Interview with Christine Lagarde at the IMF

By Chrystia Freeland
January 18, 2013

Managing Director of the IMF Christine Lagarde sat down for an interview with Chrystia Freeland yesterday, January 17th, following the IMF’s New Year Press Briefing.

CHRYSTIA FREELAND:

Thank you for joining me, Madame Lagarde.

CHRISTINE LAGARDE:

My pleasure.

CHRYSTIA FREELAND:

One of your themes as we enter 2013 is that financial reform must continue.  And you have just said that you’re concerned, you see a waning commitment to financial reform.  What do you see going on?

CHRISTINE LAGARDE:

I see a lot of pressure coming out of the industry.  Which is clearly part of their job.  They will naturally lobby to support more flexible, more accommodating regulations.  I think, you know, the financial sector is so particular and so special because of the confidence factor associated with it and the role played by the authorities sometimes in order to support that sector, that it warrants stronger regulations.

And, you know, stronger buffers against potential risks and regular tests of their capacity to resist shocks.  So my– our take is that the financial regulation has to proceed, has to be completed.  And that the appropriate buffers, whether it’s by way of liquidity ratio, whether it’s by way of capital ratio for banks, or whether it’s by way of appropriate scope of regulations, for instance the shadow banking, has to proceed.

CHRYSTIA FREELAND:

Something that we are hearing a lot from the banks is that actually now is the wrong time to be tightening finan–

CHRISTINE LAGARDE:

It’s always the wrong time here.  It’s always the wrong time.  What’s critically important, and in that sense they’re right, is that they are capable of concentrating on lending to the real economy.  So anything that is done to regulate, supervise, strengthen the system has to be aimed at improving their capacity lending to the real economy.  And certainly we would support that.

CHRYSTIA FREELAND:

An argument that we’ve heard from some of the American bankers is that Basel III is anti-American, that it puts a particular burden on the U.S. banks.  Do you have any sympathy with that?

CHRISTINE LAGARDE:

You know, when I was sitting on the other side of the pond, I heard exactly the same story from the European banks, that it was anti-European and overly pro-American.  So I’m sure there must be something right about it.  I think, you know, the Basel committee’s trying to do as good a job as it can and is trying to resist the pressure.

And I certainly hope that it continues doing so.  The the F.S.B. has been doing the same thing as well and I hope it continues doing so as well.  It has to be a system which is evenhanded in its implementation and leaves no room for potential arbitrage and forum shopping.

CHRYSTIA FREELAND:

Around the world?

CHRISTINE LAGARDE:

Yup.

And do you think international regulators are capable of that?

CHRISTINE LAGARDE:

If not, I’m sure that they can improve their game in order to do so.

CHRYSTIA FREELAND:

Hearing you talk about this pushback from the banks, regulators maybe having a hard time resisting it, it feels as if maybe we’ve forgotten 2008.  It’s not as if a financial crisis is very far behind us.

CHRISTINE LAGARDE:

Again, it’s human nature.  The moment the situation improves you tend to forget about the hard times.  And on this occasion, I think it is the job of policy, decision-makers, of supervisors, of regulators to constantly have that in the back of their mind and as objective to avoid a relapse of what happened back in 2008.

CHRYSTIA FREELAND:

Is the recent relaxation we’ve seen in Basel III a cause for concern for you?

CHRISTINE LAGARDE:

Look, the liquidity coverage ratio in particular, which has been decided and agreed upon lately, is good news/bad news, but it’s more good news than bad news.  Good news because it removes the uncertainty around liquidity coverage.  It’s good news because it has been agreed on a sort of consistent basis.

It’s good news because it sets a timing that is long enough in order to accommodate the appropriate raising of liquidity and constitution of appropriate buffers by the banks.  We would have preferred it to have been a bit more rigid and for the denominator, in particular, to have been a bit more solid rather than slightly softened as it has.

