Lagarde in Davos: How to Avoid an Economic Deep Freeze

By iMFdirect

Amid the heaviest snowfall in Davos for decades, IMF chief Christine Lagarde has been making her case for urgent action to resolve the eurozone crisis, which is at the center of current global economic concerns. The Fund recently sharply revised downward its forecast for global economic growth and in a speech in Berlin Lagarde mapped a way forward.

Policy priorities

Lagarde has taken her messages to the Alpine resort in Switzerland, where global leaders are gathered for the 42nd Annual Meeting of the World Economic Forum. At the top of the agenda is the need to find and implement the policy solutions to avoid a downward economic spiral—or what Lagarde as has called a “1930s moment.” She set out some of the policy priorities in a video interview and stressed the need for policy action to be “coordinated, cooperative and comprehensive”. The main goal is to get growth going again “because that’s most needed. There is too much unemployment around the world,” Lagarde said.

Worldwide repercussions 

While Europe may be at the epicenter of the crisis, today’s economic difficulties are being felt in all quarters of the globe, so policymakers and leaders everywhere are responsible not only “for making sure that their jurisdictions, their countries, their regions, but also the global community does better and actually can manage through the crisis.” For the IMF to play its part, the institution has called for a big increase in its lending resources. The “IMF is a guardian of stability and a builder of confidence. And there is a lot to be done at the moment, and we probably will need more funding to be able to respond to a time of crisis ... because it is our membership at large that we care for,” Lagarde explained. She also spoke on Facebook.

Watch the video here:


2017-04-15T14:13:35-05:00January 27, 2012|


  1. […] Lagarde in Davos: How to Avoid an Economic Deep Freeze « iMFdirect – The IMF Blog Posted on January 27, 2012 by Georg Zoche var addthis_product = 'wpp-262'; var addthis_config = {"data_track_clickback":true,"data_track_addressbar":false};if (typeof(addthis_share) == "undefined"){ addthis_share = [];}Lagarde in Davos: How to Avoid an Economic Deep Freeze « iMFdirect – The IMF Blog. […]

  2. Per Kurowski January 27, 2012 at 3:59 pm

    Mme Lagarde, What is most required in order to regain confidence, and therefore to restore stability, and stop the downward spiral, is to admit that the current capital requirements for banks, based on the perceived risks of default that were already considered by bankers when setting interest rates and amounts of loan, the pillar of Basel bank regulations, has been one of the greatest regulatory mistakes ever made. To sacrifice the world, in order not to expose colleagues to shame, is shameful, and only an expression of what could be considered as bureaucrat cronyism.

    What could now be done? One solution could be declaring a ten year new capital requirement moratorium on all current bank exposures; allowing the banks to run any new lending with whatever new capital they can raise, while imposing an equal 8 percent capital requirement on any new bank business, meaning no risk-weighting. If there’s an exception, that should be on lending to small businesses and entrepreneurs, in which case one could require the banks to hold for instance only 6 percent of capital, because these borrowers do not pose any systemic risk, and also because, when the going gets to be risky, all of us risk-adverse, really need the “risky” risk-takers to get going.

    At this moment let us try some capital requirements for banks based on job creation potential ratings, most specially job for the youth job creation ratings.

  3. Angus Cunningham January 27, 2012 at 4:08 pm

    It is encouraging to receive Ms. Lagarde’s account of the danger of an economic deep-freeze descending on the world and of her prescriptions for growth solutions to it. What most people outside the professional circles of global economics and finance want to see is not only a recovery of employment in the richer economies but also a transition in the practices of financial decision-makers — whether investors or entrepreneurs — that will promote social and environmental sustainability. It is in these areas that the crises are most obviously manifesting and threatening the future of the entire global community.

    Can such a transition be made in a climate of conventional problem-solving discussions? If that means the gamesmanship of one ‘side’ playing “we can’t do that because there’s no empirical history of success with such an approach” and the other ‘side’ pleading “No, this project is something new, but it’s success will advance us in a direction that would transition us all to path that is more socially equitable and environmentally ecological, and so the question of its financial viability is something for which we both must, going forward, accept a responsibility”, then the answer is obviously “no”.

    But that serves only to make the point that new forms of exchanges of data and feeling are needed that recognize the strengths and weaknesses of both parties in a ‘going forward’ path on which parties formerly tied, perhaps unconsciously, to such gamesmanship, agree in the future to share sensible responsibilities.

  4. Georg Zoche January 27, 2012 at 4:10 pm

    If Lagarde is right about “a 1930s moment,” then it would be very worthwhile to look into Keynes’ proposal of a supranational currency, which would be avoiding the extreme disequilibrium we are experiencing today and that we were experiencing in the 1930s.

