http://www.informationclearinghouse.info/article19220.htm IMF head in shock fiscal warning By Chris Giles and Gillian Tett in Davos 28/01/08 "Financial Times " -- - The intensifying credit crunch is so severe that lower interest rates alone will not be enough ³to get out of the turmoil we are in², Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warned at the weekend. In a dramatic volte face for an international body that as recently as the autumn called for ³continued fiscal consolidation² in the US, Dominique Strauss-Kahn, the new IMF head, gave a green light for the proposed US fiscal stimulus package and called for other countries to follow suit. ³I don¹t think we would get rid of the crisis with just monetary tools,² he said, adding ³a new fiscal policy is probably today an accurate way to answer the crisis². Mr Strauss-Kahn¹s words rip apart a long-standing global consensus that fiscal retrenchment in the US and Japan is needed to help reduce huge trade imbalances. It comes as the IMF is due to release new economic forecasts this week which, he said, would show a ³serious slowdown and it needs a serious response². The US Federal Reserve starts a regular meeting tomorrow and markets expect another half-point cut on top of the 0.75 percentage-point cut last week. Mr Strauss-Kahn¹s dramatic change in stance amazed Larry Summers, the former US Treasury secretary. He is known for saying that the IMF stands for ³It¹s Mostly Fiscal² because the organisation has to be tough with countries¹ budgetary laxity. But such is his concern about economic prospects if the US slows and other countries do not pick up the slack in world demand that he supported Mr Strauss-Kahn. ³This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face,² said Mr Summers. The dark economic mood in Davos was reinforced at the weekend by John Thain, the new chief executive of Merrill Lynch, who predicted the problems in subprime mortgage markets would spread to credit card and consumer loans. ³It will be a while before you see a return to normality in the banking system,² he said. Thomas Russo, vice-chairman of Lehman Brothers, said: ³Absent government intervention, the economic picture is very grey but with government intervention you have a decent chance of stabilising the picture.² The IMF¹s call for countries with strong fiscal positions to loosen their budgets gained approval from Christine Lagarde, the French finance minister, and Palaniappan Chidambaram, the Indian finance minister. Ms Lagarde suggested Germany would be a prime candidate for fiscal loosening, while Mr Chidambaram said: ³India may have some room, if necessary, for some fiscal stimulus.² But in a rare direct reference to China, he called on Beijing to play its part. ³China has huge headroom to stimulate domestic consumption.² However, it is the global community¹s lack of confidence that China will play ball in offsetting a slowing US consumer that makes greater fiscal laxity in many countries appear suddenly appealing. But amid a sudden enthusiasm for fiscal stimulus packages, some voiced caution. Professor Ken Rogoff of Harvard University and a former chief economist of the IMF said aggressive fiscal easing generates ³more harm than good in most cases², leading to unsustainable budgetary position that require painful correction in the longer term. Copyright The Financial Times Limited 2008 Click on "comments" below to read or post comments Comments (14) Comment (0) Comment Guidelines Be succinct, constructive and relevant to the story. We encourage engaging, diverse and meaningful commentary. Do not include personal information such as names, addresses, phone numbers and emails. Comments falling outside our guidelines those including personal attacks and profanity are not permitted. See our complete Comment Policy and use this link to notify us if you have concerns about a comment. We¹ll promptly review and remove any inappropriate postings. Send Page To a Friend In accordance with Title 17 U.S.C. 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