 |
Traders
work on the floor of the New York Stock Exchange,
August 5, 2011. (Credit: Reuters/Brendan McDermid) |
(Reuters) -
In a sign of the harm that tumbling markets are doing to the global economy,
calls multiplied on Tuesday for a concerted campaign of bold policy-making to
stop the rot.
Globally
coordinated asset purchases, debt relief for under-water U.S. home owners, a
cut in euro zone interest rates and a reduction in Chinese banks' required
reserves were just some of the ideas aired to cut the negative feedback loop of
a 10-day slide in world share prices that has fanned fears of a new recession.
"We're
in a situation where sentiment is so very badly damaged that everything should
be on the table in terms of policy options to tackle the crisis," said
Mark Cliffe, chief economist at ING Bank in Amsterdam.
"Almost
anything is worth a try," he added.
The
obstacles to a policy "grand bargain" are well known. Interest rates
in many countries are already near zero, while governments are under market and
political pressure to borrow less, not more.
China has
no appetite to let the yuan rise, which would stoke export-led growth in the
United States and elsewhere. In Europe, critics blame the European Central Bank
and Germany for deepening the euro zone's debt crisis by opposing radical
proposals to bail out indebted members of the bloc's periphery.
It is a
measure, then, of the sudden deterioration in global growth prospects that
economists are urging policy makers to think outside the box to get round these
constraints and make good on their repeated promises to cooperate to ensure
financial stability.
"Should
we be dished up half-hearted and lukewarm measures, the markets will give a
decisive thumbs-down and central banks will be pressed to do more later -- in
less favorable circumstances," said Paul Mortimer-Lee, global head of
market economics at BNP Paribas in London.
WAITING FOR
THE FED TO LEAD
All eyes
for now are on Tuesday's policy meeting of the Federal Reserve. The consensus
is that the U.S. central bank will not launch a third round of asset purchases
-- quantitative easing (QE) in market jargon -- but could well lengthen the
maturity of its government bond holdings and reinforce its pledge to keep
monetary policy ultra-loose for much longer.
Mortimer-Lee
said such an outcome would be worthy but insufficient. What is needed, he said
in a note, is coordinated QE from the United States, Britain, the euro zone and
Japan to increase liquidity and stimulate demand for risk assets.
Keep
markets awash with cash is always a priority for policy makers when markets are
stressed. If banks hoard money and refuse to lend to each other, the wheels of
the economy can grind to a halt.
To that
end, Mortimer-Lee said overnight money market rates should be allowed to fall
below central banks' official policy rates. He also advocated joint central
bank intervention to prevent a further destabilizing rise in the Japanese yen
and Swiss franc.
Harvard
University economics professor Kenneth Rogoff agreed that both the Fed and the
ECB ideally would adopt expansionary policies to keep exchange rates on an even
keel.
Writing in
the Financial Times, Rogoff also advocated very large debt write-downs in the
smaller countries on the edge of the euro zone combined with a German guarantee
of central government debt in the rest. In the United States, a scheme was
needed to write down mortgages that surpass the value of the homes they are
financing.
If
political obstacles rule out direct debt reduction, excess debt now shackling
the global economy could be partly inflated away by targeting inflation of 4-6
percent for several years, he argued.
NO QUICK
FIX
John Wadle,
a banking analyst at Mirae Asset Securities in Hong Kong, said he backed the
thrust of Rogoff's comments. What markets needed, though, was a concrete
commitment by Fed Chairman Ben Bernanke and U.S. Treasury Secretary Timothy
Geithner to tackle the debt overhang using the Fed's balance sheet and
regulatory sticks and carrots.
"Bernanke
and Geithner need to jointly make an announcement of a coordinated set of
measures to rebuild confidence and economic fundamentals," Wadle told
clients. A Fed press statement at this point would fall short.
Desperate
times call for desperate remedies. But not everyone agrees that it is time to
press the panic button.
Economists
at Bank of America Merrill Lynch said their measures of financial stress are
rising but are not as elevated as during previous market slumps. So the urgency
for the Fed to ease is not as great.
And some
seasoned market-watchers are convinced that there is little policy makers can
do in any case in the short term to redress what are deep-seated global
imbalances in savings and investment.
Charles
Dumas, chief economist and chairman of Lombard Street Research, a
macroeconomics forecasting consultancy in London, is convinced the world is
headed for recession in 2012 because countries with excess savings are doing
too little to consume and import more from economies such as the United States
that need to save more.
Japan had
tried and failed for 20 years to stoke domestic consumption; hopes that China
would switch its engine of growth to homegrown demand were similarly fanciful,
Dumas said. But the greatest measure of blame attached to Germany, he argued.
"You
can produce fancy economic solutions until you are blue in the face, but they
won't work until Germany gets out and starts spending," Dumas said. "And
they won't do it."
(Reporting
by Alan Wheatley; editing by Ron Askew)
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