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After the shocking global economic crisis, governments around the world struggled incessantly to uncover effective solutions in the shortest possible time. With both sides of the Atlantic (Europe and America inclusive) more affected than even developing countries, and even as the crisis lookedto be more prolonged in those very regions, central banks of the affected countries had to use unusual monetary policy measures to arrive a far-reaching solutions.
The Federal Reserve is presently in its third round of Quantitative Easing, while the European Central Bank has finally agreed to purchase unlimited volumes of troubled Eurozone member government bonds. But like a scene in a suspense movie, the markets seem to have been watching.In fact, the market in the US responded euphorically to the recent Eurozone move to rescue its troubled members.
However, some analysts have pointed out that the on-going ‘money-throwing’ activities in Europe and the United States may ultimately fuel inflation and propel governments into a prolonged spending spree.
One major indicator that has been followed by most investors and analysts is the language of the Fed and the ECB. First of all, both central banks have tactically admitted that their previous actions have failed, and that their ability to reverse the wrong might be limited.
Similarly, a recent announcement made by the Federal Reserve,stating that it will likely keep interest rate low until 2015, implies one thing; and that is the fact that it doesn’t foreseea recovery anytime soon. This should be a major source of concern for players in the European market-a market which is presently suffering the brunt of severeregulatory measures.
And most importantly, both central banks, the Fed and the ECB recently admitted that the markets is not likely to restore full employment on their own, without further help from the government. This will be a complete shocker to the popular proponents of austerity in Europe (there are lots of them) and America – the signal coming is that the economy may not be able to survive without further stimulus.
But what kind of stimulus, after all, the pouring of money through QEs and euro rescue fund has been in effect for long. Fiscal stimulus may well be the new solution for sustainable growth.Why?
The concept that supports measuressuch as QEs and rescue funding, stems from a desire to activate more lending to investors and consumers, in order to create demand and expand employment. But with the ongoing euro crisis where the banking systems which are supposed to lend are almost persistently broke, increasing liquidity and austerity can never prove to be an effective solution.
With the US, smaller banks that lend more have been ignored for mega banks; therefore, more money won’t bring greater accessibility to funds for those who truly need it.
The road that needs to be taken is one towards expansionary fiscal policies and financial sector reform;these would certainly go a long way in boosting lending.
