IMF’s warning By Alex Hawkes - Thursday 7th April 2011

THE global economy is facing a flock of “black swans”, the head of the International Monetary Fund has warned. Dominique Strauss-Kahn told students in Washington on Tuesday night that “great uncertainty still prevails. Indeed, numerous black swans are now swimming in the global economic lake”.

Strauss-Kahn was referring to the theory outlined by writer and investor Nassim Nicholas Taleb, who has argued that investors take too little account of unpredictable high-impact events. Black swans can be either positive or negative.
Strauss-Kahn`s reference to black swans is cryptic, since by definition a black swan event is so unpredictable it should be invisible to forecasters, and make a mockery of their forecasts when it breaks cover.
In more conventional forecasting territory, Strauss-Kahn said that European countries need to do more to deal with their debt crises. “Ultimately, Europe needs a comprehensive solution — based on pan-European solidarity — to deal with lingering financial sector and sovereign debt problems. Progress has been partial and piecemeal so far, and this is a key risk for the crisis countries as well as for overall recovery in Europe.”
Strauss-Kahn also said that the financial crisis had made the case for taxes to prevent risky behaviour in the finance industry.
“We need a tax on financial activities to force this sector to bear some of the social costs of its risk-taking behaviour. Overall, I would say there are two broad conclusions. In designing a new macroeconomic framework for a new world, the pendulum will swing — at least a little — from the market to the state, and from the relatively simple to the relatively more complex.”
He also said that inequality may have helped cause the financial crisis. “Inequality might have been one of the `silent` causes of the crisis. On the eve of the crisis, inequality in the United States was back to its pre-Great Depression levels. Like the Great Depression before it, the Great Recession was preceded by an increase in the income share of the rich and a growing financial sector. In these circumstances, borrowing could have acted as a safety valve for ordinary people to increase living standards — but on borrowed time. Over the longer term, sustainable growth is associated with a more equal income distribution.”
Growth in rich countries is too low and unemployment too high, he said.
“At the same time, the emerging market economies, especially in Asia and Latin America, are powering ahead, and dealing with overheating. The low-income countries proved remarkably resilient, but are now being hit by high food and fuel prices,” he said in his speech at George Washington University. — The Guardian, London


Source : http://www.dawn.com/2011/04/07/imfs-warning.html