March 1, 2024

Central Banks Act With a New Boldness

Central bankers, anywhere in the world, are a cautious lot. They prefer slow and steady over the dramatic gesture. And they rarely go public with criticisms of other central banks.

But the economic stagnation of the major developed nations has driven central banks in the United States, Japan, Britain and the European Union to take increasingly aggressive action. Because governments are not taking steps to revive economies, like increasing spending or cutting taxes, the traditional concern of central bankers that economic growth will cause too much inflation has been supplanted by the fear that growth is not fast enough to prevent deflation, or falling prices.

The Fed has announced plans to keep borrowing costs at historic lows until unemployment declines. The staid Bank of England has bought more than a half-trillion dollars’ worth of bonds to ignite British business activity.

Last month, Haruhiko Kuroda, the new chairman of the Bank of Japan, steered the central bank toward an audacious new policy of reinflating the Japanese economy by doubling the money supply. It is considered the boldest step so far by a central bank.

So far, the results of these activist central banks have fallen short of expectations.

“I’m not sure why we’re not getting more response,” said Donald L. Kohn, a former Federal Reserve vice chairman who is now at the Brookings Institution. “Maybe we’ve made some progress in identifying some of the causes, but it’s not fully satisfying why we have negative real interest rates everywhere in the industrial world and so little growth.”

Certainly investors around the world watch for any sign that the central bankers are backing away from their bold steps.

Stock markets wobbled in Japan and elsewhere last week on fears that the Federal Reserve might start pulling back on its stimulus sooner than expected and that Japan’s effort might fall short of its goal of reviving the economy. A few central bankers’ reassurances seemed to calm the markets.

The lackluster results have provided cover for the European Central Bank, which has remained the most cautious of the major central banks. It is sticking to the more traditional formula of cutting interest rates — a string Japan ineffectually pushed for more than a decade — in the hopes that it will encourage banks to lend more money to businesses.

The Federal Reserve in the United States has been significantly more aggressive since December 2008, when the Fed reduced its benchmark short-term interest rate nearly to zero. Ever since, it has pursued a pair of experiments aimed at dragging other interest rates closer to zero, too.

The Fed has tried to bolster confidence that rates will stay low by talking more about the future. In December, it said it intended to keep short-term rates near zero at least as long as the unemployment rate remained above 6.5 percent, the first time it had tied policy to a specific target. That, and buying almost $3 trillion in Treasury and mortgage-backed securities, has helped to cut borrowing costs for businesses and consumers.

While the share of Americans with jobs has barely budged and other economic indicators remain weak at best, the Standard Poor’s 500-stock index has doubled since the Fed announced its first round of bond purchases in November 2008. Interest rates on mortgages and car loans are near the lowest levels on record. Average yields on junk bonds fell below 5 percent for the first time. Corporations with strong credit ratings, like Apple, also are
borrowing vast sums at little cost.

Still, for all the daring, some critics argue that the Fed is not trying hard enough. “It’s as if we went to the biggest fire we’ve ever seen and we poured more water on it than we’ve ever poured, and the fire isn’t completely out,” said Joseph E. Gagnon, a former Fed economist now at the Peterson Institute for International Economics. “Well, we should try more water.”

Officials in Britain, too, are debating its central bank’s ability to do more.

Last month, the departing governor of the Bank of England, Mervyn King, gave a speech at the International Monetary Fund in which he said — a bit acidly — that there was a limit to what monetary policy could do to spur recovery in a country like Britain, where a small number of stingy banks dominate the economy and the government is tightening its spending.

Like other central banks around the world, the Bank of England, by far the oldest of them all, has done its part to ward off a depression. It has bought, to date, the equivalent of $569 billion worth of government bonds — a bold use of the printing press for an institution known for its hidebound ways.

This shock treatment, the professorial Mr. King pointed out, equaled 20 percent of the British economy, outpacing the central bank interventions of the European Central Bank, the Bank of Japan and the Federal Reserve.

And what does Mr. King have to show for his monetary exertions — beyond record stock market highs and bottom-scraping yields for British corporate bonds? An anemic recovery. Growth this year is expected to be 0.5 percent, according to the monetary fund, while Japan’s gross domestic product grew at an annualized rate of 3.5 percent in the first quarter and the United States’ is expected to grow a little more than 2 percent.

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Japan Approves $116 Billion in Emergency Economic Stimulus

TOKYO — The Japanese government approved emergency stimulus spending of more than $100 billion on Friday, part of an aggressive push by Prime Minister Shinzo Abe to kick-start growth in Japan’s long-moribund economy.

Mr. Abe also reiterated pressure on Japan’s central bank to make a firmer commitment to stopping deflation by pumping more money into the economy — a measure the prime minister says is crucial to getting businesses to invest and consumers to spend.

