WASHINGTON, DC – Central banks around the world have finally reacted to the global financial crisis by engineering a coordinated half-point interest-rate cut. That is welcome, but far more is needed – and quickly. If implemented now, steep rate cuts can still have a significant positive effect. If delayed, their effect is likely to be minimal.
Across the board, the world’s major central banks have been slow to respond to the deepening crisis. This failure reflects the dominance of conventional economics, which has produced closed-minded group-thinking within the global central banking community. As a result, central banks failed to see the oncoming financial tsunami, and even after it arrived they continued to fight the last war against inflation.
The European Central Bank and the Bank of England have been the worst offenders. That is no surprise, as European central bankers are the most conventional in their thinking and have been the most obsessed with inflation. It also explains why Continental Europe has had such high unemployment rates for so long.
The United States Federal Reserve Board has done a much better job, though it, too, has moved in fits and starts, repeatedly playing catch-up with a crisis that has persistently remained one step ahead of policy. This pattern reflects the Fed’s own obsession with price stability, which encourages preemptive interest-rate increases to head off inflation, but restrains equivalent preemptive reductions to head off unemployment.