With her first important speech as managing director of the IMF, Christine Lagarde stole all the headlines at the Federal Reserve Bank of Kansas conference at Jackson Hole. Market participants had hoped that Federal Reserve chairman Ben Bernanke would be the star, with a new announcement of further quantitative easing to calm the markets.
Instead, Lagarde commanded the spotlight with an unflinching analysis of what she calls a dangerous new phase of the crisis that began in 2008, amid signs that the fragile economic recovery is being derailed and confidence in policymakers’ capacity to respond is evaporating.
Her urging that governments should retain some capacity to support growth through fiscal expansion and focus more on reducing long-term funding commitments to entitlements such as pensions and health care and less on drastic up-front belt tightening, might sound simplistic and even the product of wishful thinking. At least it is a useful challenge to the now prevailing orthodoxy that markets are close to shutting out developed-world sovereign borrowers.
In any case, it was her call for urgent and even mandatory substantial recapitalization of Europe’s banks, drawing on private capital first and public funds if needed, that drew the most startled response.