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2012: Year of the Central Bank?

If 2010 was the year of austerity, then 2012 may be remembered as the year of stimulus. The Fed made a major splash last week when it announced a nearly unlimited bond-buying program that is scheduled to continue well after unemployment falls. Earlier this month, the ECB announced a similar plan to tackle the issue of sovereign debt in Europe. This week brought news that Japan is following suit and the UK may be as well, according to the Wall Street Journal.

The Bank of Japan took investors by surprise on Wednesday when it announced a plan to ramp up its bond-buying program:

The central bank’s policy board decided to increase the size of its asset-purchase program—its main tool for monetary easing with interest rates near zero—to ¥80 trillion ($1.01 trillion) from ¥70 trillion, and also to extend the deadline of the program by six months to the end of 2013. . . .

The central bank will purchase another ¥5 trillion of Japanese government bonds by the end of December 2013 and buy additional ¥5 trillion of short-term government bills by the end of June 2013.

In the UK, meanwhile, official policies have not yet changed, but discussions at the Bank of England indicate that most members expect the bank to unveil similar policies later this year:

Yet [the BoE minutes] also record that some rate-setters “felt that additional stimulus was more likely than not to be needed in due course,” due to a “subdued and uncertain” outlook for growth. For one unidentified member, probably arch-dove David Miles, there was a case for announcing more asset purchases immediately, although he ultimately sided with the majority.

“Overall, the minutes indicate that the committee retains a collective dovish bias,” economists at Royal Bank of Scotland said in a note to clients. They expect the MPC to authorize another £50 billion of bond purchases in November, although they added that the decision might not command universal support. Spencer Dale, the BOE’s chief economist, and Ben Broadbent, one of four external MPC members, opposed the MPC’s decision to increase its bond-buying target in July.

These are exciting times for central bankers everywhere. With America, Europe, and Asia all on the verge of a major slowdown or outright recession, central bankers are pulling out all the stops in what looks like a last-ditch effort to get something postive going.

Naturally, we wish them luck, but there are good reasons to doubt whether these schemes will work. In Europe, it is doubtful that the actions of any bank can make up for the lack of political agreement or leadership in tackling the biggest crisis in half a century. And as we’re beginning to see in America, low interest rates aren’t much use when credit standards are high and banks aren’t willing to lend. Printing money that nobody wants is hardly a recipe for success, but we may see more of it as the year goes on.

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