“We will put an end to this shrinking, and aim to build a stronger economy where earnings and incomes can grow,” Mr. Abe told a televised news conference. “For that, the government must first take the initiative to create demand, and boost the entire economy.”

Under the plan, the Japanese government will spend about 10.3 trillion yen (about $116 billion) on public works and disaster mitigation projects, subsidies for companies that invest in new technology and financial aid to small businesses.

The government will seek to raise real economic growth by 2 percentage points and add 600,000 jobs to the economy, Mr. Abe said. The measures announced Friday amount to one of the largest spending plans in Japan’s history, he stressed.

By simply talking about stimulus measures, Mr. Abe, who took office late last month, has already driven down the value of the yen, much to the relief of Japanese exporters whose competitiveness benefits from a weaker currency.

But the government’s promises to spend its way out of economic stagnation also raise concerns over Japan’s public debt, which has already mushroomed to twice the size of its economy and is the largest in the industrialized world.

At the root of Japan’s debt woes was a similar attempt in the 1990s by Mr. Abe’s own Liberal Democratic Party to stimulate economic growth through government spending on extensive public works projects across the country.

Mr. Abe said, however, that the spending this time around would be better focused to bring about growth through investment in innovation. He said the government would also invest in measures that would help mitigate the fall in Japan’s population, by encouraging families to have more children.

“To grow in a sustainable way, we must help create a virtuous cycle where companies actively borrow and invest, and in so doing raise employment and incomes,” Mr. Abe said.

“For that, it is extremely important that we adopt a growth strategy that gives everyone solid hope that the future of the Japanese economy lies in growth.”

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Socialists Lose to Popular Party in Vote in Spain

With 99.8 percent of the vote counted Sunday night, the Popular Party, led by Mariano Rajoy, had won 186 seats and a governing majority in the 350-seat lower house of Parliament, while the governing Socialists plummeted to 110 seats from 169. It was the Popular Party’s best showing, and the Socialists’ worst, since Spain’s return to democracy in the 1970s.

Spain is the third southern European country in two weeks to see its government felled by the debt crisis in the euro zone. In Italy and Greece, prime ministers were forced by mounting financial and economic woes to resign and give way to interim “unity” governments of technical experts, who are meant to take urgent but unpopular austerity measures to cope with the crisis and then call new elections.

The new Spanish prime minister will have an advantage they lack — the solid backing of a freshly elected single-party majority in Parliament — but he must still cope with the same dire combination of economic stagnation, gaping budget deficits and crushing debts that brought down his predecessor, and that swept governing parties out of office in Greece and Italy this month, Portugal in June and Ireland in February.

In each case, the financial markets have forced the pace of events. As happened to Italy and Greece before it, Spain saw the effective interest rates on its new debt issues soar over the past week to heights not seen since the 1990s, before the introduction of the euro. The so-called risk premium demanded by investors for holding Spanish government bonds — compared with those of Germany, the soundest of the euro economies — briefly exceeded that of Italy on Friday. Together, they demonstrate a deepening skepticism that the euro zone can hold together and head off defaults by its weaker members.

In the end, the Socialist government of Prime Minister José Luis Rodríguez Zapatero was undone by the evaporation of Spain’s economic boom after the world financial crisis took hold. When the government took office in 2004, the Spanish economy was growing by 3 percent a year, the budget was balanced and unemployment was low by Spanish standards. But when the financial crisis hit, property values and the construction industry collapsed, banks needed rescuing, economic growth slowed, joblessness soared (it is now over 21 percent), and government finances fell deeply into deficit.

When Mr. Rajoy, 56, takes over as prime minister next month, he will bring little novelty to the Spanish political scene: he held senior posts in his party’s last government, from 2001 to 2004, and was defeated by Mr. Zapatero in the general elections of 2004 and 2008.

In the closing days of the campaign, Mr. Rajoy called on Spaniards to make “a common effort” to confront what he described as “the most difficult economic situation that Spain has faced in the past 30 years.” He also insisted that Spain’s voice “needed to be respected in Brussels” during coming European negotiations over the debt crisis, adding, “We will stop being a problem and instead form part of the solution.”

The threat of another recession and the magnitude of the euro debt crisis have made even supporters of the Popular Party question whether a center-right government can deliver the swift turnaround in Spain that the financial markets are demanding.

“The situation is so critical that it’s unfortunately not inconceivable that Spain will need outside intervention even before the new government gets a chance to get down to work,” said Gonzalo Díaz-Rato, a Madrid financier, who added that he backed the Popular Party because “Spain really needs change.”

