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16.10.2008 Business & Finance

Global Financial Crisis - Deploy Instruments Of Good Policies

The Head of Internationl Monetary Fund (IMF)Dominique Strauss-Kahn, has said that in the current global financial crisis, governments that could afford it should consider stimulus plans for their economies.

Strauss-Kahn told the annual meeting of the International Monetary Fund and World Bank in Washington that "action in the financial markets is essential, but it is not sufficient.

"We also need to deploy all of the instruments of modern macroeconomic policy to limit the damage to the real economy," he said.

"For the advanced economies, this means using fiscal policy when they can.

 

The most obvious use of fiscal policy is precisely to ease pressures where they are greatest: in the financial and housing sectors."

"But governments that can afford it should also be ready to undertake a broader fiscal stimulus."

Fiscal policy stimulus would either be tax cuts or increased government spending.

Strauss-Kahn was speaking after a weekend of high-level meetings of world economic powers in Washington which led to pledges to protect systemically important financial institutions and use all tools to fight the crisis.

The Group of Seven leading democracies the United States, Britain, Canada, France, Germany, Italy and Japan agreed last Friday to take all necessary measures to tackle the crisis.

That stance was backed by the main committee of the IMF and endorsed by the enlarged G-20 group of rich and emerging nations that include Brazil, China, India and Russia.

It was also picked up at the eurozone meeting on Sunday when the 15-nation group unveiled plans to recapitalise their banks and guarantee inter-bank lending, the key source of short-term funding for the finance system.

Strauss-Kahn warned that action had to be taken quickly to avoid the mistakes that led to the Great Depression of the 1930s but there was also no reason for despair.

"I am confident that we can emerge from this crisis with our economies and societies intact," he said, calling for steps to prevent more bank failures as part of a comprehensive plan of action.

"In the (1930s) countries acted in a piecemeal way, and were hamstrung by old-fashioned orthodoxies.

 

 Instead, we are acting imaginatively," he said, citing efforts to tackle problems of "liquidity, bad assets, shortages of capital, and especially confidence."

He said that with the latest government efforts, "things are beginning to turn around" but cautioned that "we still have a very long way to go. This weekend is just the beginning of a long effort."

Robert Zoellick, head of the World Bank which focuses on development issues, said at the meeting that some poorer countries would have to prepare for more difficult times as the crisis bites deeper.

He said October could be the tipping point, as developing country exports, capital inflows, investment all come under pressure, leading to business failures and "increase the risk of banking emergencies.

"As is always the case, the most poor are the most defenceless," he said.

This year's meetings were taking place "at an extraordinarily difficult time a time of uncertainty and insecurity, with a danger that those fears push us away from not towards a more inclusive and sustainable globalisation," Zoellick said.

- AFP

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