    You can find some info on Keynes’ Bancor at

  5. GS RADJOU January 27, 2012 at 4:22 pm

    Subject: Davos

    Paris, Jan. 27, 2012

    Dear Ms Lagarde,
    If I was in Davos I would probably exchange ideas on the 3 following points (at least, as a start):

    1. Stability is the buzzword and it is the role of the IMF to ensure the concept and implement it.

    + Davos, looks like a big pot where stakeholders i.e. economists, bankers, policymakers… are making traditional finance cooking i.e. the international stew….healthy: Overseas, one should look at consuming more and in Europe at fiscal policies.

    Is it so much different than before the crisis. The world was already organized in this way; the difference today, the pot looks stickier.

    If we have done reforms (Basel III, reduced operational risks,…yourself, you have asked banks to capitalize more; there was also quantitative easing in Europe and America. Should the financial system change in a more innovative way?

    2. I meant, the IMF is the main world financial institution for short lending. It is the heart of the global financial system. It is like a pump, attracting monies from lenders, it is pushing money, too, where it is needed most; it is an engine for businesses and enterprises particularly with new eyes on default swaps, bankruptcies, and countries and banks being downgraded from their 3 stars.

    3. My concern: if the 21st century is about financial stability too, with new paradigms and shifts — reference to the United Nations Millennium Development Goals i.e. starvation and hunger (1), education (2), gender (3), health of child (4), mortality during pregnancy of women (5), HIV-aids (6), sustainable development (7), global partnerships (8) — for a new world of new opportunities – then a bit like Christopher Colombus did, we should be looking for new solutions. Today, in the green economy, what is this new gold that will help to reduce CO2, decrease temperature, global warming, pollution, help empower women, and build a better world for tomorrow?

    Do you think this financial system can reduce poverty in the world and at the same time give people the wellbeing they expect for them and their children?

    I look forward to hearing from you on one of the above subjects and wish you a good debate. Keep informing us while Davos is still on.

    Yours sincerely,

    Georges RADJOU

  6. Rodger Malcolm Mitchell January 27, 2012 at 4:33 pm

    When the World Economic Forum members demonstrate a knowledge and understanding of Monetary Sovereignty, they will be worth listening to. Until then, one would be better to watch sports on T.V. than to waste time evaluating the WEF blatherings.

  7. Georg Zoche January 27, 2012 at 4:40 pm

    The “1930s moment” that Lagarde is talking about is caused by the Triffin dilemma, which not only took down the British Pound in 1931 but also forced the U.S. to abandon the dollar’s peg to gold.

    The “Triffin dilemma” was described by Robert Triffin in 1959 and is being caused by the following irresolvable contradiction:

    The national currency which is being used as world key currency has to be safe and stable. Therefore, the economy of that reserve nation must be stable.

    Being used as world key currency, the reserve currency must be available in very large amounts outside of the boundaries of its nation. Therefore, the reserve nation must spend more money than it is earning.

    But how could – in the long run – the economy of a nation be stable and exhibit large trade deficits at the same time? This problem is aggravated by the fact, that the trade deficit of the reserve nation has to grow in order to provide an increasing money supply to a growing world economy. While the reserve nation is building ever bigger deficits, the trust in its currency will fade accordingly – until this mechanism culminates in a full blown crisis of confidence in that reserve currency. Therefore, Triffin concluded:

    The use of national currencies as international reserves constitutes indeed a “built-in destabilizer“ in the world monetary system.

    In the preface to his book, written on Halloween 1959, Triffin closes with the not so optimistic words:

    “Whether […] these problems have any chance to be negotiated in time to avoid a major crisis in the international monetary system, is an entirely different matter which history alone can, and will, answer.”

    In March 2009 Zhou Xiaochuan, governor of the People’s Bank of China, in a widely acclaimed speech called for a reform of the international monetary system. In his speech he expressed his conviction that the Triffin dilemma was the underlying cause of the crisis and its global propagation:

    “The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system. […] The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists. […] Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.”

    The second special feature of the USA results from the fact that – due to the special role of the US dollar as key currency – the USA attracts more foreign investments than any other country in the world; in the current monetary system it is almost mechanically codified, that the nations of the world invest their money in the USA. Since the most important commodities and markets of the world are using the US-dollar as transaction currency, market participants and central banks are forced to keep gigantic amounts of reserves in US dollars, in order to be prepared for fluctuations in trade as well as in currencies exchange rates. Obviously, since the storage of cash does not earn any interest, these reserves are not held in the form of US-dollar bank notes but in the form of interest earning U.S. bonds which therefore need to be bought in accordingly large quantities. When for example China, through the export of t-shirts to the US, would generate a surplus of US-dollars, then these dollars would in the first instance lie about, not earning interest while losing purchasing power due to inflation. In order for this not to happen, China will loan its excessive dollars back to the US, who then can use these dollars to buy more t-shirts from China. Having earned the very same dollars now a second time, China lends them back to the US, who again can buy more t-shirts. And so on and so forth. The U.S. is buying t-shirts, while China is buying U.S. bonds.

