Central bank stimulus won’t solve the crisis

July 9, 2012

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Following another weak U.S. jobs report, fear abounds. The sense is that the global economy is teetering and central banks can’t do much more. The point is that in the developed world they should not do more. Monetary policy risks becoming harmful if pushed further.

Mario Draghi, the President of the European Central Bank, hinted at the limits of policy on July 5. The interest rate doesn’t work so well when demand for credit is lacking, he said. In other words, you can create pools of cheap money but you can’t make nervous borrowers drink. Nor did it seem that he was thinking of other spurs, such as quantitative easing. It’s “not obvious there are measures that could be effective in a highly fragmented area”.

The hard truth is that Draghi is ill-placed to stimulate growth in the euro zone. Confidence is the problem. The ECB cannot resolve a crisis of insolvent and uncompetitive states locked in a union with solvent and competitive ones. Only politicians can do that. Then the growth horses might drink.

The Bank of England is trying, but it’s hard to imagine the newly launched 50 billion pounds of quantitative easing, taking the total to a colossal 375 billion pounds, will do much for growth. Of course, the BoE could emulate the U.S. Federal Reserve and buy mortgage-backed securities. But UK house-buyers might still be reluctant to drink.

In emerging economies, central banks are far from the end of the stimulative line. China has just cut its lending rate to 6 percent; Brazil is now down from 12 percent last summer to 8.5. Emerging economies can and will ease further, profiting from falling global inflation. But that helpful fall in inflation could itself be undone if the West chooses to push harder on the monetary string. Further QE would push up bonds, commodities and equities, pleasing financial markets – but driving up oil prices and hurting consumers.

In 2008, central bank QE was essential. Now its power is diminished. But the global mess is less grave than then. Recovery proceeds, though at a disappointing pace. But not all the world’s woes can be solved by more and more cheap money.


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Repaying debt is not a crisis. The world governments issued $60 Trillion of debt and the debt must be repaid or reneged. Either way the money supply must contract over the coming century.

Posted by mulholland | Report as abusive

If the entire Financial Industry lasts beyond 21st December 2012 then perhaps we ought to start building more homes. Or rather a spate of building affordable housing.

On 25 and 40 year fixed term mortgages of low interest.

This could upset people who already have homes or mortgages. So let them re-mortgage or just ask them not to be too selfish.

Full banking and Government reform is required to avoid a total financial collapse but one small step at a time.

Posted by DR9WX | Report as abusive

The Bank of England is indeed very trying and currently on trial.
Mortgage backed securities? Only after rigorous Regulation is in place. They are what started the current crisis and were rated AAA by the rating companies. They were of course junk.They were wrapped in a cloak of “sub-prime” and wow, they were indded that! Flogging mortgages that have no chance of being repaid is not good practice as millions of people worldwide have found out the hard way.
A National Development Bank backede by Government is what we need, one institution dedicated to funding SME’s who can’t get loans from High Street Banks. The CEO would not be paid £20 million either. Besides, the High Streeters/Hooker Banks will be tied up in current inquiries, hopefully undertaken by Judges, not Parliamentary Committees with no teeth, after hearing “evidence” which within 48 hours is exposed as a series of lies.Let’s put our economy straight, then we can have a National Homeowners Bank againGovernment Bank for the average person on £20,000 a year. HIGH street will look after the rich at a price.
The bottom line is, earn money before you spend it.

Posted by antipyramid | Report as abusive