John Lipsky has ridden many economic and financial waves during his long career at the International Monetary Fund and on Wall Street.
He started at the IMF overseeing international capital markets, exchange rate surveillance, and more, for many years leading to his role as First Deputy Managing Director during the global financial crisis. He started his Wall Street career at major Wall Street firms, JPMorgan, ChaseManhattan Bank, and Salomon Brothers holding postions as chief economist at Salomon, and as Vice Chairman of the JPMorgan Investment Bank. He continues his work as Senior Fellow at the Foreign Policy Institute at John Hopkins Uninversity’s School of Advanced International Studies in Washington. He’s still a very active participant in all of the big global isses.
I sat down with John on the last day of the IMF and World Bank Group’s Annual meetings last week. We started on our conversation going over the IMF’s World Economic Outlook report at the beginning of the week, showing resilient economic growth despite tariffs. We went on to John’s fascinating - and educational - explanation of how the IMF actually works, what its responsibities are, the power it does and does not have over its members and more.
We took a deep dive into the findings of the Global Financial Stability Report also out at the beginning of the week where hot topics are presented like stablecoins and central bank digitial currencies and the benefits and risks they may pose as the world prepares for the digital unknown.
John hearkened back to his work at the IMF and on Wall Street to discuss what was one of the most important topics in the GFSR: the rapid growth of non-bank, or “private” credit and the risk it may pose to commercial banks. “What is uncertain is… about how much leverage is involved in the creation of private credit and… who holds the exposure.”
”In other words, are banks providing credit to institutions that hold private credit? So is it possible that there is a backward linkage, not just from private credit to, from private debtors to private creditors, but there’s also potential linkage to the banking system,” he asks. “And the concerns are if credit quality in these markets suddenly deteriorates, is it going to cause pressures for monetary accommodation that have been unforeseen?”
So dive in and hear what John has to say about the risks, what they could even mean for global financial stability. As I said he has ridden many financial and economic waves and is well positioned to look at what could happen next.
Introduction: 00:00:06:23
Kathleen: So I’m very happy to welcome John Lipski. John Lipski, I’m going to let you introduce yourself:
John 00:00:33:12
Okay. Kathleen. Currently I’m the senior fellow at the Foreign Policy Institute at Johns Hopkins University’s School of Advanced International Studies here in Washington. All right. Previously, I was first deputy managing director at the IMF, during the global financial crisis. And prior to that, I had, a career in the private financial sector. or.
From Spring-time for tariffs to an unexpectedly good performance 00:01:11:15
But I guess if you think from the Spring meetings when the big surprise wasn’t a surprise, that, oh my gosh, we’re having tariffs this this President Trump’s going to go crazy with them. And Trump’s these tariffs are going to hurt the economy. They’re going to cause inflation. But it turns out that maybe that’s not exactly what happened. And so this sense that well so where is the economy.
Less than great expectations but a solid result 00:01:32:16
Let’s start with tariffs. So the way most folks are looking at it, the buzz word is resilience. The economy’s not just here but globally proved to be somewhat more resilient than had been expected. But that’s in a context. Don’t forget that’s in a context in which the IMF had foreseen an extended period of slower global growth than had been the case previously. So, at best, <this can be> seen as a bit better than had been expected. But what was expected was not great, right? But on the other hand, it’s not bad. And one of the real surprises is not only that growth held up better than expected, but that inflation stayed lower than had been feared.
Still waiting for the ‘other shoe’ to drop… 00:02:22:12
It was widely anticipated that the tariffs were going to be disruptive, both of activity. But also to push prices higher. There is an active, active, debate still going on, and you could have heard it in the halls, in the meeting rooms this week here in Washington. Is it because we overestimated the risk of inflation, or is it we misjudged how long it was going to take to show up?
Growth ‘OK’ but too-slow for rich-poor divide 00:02:51:06
And you’ll find arguments on, on both sides as a result. The general view is that growth is likely to be sustained globally. It’s going to stay at more or less the same pace as at present, but there are substantial risks that could appear and worries that those risks are mostly pointed to. The downside. So, mostly pointed to the downside. But let’s point out that, you know, if a lot of people say, oh, gosh, the forecast for growth, GDP growth this year is 3.2%. Yeah. And 3.2% seems pretty decent. At the same time, within global growth, you break it down and that’s where it gets trickier because, because you think, well, how are the poorest countries doing? How are the richest countries doing? Are the richest countries going to be going fast enough to, to buy stuff? Oh, especially with tariffs in the way from the poorer countries that depend so much on the things they’re exporting.
