Dominique Strauss-Kahn on the Financial Crisis

The sense of relief at last week's G20 summit was nearly palpable: thanks to their decisive actions over the last year, world leaders had staved off a second Great Depression. But Dominique Strauss-Kahn, managing director of the International Monetary Fund, cautions that "crises never end." NEWSWEEK's Tony Emerson and Barrett Sheridan spoke with him about the knock-on effects of the recession, from war to banking reform.

You recently mentioned the risk that the crisis could lead to war. Why raise that risk now?
The social crisis is still in front of us. That is true for advanced economies, but it is even worse for low-income countries, where the question is not just lost purchasing power or greater unemployment but life and death, starvation and refugees.

Linkages between economies helped to accelerate and spread the crisis. Have we seen the dark side of globalization?
You may call it the dark side if you want, but it is clearly a globalized crisis. The Asian crisis was only an Asian crisis, and the Latin American crisis was only a Latin American crisis. This is really a global crisis. In emerging countries, there was an idea at the beginning of the crisis: decoupling. But after a while they were hit in the same way. Today we have a global economy.

But haven't we seen some degree of decoupling? China is growing at 8 percent this year, India at 5 percent.
But that is not as good as before. You are right to say that 8 percent is huge, but they were growing at more than 11 percent before the crisis. That is not decoupling. And the Chinese authorities themselves saw the need for a stimulus package, so they didn't think there was decoupling.

As the globe recovers, will we return to business as usual, or was this a permanent disruption leading to a "new normal"?
I am more on the latter side. I think that the growth model we had [before the crisis] has been destroyed. That growth model—with the U.S. consuming, and the rest of the world providing resources for it—was not sustainable. The main question is where the new sources of growth will be. Some of the reduced consumption in the U.S. can be offset by higher consumption in emerging countries, but not all of it. And increased consumption in China will not create the same kind of demand as in the U.S. The average level of growth after the crisis will probably be lower than the level we had before.

Will there be another shoe to drop?
Crises never end. You are always dealing with the consequences of the previous crisis until you reach the next crisis. I think the policies implemented by most of the world's central banks and governments—on the IMF's advice—were the right ones, but it doesn't mean they were costless. But when the house is on fire, you need to put a lot of water on it to get rid of the fire, but then you have to mop up. But it is obviously too early to do that now.

Are the bailouts over?
I think that the peak of the crisis in the financial sector is behind us. But it doesn't mean that the cleansing of the balance sheets of the financial sector is over. Not at all. A lot has been done, but there is still a lot to do.

Is compensation the most important target for reforms?
No. Compensation is important, because it induces people to take risks that may require public intervention. But compensation is not the end of the story. Capital requirements are just as important; accounting practices are just as or even more important. But compensation [reform] has more political momentum. So for politicians it may be the right way to get at the problem, because they have some political support for doing that.