PALO ALTO – With the global economy mired in recession and financial crisis, policymakers everywhere have launched a series of monetary, financial, and fiscal responses. Nevertheless, economies continue to contract, unemployment to rise, and wealth to decline.
Countries’ policy responses have ranged from modest to immense. China has undertaken a 6%-of-GDP stimulus package aimed (mostly) at infrastructure; the United States has enacted a two-year $800 billion spending and tax rebate package. The Federal Reserve and the Bank of England lowered short-term interest-rate targets to near zero and are adopting “quantitative easing” – i.e., continuous infusions of money.
Despite all this, massive excess bank reserves remain unlent. During Japan’s “lost decade,” the Bank of Japan mostly bought Japanese government bonds, whereas the Fed is trying to reopen secondary markets for securitized private lending (which in the US is as important as bank lending), buying mortgage-backed securities and consumer and business loans, as well as U.S. Treasury bonds. The Bank of England is buying UK government bonds (“gilts”). The European Central Bank, reflecting a strong inflation concern, has responded more slowly.
The US government is now insuring, lending or spending over $10 trillion from guaranteeing money market funds to the AIG bailout to the Fed’s swap lines supporting foreign central banks. Analogous guarantees and bank bailouts have occurred in the other major economies (the ECB does not play this role for Europe; national governments do).