Economic Outlook: Banks step in

By ANTHONY HALL, United Press International  |  Sept. 16, 2011 at 8:47 AM
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Five central banks said they would coordinate their efforts to keep banks in Europe afloat, offering an unlimited supply of hard-to-borrow U.S. dollars.

Banks in Europe are floundering due to their heavy investment in government debt in Greece, Spain and Portugal -- countries where default threatens to undermine the banking system and the euro, the currency shared by 17 nations.

The U.S. Federal Reserve, the National Bank of Switzerland, the Bank of Japan, the Bank of England and the European Central Bank put together the show of force based on prior agreements. As such, the Fed did not consider the move groundbreaking and did not issue a statement, The New York Times reported Friday.

High-ranking financial officials, however, took note of the maneuver with International Monetary Fund Managing Director Christine Lagarde remarking that, "They are getting together and acting together. To me, that is the most important message."

For all that, forgive the cynical word play, but some economic mistakes only work if they are seen through to the bitter end. That is to say, if a government adds stimulus dollars to the economy, eventually businesses will figure out there is cash around they can turn into profits and they will start hiring to catch the wave. The new workers will start paying income tax and the government will have its investment repaid.

The way to ensure such a strategy fails is to stop in the middle. Then the government has spent the money on which it sees no return as companies do not hire when they see the cash is about to run out.

This also works in reverse. Not adding stimulus to the economy allows weaker businesses to fail, allows stronger ones to survive and bolsters confidence in a government that keeps its spending in check. This keeps taxes low, which attracts businesses. The way to undermine that is to start spending frivolously.

Some analysts consider that, by definition, a move by the central banks is a stalling technique that boosts confidence, but at the price of having a currency with diluted value, which can spark inflation, which puts everybody behind, the rich and the poor alike.

Then there is the element of time. "The lesson of 2008 and earlier crises is that the later you act, the more you have to do, and the more painful it becomes," World Bank President Robert Zoellick said Wednesday.

"It is not responsible for the eurozone to pledge fealty to a monetary union without facing up to either a fiscal union that would make monetary union workable or accepting the consequences for uncompetitive, debt-burdened members," he said.

Translation: There is more work to be done, because the system is currently self-defeating. Without a collective tax Europe cannot support a common currency, as a weak euro simultaneously helps export countries and hurts import countries. What is good for Germany -- exporting cars and cameras to Greece -- has not been good for Greece, as the value of its currency is tied to Germany's success, not its own.

Markets in Europe and on Wall Street rebounded Thursday on the central banks' move.

On Friday, the Nikkei 225 index added 2.25 percent while the Shanghai composite index gained 0.13 percent. The Hang Seng index in Hong Kong rose 1.43 percent while the Sensex in India climbed 0.34 percent.

In Australia, the S&P/ASX 200 index gained 1.91 percent.

In midday trading in Europe, the FTSE 100 index in Britain added 0.45 percent while the DAX 30 in Germany rose 1.03 percent. The CAC 40 in France rose 0.48 percent while the Stoxx Europe 600 rose 0.75 percent.

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