Dan Richards is president of Strategic Imperatives. He is a faculty member in the MBA program at the Rotman School at the University of Toronto.
While attending the American Economic Association meeting in Atlanta this month, I sat down with Olivier Blanchard, chief economist at the International Monetary Fund. He joined the IMF in September, 2008, just as the global financial crisis was taking shape and is on leave from the Massachusetts Institute of Technology. Here's his perspective on some of the key issues.
Where we stand today
We have turned the corner and the most acute part of the crisis is almost surely behind us.
Now there are issues we have to deal with to make sure the recovery continues. There are new challenges that are quite different from those we faced a year or so ago.
Where we were a year ago
One of the big decisions was to have much larger fiscal deficits because it was feared that private demand was low.
Larger spending or lower taxes were called for - whatever it took to basically push people to buy. It was needed but at the same time the numbers were scary. We had to think about fiscal deficits.
The same thing was true on the monetary front. The central banks by then had decreased interest rates to zero. They were buying assets, accepting all kinds of things as collateral and doing all sorts of crazy things by normal standards. Again, that was needed.
But we had to think about, when times became quieter, how we could go back to normal monetary policy.
On the financial side, we were trying to save all kinds of financial institutions, having understood the consequences of Lehman Brothers' failure.
New challenges ahead
The first challenge is to make sure that growth actually continues. Growth is now positive in most of the countries of the world, but not all of them.
But at this stage, that growth is from steroids - from drugs.
It comes partly from the fiscal impulse, from low interest rates, and from what we call the "inventory cycle." This is when companies rebuild their inventories that have been depleted.
All this is useful, because it creates growth. But we can't rely on it and it won't go on forever. When it ends depends on the country - maybe six months or a year. After this, something else has to come. Consumption, investment and private demand have to go up. How that happens is much less obvious.
On an exit strategy from government intervention
It's not yet the time to execute an exit strategy, but to think about how to do this and be ready to do this. Until private demand is there, if we increase interest rates and decrease the deficit, growth will stop and there will be trouble.
So we have to think about how to exit, but we shouldn't exit now. We should be ready in a year.
Government spending
There is an asymmetry between monetary policy and fiscal policy.
Exiting from monetary policy is not very hard. It is not a catastrophe to continue to keep rates low for a long period of time. For monetary policy, the course is low interest rates for as long as necessary, and then slowly increase them.
On the fiscal side, it is much harder. In many countries there are high levels of debt and deficits are enormous. That had to be. So, now, how we actually get out of the hole is not obvious. It's going to depend on the country, but it's going to be very difficult.
On escalating debt levels
I think the fiscal issues are the big issues. It's going to be an issue nearly everywhere.
I think that there is a good chance that, in some countries, the financial markets are going to look at it and say that it doesn't look so good and take their ratings down and start asking for a premium on their debt. And governments will have to take tough countermeasures. Some of the measures that were taken during the crisis can be taken off easily, but others can't.
In the end, you will have more debt. You will have the aging problem that was there before the crisis and is still there after the crisis. You will have the health care problem, which in many countries was there before the crisis and will be there after the crisis.
It's fairly obvious to us that you will have to do a lot of spending, such as on health care, and you will have to do something on taxes.
How is it going to happen? Well, the ideal situation is that governments are responsible. But sometimes it takes a push. I think when financial markets indicate that they are unhappy, governments can't ignore that.
Dan Richards