WASHINGTON, April 4: The chief of the International Monetary Fund said on Monday that policy makers needed to do a “major regulatory surgery” to ensure financial stability and to curb inequality.

In an unusually frank speech at the George Washington University, Dominique Strauss-Kahn urged policy makers to rethink their approach and to use monetary policy to ensure financial stability.

The IMF managing director also emphasised the need to reduce growing inequality across the world.

“The old pattern of globalisation … had a dark side—a large and growing chasm between rich and poor,” he said. “The new global governance must also pay more heed to social cohesion.” Mr Strauss-Kahn noted that while trade globalisation was associated with lower inequality, “financial globalisation—the big story of recent years—increased it.”

So far, the tendency had been to downplay inequality, to see it is a necessary evil on the road to riches, but the current economic crisis and aftermath had fundamentally altered perceptions, he said.

“The lethal cocktail of prolonged high unemployment and high inequality can strain social cohesion and political stability, which in turn affects macroeconomic stability,” Mr Strauss-Kahn warned.

“Inequality might have been one of the 'silent' causes of the crisis.” On the eve of the crisis, he noted, inequality in the United States was back to its pre-Great Depression levels.

The Great Recession, he pointed out, was preceded by an increase in the income share of the rich and a growing financial sector. “Over the longer term, sustainable growth is associated with a more equal income distribution,” he said. “Inequality can hinder access to finance. It can make countries more prone to adverse shocks. It can reduce trust in institutions and encourage instability. And without a solid middle class, domestic demand is unlikely to take off.”

Mr Strauss-Kahn noted that the recent financial crisis had “devastated the intellectual foundations of the global economic order of the last quarter century,” which came crashing down with the crisis.

The Washington consensus that built the world economic order was “now behind us,” he warned.

He also repeated his caution that while the global economy was recovering the recovery was uneven and faced a high degree of uncertainty.

“The financial sector needs some major regulatory surgery. The crisis originated in a culture of reckless risk-taking, culture that is unfortunately still alive and kicking,” he warned.