The US Sues Itself While Europe Crumbles

There Has Been a Clear Crisis of Confidence, says IMF head Christine Lagarde. What confidence is she talking about? Turns out, it's not your confidence in her. Neither is it your confidence in your elected politicians. While both may be shaken to the core, Ms. Lagarde addresses another form of confidence, the confidence "in the markets". And she has a solution for it. She says she knows how to restore this confidence.


'There Has Been a Clear Crisis of Confidence'
http://www.spiegel.de/international/world/0,1518,784115,00.html

When we look at the European situation, there has to be fiscal consolidation qualified by growth-intensive measures. In addition, there has to be increased recapitalization of the banks. Clearly, the two go together. The sovereign debt issue weighs on the confidence that market players have in European banks. [..]

The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009. But if the various governments, international institutions and central banks work together, we'll avoid the recession.

SPIEGEL:
Does the US need a new stimulus package?

Lagarde:
We are in a situation of slowed growth and we have a confidence issue that culminated this summer with the downgrading of the US from its AAA status. As long as the US puts in place a credible medium-term adjustment plan, there is probably space at the moment to contain the short-term adjustment and take some of those growth-inducing measures.

SPIEGEL:
You suggest fighting the effects of a debt crisis with more debt?

Lagarde:
That's not how I see it. In a world that is so economically interwoven, where the actions of industrial countries have direct influence on emerging economies, one can't be stubborn when the situation changes. We didn't change our minds about the dangers of too much debt, but over the current state of the world economy.


Nothing new from Ms. Lagarde, in other words. What we need is growth! Never mind that with high unemployment in many European countries, as well as the United States, and with housing markets either about to burst (Britain, Holland, Denmark, Sweden) or in just the first steps of doing so (United States, Spain, Ireland), substantial economic growth is but a mirage. It's not all that far-fetched to say we haven't seen any real growth for three decades; instead we've done nothing but borrow our way into an increase in spending power.

And the debt we've accumulated while we were borrowing has now reached levels that make growth no longer possible. In the US, each additional dollar of debt doesn't presently have any positive effect on growth anymore. In Greece, government bonds, the favorite debt instrument among politicians, have reached yields that top 70% for 1-year debt and 40% for 2-year paper. Italy needs to roll over €62 billion in debt before the end of September (the most ever in a single month). There are no buyers on the horizon except for the ECB; a scary realization.

Still, Ms. Lagarde pushes head first and full force for even more debt. In the US, where ..there is probably space at the moment to contain the short-term adjustment .., and in Europe, where ..there has to be fiscal consolidation qualified by growth-intensive measures. In addition, there has to be increased recapitalization of the banks..

In both cases, this would mean more money to be transferred from the taxpayer to the financial institutions. One might say that the crisis of confidence Lagarde talk about is one in which banks are starting to get worried about the size of their next bail-out. Nothing more, nothing less......

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