Let’s not expect central bankers to bail out the continuing economic mess. That’s not who they are, and cheap money can only do so much to levitate a deflated economy.
This past week, Mario Draghi, president of the European Central Bank, said that he would not in fact do “whatever it takes,” as he had pledged a week ago Thursday, to save the euro and the European economy. After Draghi floated a commitment buying more government bonds without demanding rigid austerity policies in return, his trial balloon was shot down by Jens Weidmann, president of the German Bundesbank. Draghi will remain captive to the budget hawks led by the Germans who are keeping Europe depressed.
Here in the U.S., the policy-setting Open Market Committee of the Federal Reserve met on Wednesday and decided against taking any further action for now. Financial commentators clucked that the Fed perhaps should have done more.
But, face it, there is not much more that that the Fed can do, and we should not expect it to perform miracles. Interest rates are already at record lows, and that is not enough to revive an economy suffering from the aftermath of a financial collapse. After the crash of 1929, critics called the fantasy that cheap money alone could rescue a deflated economy “pushing on a string.”
Today, consumer demand is deflated by high unemployment, low wages, and diminished capacity to borrow. Growth slowed to an annual rate of just 1.5 percent in the first half of 2012. (more…)