IMF: ANOTHER BAILOUT WILL KILL DEMOCRACY
DEMOCRACY would be at risk if the public were called on for a second bailout of the financial industry, the head of the International Monetary Fund warned yesterday.
Dominique Strauss-Kahn said the “man in the street” would not tolerate a bailout of the sector if another global crisis were to blow up in five year’s time.
“The political reaction will be very strong, putting some democracies at risk,” he told a group of business leaders at the CBI annual conference yesterday.
He added that while the global economy had made remarkable progress over the year and was on the cusp of recovery it remained “highly vulnerable” to shocks.
“The major advanced economies in particular remain fragile, still dependent on policy support,” he said.
It was too early for governments to start winding down their fiscal stimulus packages, he added.
“I think it is still too early for a general exit,” he said. “Exit should instead await a sustained recovery in private demand, as well as entrenched financial stability – a key litmus test.
“We recommend erring on the side of caution, as exiting too early is costlier than exiting too late.”
Global banks have so far only revealed half their losses from the crisis, he added.
“Probably a little more has been disclosed in the US and a little less in Europe,” he said.
And Strauss-Kahn backtracked on his opposition to a tax on the transactions of global finance. He told the CBI that the so-called Tobin tax was interesting and should be considered.
“Can the tax system be used to further the legitimate goals of fairness and equity in this area?” he asked. “There are a number of ways to think about this, and we will look at it from various angles and consider all proposals.”
Lord Turner, the chairman of the Financial Services Authority (FSA), told the conference that regulatory reform needs to be combined with macro prudential tools to safeguard against future financial instability.
Low and stable inflation does not by itself guard against the “dangers of volatile credit supply”, he said.