    Since all of the world is lending their money back to the U.S. in that manner, in the course of time the U.S. regressed from the wealthiest nation in the world to the most indebted of them all. Nobel laureate Joseph E. Stiglitz explains:

    “From this perspective, the continuing trade deficit of the US has to be attributed to the fact that the US-dollar is a reserve currency: other nations are unswervingly stockpiling U.S. treasury bills.”

    The growing global demand for US-American financial products resulted in the US developing from a nation that was exporting goods into a nation that now is exporting financial products. Accordingly, the share of the goods-producing sector within the US-American economic performance has dropped, while the share of the financial sector has increased dramatically, resulting in a correspondent increase of size and power of the US financial industry. Over the course of the last decades the political influence of the financial industry has grown to proportions that urged former IMF chief economist Simon Johnson to publish his remarkable article The Quiet Coup in which he describes the situation as a factual take-over of the U.S. government by the financial industry, comparing the political circumstances in the US to those of a banana republic.

  8. Georg Zoche January 28, 2012 at 3:17 am

    Georges Radjou,

    I wholeheartedly agree with your points. One amazingly innovative solution is Keynes’ proposal of a “supranational” currency. Do you now about it?

    You can find some info on Keynes’ Bancor at

    All the best, Georg Zoche

  9. Javed Mir January 29, 2012 at 11:25 am

    Although not perfectly, the IMF has already been functioning as an International Clearing Union (mechanism) with Special Drawing Rights as supranational currency. In case Keynes proposed single currency, then this will not be workable since we have already an unsuccessful experience with Euro.

    In addition to the policy priorities proposed by the IMF Chief being very relevant, the following suggestions could also be considered to avert further economic freeze:-

    – Perceptible reduction in the non-productive defense expenditures as recently proposed by the USA Secretary of Defense.

    – Elevation of the Chinese currency to the status it deserves in the international market.

    – Reallocation of Eurozone countries into easy-to-manage zones since welding together of 27 independent sovereign countries does not seem to be workable for any longer period of time.

    – Tighter surveillance of the banking systems of all the member countries by the International Monetary Fund. Without robust banking system, economic growth will not be achievable.

  10. Angus Cunningham January 29, 2012 at 12:19 pm

    These priorities make a lot of sense to me. The first three I can imagine occurring naturally, although whether that will be at the rate the world needs is up to the courage and wisdom of the officials and politicians involved to achieve.

    Regarding the fourth, I wonder if a transition of supra-national banking surveillance from Basel to the IMF will accomplish much. I wonder this because, although the micro-managing ‘macro-prudential financial management’ attempted by banking ‘gurus’ in Basel with their absurd risk-weighting formula is clearly not coaxing capital into the transitions of investment activity required for the socially and environmentally sustainable growth the world needs, neither has the IMF, at least in this generation, been able to earn much kudos for having been able to do that either.

    What is needed is a very large culture shift in investment leadership. In principle, the IMF is positioned, based on its global governmental membership, to help. But its performance in relation to recognizing the stability-generating features of the FTT established by its visiting professor Schulmeister, and its failure to see the potential for a smart FTT to generate funds for socially and environmentally desirable activities that, to conservative thought-mongers, are difficult to justify, have both been decidely ‘lacklustre’ IMO so far.

  11. Per Kurowski January 29, 2012 at 1:43 pm

    @Javed Mir. “Elevation of the Chinese currency to the status it deserves in the international market”

    I would say it is up to China to win any international status for its currency, with a lot more openness and transparency. As is, it deserves little or no status at all.

    @Javed Mir “Tighter surveillance of the banking systems”

    And what do you think the whole Basel Committee adventure has been about… and where has that taken us?

    @Javed Mir “Without robust banking system, economic growth will not be achievable”

    And it goes the other way too. Without a robust economy a robust banking system is impossible. And that is why the current capital requirements for banks, just based on avoiding the perceived risks of default and pushing the banks go where the officially perceived risks are low, is so totally useless.

  12. Georg Zoche January 30, 2012 at 3:39 am

    Javed Mir,

    Keynes’ supranational Bancor cannot be compared to the Special Drawing Rights or the Euro, since the Bancor was not supposed to be based on credit but on barter. Often, the International Clearing Union is falsely described as a currency clearing system, when it really was supposed to be a barter clearing system.