US growth to lead China expected to slow 00:04:01:11
So in general, the expectation is that as this year, the of the advanced economies, the US will continue to do better in part, as you know, because current fiscal plans imply a rather substantial fiscal impulse, a boost to the economy in early 2026, both in the household side and on business side, so that has led to the, I’d say, a general sense that once again, there are risks, but likely the US will lead the advanced economies and the emerging economies, there’s an expectation that growth in China is going to be slowing slightly. It’s going to be under 5%. According to the fund forecast that India will be the fastest growing of the large, emerging economies
The IMF has resources and lots to do 00:04:58:19
I just have to come back to this, 1200 economists at the IMF . There’s 190 nations. That’s a plenty of economists per country. If you’re doing in-depth studies of both the economic situation and policies of of each of those countries every year, the teams that tend to be 4 or 5, individuals that will focus on, on each individual country, so that it’s unique, that’s a unique resource not only for the country itself, but also for the other members of the of the IMF.
The IMF process 00:05:37:22
After all, in formal terms, these reports are presented to the Executive Board, which is the representative of the political representative of the member countries. And so this process allows, uniquely allows all 190 member countries, the 191 member countries. I know I left 190 countries to, in essence, comment on what they think is appropriate and successful, or needs to be attended to by the other member countries.
Is the IMF’s advice binding? 00:06:34:10
Our recommendation is that you, you know, cut, well, don’t cut taxes. Raise them? I mean, what actually is that? The under the under the articles of agreement of the IMF, which is the Constitution, in essence of the IMF, individual countries, the member countries, upon signing, do have obligations. And one of the obligations is to run policies that are not destructive of the international economy in general. So this is an opportunity and looked at on one level for the staff and the other members to express where they think they can provide advice. And it could be that that advice is relatively strong, namely, that they would see that the actions of a of a country seem detrimental or not in fulfilling their obligations as members. …if there’s a program of support, especially financial support, those programs will be quite specific. And they will involve what are known as performance criteria. Because in essence, the IMF, which is the members, will be loaning money to the country with the program country with the promise that it will be paid back because the fund operates as a revolving fund. So what is the what is the collateral, if you will, for this provision of funds? The collateral are the policies that the country, the program country are going to carry out. And those are specified very, very clearly in so-called performance criteria in which access to the fund depend on the country performing as it’s supposed to. In that case, the obligations are quite clear and quite specific.
The challenge of dealing with large powerful members… 00:09:59:11
Well, the clear admonition from the membership to the staff is to, if you will tell it like it is and the staff reports obviously tend to be couched in, clear, careful wording. But I will say, where they identify problems or difficulties with policies. But again, that that is the grist for the discussion of the members. And in the end, the membership, takes a decision with regard to the judgment of the policies of the individual countries. So what do you think is the gist and the grist of what has come out of all the discussions this week?
WEO offers outlook and advice 00:10:27:19
Well, that a lot of things. But the, in, in the terms were discussing, as you can read in the World Economic Outlook, that there’s some broad suggestions that especially for the advanced economies, instance specific advanced economies, there’s a need to be looking towards fiscal consolidation and reduction in deficits and some discussion about how that how that might be done. There’s a, need to examine or point out the need in many countries to deal with issues of debt sustainability because, sovereign debt and general debt has become extremely high in many countries as we know. And third, there’s an admonition to pay attention to structural factors needed to promote economic growth, in other words, reforms, growth, promoting reforms in that those are broad admonitions in the in the current context.
The AI impact 00:11:30:17
Now, there are some rather more specific things, okay, that have been point that are pointed out, been pointed out and are certainly, in broad discussion, not just in the formal, meetings, but in the hallways and, informal meetings. And those are, for example, we’ve seen the, huge, impact of artificial intelligence on markets and potentially on economies. And, this is, there’s, it’s quite fantastic, really, to see the amount of investment that looks like it’s going into AI. And the implications, for example, for things like need for power, power supplies for power developed. Yeah. These that that they need a lot of power. But the so the potential impact is very large in a very short span of time with the promise that it is going to be potentially transformative or excuse me or extremely, impactful, economic performance.
