Driving the global economy out of its worst period since the Great Depression will require the same basic fundamentals as any safe car ride — proper application of the accelerator and brakes, with a firm hand on the wheel, ready to make the necessary adjustments.
Olivier Blanchard, director of the International Monetary Fund’s (IMF) Research Department, used this simple analogy in his public address, to a near-capacity crowd at the CIGI Auditorium, as a way of explaining where we are in the global crisis relative to past economic crises and, more importantly, where we might be headed. He described monetary policy as the accelerator that must operate in conjunction with — and to counter certain aspects of — the three brakes of fiscal consolidation, financial intermediation and global uncertainty.
Blanchard opened on a cautionary note, demonstrating how Britain’s rush to fiscal consolidation following the First World War led to a sharp increase in government debt and a plummeting gross domestic product.
“If you try to do fiscal consolidation in the wrong way, you get a recession and you don’t succeed,” Blanchard said. The challenge, he added, is to achieve fiscal consolidation while sustaining growth in the world’s advanced economies.
In advocating for a continued use of the “accelerator” of low interest rates, Blanchard warned that this could lead to new risks. The world’s regulatory bodies must “watch financial institutions like hawks” to ensure “that financial players don’t go back to doing things they shouldn’t be doing.”
Following his presentation, Blanchard took questions from the audience on topics including the possibility of a sovereign debt restructuring mechanism (SDRM) and the need for capital account regulation. On the former, he noted that the IMF had advocated for an SDRM in the late 1990s, but conceded it remains “a bit of a taboo topic.”
Blanchard concluded his talk by saying he was “reasonably optimistic” that policy makers would be able to steer the global economy to a full recovery. But he cautioned that it might be a long road with some serious bumps along the way, as evidenced from his study of past crises. “We don’t have to repeat history,” he said. “But this tells us it’s going to be hard.”