It's up to policymakers to fix global mess

Love 'em or hate 'em, the central bankers have done all they can.

By InvestorPlace Jun 21, 2012 8:14AM

By Dan Burrows

If nothing else, the term "central banker" is more than apt. Taking flak from both the left and the right, the global chiefs of monetary policy are stuck in the middle and singled out for scorn for both doing too much and doing too little.

True, the criticism comes with the job, and in many cases is more than warranted. But monetary policy can only do so much. Both at home and abroad, real solutions to the world's economic woes won't come out of the Federal Reserve or the European Central Bank. They'll come from the fiscal policymakers -- the politicians -- and that's why yields on Treasurys and German bunds and Japanese sovereign debt are sounding once unfathomable lows.

The market hates uncertainty, and whether it's the looming "fiscal cliff" in the U.S. or a revolutionary rethinking of the euro experiment, is it wrong to have little faith in timid, squabbling policymakers?

Yes, it's both fashionable and fun to pour opprobrium on "Helicopter" Ben Bernanke regardless of what he does. But when the Federal Reserve chairman led the charge to a zero interest rate policy, wags pronounced the end of Fed action. The central bank, it was said, was out of bullets.

Well, hardly. After two rounds of quantitative easing and Operation Twist, the Fed is firing weapons once unthinkable as part of a monetary arsenal. And yet, according to critics on either side, it's both too much and too little. High unemployment, they say, is solely the Fed's fault.

Meanwhile, the recessions spreading across Europe do make a good case that the U.K. and the ECB didn't cut rates by enough, raised them too quickly and are now keeping them too high. But it's also true that such actions are most effective -- and perhaps only effective -- when paired with coordinated fiscal policy.

Indeed, Bernanke and his ECB counterpart, Mario Draghi, are all but begging the people with the true power -- the policymakers -- to take bold action. In his testimony before Congress on Thursday, Bernanke once again warned of the drag on the recovery being exerted by fiscal policy.

"Real spending by state and local governments has continued to decline," Bernanke said. "Real federal government spending has also declined, on net, since the third quarter of last year, and the future course of federal fiscal policies remains quite uncertain."

Meanwhile, the economy is hurtling toward the fiscal cliff, and no one in Washington is in the diver's seat.

"Monetary policy is not a panacea," Bernanke said. "I would be much more comfortable if Congress would take some of this burden from us."

Draghi, meanwhile, faces even more formidable challenges. Bailing out Spain's banks will buy the eurozone some more time. But the hard choices, requiring huge compromises on the part of Germany and the weaker eurozone nations, are ultimately out of the ECB president's hands.

"I do not think it would be right for monetary policy to compensate for other institutions' lack of action," Draghi has said.

Make fun of Bernanke and Draghi all you like -- but they're right. If nothing short of a central authority with control over the budgets of member states -- seemingly a political impossibility -- can make the euro work, then what's a central banker to do?

This is why economist and Nobel laureate Joseph Stiglitz says anyone counting on monetary policy to get us out of this mess is just "wrong." This why Martin Wolf, the Financial Times' esteemed economics commentator, wrote: "Before now, I had never really understood how the 1930s could happen. Now I do."

Investors' panicked rush into Treasurys and other solid sovereign debt indicates a deep aversion to the downside risks, Wolf says. "Policy makers must eliminate this panic, not stoke it."

The crisis is now beyond the power of monetary policy. It's in the hands of the policymakers -- the elected officials in democratic nations both here and abroad. In the U.S. and Europe, we have met the enemy, and he is us.

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Tags: congress
Jun 22, 2012 10:22AM

Stimulus both monetary and fiscal will not improve the economy. We need major, major restructuring. This will require tough decisions that no one is going to like. To get the American people to make the restructuring decisions is going to take a economic 2X4 on their head. That 2x4 is coming.

Jun 22, 2012 10:39PM
United we stand. Divided we fall. We are definitely divided and can't agree on anything, so the fall is inevitable. It may not be armageddon but the world as we know it is dead in 2012. The time has run out for the politicians to act and they still think they have the luxury of waiting until Jan 2013. They are delusional. You can't put a crisis in your back pocket and decide to address it when it is convenient. The politicians are morons and the people who elected them are morons. The world economy is toast.
Jun 22, 2012 9:38PM
We need policy makers to cut spending and get out of the way.  Obviously Ben's funny money and low interest rates won't do it.
Jun 25, 2012 1:38PM

spain this week...greece last week....its always something euro


how about Luxemburg..they should be a cheap bailout!

Jun 21, 2012 10:17AM
We'd like you to do something, as long as it's what we tell you to do.
Jun 25, 2012 12:21PM
Jun 28, 2012 12:25PM
Translated,more debt for people who have done knothing wrong.Bailing out banks and governments who make bad decisions.Let them fail.
Jun 25, 2012 6:44PM
The Central Bankers have done all they can in making people slaves to the system..when the Banking Cartel makes a BET on Wall Street and wins it is Happy Town for the Bankers but when the Banking Cartel takes a big loss at Casino Wall Street the bankers put a gun to the heads of the people and say if you dont the economies of the world will fall,... when are "We the People" going to stand up to these bankers and put them in Jail... until then people empty your pockets becasue Wall Street is coming for what's left of YOUR 401ks
Jun 23, 2012 10:53AM
Ben and the boys has gave wall street free money at the fed window for too long hoping that the investors and wall street , part of the private sector thats suppose to create jobs ? The republicans are stopping any type real solutions to a lot of problems !The DEMs are blocking any out dated solutions and no one can do anything in the HOUSE or SENATE to solve any problems for the AMERICAN PEOPLE and the USA , and they truly are running out of time !  Hoping again they create jobs ! I mean thats why they have had them for over ten yrs ? LOL Still looking for all  them jobs republicans ! The DEBT from two unpaid for wars for over ten yrs has bankrupt this country! Not soc sec ! Healthcare was to be fixed by teh Dems and all that happend was a giant mess! Every single senator and house rep in Washington needs to be UNELECTED by the people of the USA and a whole new crop elected that will have the HUTs to let the tax cuts expire !! They have not worked ! Too much free money Ben ! Too much debt with tax payer money ! Too many foreclosed homes saturating the market ! No Jobs even with tax cuts for 10 YRS ! The US Congress should not raise the debt limit this yr! I think 15 TRILLION is enough! I would rather have it hurt now that latter ! Latter will hurt a lot more , and may KILL THE USA folks ! And that is real....
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