After the Great Recession, central banks undertook extraordinary efforts, but with un-extraordinary results.
The US Federal Reserve first backstopped the entire financial system, then printed trillions in reserves and pushed down long-term interest rates. Mario Draghi’s ECB did “whatever it takes” to preserve the euro by buying billions worth of government bonds. And the Bank of Japan’s aggressive monetary policy served as a cornerstone of “Abenomics” by weakening the yen to supercharge exporters.
These efforts staved off global depression. But they didn’t ignite a strong economic expansion. And now that the world’s second-largest economy, China, is slowing fast, the markets are loudly proclaiming the growing risk of another recession.
This week Japanese stocks endured one of their worst selloffs in history as the yen strengthened, even after the BoJ pushed interest rates below zero. Europe’s debt crisis flared anew. And in the US, with markets 10% down from their May 2015 peak, Fed chair Janet Yellen acknowledged that the Fed might have to slow or even reverse its plan to gradually raise interest rates.
The fact is central bankers, for all their nearly magical powers, can’t keep the global economy moving forward alone. It’s clear that elected governments now need to act by spending some of the money central banks created, either with investment projects or with tax cuts.
This isn’t a controversial claim. John Maynard Keynes warned 80 years ago that when interest rates got near zero, they would become ineffective—”pushing on a string,” as Keynes artfully put it—and government spending would be required. And Milton Friedman in 1969 argued an economy mired in a deep depression and deflation could always print money and give it away.
These solutions have something in common. They both sidestep banking systems that look less like conduits for capital and more like clogged pipes. The rapidly eroding confidence in the markets shows it’s time to give them a try.