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Central Banks Keep Trying Stimulus Strategies That Don’t Help Growth

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Central bankers are finally seeing the obvious. Their “policy tools” no longer help the economy and might even make it worse. So what next?

Federal Reserve Chair Janet Yellen, speaking last week at the bank’s conference in Jackson Hole, Wyoming, all but admitted that rate cuts and quantitative easing may not work in the next crisis. She wants to find new tools.

This is good. However, if the old tools aren’t helping and are in fact hurting, the logical first step is to stop using them. They are ineffective and counterproductive.
Yellen seems unwilling to do this.

She’s not alone. Consider what Yellen’s European Central Bank counterpart, Mario Draghi, is doing.

The ECB is in the midst of a massive bond-buying stimulus program. At its current pace, the central bank is nine years or less away from owning all the sovereign debt of Spain, Germany, the Netherlands and Finland. Give them two more years and you can add France and Austria to the list.

Is socializing much of the continent’s government debt helping the European economy? No. Draghi knows this. Yet instead of changing course, he is swinging the same ineffective tool even harder.

Starting in June, the ECB added certain types of corporate bonds to its asset-purchase list. That’s right. The Eurozone’s central bank is lending free cash to private businesses.

Mind you, not just any private business gets this free cash. Only those that meet the ECB’s “standards” get it. And maybe not then, unless they have the right banker friends.

The Wall Street Journal last week reported that Morgan Stanley had private placement bond sales for two Spanish companies totaling €700 million. We don’t know on what terms the ECB loaned this money. We can presume the companies thought the terms more attractive than they would get from a private lender.

There’s the problem.

Central banks like the Fed and ECB are supposed to be the “lender of last resort.” The ECB is instead becoming the “lender of first resort” for European businesses. That’s not how it should work.

Does this hurt anyone else? You bet it does.

Companies that can’t convince anyone to buy their debt should change their ways or go out of business. Keeping zombie companies alive is terrible for everyone. It prevents better, more efficient companies from rising to take their place.

Central bank interventions can reduce short-term pain but they never cure the disease. If anything, they spread it.

No patient should want this kind of “cure.” Yet that’s what the ECB is giving Europe.

The Fed isn’t far behind.

Unnamed Fed officials at Jackson Hole told Reuters they were considering whether the Fed should add corporate debt purchases to its toolbox.

Why not? It’s working so well in Europe. They can’t let Draghi have all the fun.

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