With fiscal policy hamstrung by public debt in both the E.U. and U.S., monetary policy was a major beneficiary in the wake of the financial crisis of 2008 and the ensuing debt crisis that stammered on at least until 2013 in Europe. Lest it be concluded that central bank policy had reached an unassailable hegemony, the expanded role actually made its delimitations transparent, at least in financial circles.
Speaking to Charlie Rose on March 11, 2013, Jeremy Grantham of a Wall Street firm argued that the Fed’s extremely low interest-rate policy would be unlikely to spark an increase in employment. In fact, the low interest rate is a transfer of wealth from the poor to the rich. Fiscal policy, such as the CCC of the New Deal in the 1930s, is a much better tool to achieve full employment.
Meanwhile, Jens Weidmann, the president of the Bundesbank, argued that monetary policy in the E.U. “can only buy time at best..” He went on to say he was “a bit concerned about some of the expectations around the power and potential of monetary policy.” The ECB should get back to monetary policy in a stricter sense, rather than trying to spark economic growth and employment through low interest rates and buying state government bonds.
Behind the hypertrophy of interest-rate policy as salvific economically was the paralysis of fiscal policy determination in both unions. Divided government at the federal level stymied fiscal policy in the U.S. after President Obama’s “stimulus” package in 2010. In the E.U., the vetoes retained by the state governments at the federal level put pressure on state governments strapped fiscally to take on themselves additional fiscal expenditure by issuing even more debt. In short, much of the allure of monetary policy was actually structural flaws in the political systems.
Katy Barnato, “Central Banks Alone Can’t Fix Europe: Weidmann,” CNBC, March 12, 2013.