Lagarde Lehman Ten Year Anniversary



Edited Package
Washington, DC --- 03 August 2018
1. Slate: Was the Crash predictable?
2. Soundbite (English) IMF Managing Director Christine Lagarde:
Actually, most economists have actually missed that boat, and haven't seen the crisis coming, with the exception of maybe two, one of whom was the chief economist of the IMF, because in 2005 at Jackson Hole, in the presence of the entire community of central bankers of the world and academics, he actually presented a paper in which he foresaw the crisis. And that paper was met with a lot of skepticism.
But other than that, most economists simply did not see the crisis coming. And we didn't, either. So much so that, you know, our October [INAUDIBLE] 2008, which came just a few weeks after the Lehman Brothers collapsed, forecasted growth at 3.9 and then 3%. So although we saw that it was declining, we certainly did not anticipate at the Fund that it would be such a great financial crisis.
3. Slate: Personal Recollection of the Crisis
4. Soundbite (English) IMF Managing Director Christine Lagarde:
Well, you know, I took my job as finance minister in June of 2007. And in August of 2007, BNP Paribas closed three funds. And that was the signal that something was wrong, that something was not working, that they felt the crisis required the closure of those funds.
So from there on, from August 2007 until the Lehman Brothers' collapse, the crisis was brewing underneath. And we couldn't actually put our finger on it, but growth had gone down at the time of the funds' closure. And then it picked up, and things were sort of stumbling along. But we had, you know, one incident after the other. And it was in the making.
5. Slate: Lessons Learned by the IMF?
6. Soundbite (English) IMF Managing Director Christine Lagarde:
I think the fund has learned a lot from the crisis, as many other economists and many people have. There was a complete rethink of macroeconomics. And under the leadership of Olivier Blanchard, there was a determination to reassess, to review, to identify what had been missed. And I think it's from there on that we developed our efforts to capture the connections between the financial markets and flows, the capital flows, and traditional macroeconomics, and the impact and the connections and the interconnections and the spillovers and spill-back. I mean, those words were not in frequent use before that.
So I think that was number one. Number two, I think that the fund has changed also because it was precipitated into being a firefighter of first order, because we had to deploy resources right, left, and center in many countries. Particularly in Europe, of course, but not in Europe.
And that led us to revisit policy recommendations to be both less detail-oriented and maybe broader in our recommendations, bringing in fiscal monetary policy recommendations, as well as structural reforms. And I think we did more work on structural reforms and the impact of structural reforms than we had in many years before.
I think, since that-- and that is probably a more recent development-- we have also looked at different facets of our economies whenever it was macro critical. And that led us to look at issues such as impact of climate change, such as gender and economics, such as excessive inequalities, such as governance and corruption, for instance, and to be as aware as we can to try to anticipate where the next crisis will come from and what can be achieved to deliver on our mission, which has to do with financial stability, which has to do with growth. So in that way, the fund has changed.
7. Slate: Are we Safer Now?
8. Soundbite (English) IMF Managing Director Christine Lagarde:
You know, the financial system, the traditional financial system, is certainly stronger, better capitalized, less leveraged, with better liquidity buffers. And I think that the supervision function is also much stronger, better equipped, probably more competent. And the level of awareness to crisis causes is higher.
But because we don't know where the next crisis will come from, we have to continue to be very, very attentive, particularly to the shadow banking system, particularly to the role that fintech will play in the financial system moving forward, with stability in mind, not the view to restrict innovation, not the view to keep the status quo, but with in mind the imperative of stability.
9. Slate: What May Cause the Next Crisis?
10. Soundbite (English) IMF Managing Director Christine Lagarde:
Everything because, you know, if I learned one thing over the course of my life in different positions, it's that it's never going to come from where you expect it to come. And you know, where we expect it to come reasonably here now is excessive tightening of monetary policy, which would cause significant currency valuations, the significant increase in the cost of financing, capital flow moves that would leave heavily indebted sovereigns and corporates at risk, that would impair growth and development. That's the sort of natural, intuitive cause for concern.
The second intuitive cause for concern at the moment is the break on growth that increased trade restrictions by way of tariffs and tit-for-tat restrictions on trade and investment could have. But it could come from many other places that we simply don't know about today. So we have to have our eyes wide open and have a radar screen as big as possible so that we can see it coming when it comes.
11. What can Policy Makers Do?
12. Soundbite (English) IMF Managing Director Christine Lagarde:

They should have a big radar screen, and they should listen to all views and be attentive not only to the traditional channels of information, but be very attentive very broadly.
13. Would it have been different if Lehman Brothers had been Lehman Sisters?
14. Soundbite (English) IMF Managing Director Christine Lagarde:
You know, I've said that for two reasons. One is I think that diversity on the workplace and on the trading floors is going to generate better thinking, more questioning, more doubts, and a better quality of assessment. If you only bring men together, or if you only bring women together, or if you only bring the same breed of people, they're going to come up with similar thinking. So to create the diversity that will generate variety, plurality of views that will be confronted and debated to arrive at something better I think is a necessary risk-mitigating factor, number one.
Number two, I think, in the world of finance, it is often demonstrated, including now by IMF research, that when you have more women on the board, more women in the banking system, more women in supervisory position, you tend to have a better attention to risks, more precautions being taken, probably a less risky approach in terms of portfolio management, for instance. That has been demonstrated by research. So I think, you know, for both reasons, diversity and more attention to risk would have been procured by more sisters than they were, only brothers.
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