Do Central Banks Still Have Enough Tools To Fight Economic Crashes?

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By Jacob Maslow

Federal Reserve Building
US Federal Reserve

Whether you’re a big fan of central bank intervention in stabilizing markets or not, it can’t be denied that these central bank moves do have a major impact on market performance and investor behavior. The problem is, that’s not the primary objective of government financial market interventions. The primary focus is to, of course, stabilize the economy. Put simply, government intervention, whether in the form of interest rate magic tricks or simply turning on government currency printing presses, is aimed at producing ‘soft landings’ after markets find themselves overheated or economic growth figures start sputtering. On this front, the US Fed has been successful-somewhat.

Thanks to interest rates almost glued to zero and Fed willingness in the past to do quantitative easing, the US financial market (and thanks to hedge funds, the global finance market) is awash in easy cash. Not surprisingly, emerging markets that would otherwise be stagnating are seeing double digit appreciations in asset value. All the while, the arrows in the quiver of central banks are seemingly depleted. How many more rounds of quantitative easing can the global markets handle when it seems the intended effect of spurring the economic back to a robust level of activity just isn’t happening?
While Henry Blodget of Business Insider might be wrong in his claim that there is a lack of political will to do further interventions, he still might be right as far as the big picture is concerned. An appeals court in the EU did give the ECB the green light to do easing. The problem, as I see it, is not political will-heck, who has a problem with free money?-it is economic reality. The global economy is between a rock and a hard place. Faced with slumping commodity prices, wobbly job figures, deflation, and no real unsubsidized economic growth, it seems the old solutions simply aren’t working. What we have here, ladies and gentlemen, is a failure of imagination. Maybe the Austrian libertarian kids are right-maybe the solution is to let ‘natural’ market forces prevail. Unfortunately, we’re in the Age of Too Big To Fail. That’s the problem.
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