HEARD ON THE STREET
Updated June 25, 2012, 3:46 p.m. ET
The Great Central Bank Bridge to Nowhere
By SIMON NIXON
We have done all we can, now it's your turn. That was essentially the message
from the world's central banks to Western governments, as communicated by the
latest annual report of the Bank for International Settlements. Since the global
financial crisis began, central banks have massively expanded their balance
sheets, helping avert a second Great Depression. But the BIS now fears that
ultraloose monetary policy is reaching the limits of its effectiveness and may
now be doing more harm than good.
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The BIS is clearly right. Easy monetary policy can act only as a bridge, providing governments and banks time to address underlying solvency problems. But for many Western countries, the actions taken over the past five years have proved a bridge to nowhere: Outside the worst-hit crisis countries, governments have been slow to tackle their long-term fiscal problems, including unaffordable long-term health and pension commitments. Governments have also been slow to introduce the structural overhauls needed to free up product and labor markets, enabling economies to rebalance. Meanwhile, too many banks have been slow to recognize bad debts and recapitalize, leaving them unable to supply credit.
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The BIS fears central-bank accommodation is partly to blame for the lack of action as it has taken the pressure off governments to reform. But despite new pressure in the U.S., euro zone and U.K. for another round of monetary easing, it also fears that further expansion of central-bank balance sheets is creating new risks for the global economy by keeping asset prices artificially high and insolvent businesses afloat. There is also growing evidence of new imbalances in emerging markets.
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Governments should take heed. Most advanced countries need to run a primary budget surplus—before interest costs—of two percentage points of GDP for 20 years to bring debt-to-GDP ratios back to precrisis levels, the BIS estimates. Most are nowhere close. As the BIS says: "The question is not whether governments must adjust, but how?"
.
The BIS is clearly right. Easy monetary policy can act only as a bridge, providing governments and banks time to address underlying solvency problems. But for many Western countries, the actions taken over the past five years have proved a bridge to nowhere: Outside the worst-hit crisis countries, governments have been slow to tackle their long-term fiscal problems, including unaffordable long-term health and pension commitments. Governments have also been slow to introduce the structural overhauls needed to free up product and labor markets, enabling economies to rebalance. Meanwhile, too many banks have been slow to recognize bad debts and recapitalize, leaving them unable to supply credit.
.
The BIS fears central-bank accommodation is partly to blame for the lack of action as it has taken the pressure off governments to reform. But despite new pressure in the U.S., euro zone and U.K. for another round of monetary easing, it also fears that further expansion of central-bank balance sheets is creating new risks for the global economy by keeping asset prices artificially high and insolvent businesses afloat. There is also growing evidence of new imbalances in emerging markets.
.
Governments should take heed. Most advanced countries need to run a primary budget surplus—before interest costs—of two percentage points of GDP for 20 years to bring debt-to-GDP ratios back to precrisis levels, the BIS estimates. Most are nowhere close. As the BIS says: "The question is not whether governments must adjust, but how?"
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