IMF "sleepwalking into another global economic catastrophe."

Philip Inman in the Observer: “The complacency is palpable. Despite some dire warnings about risky trading and the threat posed by overly indebted banks, the mood last week at the International Monetary Fund’s spring conference was one of calm.”
“We have turned a corner since the financial crisis, the Washington-based organisation says. Normality is returning. And this will mean establishing normal interest rates (up from 0.5% in the UK to 2%-3%, according to Mark Carney), restoring normal inflation and generating steady growth in the west of 2%-3%.
Officials expect the US to lead the way. As consumer-in-chief, it will propel the world economy and global growth much as it has in the last 60 years. The dynamism of the US economy and its huge capacity to buy stuff will make life better for everyone, goes the rather tired argument.
The legacies of the crash will be disposed of quietly. Having spent north of $3 trillion pumping funds into its economy and maintaining the cheapest borrowing costs in more than 100 years, the US central bank will find a way to sell this money back to the market, while at the same increasing rates, without much more than a ripple disturbing the markets.
Central bankers in London, Frankfurt, Tokyo and especially in the Federal Reserve will make sure it all works smoothly.
….George Osborne revealed himself a cheerleader for the technocratic answer to debt and financial risk. The chancellor declared on Friday that central banks and regulators would make sure the west’s economies had a bright future, as they withdrew the post-2008 stimulus and locked down risky lending.
It would be a neat trick. And the betting must be that it will fail.
It will fail because policymakers will be unable to cope with more fundamental forces at work.
First there are the debts: government debts and household debts across the developed world. Put simply they are still too high. Bank debts in the eurozone and corporate debts in many emerging-market economies are similarly at risk from small financial shocks.
The eurozone poses a particular problem….
….Another part of the problem is the legacy of savings generated in Asia. That savings glut has had to find a home, and one that provides a good return.
There is about $70tn-$80tn invested in assets of various kinds from government bonds to property and exotic derivatives. The IMF highlighted how a $300bn market in US credit mutual funds in 2000 has grown to $2tn today. These funds are invested in junk bonds that are difficult to sell when the panic starts, making the panic even worse.
Andy Haldane, soon to be chief economist at the Bank of England, told an audience of economists in Toronto last week that we were “still in the intellectual foothills in terms of dealing with potential financial risks”. He pointed out that while there was some good news – for instance that banks in 2006 had borrowings worth 32 times their balance sheets and now “only” about 21 times – the problem had shifted to exotic derivatives, which accounted for $19tn of bank portfolios in 2006, but total $31tn today. Then there is the fact that 90% of trades in New York are generated by algorithm-driven computers, making the financial system prone to extreme volatility.
Savings are generally seen as benign and the result of virtue and thrift, but they are dangerous when handed to investment managers under pressure to produce high returns.
The IMF wants a financial system with airlocks that can contain panics, but knows there are instruments of contagion everywhere it looks. Its boss, Christine Lagarde, has warned of the threats, but without accusing those whose complacency she fears. It is time for some straight talking.”