Tags: Central | banks | Quantitative | Easing

Three Central Banks Warn on Quantitative Easing Policies

Monday, 26 March 2012 10:12 AM

Three global central-bank chiefs warned that the world's largest countries may suffer from the fallout of excessively loose monetary policies if they fail to take steps to make fundamental improvements to their economies.

Bank of Japan Governor Masaaki Shirakawa, former European Central Bank President Jean-Claude Trichet and Jaime Caruana, who runs the Bank for International Settlements, warned at a conference in the U.S. that side effects from loose monetary policies, rising inflation rates namely, will soon threaten recovery.

"While aggressive monetary easing is definitely needed after the bursting of bubbles, its side effects and limits should also be taken into consideration," Shirakawa says, according to The Wall Street Journal.

Editor's Note: Meltdown on Main Street Coming, Prepare Now

Central banks have cut interest rates and flooded their respective economies with liquidity to encourage borrowing and investment as a way to jolt their economies back to life and avoid falling into deflationary decline.

Such policies tend to pressure inflation rates upward down the road, especially when growth picks up.

Meanwhile, fiscal policies such as spending cuts and revenue hikes are often needed to accompany monetary easing despite their political unpopularity.

Failure to improve the economic fundamentals on the fiscal side threatens to agitate the side effects of loose monetary policies.

"Even with monetary easing," Shirakawa said in prepared remarks, "economic entities with excess debt neither increase expenditures nor embrace more risk taking until their debts are reduced to an appropriate level."

Caruana, of the BIS, was more blunt.

"It is important to acknowledge the limitations of these policies," Caruana says.

Low interest rates "can make it easier to waste this time" by allowing firms to avoid recognizing losses and could also fuel excessive risk-taking, he says, according to the Journal.

Trichet praised the European Central Bank's version of monetary easing by making loans easily available to banks but stressed that banks needed to raise capital and not assume low interest rates would last forever.

Some U.S. central bankers themselves argue that it may be time to reconsider loose policies.

"Some of the further actions that could be undertaken at this juncture would have effects far into the future, in an environment of continual improvement and repair for the U.S. economy," Federal Reserve Bank of St. Louis Fed President James Bullard said at a Credit Suisse Asian Investment Conference in Hong Kong, according to Reuters.

"Overcommitting to the ultra-easy policy could well have detrimental consequences for the U.S. and, by extension, the global economy."

Editor's Note: Meltdown on Main Street Coming, Prepare Now

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Monday, 26 March 2012 10:12 AM
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