Fed Chairman Ben Bernanke said yesterday in his testimony to the House Financial Services Committee that Europe is a long way off from having a long-term solution for its debt troubles. In the meantime, Bernanke and his international counterparts continue to gin up asset prices and hold down interest rates by printing money. Central bankers believe this eases the pain of recession and buys time for governments to make reforms toward a more fiscally sustainable future. But as I explain in this letter to The Wall Street Journal, monetary expansion makes solving Europe’s long-term debt problem even more difficult and markets are becoming increasingly aware of this reality.
The front page of the July 5th online Europe issue features three articles that describe lending rate cuts by the European Central Bank, the Bank of England, and The People’s Bank of China as stimulus. A fourth article notes widespread market pessimism despite these stimuli.
As central bankers conceal the fundamental economic problems of their countries with the printing press, they distort markets and forestall recovery. Growth will not return until governments rein in unsustainable budgets, let entrepreneurs out of regulatory strait jackets, and shrink inefficient state-owned enterprises that crowd out resources from private enterprise.
Central Banks are explicitly disincentivizing reform. Markets are realizing this, as each shot in the arm by the world’s central bankers becomes less and less effective at stimulating optimism, let alone economies.
Competitive Enterprise Institute
For a quantitative explanation on how the European Central bank helped bring about crisis in the Eurozone and why its current efforts will turn bad to worse, see my article on RealClearMarkets.