The Mañana Bankers
03/08/2012 5 comentarios
How bad do conditions have to get before the Federal Reserve and the European Central Bank take new steps to support economic growth? We are about to find out. Despite ample evidence that the economy is weakening, Fed chairman, Ben Bernanke, and Fed policy committee decided on Wednesday not to undertake any additional monetary stimulus. Then, on Thursday, E.C.B. also punted. Its president, Mario Draghi, not only failed to deliver on the bold action he signaled last week when he said he would do “whatever it takes” to save euro, he failed to deliver on any action, even a token clip in ECB’s benchmark interest rate. (source: Editorial – NYTimes – 03/08/2012)
Instead, he said that central bank purchases of government bonds in Spain and Italy would depend on those countries’ adherence to commitments to restructure their budgets and economies, an echo of self-defeating austerity arguments advanced by Germany in the face of deepening recession. While Draghi expressed readiness to intervene, he did not outline how or when aid would be delivered, sowing doubt instead of confidence. The markets were generally calm on Wednesday after Fed announced its wait-and-see approach, in part, because Fed dampened investor disappointment by strongly indicating that it would act soon. But markets were rocked on Thursday by Mr. Draghi’s perceived flip-flop, with stocks dropping and bond yields rising again to dangerous levels on Spanish and Italian debt. That means trouble for everyone. Euro crisis is arguably the biggest threat to United States economy, as recession in Europe saps growth here and imperils globally interconnected banking systems. Even short of calamity, rocky stock markets are bad for growth and jobs, in large part because corporate executives often tie their plans for expansion and hiring to company’s stock price. All of which raises the question: What are Bernanke and Draghi waiting for? Slower growth? Higher unemployment? Lower output? In United States, growth in second quarter of the year came in at 1.5%, down from 2% in the first quarter and 4.1% at the end of 2011. Joblessness is stuck above 8%, and that figure understates the weakness of a job market that is also plagued by low-wage and part-time work. Manufacturing has slowed, while housing, the traditional linchpin of economic recovery is, by Fed’s own analysis, still depressed. Europe is in even deeper trouble, several countries in or near recession, unemployment in double digits.
Bernanke and Draghi are justifiably concerned that their crisis-fighting tools, which boil down to various ways to lower borrowing costs, will, at best, only ameliorate rather than reverse the current economic slowdown. Even so, that could make a positive difference. Of course, they are right that full recovery will require action by elected government officials. In United States, Mr. Bernanke has told Congress repeatedly that near-term stimulus measures should be coupled with longer-term plans for deficit reduction. Congressional Republicans, who do not seem to want economy to improve before Election Day, have refused to heed the advice. In Europe, Mr. Draghi has stressed to little effect that monetary policy cannot substitute for Europeanwide institutional reforms that are needed to hold the euro zone together, including a banking union. It would, indeed, be better if the monetary policy were combined with fiscal policy and structural reforms. But elected officials are balking, and, in the meantime, the entire global economy is slowing given weakness in both the United States and Europe. Central bankers have the autonomy to act and the tools to help the recovery. It is past time to use them.