Reading former French Finance Minister Christine Lagarde’s maiden speech as Managing Director of the International Monetary Fund is a valuable reminder that the global policy elite can always benefit from some fresh blood. She very sensibly argues that the problem of the global crisis is an excess of overall debt and not some peculiarity of sovereign borrowing. She correctly argues that “[m]onetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation” and urges policymakers to engage in growth-oriented fiscal policy, trimming unsustainable long-term commitments rather than strangling short-term growth with contraction.
Here she is specifically on the US, arguing for action on two fronts:
First — the nexus of fiscal consolidation and growth. At first blush, these challenges seem contradictory. But they are actually mutually reinforcing. Credible decisions on future consolidation — involving both revenue and expenditure — create space for policies that support growth and jobs today. At the same time, growth is necessary for fiscal credibility — after all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?
Second — halting the downward spiral of foreclosures, falling house prices and deteriorating household spending. This could involve more aggressive principal reduction programs for homeowners, stronger intervention by the government housing finance agencies, or steps to help homeowners take advantage of the low interest rate environment.
This is all done in the mild language of an international agency. But the first front is a massive rebuke to the prevailing dogma among American conservatives, which argues for immediate fiscal austerity while demanding that adjustment take place 100 percent on the spending side. The second front is a rebuke not only to do-nothing conservatives, but to the climate of lassitude that seems to exist in the FHFA and sundry other warrens of the executive branch. The IMF is generally viewed negatively by progressives as a legacy of some things that happened in the 1990s, but throughout the Lesser Depression, its staff has done good work under the leadership of Dominique Strauss-Kahn and Olivier Blanchard and Lagarde seems strongly inclined to continue in that direction without the baggage of sexual assault charges or a forecast presidential campaign.