EDITORIAL: Much ado about monetary policy

The West won’t recover without a radical shift in priorities

The economy continues to drag, and policymakers refuse to do what it takes to restore prosperity. The official unemployment number climbed to 8.3 percent, and the broadest measure of joblessness, known as the U6, increased to 15 percent for July. Economic growth is stalled at 1.5 percent.

Our friends across the Atlantic share the same problems, as the European debt crisis continues its downward spiral. Pressure is building on monetary authorities to do something, anything. Yet there’s not much Mario Draghi of the European Central Bank (ECB) and Ben S. Bernanke of the Federal Reserve can do with interest rates already at historic lows. No central-bank trick can make the fundamental problems in the European Union or the United States disappear.

Neither side is serious about curbing runaway entitlements and a regulatory state that smothers private-sector initiative. Politicians who refuse to make tough decisions are looking to central banks for the quick fix of easy money. For a while, Mr. Draghi resisted, stating fiscal reform was the key to saving the EU from recession. Now he has capitulated, and the ECB will buy short-term bonds in an effort to drive down sky-high yields for Italian and Spanish government debt.

The plan so far has the ECB stepping in only after the funds of the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) are exhausted. That won’t take long since these funds combined only have about $433 billion. Spain’s current financing needs are comparatively modest but will climb to about $457 billion by 2014; Italy’s will be $766 billion by then. Declining interest rates will enable Italy and Spain to issue ever more short-term debt — and more debt is the last thing needed by countries in the middle of a debt crisis.

After its meeting Wednesday, the Fed reserved the option of expanding the money supply in September if the economy doesn’t improve. This would be the third round of quantitative easing in four years; each round gives a smaller and shorter temporary boost to the economy. As a 2011 paper by New York University professor Nouriel Roubini argued, extraordinary increases in money supply will go into buying commodities, not into expanding investment capacity. That’s confirmed by the fact that corporations are currently sitting on profits rather than investing. Businesses are hording cash because they know Taxmaggedon is set to hit in January and fear other regulatory threats on the horizon.

Printing more money won’t change today’s dire fiscal reality. Italy, Spain, Greece and the other basket cases of Europe — along with the United States — need to adopt true fiscal austerity and reduce the burden of government. That will give the private sector the relief it needs to grow and create jobs.

The Washington Times

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