IMF Chief Lagarde Pushes the Panic Button

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It is credible to say that many parts of Europe are in the grip of a new recession. It is equally credible to say that the U.S. economy could contract and that China’s GDP growth could fall well below its current 9% level. It is another matter to claim that the world may enter an economic period like the 1930s. But that is what IMF chief Lagarde has said, and it undermines her ability to offer reasonable forecasts.

Lagarde stated in a speech yesterday:

. . . economic retraction, rising protectionism, isolation and . . . what happened in the ’30s [Depression]

And she added:

There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating. It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action.

Perhaps the alarm she set off is meant to encourage nations outside of Europe to help the region financially. But, while many think that problems in the eurozone will spread beyond its borders, few believe that the trouble will spread all the way back to the Great Depression of the 1930s.

Largarde has tried to convince countries outside the eurozone to offer it financial aid. This could come in one of two forms. The first would be to build the balance sheet of the International Monetary Fund so that it can intervene directly in the problems of Spain and Italy. The other would be for countries to use their central banks or treasuries to buy the sovereign paper of these countries to build confidence and drag down the huge interest rates they must pay to raise money.

There is a point when an alarm is too loud to be reasonable. Lagarde hit that level yesterday. The trouble in Europe is severe, but it will not drag the world into a new economic dark age. To say otherwise is foolish.

Douglas A. McIntyre