Optimistic That Alarm Could Inspire an Answer
Friday, October 10, 2008
The chief economist of the International Monetary Fund, Olivier Blanchard, asserts that he is an optimist -- though that is a relative term during a week that has seen free-falling stock markets, frozen credit markets and talk of another Great Depression.
"We're not heading toward a depression," the French-born Blanchard said in an interview. "We've learned a few things in 80 years."
Just how much the world's economic policymakers have learned will be put to the test this weekend at meetings of the IMF, World Bank and the Group of Seven industrial nations in Washington.
"This is not a crisis where we are completely lost," said Blanchard, who will be deeply involved in the talks. "We are surprised by the facts, [but] we understand what the solutions are and how to use them. When governments are scared enough, they will use them correctly."
He thinks that they might be scared enough to pull together at this weekend's meetings. "That's why I am fairly optimistic about the future," he said.
But Blanchard isn't as optimistic as he or the IMF have been in the past. On Wednesday, he unveiled a new World Economic Outlook that lowered the fund's world growth forecast to 3.0 percent in 2009, 0.9 percentage points lower than the July forecast. And he said that the pain of the slowdown would be felt most acutely in the United States and other developed countries, where he said that growth would be "very close to zero or even negative until at least the middle of 2009 with a slow recovery during the rest of the year."
Unlike the majority of IMF chief economists, who have been Americans, Blanchard is a citizen of France. He has, however, lived in the United States since attending graduate school at the Massachusetts Institute of Technology, where he was until recently an economics professor. He joined the IMF in August.
On the issue of his economic philosophy, Blanchard said "it's fairly obvious that financial markets, if left to themselves, are fairly fragile. And when things break down, you need serious government intervention."
This has been the IMF position since even before Blanchard's arrival. In fact, he said that the fund had urged the Treasury in the early spring to adopt a more aggressive program, similar to the rescue package that the United States recently adopted. In a report in April, the IMF recommended that U.S. policymakers "prepare contingency measures in the financial sector -- for example, with the Treasury stepping in to support market liquidity with longer-term asset swaps."
"IMF thought something like this could happen," Blanchard said.
He added that a systemic solution now needs "three legs" -- massive liquidity injections, a plan for recapitalizing insolvent institutions with both private and public money, and the purchase of troubled bank assets -- "with clear rules so that people understand pricing."
"If you do it soon enough, we can get through this," he said, adding that "anytime last week would have been good."