New IMF global outlook has been released. IMF predicts almost 4% global growth in 2010. It will attract media attention as the key message from the IMF. But there is one paragraph that should have attracted even more attention, a quote:
“Due to the still-fragile nature of the recovery, fiscal policies need to remain supportive of economic activity in the near term. The fiscal stimulus planned for 2010 should be fully implemented”.
IMF repeats the policy consensus, that we should continue to print money, run huge fiscal deficits as long as necessary, i.e. as long as private demand remains weak. Such policy recommendation is no surprise, after all anything against the policy consensus would be blocked by the board. So why bother, lets flock together around the wrong recipe, again.
IMF did not learn much during the crisis. US universities’ mafia that rules IMF cannot do any better. To see this clearly let me repeat the key paragraph from the IMF article IV consultation with the United States in 2003, it read:
“While monetary policy has responded aggressively to the economic slowdown, further easing may still be required if the recovery does not regain momentum. With inflation having fallen to near post-war lows and interest rates close to the zero bound, the appropriate bias is toward aggressive and preemptive action to support a healthy recovery. Although deflation risks in the United States appear modest, the FOMC’s strong signal of its readiness to act, and its willingness to use a broader range of policy instruments should deflationary pressures intensify, is welcome”
Yes. Exactly when the biggest asset bubble in the history was buiding at the light-speed, IMF was worried about deflation, hailed US zero interest rates and advocated that US should consider adopting other measures, such as quantitative easing. There could be no worse policy recommendation at that time.
It is high time that IMF does change. That it provides solid policy advice instead of flumsy policy consensus, which led to massive crisis of 2008, and will likely lead to another big crisis in the coming years, the crisis of developed countries sovereign debt. Recently CDS market priced in higher risk of sovereign default in rich countries that the risk fo corporate default of some large corporates located in these countries. Before IMF publishes its WEO and GFSR in Spring 2010, it should rethink its mission. We need policies that prevent crises, not ones that avoid one crisis at the price of creating another one.