on augmente les transferts, il vaut mieux cibler les populations victimes du chômage ou surendettées. Elles en ont plus besoin et elles le dépenseront aussitôt, contribuant à la reprise de l'activité économique. La baisse temporaire de la TVA, mesure adoptée en Grande-Bretagne, ne me paraît pas une bonne idée ; 2% de moins ne sont pas perçus par les consommateurs comme une réelle incitation à dépenser. En revanche, la prime à l'automobile décidée en France donne de fortes incitations et me paraît une bonne idée.
If taxes are lowered or if the transfers are increased, it is better to target the populations who are victims of unemployment or overindebted. They need it more and they will spend it immediately, thus contributing to the resumption of economic activity. To me, TVA reduction, which has been adopted by Great- Britain soesn't seem to be a good idea; prices reduced by 2% are not perceived by consumers as an incentive to spend. On the other hand, the car purchase bonus implemented by France provides a good incentive and seems to be a good idea.
Malgré le caractère éphémère de ses effets ?
L'important, c'est de soutenir l'activité et de relancer la confiance maintenant. Les six mois qui viennent sont capitaux. Si l'Allemagne ne participait pas suffisamment à cette relance, beaucoup d'autres pays hésiteraient aussi à le faire et ce serait désastreux pour l'Europe.
In spite of the temporary nature of its effects?
The important thing is to support the economic activity and to boost confidence now. The six months ahead are crucial. If Germany was not involved enough in this revival, many other countries would also hesitate to do so and that what would be disastrous for Europe.
Les pays émergents doivent-ils faire de même ?Must emerging countries adopt the same policies?
Face à la baisse de leurs exportations, ils y ont tout intérêt. La Chine a annoncé un plan dont on connaît mal la réalité, mais on peut penser qu'elle fera plus si nécessaire. L'Inde, qui a une moins grande marge de manoeuvre budgétaire, s'y met aussi.Faced with declining exports, it is in their interest. China announced a plan we do not know the actual content very well, but one can expect that it will do more if necessary. India, which has less budgetary room for maneuver, is also moving.
Beaucoup de pays émergents font face au danger supplémentaire que le retrait des capitaux étrangers amène à une crise de change et une fuite générale des capitaux. Dans beaucoup de pays, la taille potentielle d'une telle fuite de capitaux peut représenter la moitié du produit intérieur brut... Ceci représente beaucoup d'argent. Multiplié par le nombre de pays potentiellement exposés, on parle de milliers de milliards de dollars, un montant bien supérieur à ce que le Fonds peut avancer. Il faut d'urgence réfléchir et mettre en place les moyens de mobiliser les liquidités nécessaires, si besoin était.Many emerging countries have to face the added danger presented by the withdrawal of foreign capital, i.e. an exchange crisis and a general capital flight. In many countries, the potential size of such capital flight may represent half of the gross domestic product. This represents a lot of money. Multiplied by the number of potentially exposed countries, we are talking about thousands of billions of dollars, an amount well above what the Fund can provide. It is urgent to think about it and find ways to raise the required cash, if necessary.


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What is new and sounds scary to me is the massive withdrawal of foreign capital from emerging countries (and probably developing countries as well). It could trigger a complete collapse of the world economy, with social and political consequences we cannot easily foresee...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Dec 23rd, 2008 at 01:33:02 PM EST
Its not entirely new to the world, but its definitely the risk generated by the policies that the IMF has insisted on for the past thirty years.

The lack of recognition of the IMF's culpability in that state of affairs is dizzying.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Dec 23rd, 2008 at 06:41:43 PM EST
[ Parent ]
What worries me is the herd mentality about it all.  Now every state is borrowing heavily to staunch the losses and provide stimulus - but if everybody is doing it - does that not simply devalue the currencies it is done in - i.e. not relative to each other, but relative to real goods and services.  We may not have inflation on the Zimbabwe model, but the value of money itself is being devalued.

At some stage the real economy has to bottom out. Oil and commodity prices have gone down dramatically.  Interest rates are approaching zero.  The real cost of doing business should be declining rapidly.  At some point people will start buying again - and then the herd mentality will go in  reverse, and everyone will join a mad scramble to buy up hugely cheap assets.