The digitization of finance 00:12:41:10
Yes. So that’s, that’s one the level of promise, the level of commitment and the level of uncertainty is something I don’t think I’ve ever seen before. At the same time, we can see, let’s call it the digitization of finance and the development of new formats and stablecoins. I’ve seen so many white papers and so many people speaking over it, and I think everyone’s looking at it like we know it’s happening.
New procedures, new risks 00:13:13:05
It’s going to change the world of banking, perhaps, but it’s we’re moving forward. So what are the risks and what are the rewards? So let’s start there. The we’ve already been seeing over the past two years, the relatively rapid growth in the non-bank financial institutions. Yes, and intermediaries. And so we’ve seen, in especially in places like the States, but elsewhere that the centrality of the commercial banking system has been reduced relative to the non-bank financial intermediaries and and to securities markets.
GSF: the report on global financial stability 00:14:13:15 - 00:14:36:11
I see. I always it’s okay. I have the financial I do that all the time. That’s all right. It’s all right. But it has to do with financial stability. And it’s global. And it’s a very important report. Watched very closely now, not just in this place like, you know, this sort of, an institution trying to help people stay on the right track, countries stay on the right track, it financial markets. DIGITAL- And a lot of people watch this. Of course, it’s a it’s an analysis and report on developments in international financial markets. And from that let’s talk about this digital these digital forms for a minute. And that are of course referenced in the GFS. Are we know about crypto. Crypto is a financial instrument that has no backing, and operates on an open ledger. Stablecoins, a format that has backing and operates on an open ledger, tokens that has backing and operates on a closed ledger. In other words, somebody is in charge. And there is the, central bank digital currencies, which is just a digital form of central bank money. It’s not clear to me exactly what the use case for crypto is other than a format for speculation and perhaps illicit, transactions. Stablecoins similarly, as Strike me as, potentially, similar, but because they depending on the backing and the credibility of the backing, this seems, less suspect. This does not seem so speculative. Yes. Tokens strike beef such as that are could be issued by a conventional financial institution. A well known bank, a global bank, strikes me as potentially very useful.
Preparing for the digital unknown 00:16:22:18
Okay, not not necessarily. For example, to an American citizen saying, why do I want a stablecoin or a dollar token when I can have a dollar, a dollar account? I don’t need a token. But internationally it could be extremely, extremely interesting. Any rate, what’s important is that there’s a sense that these things are being developed at a high rate of speed, that there’s going to be adoption and that there’s difference in the in in the major economies as to which route they’re taking.
Central banks try to set control parameters 00:17:00:00
The US has made it has with the genius Act is promoting a token stablecoins and saying we are not going to have central bank digital currencies. In Europe, they’re committed to central bank digital currencies and have no legit no equivalent legislation like the Genius Act in China. They have a digital currency and ban crypto. So this is an important development okay. And in global markets they’re different major economies going down different roads. So that’s and things moving at a high rate of speed.
And private credit growth is jumping, too- 00:18:01:11
Another aspect of course, and especially here, but not just in the United States, is the rapid growth of private credit. Well, private credit is, certainly, just as quickly because I think private credit involves a lot of things How big of a threat is it to commercial banks? Because the GSR indicated that there’s a growing potential risk to how they’re being developed. And, and so what is the conclusion, of what needs to be done, if anything? Well, ‘the what’ is uncertain about how much leverage is involved in the creation of private credit and who is who holds the exposure.
Wary of financial connectedness- 00:18:29:21
In other words, are banks providing credit to institutions that hold private credit? So is it possible that there is a backward linkage, not just from private credit to, from private debtors to private creditors, but there’s also potential linkage to the banking system…And the concerns are if credit quality in these markets suddenly deteriorates, is it going to cause pressures for monetary accommodation that have been unforeseen?
