In bold moves, central banks in the US and Europe promise indefinite spending to boost markets. The Federal Reserve and European Central Bank may be financial backstops but they can't pitch certainty into an economy.
The central banks in the world’s two largest economies, Europe and the United States, took extraordinary actions this past week. They each promised an unlimited amount of money to help restore the economy.
By opening their money spigots indefinitely – essentially printing more dollars and euros – the banks are attacking one big problem: uncertainty. Too many investors and consumers still see too many unknowns to be confident about the future.
China, the third largest economy, has also turned on its money spigot. It promised $157 billion in new government spending to deal with an unusual slowdown in the world’s fastest-growing economy.
The Federal Reserve chief, Ben Bernanke, happens to be one of the leading scholars on economic uncertainty. In a 1983 paper, he showed how small-business owners will delay hiring and spending if government policies on taxes and regulation are too fickle over time.
Now as Fed chief he’s promising to spend $40 billion a month to buy up bonds in order to push easy money into lending markets, especially housing. This latest round of “quantitative easing” (or “QE3”) includes another extraordinary move for the Fed. Its buying spree will end only when the job market is healthy, Mr. Bernanke says. The European Central Bank (ECB), meanwhile, promises unlimited bond-buying to stem a lack of confidence in the eurozone.