Spain was not due to hold the election until March, but the impact of the debt crisis forced Mr. Zapatero to move up the date and forgo a campaign for re-election himself. Alfredo Pérez Rubalcaba, Mr. Zapatero’s 60-year-old former interior minister, led the Socialists in the campaign instead. Turnout was high, at 71.8 percent, but slightly lower than in 2008.

Mr. Zapatero’s government introduced a series of austerity measures over the last 18 months, cutting spending and laying off state workers, but economists say the new government will have to cut billions of euros more from state spending to meet the country’s deficit reduction targets. In the campaign, both parties’ leaders avoided spelling out in any detail what they would do to pull Spain from its economic quagmire.

“There will be no miracles, and we haven’t promised them, but when things are well done, results arrive,” Mr. Rajoy said after his victory.

Consuelo Pérez Cribeiro, a Popular Party volunteer poll watcher in Madrid, said Sunday that it was easier to predict how the election would come out than “to predict exactly what the next government will be able to do.”

Some regional parties also did well in the election. The Catalan nationalist party that governs the Catalonia region gained seats, as did Amaiur, a radical Basque nationalist party, a month after the separatist group ETA announced that it would stop its campaign of violence.

Aside from his government’s struggles with the economy, Mr. Zapatero brought marked social change to Spain, promoting women’s rights, pushing through contested changes in the abortion law and legalizing same-sex marriage. Relations with the dominant Roman Catholic Church cooled as his government made the state more secular. Mr. Rajoy has pledged to tighten access to abortion, but he is not expected to significantly unwind other parts of the Socialist agenda.

His new government will be pressed to overhaul rigid labor rules and the banking sector, particularly its savings banks, known as cajas.

“I think the market is after a clear resolution on the banking issue, because so far the approach to the restructuring and recapitalization of the cajas has been very hesitant,” said Gilles Moec, co-head of European economic research in London for Deutsche Bank.

While he has recently emphasized the importance of government by elected politicians rather than by technocrats, Mr. Rajoy’s government is expected to include some party outsiders in important jobs, including the Finance Ministry.

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Special Report: Energy: China Marches On With Nuclear Energy, in Spite of Fukushima

Meltdowns of three reactors at the Fukushima Daiichi nuclear power plant in Japan last March have put a chill on much of the world’s nuclear power industry — but not in China.

The German Parliament voted this summer to close the country’s remaining nuclear power plants by 2022, while the Swiss Parliament voted this summer to phase nuclear power out by 2034. Economic stagnation in the United States and most other industrialized economies since 2008 has produced stagnant electricity demand, further sapping interest in nuclear power.

In Japan itself, the government has put on hold its plans to build further nuclear power plants, and the government faces a political battle to continue operating existing reactors. Emerging economies like Brazil and particularly India are still planning nuclear reactors. But the Indian leaders introduced legislation on Sept. 7 that is supposed to increase the independence of nuclear regulators from the industry, though critics are skeptical.

That leaves China poised to build more nuclear reactors in the coming years than the rest of the world combined. But questions abound whether China will be a savior for the international nuclear power industry, or a ferocious competitor that could create even greater challenges for nuclear power companies in the West.

Chinese regulators performed a four-month review of safety at all existing nuclear reactors and reactors under construction after the Fukushima meltdowns and declared them safe. Safety reviews continue at reactors where construction had not yet started at the time of the Fukushima accident.

Jiang Kejun, a director of the Energy Research Institute at the National Development and Reform Commission, the top Chinese economic planning agency, said that the government was sticking to its target of 50 gigawatts of nuclear power by 2015, compared to just 10.8 gigawatts at the end of last year.

Mr. Jiang said in an interview that nuclear power construction targets for 2020 had not yet been set and might end up slightly lower than they would have been without the meltdowns in Fukushima. But he and other Chinese officials say that China’s rapidly rising electricity consumption makes nuclear power essential. They even try to portray the Fukushima incidents as salutary for the nuclear power industry, a view seldom heard elsewhere.

“Globally, I think Fukushima could be a good thing for nuclear power,” Mr. Jiang said. “We can learn a lot from that. We can’t be smug or too clever.”

China allowed existing reactors to continue operating during the safety review from March to July and allowed construction to continue at reactors where it had already begun. Chinese regulators have also encouraged electric utilities to continue planning future nuclear power plants.

But one category of reactor has been delayed by the Fukushima incident. At reactors that had been approved before the Fukushima accident but where construction had not yet begun, the government still has not allowed construction to start while continuing to study whether further safety improvements can be made, said Xu Yuanhui, one of China’s top nuclear engineers for the past half century.

The delay applies to several conventional nuclear reactors plus Beijing’s project to build two reactors in northeastern China, using a new generation of technology known as a pebble-bed design. Critics and advocates describe it as safer than current reactors, though its cost-effectiveness unclear.

