Jon Hilsenrath | Th Wall Street Journal | August 29, 2011
After four years of fighting crises and pumping money into the financial system, the world’s central bankers are concluding that the global economy is still in a precarious position and the policy apparatus is ill-equipped to help.
The mood here in the Grand Tetons, where central bankers and private economists from around the world gather each August, was distinctly gloomy.
The angst was underscored in a blunt speech by the International Monetary Fund’s new managing director, Christine Lagarde. “We risk seeing the fragile recovery derailed,” she said Saturday. Those risks have been aggravated, she said, by the public’s sense that policy makers’ response has been inadequate. “We are in a dangerous new phase,” the former French finance minister said.
What Ms. Lagarde said publicly, several central bankers expressed privately. The central bankers’ problems are compounded by internal divisions and current realities. Several U.S. Federal Reserve officials have doubts about how much more they can do to resuscitate a U.S. recovery that is falling short of Fed expectations. Most European Central Bank officials believe the solutions to Europe’s sovereign-debt, governance and banking woes lie with elected leaders, not the ECB.
Economists at JPMorgan, in their weekly reprise of economic developments, blamed the recent global stock selloff on “a sense of policy paralysis in the U.S. and Europe, which has driven home the point that there is no cavalry to ride to the rescue.”
“Fiscal policy has turned restrictive and an additional sharp tightening lies just ahead in the U.S., while monetary authorities have exhausted much of their ammunition,” they said.
Officials on both sides of the Atlantic who orchestrated the response to the global financial crisis insist the world economy would have been worse had they not acted as they did. But it’s clear that the remedies didn’t deliver the recovery for which they hoped.
Some economists, among them Harvard University’s Kenneth Rogoff, say today’s painfully slow economic growth is the inevitable result of the massive head winds that follow a recession caused by a banking and financial crisis. Government policies, given already heavy burdens of debt on governments in the U.S., Europe and Japan, can’t overcome the relentless efforts of households and banks to reduce their debt loads.
At Jackson Hole, Ms. Lagarde called on major central banks to keep interest rate policies “highly accommodative,” an obvious reference to the ECB, which was the first of the major developed-country central banks to raise rates, most recently in July. ECB President Jean-Claude Trichet, sharing a podium with her during her remarks, gave no indication he was thinking about reversing course on interest rates any time soon, saying the anchoring of public and market expectations about inflation was one of Europe’s “major assets.”
But Ms. Lagarde also directed stern words at politicians. “There are no easy solutions, but that does not mean there are no solutions,” she said, appearing to voice more directly concerns that French officials have, so far, expressed more discretely.
Amid predictions that the U.S. and Europe may be tumbling into another recession before fully recovering from the last one, the next several weeks could be pivotal on the policy front—well before leaders from the Group of 20 major economies are to meet in Cannes, France, for their scheduled summit in November.
“I’m concerned about a risk of events this autumn,” World Bank President Robert Zoellick said at Jackson Hole.
Officials at Jackson Hole expressed concern about European leaders’ inability to arrive at compromises that quiet restless financial markets. European leaders’ approach to the sovereign-debt crisis—basically, to first agree on vague generalities, leaving the difficult details for later—has left central bankers with a full plate.
The ECB has been buying bonds of troubled governments in the secondary market. The efforts weren’t enough for Greece, Ireland and Portugal to avoid bailouts, but ECB intervention after a surge in Italian and Spanish bond yields earlier in August has pulled their yields back down.
Euro-zone governments agreed in July that their bailout fund, the European Financial Stability Facility, will relieve the ECB of its front-line role. But the countries haven’t yet agreed on the complex mechanics. Parliaments in Europe are to vote on changes to the fund in September.
Before they get to that, there’s another hitch: Finland and some others are demanding that Greece post collateral in exchange for continued rescue lending. That’s a tall order for the country, which has already committed to selling some of its prime state assets to raise cash to plug budget gaps.
Mr. Trichet said European banks should move to reinforce their balance sheets. But he dismissed worries about a liquidity crisis, saying the extraordinary lending the ECB has offered means such concerns are “just plain wrong.”
In the U.S., President Barack Obama is promising another set of initiatives aimed at creating jobs, reducing unemployment (last reported at 9.1%) and targeting particularly the 4.4 million Americans who have been looking for work without success for a year or more. Congressional Republicans, however, are somewhere between unalterably opposed or skeptical about the sort of action that some economists—including several of Mr. Obama’s former advisers—are urging.
The pressure on the White House and Congress to act on the near-term weakness of the economy, perhaps as part of a longer-run deficit-reduction package, could intensify this week with two new clues to the health of the economy: Friday’s reports from the Labor Department on the job markets and from a closely tracked survey of factory purchasing managers
Federal Reserve Chairman Ben Bernanke disclosed the Fed has expanded its September meeting of policy makers to two days, Sept. 20 and Sept. 21, to contemplate its options.
“Unfortunately,” economists at IHS Global Insight said this weekend, “the Fed doesn’t have any rabbits to pull out of the hat to magically re-ignite economic growth. It is doing what it can (and that will probably mean more quantitative easing at some point), but its prime ammunition has already been used.”