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12 August 2011

FT: Central banks - Two against the world


This FT analysis comments that the action this week leaves behind many questions as to whether central banks have done enough, what more they can do, and whether they can survive the powerful internal and external pressures which momentous decisions unleash.

Looked at another way, central bankers are the surgeons of the world economy. Their problem is that the oncologists and radiologists – the governments that could use their budgets to support the recovery or lend to Spain and Greece – have gone on strike. The surgeons have two choices: they could keep on operating, trying more radical forms of monetary policy, although there are limits to what that can achieve. The alternative is straying towards fiscal policy – prescribing drugs or radiation – and risking the malpractice suits that may result.

If the US economy does continue to weaken, the Fed will have to do more, as critics such as Paul Krugman have long called on it to do. The central bank always has the power to create money, buy assets and generate inflation – but the Fed will constantly be restrained by a feeling that much of that is really a job for Congress.

In Europe, the ECB is taking even more profound decisions. By buying the debt of Spain and Italy it is arranging for the whole euro area to lend to troubled countries within it – a highly political choice. Thomas Mayer, chief economist at Deutsche Bank, says: “This is the ECB doing exactly what it was not supposed to do. The fathers of the Maastricht treaty [on economic and monetary union] went out of their way to build a big firewall between the ECB and government finances – and that has not worked. The ECB has been dragged into the fiscal arena and is now a combined monetary and fiscal agent.”

Full article (FT subscription required)



© Financial Times


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