Interview with IMF Head Dominique Strauss-Kahn: 'It Is Dangerous to Think the Financial Crisis Is Already Behind Us'
The managing director of the International Monetary Fund, Dominique Strauss-Kahn, 60, talks to SPIEGEL about Wall Street's unwillingness to learn lessons from the financial crisis, the future of the global economy and his ideas for a new role for the IMF as a global financial safety net.
SPIEGEL: On the day after the bankruptcy of the investment bank Lehman Brothers, the American real estate crisis became an earthquake which was felt throughout the world economy. Have the people who caused the crisis learned from the events of last September?
Dominique Strauss-Kahn: A few months prior to the Lehman Brothers bankruptcy, the secretary of the Treasury at that time, Hank Paulson, organized a dinner for government officials and a handful of CEOs from big American investment banks. Hardly anyone knew about Lehman's problems then, but Bear Stearns had already collapsed. So the problems in the financial sector were evident. Over dinner, one of the high-profile bankers told us: "Look, we were actually too greedy. This is why we need to restrain our greed with better regulation."
SPIEGEL: Sounds good. But are you sure ?
Strauss-Kahn: I know what you are about to ask: No, I am not sure. I do not know if he would say the same thing today.
SPIEGEL: Most Wall Street bankers seem to feel bullish again. Once again, millions are being handed out in bonuses, as rewards for highly risky business deals. The banking community would much prefer to be left alone by politicians once again.
Strauss-Kahn: Well, human weakness is stronger than reason.
SPIEGEL: The CEO of Goldman Sachs said after the crisis that it was a "perfect storm" and that you cannot do anything to protect yourself against a perfect storm.
Strauss-Kahn: That is a flawed metaphor. Human society is not a force of nature. The financial crisis was a catastrophic event, but one created by human hand. The lesson we all need to learn is that even a free market economy needs some regulation, otherwise it cannot function. All these ideas about deregulation -- that more deregulation is always better and that the market can solve every problem -- are fine on paper but they do not work in reality.
SPIEGEL: Ludwig Erhard, the mastermind behind the German Wirtschaftswunder, the post-war "economic miracle," had this insight 60 years ago. He coined his own term for it, calling it the "social market economy."
Strauss-Kahn: Erhard is a German legend, but his ideas are attracting more and more followers worldwide. There are very few people today who say you should not have a market at all. And there are also very few who want absolutely no regulation. I think it is very interesting that during this crisis all governments -- whether liberal or conservative -- took similar measures, ranging from fiscal stimulus to the restructuring of the banking sector.
SPIEGEL: Then again, in reality not much has changed. In American political circles, the motivation for reform seems to be waning.
Strauss-Kahn: In general, I share part of your skepticism. I remember only too well the first report on lessons from the crisis. That was at the G-7 meeting in spring 2008 when problems in the financial sector were already evident. All of us agreed with most of the reform proposals, but 17 months later, only a part of it has been implemented. Of course, it is not an easy task to do, but that worries me, particularly when I think of the traders on Wall Street.
SPIEGEL: Are you suggesting that there are no incentives for them to change their risky behavior?
Strauss-Kahn: There is not much point in politicians, academics and authors drawing lessons from the events if these do not reach the young trader at the bank. Without rules, the trader is likely to resort to his old behavior. He will attempt to take greater risks to earn higher rewards, because someone else will cover the risk. That is precisely what happened a year ago.
SPIEGEL: But isn't the current response to the crisis creating new risks? Bankers now know that the government will ultimately come to the rescue when all goes terribly wrong. Economists call this "moral hazard," where individuals have an incentive to behave recklessly because they know they will not be punished for their mistakes. Was the downfall of Lehman Brothers necessary as an educational measure?
Strauss-Kahn: From a moral hazard perspective, it may be the right decision to allow a bank to fail. But the systemic consequences have to be taken into account and in this case they have been severe. I think most people today would say that letting Lehman go down was not a good idea. But hindsight is always easier than foresight. At the time, many factors and scenarios needed to be considered under extreme time constraints. Policymakers needed to make a decision and it had to be made fast.
SPIEGEL: Does that mean that next time CEOs will know they can count on the government to bail them out? Why should they change their behavior?
Strauss-Kahn: You forget that many investment bankers lost their jobs. In any case, I agree that the compensation system within financial institutions should be reconsidered. I am particularly interested in the link between traders' incentives to take risks and the impact on the global economy, rather than in the ethical questions -- even though they certainly disturb me as a private citizen. But working on compensation is not enough -- capital requirements in the financial sector have to be increased.
SPIEGEL: So your assessment one year after the Lehman collapse is somewhat pessimistic.
Strauss-Kahn: It would be unfair to say that nothing has happened, but it is correct to say that not enough has happened. I am hoping that the G-20 summit in Pittsburgh will provide some fresh impetus.
SPIEGEL: Are you satisfied with the achievements of the IMF in this crisis?
Strauss-Kahn: The IMF has three different roles. The first is to try to provide early warnings of impending crises. Prior to this crisis, we were not as good as we should have been on that score. We were not vocal enough.
SPIEGEL: Would it not be more honest to say that the IMF simply missed the boat?
Strauss-Kahn: Once everything started sliding, the IMF was the first institution among all the central banks and think tanks worldwide to warn that this crisis would be very wide-ranging and very severe. And at that time, we were strongly criticized for being too pessimistic.
SPIEGEL: And the second role of the IMF?
Strauss-Kahn: The second part of our job is to provide advice to policy-makers. In that regard, we have fulfilled our role. After all, the main responses to this crisis -- fiscal stimulus and the restructuring of the banking sector, even in some cases taking over banks -- were generated here. They were very controversial because they were costly but we succeeded. The third role is our classic function: We provide resources to countries in financial crisis.
SPIEGEL: Does the IMF have sufficient resources to fulfill its role in the future?
Strauss-Kahn: We now have firm commitments from member countries of $500 billion in additional resources. We have enough resources to meet our traditional lending responsibilities -- though these are becoming greater, as we are now dealing more often with entire regions, not just individual countries. In a globalized world, crises spill across borders much faster.
SPIEGEL: How much of the money committed in London has already been spent?
Strauss-Kahn: About $165 billion has already been committed to countries in need. That is double what we lent during the Asia crisis in the mid-1990s.
SPIEGEL: Do you worry that the IMF could run out of funds soon?
Strauss-Kahn: At the moment, we have sufficient funds. But there could be another, additional role for us in the future. For this new role we would need additional resources.
SPIEGEL: What would this new role entail?
- Part 1: 'It Is Dangerous to Think the Financial Crisis Is Already Behind Us'
- Part 2: 'We Have to Find New Sources of Growth'
© DER SPIEGEL 38/2009
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