    From a monetary theory point of view, that changes everything: today, we live in a world that needs money first in order to e.g. create jobs. With money not created out of credit, but through barter, we would then live in a world where money is always available, as long as there is work that needs to be done.

    Find some more info on the Bancor at

    All the best, Georg Zoche

  13. pleijaden5 January 30, 2012 at 3:51 pm

    In response to demands by other governments, the Greek government is declaring existing collective bargaining agreements null and void. Leaving aside the legitimate discussion of the key problem, this marks the complete end of the rule of law and reduces the principle of Europe to an absurdity. This autonomy, which is important in order for an economy to thrive, is being eliminated by directive. Ultimately, this can lead only to the final collapse. At this point, politics is becoming the willing enforcer of the demands made by the financial market, whose involvement appears to be driven by indifference.

    A reasonably healthy economy could survive such a drastic remedy and perhaps even emerge stronger. But the Greek economy is sick, weak, in need of nursing. It is upsetting to observe the speed with which Greece’s prosperity is crumbling, Greece’s economy is shrinking, and Greece’s social fabric is falling apart. The mood in the country ranges from highly explosive to profoundly depressed. Now more than ever, political leadership is needed to keep Greece from imploding. That is because these new requirements are conditions for the bailout of a country that is in a deep mess owing to incompetent and patronage-oriented politicians. The alternative to conditional aid is unconditional bankruptcy. Under the big deal, the bill will be paid by small and mid-level taxpayers, i.e. by dependent employees – in Greece and in the other EU countries. The planned participation of banks and insurance companies in the rescue of Greece will apparently continue to depend on taxpayers as well.

    Formally speaking, the debt write-off agreed to last fall should not affect public investors. Calculations have shown that German taxpayers alone will bear a burden of more than €25 billion. Giving up part of the public assistance loans for Greece would make that burden even greater – if someone is at risk of suffocating, you do not help him by squeezing his neck. The impression must not be created that governments are protecting the economic interests of those who have been excessively involved in the past as well.

    Loans alone can do nothing to combat corruption, tax evasion, incompetent administration, and political patronage. If further cuts remain limited to pensions and salaries, then recession and depression will ensue, and economic recovery will then be beyond reach.

    Where are the new jobs supposed to come from? Ultimately, there are hardly any major companies that are currently willing to invest in Greece, which is why the renewed plans involving privatization proceeds will likely be of little help. But lower wages also mean lower tax revenues and less consumer spending. And in any event, the social security coffers are already largely empty. Greece is in a bottomless pit.

    We must open our eyes and look at the people standing in line at soup kitchens, look at the parents turning their children over the care of the SOS Children’s Villages, thus giving up their custody rights, and we must not close our eyes to the large number of homeless people in Greece’s cities, to the unemployed, the pensioners, the young people with no prospects, etc. These people cannot expect any government support.

    Are we supposed to regard all of these people as collateral damage of the crisis? If so, Søren Kierkegaard’s words would acquire a sad truth: I live, I die; I have lived, I am dead; I will die, I want to live!

  14. Angela Jones February 6, 2012 at 5:43 pm

    I would like all of you to think about stopping the ministers and ex-ministers in Greece, having a SECOND pension BEFORE you cut pensions and wages from the low-paid people!!! Make them sell stupid places that don’t make money anyway, and most of all, tell them NOT to make the LITTLE people pay anymore!! I have lived in Greece for 24 years, and I’ve just got the right to vote locally! I don’t have the right to vote Nationally! I’m English, I’ve paid rates, VAT, and all the other taxes that the governments have asked! Also, I’d like to know how much the taxpayers of Greece pay every time you come here? Nothing you are doing is paying off! Please do something about it or get out! Angela.

  15. GS RADJOU February 10, 2012 at 5:11 pm

    Dear Kurowski,

    I fully agree with you. What about these bancour in the Keynes theory?

    Yours sincerely,


  16. GS RADJOU February 10, 2012 at 5:16 pm

    Dear Georg,

    You are correct. I am frightened too see the dematerialization of money.
    One click of the mouse and your money has travelled so fast that you still do not know where it is.


    Georges RADJOU

  17. GS RADJOU February 17, 2012 at 4:45 pm

    Perhaps, in the first place look what has happened before and after the making of Europe for these countries that cannot afford it — Greece the birthplace of democracy and Christianity (2 pillars of the whole EU and USA worlds) is a typical example of crises ahead for other countries — be aware not to go too far with this type of financial engineering.

  18. Angus Cunningham February 18, 2012 at 5:07 pm

    As an example of accurate insight and also authentic comment empathically expressed on this situation, I cannot find a better example than der Spiegel’s Feb 23 interview with George Soros:,1518,814920-2,00.html

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