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If central
bankers weren't the main architects of the coming depression, it might be
tempting to pity them. The world is falling apart and everyone expects them
to save the day with lower rates and/or exotic new stimulus programs. But at
the same time everyone assumes this debt monetization will destabilize the
financial system, bringing about the end of the world as we know it.
The bankers
can't win, in other words, because whatever they do or don't do will be seen
as causing a global meltdown of one kind or another. And the poor bastards
know it.
So it's not
surprising that they're dithering and seemingly working at cross purposes.
First the European Central Bank decides to hold rates steady despite the
imminent implosions of Spain and Greece:
Central
bank in Europe decides not to cut rate
FRANKFURT,
Germany -- The European Central Bank withheld the stimulus of an interest
rate cut Wednesday, keeping up the pressure on eurozone
politicians to take decisive action -- even as growth predictions worsened
and fears intensified that Spain may need help bailing out its banks.
The 23-member
governing council left its benchmark refinancing rate unchanged Wednesday at
a record low 1.0%.
ECB President
Mario Draghi cited economic growth forecasts for a
gradual recovery this year in justifying the decision not to cut rates this
time. Rate cuts are supposed to help growth by lowering business borrowing
costs. Some analysts, however, said the bank's expectations of only a 0.1% decline
over the full year were overly optimistic.
Analysts say Draghi's hands-off stance Wednesday was meant to
underline the need for action on restructuring the euro by the 17-country eurozone's divided and often slow-moving politicians. He
has urged leaders to sketch in a vision of how the economies and financial
systems of euro member countries can be better linked ahead of a June 28-29
summit where new ideas to save the euro are to be presented.
And the Bank
of England does the same despite a deepening recession:
Bank
of England holds rates and leaves QE unchanged
The Bank of
England has held interest rates at 0.5pc and left quantitative easing
unchanged at £325bn despite mounting speculation that it would take
steps to stimulate growth this month.
The decision
contrasts with the recommendation from the International Monetary Fund (IMF),
which last month urged the Bank to restart QE to help restore Britain's
faltering recovery.
Surveys in
the past week of the manufacturing and construction industries added to fears
that the economy is continuing to slow, although today's report on the
powerhouse services sector offered some consolation by beating expectations.
Rates have
now been on hold at a record low since March 2009, the longest unchanged
period since decade spanning the Second World War and the subsequent
austerity that ended in 1950.
The economy
has collapsed back into recession, falling 0.3pc in both the first quarter of
the year and the final quarter of 2011. The consensus forecast now is that
the UK will grow just 0.4pc this year, compared with the Office for Budget
Responsibility's prediction of 0.8pc.
Then
China cuts rates:
NEW YORK (CNNMoney) -- China's central bank announced a rate cut
Thursday -- its latest move to try and spur its slowing economy.
In its first
rate cut since 2008, the People's Bank of China trimmed a quarter percentage point off its deposit and lending interest rates. China's
one-year lending rate is now 6.31%, which is much higher than interest rates
in the United States, Europe and Japan.
Economists
and investors worldwide are concerned about China's recent slowdown because
it is an important driver of global growth. China is now the world's
second-largest economy behind the United States.
The central
bank had most recently sought to spur growth on May 12 by reducing the amount
of cash banks must hold in reserve, an effort to free up funds for lending
and investment.
But China's
economy has continued to cool over the past month.
A purchasing
managers' index compiled for banking company HSBC earlier this month showed
that Chinese manufacturing declined in May for the seventh straight month.
The index fell to 48.4 in May from 49.3 in April. A reading of above 50
indicates growth in the sector.
Chinese
exports have been hit by the European sovereign debt crisis, which has caused
11 countries on the continent to fall into recession and hurt demand from
China's largest market.
China's gross
domestic product, the broadest measure of its economic health, grew at an
8.1% annual rate in the first quarter. But that was sharply lower than the
8.9% growth at the end of last year.
And finally,
the US Fed splits the difference by promising to act if necessary:
Fed
ready to act if stresses mount: Bernanke
WASHINGTON (MarketWatch) -- The Federal Reserve stands ready to act
to protect the financial system and the economy in the event that financial
stresses from the European crisis escalate, Fed Chairman Ben Bernanke said
Thursday.
"The
situation in Europe poses significant risks to the U.S. financial system and
economy and must be monitored closely," Bernanke said in testimony
prepared for delivery to the Joint Economic Committee of Congress.
He called on
European leaders to do much more to stem the crisis.
Some thoughts
"ECB
President Mario Draghi cited economic growth
forecasts for a gradual recovery this year in justifying the decision not to
cut rates this time." Seriously? The
PIIGS are going to recover this year? Or will Germany and France somehow grow
enough to offset Greece and Spain falling into the abyss? In any event, would
a gradual recovery accomplish anything for a system that continues to pile up
debt while offering zero hope for young unemployed college graduates?
Unlikely across the board. The pressure will continue to mount even in the
best case scenario.
The central
banks are being cautious because they realize that no one trusts them. The
financial markets are poised for a rush back into hard assets at the first
hint of dollar weakness, which means monetary policy is losing its pop. Hence
the desperate calls for politicians to deal with the fiscal imbalances and
take central banks off the hook. But of course the fiscal authorities can't
raise taxes or cut spending, so they're tossing the ball right back to the
central banks.
There's a
"June 28-29 summit where new ideas to save the euro are to be
presented" eleven days after the Greek election which might produce an
anti-euro government. Should be a fascinating interim.
But in the
end none of this matters. Either the most indebted countries implode and take
down the rest of the global financial system or the central banks open the
monetary floodgates and currencies collapse versus real assets. Or one then
the other. In any event, dithering will soon be replaced with panic.
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