Central Banks Seen Participating in Big, Risky Experiment

Wednesday, 12 Dec 2012 12:44 PM

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While the world’s countries can’t agree on internal fiscal policies, let alone coordinate with their neighbors, central banks have moved in tandem to stimulate the global economy in a very synchronized and arguably risky experiment.

Tax and spending issues represent hurdles to progress in the United States, Asia and in Europe particularly, where even though most countries share a single currency and central bank, talks to coordinate everything from banking supervision to budgetary cohesion often end up with deal-with-it-later responses.

Since 2007, however, central banks worldwide have flooded the global economy with a combined $11 trillion in fresh liquidity, often after conducting secret talks with one another, The Wall Street Journal reported.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

More stimulus measures, ranging from rate cuts to slashing costs tied to swap lines to more powerful measures such as quantitative easing — liquidity injections with freshly printed money carried out by purchasing bonds held by banks — have pushed down borrowing costs and stimulated stock markets to juice economies.

Driven by their research from the Great Depression, when central banks failed to spur enough growth and instead prolonged a downturn, central bankers are committed to pumping up their economies even if it means stoking inflationary pressures down the road.

If they succeed, experts point out, they will have steered the world from the edge of abyss.

“Will history decide they did too little or too much? We don’t know because it is still a work in progress,” Harvard Economist Kenneth Rogoff told The Journal.

“They are taking risks because it is an experimental strategy.”

Every two months, central bankers from around the world meet in Basel, Switzerland, to discuss policy, where many monetary authorities feel they alone are shouldering the world’s financial burdens while fiscal authorities avoid making politically unpopular decisions such as raising taxes or cutting spending.

“Central banks find themselves caught in the middle, forced to be the policymakers of last resort. They are providing monetary stimulus on a massive scale,” said Jaime Caruana, general manager of the Bank for International Settlements, The Journal added.

“These emergency measures could have undesirable effects if continued for too long.”

Others point out that it’s time for central bankers to stand down.

“Central banks cannot solve structural problems in the economy,” said Stephen Cecchetti, who runs the Bank for International Settlements monetary department, according to The Journal.

“We’ve been saying this for years, and it’s getting tiresome.”

Even former central bankers themselves agree that monetary policy has done all it can, including Alan Greenspan.

“I’ve not commented about Fed policy since I got out of office, but I will say this: that whatever the Fed is doing, whether you like it or not, it’s not actually, in my judgment, having a major effect,” Greenspan told CNBC.

”The issue here is that they have created a very large expansion to the balance sheet that’s ended up as reserves on the asset side out of all the commercial banks and savings banks and that’s not being re-lent. And unless and until it is re-lent, it will not have a significant impact on the
economy,” he added.

”I think the Fed is not as big a player as most people think.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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