Efforts to Overcome the Global Crisis Have Been a Failure
Since the global crisis that began in 2008, the United States and the Eurozone countries have been trying to save their economies from collapse using various bailouts and emergency plans. By and large, these programs rely on monetary expansion, primarily using interest rate cuts and fiscal expansion, which means pouring government funds into the economic system and offering tax benefits to resuscitate the economic activity.
The botchy stimulus policy of the United States government included three stimulus programs of unprecedented magnitude [14]. Yet, Charles I. Plosser, the Philadelphia Fed President, said in that regard, “The notion persists that activist monetary policy can help stabilize the macro-economy... In my view, monetary policy’s ability to neutralize the real economic consequences of such shocks is actually quite limited … Attempts to stabilize the economy will, more likely than not, end up providing stimulus when none is needed, or vice versa. ...So asking monetary policy to do what it cannot do with aggressive attempts at stabilization can actually increase economic instability rather than reduce it.” [15]
Marc Faber, a renowned economist and the author of the “Gloom, Boom and Doom” report, was slightly more direct in his response to the aforementioned plan. He described the package as “Another complete failure of Keynesian economics and corrupt interventions,” Dr. Faber summed up his words about the program, calling it “A complete joke.” [16]
As in the United States, the Eurozone countries took several steps that included pumping funds into their markets and cutting interest rates of central banks in Europe. Also, the Eurozone established a European rescue fund with hundreds of billions in Euros for the more vulnerable countries in the bloc.
The IMF also contributed its share in assisting Europe, allocating many billions in bailout money. Many countries in Europe are now carrying out austerity measures to reduce the deficit and to meet the criteria for receiving aid from the rescue funds. However, the budget cuts hurt countries’ abilities to revive their economies and to help their citizens. This made matters even worse, causing millions to go out and demonstrate in Greece, Spain, Portugal, and other countries in Europe.
The failure of the incentive policies of the United States and the Eurozone countries set the stage for a crisis in 2011 that dwarfed the one that began a few years earlier. Treating problems on a local level not only failed to resolve problems, it even aggravated them, with the great debts moving from banks and financial institutions into state budgets.
Christine Lagarde, head of the IMF, said “The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009.” [17] Prof. Roubini said in that regard, “We have reached a stall speed in the economy, not just in the U.S., but also in the Eurozone and the U.K.. ...Unfortunately, we are running out of policy tools.” [18]
[14] Described in the chapter, “Mutual Guarantee as a Practical Solution,” section “The Failed ‘Practical’ Steps in the United States.”
[15] James Saft, “Don’t expect coordinated easing,” Reuters (September 22, 2011),http://blogs.reuters.com/james-saft/tag/federal-reserve/
[16] Patrick Allen, “Marc Faber: Obama's Job Package ‘a Complete Joke,’” CNBC (September 9, 2011), http://www.cnbc.com/id/44449276/Marc_Faber_Obama_s_Job_Package_a_Complete_Joke
[17] “There Has Been a Clear Crisis of Confidence,” Spiegel Online International (April 9, 2011), http://www.spiegel.de/international/world/0,1518,784115,00.html
[18] “Roubini on U.S. Recession Risk, Europe and China,” Bloomberg (August 31, 2011), http://www.bloomberg.com/video/74655083/