April 6, 2014
The global economy seemed to be on the mend when the International Monetary Fund met for its spring meeting in Washington 10 years ago. Alan Greenspan had cut official interest rates in the US to 1% after the collapse of the dotcom boom and the world’s biggest economy had responded to the treatment. Gordon Brown was chancellor of the exchequer and the UK was in its 12th year of uninterrupted growth.
Companies in the west were flocking to China now that it was part of the World Trade Organisation. The talk was of offshoring, just-in-time global supply chains and integrated capital markets. The expectation was that the good times would last for ever. No serious thought was given to the notion that total system failure was just around the corner. Faith in the self-correcting properties of open markets was absolute.
When the crash duly came, a self-flagellating IMF confessed that it had been guilty of groupthink. It had either ignored the signs of trouble or played down their significance when it did spot them. The Fund has learned some hard lessons from this experience. Downside risks to the forecasts in its half-yearly World Economic Outlook (WEO) are now exhaustively catalogued.