The head of the International Monetary Fund, Dominique Strauss-Kahn, says without a slimming down and restructuring of the banking system there can be no economic recovery. Strauss-Kahn spoke at a forum at Washington's Georgetown University.
Strauss-Kahn said the current crisis is unique because it is global and impacting all the major economies. He said what began as a banking crisis in the United States quickly spread to the point where necessary credit is no longer available worldwide, and economies in Europe, Asia and the Americas are contracting.
"As long as the financial sector is not restructured, which means it has in some way to shrink, and some part of it has to just disappear," said Dominique Strauss-Kahn, Confidence has to be restored by recognition of all the losses [they have incurred]. Until this has been done confidence will not come back."
Strauss-Kahn, a former French finance minister, applauds the fiscal stimulus packages being implemented in Europe, China and the United States. But he said increases in government spending by themselves are not enough.
"If there is no restructuring of the banking system, then all the money you put into a stimulus will just go into a black hole," he said.
Essential to bank restructuring, Strauss-Kahn said, is a write down of all bad loans. He endorsed the proposal for creating a special bank to absorb the billions of dollars of bad loans incurred by U.S.-based banks.
In an effort to promote restructuring, the U.S. government has already provided billions of dollars to the banks. But credit remains scarce and normal lending operations have not resumed.
Investment banker Roger Altman said during the 17-month financial crisis the Western-style banking system has collapsed. He said the financial excesses and credit squeeze have done enormous damage to the U.S. model of how a market economy should function. Altman said the crisis is not yet over.
"It is this downward spiral which is plunging the financial sector into this state [condition] where the question of nationalization is being raised," said Roger Altman. "It is difficult to be optimistic about what we conventionally think of as banking."
Strauss-Kahn appealed for closer global cooperation to combat the crisis . He said much work needs to be done to make good on the promises of cooperation pledged by leaders of 20 advanced and developing economies last November in Washington.