Trying to understand something new that is very fast-moving 00:20:46:11
You know, they’re working too much at the IMF and the with the Global Financial Stability Report, and it’s fine. And all these these are people who know what risk is about. So for their own, businesses, they want to make sure they’re issuing or buying the right kind of credit. It wasn’t that long ago we had a, a financial crisis based on the, as is often the case that there’s leverage in the in the system that is unappreciated and an unrecognized.
Can you trade what you do not understand? It’s been done before 00:21:16:12
Back then, it was through the, the synthetic, the close. Yes. Collateral loan obligations that people held them without understanding what was inside them. Didn’t know, in essence, didn’t know what they bought. Moreover, they went and bought insurance on the value of those instruments from an insurance company that didn’t have the capital to pay off. So the net result was a freezing of the interbank system, in which banks refused to lend each other because they, if they didn’t weren’t certain about what was in their own balance sheet, they sure didn’t know what was on the other guy’s balance sheet. The market froze and, we saw that. We saw the results. Now we face the strong growth of private credit. Is it their leverage that is, unrecognized, which means, if remember what if we could go back to the analogy of the subprime debt, if you remember, initially Ben Bernanke’s saying it’s subprime is just not that big.
Direct VS indirect effects and knock-ons 00:22:30:20
And the answer was, that’s right. But it had infected all these instruments that were very big. And eventually froze. Now we can say, well, the private credit, if they did, if they go broke, it’s, it’s there’s there isn’t so much there’s no leverage involvement. Are we sure? Yeah. Yeah. Are we sure? In other words, are people buying private credit themselves leveraged such that if the, the private credit turned out to be less creditworthy than had been anticipated, is that going to happen?
Understanding is the first step for prevention 00:23:14:04
So maybe we wouldn’t have a great financial crisis. Maybe we would just have a medium financial crisis. Well, we don’t have to. We don’t have to be so dramatic. But yeah, surely when you see something growing so rapidly, it’s it’s important to try to understand clearly why and whether there are unforeseen risks. Yeah. And I would I can give a little, what I call promo, for the, you know, the Global Financial Stability Report, because this is a lot. And, and I think for the most part said in language most everybody could understand indeed. Yeah, that’s part of the goal. Right. Exactly. So the the important thing is at the, at a first and a first pass to understand what’s going on and to see to make sure that we’re cognizant of the potential financial risks. Not that there’s something wrong, not that there’s a crisis inevitable.
The reports are meant to be read and used 00:24:31:17
Let me give a plug to the third benchmark publication fund. We’ve said World Economic Outlook, the Global Financial Stability Report, and the Fiscal Monitor. If you want to understand what’s going on in the fiscal policy and fiscal debt of the advanced economies, take a look at the IMF Fiscal Monitor as well.
John Lipsky
John Lipsky served as First Deputy Managing Director of the International Monetary Fund from September 1, 2006 to August 31, 2011.
Before coming to the Fund, Mr. Lipsky was Vice Chairman of the JPMorgan Investment Bank. In this position, he advised the firm’s principal market risk takers, published independent research on the principal forces shaping global financial markets, was actively engaged with JPMorgan’s key clients, and represented the firm around the world with senior public and financial sector decision makers.
Previously, Mr. Lipsky served as JPMorgan’s Chief Economist, and as Chase Manhattan Bank’s Chief Economist and Director of Research. He served as Chief Economist of Salomon Brothers, Inc. from 1992 until 1997. From 1989 to 1992, Mr. Lipsky was based in London, where he directed Salomon Brothers’ European Economic and Market Analysis Group.
Before joining Salomon Brothers in 1984, he spent a decade at the IMF, where he helped manage the Fund’s exchange rate surveillance procedure and analyzed developments in international capital market. He also participated in negotiations with several member countries and served as the Fund’s Resident Representative in Chile during 1978-80.
In 2000, he chaired a Financial Sector Review Group, established by former Managing Director Horst Köhler, to provide the IMF with an independent perspective on the Fund’s work on international financial markets.
Mr. Lipsky’s current professional activities include serving on the Board of Directors of the National Bureau of Economic Research. Prior to joining the IMF as First Deputy Managing Director, Mr. Lipsky served as a Director of several corporations and non-profit organizations.
A graduate of Wesleyan University, Mr. Lipsky earned a bachelors degree in economics. Subsequently, he was awarded an M.A. and a Ph.D. in economics from Stanford University.