Anglo Irish Bank is worth 1% of what is was worth a few months ago.  Huge businesses are available for almost nothing.  The over-correction could be as bad as the current slump resulting in extreme boom and bust cycles.  Governments will have to be much more nimble if they are not going to be caught again on the rebound...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Dec 23rd, 2008 at 06:53:42 PM EST
[ Parent ]
What worries me is the herd mentality about it all.  Now every state is borrowing heavily to staunch the losses and provide stimulus - but if everybody is doing it - does that not simply devalue the currencies it is done in

Why would it? We (it should be obvious) are not at full employment of either labor or productive equipment ... more borrowing for more spending only devalues the purchasing power of money if it results in substantially higher prices ... however, if it primarily results in more production, then there's no loss of purchasing power.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Dec 23rd, 2008 at 07:36:37 PM EST
[ Parent ]
I have no problem if it actually results in more production.  But it seems to me that it has up until mow been borrowed almost solely to staunch losses due to following asset values and the damage this has done to corporate (not individual!) balance sheets.  Production is actually falling quite dramatically - in Ireland at least - and as far as I can see, else where as well.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Dec 23rd, 2008 at 08:44:55 PM EST
[ Parent ]
Yes, it is wrong to conflate the two.

The proposed "borrowing" for the stimulus, at least in the US, hasn't actually taken place yet. The argument over whether the proposed stimulus will create inflation is what I addressed above.

The "borrowing" that has taken place, to staunch the losses, is in the face of a massive de-leveraging and drop in liquidity ... it will be inflationary for a nation if it fails to staunch the losses at the same time that other nations succeed, but that is the risk of exchange rate collapse set to one side above.

Either the liquidity constraint continues, in which case there's no prospect of any inflationary impetus from the borrowing, or it doesn't, and the funds can be refunded, so there's no debt outstanding. Or, more likely, partway between the two, which would seem to be non-inflationary for the mix of reasons.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Dec 24th, 2008 at 12:38:49 AM EST
[ Parent ]
It's not looking like it's creating more production.

There are empty houses, and homeless people, and yet there's no easy way to put the homeless people in the empty houses because for some godforsaken insane reason the rules don't allow it.

That's a microcosm of the entire depressed economy. There's stuff which should be happening, and stuff which could be happening, and people who want either or both kinds of stuff.

But the rules say you can't get from A to C without going through B. And the bridge is out at B.

Why worry about 'purchasing power' when nothing else that's happening makes any sense at all anyway?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Dec 23rd, 2008 at 08:46:16 PM EST
[ Parent ]
... the way it went away was with a massive creation of purchasing power in a grossly wasteful world war.

If we could get the increase in purchasing power without the blowing people and stuff up part, and get it more quickly, that would be nice.

Indeed, getting the purchasing power in people's hands is the "B", the bridge to which has been blown up by the bonus babies and their half-baked get richer quick schemes.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Dec 24th, 2008 at 12:42:42 AM EST
[ Parent ]
I have to say, though, when the IMF opines, I tend to take the contrarian position. Habit perhaps, but all that I see here is the current CW - Keynesian policy to the max, and then some more.

I certainly understand their panic. I feel it myself a bit, beneath the adrenaline rush of this latest manifestation of Shock Doctrine.

One substantive criticism - I think that the current China stimulus policy is detailed enough and is precisely the correct approach. I doubt that capital is fleeing China; the manufacturing plants and energy systems are operational, and that physical reality is the definition of capital - not the dollars. E.g., does Blanchard think that GE will dismantle their CFL lighting facility? (I would like to see them try.)

If dollars are moving 'west' - which they are - it is to buy government bonds and to build trade with other emerging nations, while the dollars still has some 'value' in such transactions.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Tue Dec 23rd, 2008 at 09:20:34 PM EST
and?  

You´d think someone in that position would have a thought of his own, but he´s pulling his hair out, going ´bold´ and repeating the same-o, as if he were talking about rats.  

Merry blooming x-mess, western man!

"Now go produce demand-debt and buy an FUV".

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Wed Dec 24th, 2008 at 05:03:11 PM EST


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