But as I said, there’s more good news than bad news.  And as is the case with liquidity coverage ratio it’s been agreed but I’m sure that the players, meaning supervisors, regulators, bankers, and accountants for that matter, will continue to have a look at it and to make sure that it’s improved.  My hope is that it’s improved for the public interest, not for the banks’ interests.

CHRYSTIA FREELAND:

And those are not necessarily one in the same?

CHRISTINE LAGARDE:

Of course not.  (LAUGH)

CHRYSTIA FREELAND:

Well, what will be the next big fight?  What’s the next big point we should be focused on when it comes to financial reform?

CHRISTINE LAGARDE:

The shadow banking, which is clearly developing at a steady pace.  Not outrageously fast and big, but at a steady pace.  And clearly which currently escapes a degree of regulation and supervision.  I would say that fragmentation is another problem that needs to be addressed as well, you know?  Fragmentation by national markets rather than

CHRYSTIA FREELAND:

This is for the forum shopping point?

CHRISTINE LAGARDE:

Yeah, yeah.

CHRYSTIA FREELAND:

Another big theme of yours this year and for the I.M.F. is jobs.

CHRISTINE LAGARDE:

Yeah.

CHRYSTIA FREELAND:

And economic growth focused on creating jobs.  Are you concerned that we could be particularly, perhaps in the Western-developed economies, entering a period of economic development when we see a lot of jobless growth, maybe because of technological change, maybe because of globalization– is that a concern?

CHRISTINE LAGARDE:

It’s a concern that is popping up at the moment.  And there are some very solid and good thinkers that are arguing that particular case– Jeffrey Sachs is one of them, for instance.  And our point, as far as the I.M.F. is concerned, is to say, “Growth, yes please.  But growth with jobs and jobs for growth.”

Growth that is inclusive– of which benefits go to the entire population and not to a selected elite.  And growth that is better balanced– in terms of number one respect of the environment and concern about climate change, which I think is going to rise on the agenda going forward.

Maybe not necessarily now, because we’ve kept our eyes away from that, but the problem is there and growing.  And more balanced– between those countries that need more growth and those that are going to grow probably a little bit less fast.

CHRYSTIA FREELAND:

Do you have any concerns that a focus on growth with jobs could also trigger a new round of protectionism?  That there will be concerns about, “Okay, let’s keep the jobs, let’s keep the growth in our own countries”?

CHRISTINE LAGARDE:

You know, we’ve seen historically that that is very counterproductive.  And that protectionism actually leads to less growth, to complete disasters as in the ’30s.  So certainly, we have to make sure that it is both growth with jobs, growth that is inclusive, growth that is balanced, but without the protectionism that you alluded to.

CHRYSTIA FREELAND:

Now, Madame Lagarde, when you speak of inclusive growth and growth that doesn’t go to a particular elite is that part of a wider concern about growing income inequality?  And should we be worried about that?

CHRISTINE LAGARDE:

Yeah, yeah.  I mean, growing inequality is a recipe for instability, for frustration, for disorder.  And clearly this is not conducive to either economy’s stability or growth.  So yes, income inequality is something that needs to be resisted.

CHRYSTIA FREELAND:

And how do we resist it?

CHRISTINE LAGARDE:

By making the fruit of growth better shared, better distributed in the economy.

CHRYSTIA FREELAND:

And what about the arguments we hear certainly from some Americans quite loudly, but also from your countrymen, Gerard Depardieu recently, that some of these redistributional responses to rising income inequality are punitive on the most successful, most talented members of society and actually take us in the wrong direction.  Are you sympathetic with that argument?

CHRISTINE LAGARDE:

Clearly, it should– distribution should be appropriate, should be– should allow a better sharing of growth and the fruits of growth.  But it doesn’t have to be punitive– for those who are the drivers, the accelerators, the inventors– the innovators of that economy development.  It simply, you know, related to the fact that you don’t want to exclude anybody from the outcome of growth.  And you want to make sure that everybody can participate.  And the first way to participate is to have a job.

