Optimistic That Alarm Could Inspire an Answer

He concedes that even these measures "are going to take time," and that will mean an expansion of government guarantees to bank depositors and interbank lenders similar to guarantees given in Ireland. Asked how governments would disentangle themselves from such sweeping guarantees, Blanchard said, "Call me when we're out of the crisis."

How much of a role the IMF will play remains unclear, but there are signs that it could get involved soon. The British government has been urging the IMF to step in Iceland, whose banks have assets worth 10 times as much as the tiny country's gross domestic product.

Blanchard said the IMF could also help coordinate policies, not only among developed countries but in emerging economies. "The investors are going to look for the angles," he said. "If there are differences [in policies], then you are going to see money going to country A from country B" in what he said would be an "arbitrage" of uncoordinated policies. For example, Ireland's decision to unilaterally guarantee all bank deposits probably sucked money out of banks in other E.U. countries.

"Piecemeal approaches leave open too many loose ends to inspire confidence and have proven ineffectual to mitigate the financial crisis," he said Wednesday at a news conference to release the fund's Economic Outlook.

In an article published in August, the same month he joined the IMF and after the U.S. government had taken over Fannie Mae and Freddie Mac, Blanchard warned that financial institutions were still in danger.

"Because financial intermediaries are likely to have specific expertise about the loans they have made and the assets they hold, they may find it difficult or even impossible to sell these assets to third parties," he wrote in a publication of the National Bureau of Economic Research.

He also took polite aim at central banks' focus on long-term inflation expectations. "One may reasonably ask," he wrote, "whether a price setter, choosing prices for the next month or the next quarter, will change his decisions depending on what his expectation of inflation is, say, in five years."

Asked yesterday whether the Fed had been too cautious because of long-term inflation concerns, Blanchard said "the Fed was less obsessed with inflation than some other central banks." He also called Wednesday's coordinated rate cut "a step in the right direction."

Blanchard said that central banks weren't alone in the failure to spot the trouble ahead. "Three months ago . . . all the academics were writing about 'the Great Moderation' . . . and how inflation targeting was the key to good health. If we did this, then the world would be a marvelous place forever."

"What's interesting is that we've had a number of models that basically described what has happened very well," Blanchard said. ". . . Nobody believed that it would happen on that scale."