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?
'We Have to Find New Sources of Growth'
Strauss-Kahn: In the past, many countries tried to avoid dealing with the IMF because they did not like the strings and conditions attached to our loans. After the crises in Asia and Latin America, they built up huge currency reserves. This is understandable from a political point of view. But it is bad for their own economies and bad for the global economy, because this money is not being put to work, but is essentially immobilized. It would be much better to have a global financial safety net coordinated by the IMF that could be tapped by countries in financial need.
SPIEGEL: A kind of global insurance against world financial crises?
Strauss-Kahn: Exactly. I am not saying that countries will have to have 100 percent insurance and should not hold any reserves at all. But it would make sense to draw on the IMF as global rescuer. That would save national resources and help create stability in the global economic system.
SPIEGEL: It would require additional funds, though. How much do you need for this new role?
Strauss-Kahn: If our member countries agreed to this role for the Fund, it would need to be determined how much additional resources that would require. But it certainly would be vastly more than our current resources.
SPIEGEL: Many would like to see the IMF in the role of a super-regulator, a kind of world police for the global financial system. Does that not appeal to you?
Strauss-Kahn: This idea came from journalists, not from the IMF. We do not want to be in the role of setting standards. We do not have enough staff, nor do we have the right expertise. I do not see the IMF as a policeman but rather as a doctor. We provide advice to the patient on how to stay in good health. If he gets sick, we provide medicine.
SPIEGEL: The patients, namely the countries, generally do not like their medicine. Often they complain it's too bitter.
Strauss-Kahn: That also happens to real doctors, right? The Fund is often the doctor who tells the patient to stop drinking because he is sick. The patient does not like it but he stops drinking -- and promptly feels awful. He then blames the doctor for feeling that way.
SPIEGEL: But during the current crisis, you were a lenient doctor. You advised your patient the United States to drink more: Take another swig from the debt bottle!
Strauss-Kahn: In this crisis, I would compare our role and that of governments to firefighters. We all saw that the house was on fire. A lot of water was needed to put the fire out. Of course, afterwards we have to mop up. But it is better to have a soaked house than a house burned to the ground.
SPIEGEL: Do you have any idea when the house will be dry again, how the government interventions could be terminated? Is there an exit strategy?
Strauss-Kahn: I agree, we do need such an exit strategy and we are working on it. But I disagree if your question implies that we should consider implementing it already.
SPIEGEL: How many more trillions of dollars should governments continue to pump into their national economies?
Strauss-Kahn: In the minds of too many -- not only regular people but also top politicians -- the financial crisis is already behind us. That way of thinking is dangerous. The global economic crisis continues despite the fact that Germany and France saw some positive growth figures for the last quarter. However, unemployment is set to rise for at least another year, and will probably peak in mid-2010. So the financial crisis has not only been followed by an economic crisis, but also by a social crisis which has not yet reached its apex.
SPIEGEL: But the question remains: What is the exit strategy? Will central banks and finance ministers be able to pull all that additional money out of the markets before global inflation eats up savings and the purchasing power of billions of people?
Strauss-Kahn: We will have to withdraw liquidity from the markets. There is no question about that.
SPIEGEL: But how?
Strauss-Kahn: Possibly a combination of raising interest rates and an end to direct interventions by the central banks.
SPIEGEL: Or do you and others tacitly accept inflation? After all, it also helps to shrink the value of debts, including federal debts.
Strauss-Kahn: In this type of crisis, no policy action is without risk. But the question is: Where are the greatest risks? In my view, the risk that demand is stifled prematurely is much greater today than the risk of inflation.
SPIEGEL: For the first time in decades, American consumers are saving more. That means, however, they are also cutting back on consumption. Is that good or bad?
Strauss-Kahn: Both. During the last decades, American consumers served as the engine for global economic growth. The American consumer is now changing his behavior, at least the generation between 25 and 45 years of age. They are saving more. Will this trend continue? I do not know. But if it does, it would raise a new question. Who would take on the role the American consumer has played for the last 25 years?
SPIEGEL: Chinese consumers, perhaps?
Strauss-Kahn: It is not obvious that that will happen, and even if it does, it does not solve the entire problem. The Chinese invest primarily in basic goods, in education and infrastructure. US consumer demand is focused on other kinds of goods, especially in the area of high technology.
SPIEGEL: But are US consumers not well advised to save more after decades of living on credit?
Strauss-Kahn: What is right for the individual can create new problems for the global economy. We have to find new sources of growth. We cannot simply say that the Brazilians, the Indians, and the Chinese are going to consume more.
SPIEGEL: The American economist and Nobel laureate Paul Samuelson proposes another solution. Slow down, is his advice to the United States. Slow down capitalism. According to Samuelson, economic growth should be lower in the future but more sustainable.
Strauss-Kahn: Samuelson is right -- growth will probably be lower in the future. But whoever pleads for growth to slow down should also acknowledge that it will lead to higher unemployment worldwide.
SPIEGEL: Mr. Strauss-Kahn, we thank you for this interview.