CHRYSTIA FREELAND:

Has France gone too far?

CHRISTINE LAGARDE:

You know, I never comment on France.  It’s been the case for any managing director who is from that country, and I will not change the rule.

CHRYSTIA FREELAND:

An issue that has come up and has attracted a lot of attention is recent work being done in your institution, in the I.M.F. around the tradeoffs between austerity and economic growth, particularly post 2008, an extreme scenario.  Has your thinking changed?  Has the thinking of the I.M.F. changed on that particular issue?

CHRISTINE LAGARDE:

We believe that fiscal consolidation is a necessity.  You know, countries cannot live beyond and above their means.  Countries cannot run massive deficits, and countries cannot have a huge debt burden on their back if they want to grow, create jobs, and make sure that their populations are are better off.

So that fiscal consolidation has to happen, has to take place.  What we have found out by constantly, you know, reassessing and questioning our hypothesis and principles, is that as a result of this international unparalleled crisis that we’ve experienced since 2008, the multiplier effect of austerity on growth was higher than everybody had thought and we had thought prior to 2008.  So as a result, we have reassessed and we’ve gone public to say, you know, “Clearly the multiplier is higher than we thought.”  But a fiscal consolidation process is not dictated by a fiscal multiplier.  It has to take place.

CHRYSTIA FREELAND:

But is it fair to say the Keynesians should take a little bit of comfort from that new conclusion?

CHRISTINE LAGARDE:

You know what?  I’m not in that battle of the Keynesians versus the Friedmanian, the monetarists versus the expansionists.  I’m not really concerned about that.  I’m more concerned about what is effectively going to work in order to deliver improvement on a sustainable basis.

CHRYSTIA FREELAND:

How concerned are you about the debt ceiling fight in the U.S.?  What impact could that have on the global economy?

CHRISTINE LAGARDE:

Well, if it is not resolved appropriately by it being raised on time and, you know, earlier than the last hours if possible, it could be catastrophic for the global economy.  Which is why everybody thinks that it will not happen.

And I very, very strongly hope that all parties, all views will converge international interest of the U.S. economy and in the international interest of the global economy.  Because to imagine that the U.S. economy would be in default, would not honor the payments that it owes is just unthinkable.

So it’s a very serious matter, but, you know, the American decision makers are serious people and responsible people and I hope that they realize that it’s not just the responsibility to the national economy, but it’s a responsibility to the world.

CHRYSTIA FREELAND:

You’ve been around quite a few political battles in your career.  What’s your bet on this outcome?

CHRISTINE LAGARDE:

I have huge faith in the United States.  And I very much welcome U.S. leadership on that issue.  So I would hope that this is resolved properly and on time.

CHRYSTIA FREELAND:

And do you have any sympathy with some of the more creative solutions, the trillion dollar coin, the I.O.U.’s?  Do you think we’re going to see it go in that direction?

CHRISTINE LAGARDE:

You know, I’m not especially interested in– in– gadgets or in– in– I think bottom line, it’s a simple question that needs to be resolved as simply as possible.

CHRYSTIA FREELAND:

My last question Madame Lagarde– you have spoken about and your institution has been doing some really interesting work on the impact of uncertainty on the economies.  How worried should we be about uncertainty?  Is it really a thing?  I mean, it sounds like some abstract concept, maybe an excuse that businessmen or bankers use for poor results.  Is that the case?  Or is there something more there–

CHRISTINE LAGARDE:

No, it’s a serious issue.  Operating in an uncertain environment means taking on added risks that are always factored in the decision-making process.  And therefore, increase the price and the cost of decisions, whether it’s investment by household by companies, whether it’s in job creations.  So the more uncertainties can be eliminated, the safer the environment and the cheaper the decisions will be.

CHRYSTIA FREELAND:

Thank you very much for your time.

CHRISTINE LAGARDE:

My pleasure.

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