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Ahead of G-20, IMF Chief Seeks New Global Finance Rules

September 16, 2009 at 12:00 AM EDT
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The global economy is slowly starting to rebound, but in order to prevent another crisis nation's must embrace stricter financial oversight, said Dominique Strauss-Kahn, managing director of the IMF, in an interview with the NewsHour's Paul Solman.
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GWEN IFILL: Finally tonight, a global view of the financial meltdown, one year later. Economics correspondent Paul Solman sat down this week with Dominique Strauss-Kahn, the managing director of the International Monetary Fund. His interview is part of our series on “Making Sense of Financial News.”

PAUL SOLMAN: Dominique Strauss-Kahn, welcome.

DOMINIQUE STRAUSS-KAHN: Thank you.

PAUL SOLMAN: The last time you were on this program was in October. You were very, very worried about the world economy. So how’s it doing now?

DOMINIQUE STRAUSS-KAHN: Better. I won’t say the crisis is over, and the so-called green shoots and the rather good results we’ve had in some countries, including European countries like Germany or France, are welcome.

PAUL SOLMAN: Green shoots, meaning signs of growth?

DOMINIQUE STRAUSS-KAHN: Exactly, that the beginning of recovery, we can see it, and we can see the end of the tunnel. But it’s certainly too early to declare victory and to say that the crisis is behind us.

There are still in front of us some bad months in terms of growth. And, moreover, in terms of unemployment, things are going to be bad for months. So for the guy on the street who’s going to lose his job in November or December, the crisis is obviously not behind him. It’s in front of him.

PAUL SOLMAN: You said in October that your role was to provide advice, to provide financing, help rebuild the financial regulatory system. Then, in April, you got $500 billion, new. Have you loaned all that money out? Have you loaned it wisely? And who have you loaned it to?

Countries seeking aid

DOMINIQUE STRAUSS-KAHN: To whom, many countries. We never had so many -- as many programs as we have today. So we're dealing with tens of countries, some for small amounts, some for huge amounts, countries having problems due to the crisis, and we try to mitigate the effect of the crisis.

PAUL SOLMAN: So Eastern Europe, a lot of the money?

DOMINIQUE STRAUSS-KAHN: Yes, of course, Eastern Europe.

PAUL SOLMAN: Pakistan.

DOMINIQUE STRAUSS-KAHN: Pakistan, you're right, African countries. There are a large number of countries with smaller amount, because economies are not that big. That's a large number of countries. Also, Latin American countries, and also providing insurance to countries like Mexico, like Colombia, other in Central Europe, as you say, like Poland.

So all across the world, we have these kinds of programs. And we have spent -- it's a figure that may interest you. You remember the Asian crisis, which was the biggest crisis the fund ever had to deal with in the past.

PAUL SOLMAN: This is the late '90s, and suddenly all these countries in Asia, going -- crashing.

DOMINIQUE STRAUSS-KAHN: Absolutely. Korea, Thailand, Indonesia, and there was a lot of consequences. We are now lending twice as much as the IMF did lend at this time. So it shows the depth of the crisis.

IMF imposes conditions

PAUL SOLMAN: Are you still imposing those controversial conditions that you used to impose in the past? I'm reading about Iceland here, and they're complaining you're driving up health care costs, you're driving up their interest rates, this is an attack on their sovereignty.

DOMINIQUE STRAUSS-KAHN: You know, why do you believe that a country comes in and knocks on my door and says, "We need your help"? Because they're in trouble. If they're not in trouble, they're not coming, they don't need us.

And if they're in trouble, it may come partly from the global economy and environment. And it comes very often, almost always, because they have their own domestic problem, because they didn't run the right policy.

So, of course, when we're coming, we tell them, "We're going to help you." But there's no use to help you if, at the same time, you don't fix what's going wrong in your economy. If you don't fix your economy, the same causes will give the same consequences, and you will still be in trouble.

Countries don't like that. Why? They say it's a problem of sovereignty. They say -- but they have to do it.

PAUL SOLMAN: You were becoming irrelevant, many people say, not you personally, but the IMF. You're relevant again, aren't you now? You're central, is that fair?

A bigger role in world economy

DOMINIQUE STRAUSS-KAHN: Yes, it was a bit unfair. You're right in saying that; that was a main comment made about the IMF two years ago.

But we were as irrelevant as firefighters when you have no fire. People may say, "What do we use to spend money for firefighters? There's no fire." And then the fire comes and you're very happy about having the firefighters.

So would you say that firefighters are irrelevant when you have no fire or doctors are irrelevant when you're in good health? No. You need to have this, of course. You see the relevance only when the crisis comes.

PAUL SOLMAN: Did the United States get into the trouble it got into by not listening to the IMF? I remember, in the last few years, you would issue report after report about the structural deficits in the United States, the United States was spending too much, and so forth.

DOMINIQUE STRAUSS-KAHN: Well, I don't want to be pretentious, and I think that we were not as good as we should have been in preventing the crisis and forecasting the crisis. Having said that, we're probably the institution which was really the first one putting the fingers on what's not going well, subprime market, for instance; then, when the crisis began, the first institution saying the crisis is going to be very difficult.

That's why we gave this advice, which was a bit odd for an institution like the IMF, that we need a global stimulus, and we have been followed by all the countries around the world, and that's probably why we avoided a crisis as big as the Great Depression.

And I really believe that the role of the IMF in this has been great.

PAUL SOLMAN: But you didn't, for example, warn about what was going on in Eastern Europe, or at least your former chief economist says that these countries were building up their vulnerabilities and indebtedness. Aren't you at least partly or perhaps even mostly responsible for the seriousness of the situation in Eastern Europe?

Re-regulating the world system

DOMINIQUE STRAUSS-KAHN: Well, we see some risks, especially when those risks are systemic risks, including many countries. We have two possible attitudes. One is to say it in publicly. And then we have the -- we are in a situation where we may trigger the crisis.

Or we can go to the government secretly and say, "Look, we have this and this and this and this problem." And when we do that, which is our role and the way we work, then, one year after, when the crisis is there, many people to say, "Whoa, you didn't say something before." In fact, we did. But to try to be effective, we didn't say it in the open air.

PAUL SOLMAN: Last question: The G-20 is coming up. Is there going to be re-regulation of the world financial system?

DOMINIQUE STRAUSS-KAHN: I hope so. We have to find rules which make it possible for the market to work for financial innovation to go ahead, but at the same time to avoid the individual behavior may put the global economy into crisis.

The problem is, there is a broad consensus on what should be done, but the process is going very slowly, and we have to speed up this process. And not only in the United States, but in many European countries, you had a public opinion reaction to bonuses, for instance, compensation, saying, how is it possible that we gave so much taxpayer money to those banks because they were in such a situation? And now they're giving bonuses which are insane.

PAUL SOLMAN: I guarantee you almost everybody in the audience listening to this right now would say, "I still feel that way."

DOMINIQUE STRAUSS-KAHN: Yes, exactly, exactly. So I think it was right to give the money to those banks, because the collapse of banks is the collapse of the global economy. We had to fix it.

But at the same time, we have to find new rules for compensation, not only on an ethical point of view, which will be enough, but also because we have to avoid that individuals takes risk for their own interests, which put all the system at risk.

PAUL SOLMAN: Dominique Strauss-Kahn, thank you very much.

DOMINIQUE STRAUSS-KAHN: Thank you.

GWEN IFILL: Our Web site, newshour.pbs.org, has much more about the financial meltdown. You can read about how the crisis did and did not change Wall Street and find out about the current status of insurance giant AIG, which received more than $100 billion in federal rescue money.