The two reactors in Shidao, in Shandong Province in northeast China, were approved days before the Fukushima nuclear accident began with an earthquake and tsunami March 11. But the 50-month timetable for building them cannot start until the government lifts its hold on construction.

“By the end of this year, maybe we’ll have some information from the government side,” Dr. Xu said.

Nuclear power represented only 1.1 percent of China’s electricity generation capacity at the end of last year. With wind turbines and coal-fired power plants being installed at rates that far surpass those in any other country, nuclear power is on track to account for no more than 4 percent of electricity capacity by 2015.

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2 American Professors Awarded Nobel in Economic Science

Back in the 1970s, Dr. Sargent and Dr. Sims were interested in figuring out how a new policy, like a tax cut or an interest rate increase, might affect the economy. But economists cannot run controlled experiments in real life to see what happens when a policy is executed and compare the results to when it is not. Instead, they have to study whatever history is available to them, with all the complicated conditions that happened to coincide with the policy change.

Dr. Sargent and Dr. Sims developed statistical methods to organize historical data and disentangle the many variables.

Their new methodologies are used to figure out whether a policy change that happened in the past affected the economy or whether it was made in anticipation of events that policy makers thought would happen later. The methods also help decipher how regular people’s expectations for government policies can affect their behavior.

“For both Sims and Sargent, their research is fundamental,” said Mark W. Watson, an economics professor at Princeton. “They figured out what it is you need to know to answer this cause and effect question, and then they developed methods for actually measuring the effects of causes.”

Dr. Sims said that his research was relevant for helping countries decide how to respond to the economic stagnation and decimated budgets left by the financial crisis.

“The methods that I’ve used and that Tom has developed are central for finding our way out of this mess,” he said. But asked for specific policy conclusions of his research, he responded, “If I had a simple answer, I would have been spreading it around the world.”

Dr. Sims, who is president-elect of the American Economic Association, has primarily looked at temporary policy changes, like a surprise in government finances or a change in interest rates. For example, his methods have been used to determine whether a central bank’s decision to raise rates affected inflation, or whether bank officials raised the interest rate precisely because they expected inflation to change later.

His research that was honored on Monday led to a systematic method for distinguishing between unexpected shocks to the economy, like a change in oil prices or government finances, and expected changes, the prize committee of the Royal Swedish Academy of Sciences said in a statement.

His methodology, developed in the 1970s, has been influential in subsequent decades among economists in many fields and of different political leanings. Research using his methodology, for example, has helped lend credence to New Keynesianism, the theory that says that an economy can go into recession because there is not enough demand.

“The idea that there could be an aggregate demand failure is a very old idea, but it had been completely banished in the ’70s, ’80s and ’90s,” said Lawrence J. Christiano, a professor at Northwestern University. “Really the center of gravity of macro was very much in places like Chicago and Minneapolis. That was bumped away in part by results of applying this new methodology, and Sims is the one who originated that.”

Dr. Sims’s work has also been the basis of important papers by Ben S. Bernanke, the Federal Reserve chairman, and Olivier Blanchard, the chief economist at the International Monetary Fund.

Dr. Sargent, on the other hand, focused on longer-run structural changes in the economy, like setting a new inflation target. He has analyzed historical data to understand better how these types of policy changes affect the economy over time. He has also conducted experiments in a sort of laboratory setting to examine how new policies might alter the economy.

Dr. Sargent’s body of work is somewhat eclectic. For example, he spent the early part of his career building up the “rational expectations theory” — the idea that people make choices based on what they rationally expect to happen, and so expectations can affect outcomes — and then spent subsequent decades criticizing it.

“He’s an amazing character in that sense,” said Dr. Christiano, who wrote his dissertation under Dr. Sargent. “He contributed a revolution, and then tried to develop a revolution against that one.”

While the prize committee chiefly cited Dr. Sargent’s contributions to modeling and methodology, he has also done a number of influential empirical studies. He has studied historical episodes of hyperinflation, for example, and helped show how expectations for monetary policy can affect price changes.

“He looked at countries that were having inflation of hundreds of percent for months, like the European countries after world wars,” said Robert Lucas, a Nobel laureate and economics professor at the University of Chicago. “He wanted to know how you get out of inflation like that without causing a big recession. It’s a mix of economics and historical analysis.”

A more controversial line of Dr. Sargent’s research has examined how the generous welfare state in many European countries might be causing higher unemployment rates.

The two economists were awarded for work that they did independently of each other but that the prize committee said was complementary. They did collaborate once, in 1977, when they were colleagues at the University of Minnesota.

Their academic pedigrees have other similarities: Both received their Ph.D.’s from Harvard University in 1968, and both spent time studying at the University of California, Berkeley, before receiving their doctorates. Dr. Sargent received his bachelor’s from Berkeley, and Dr. Sims did postgraduate work at Berkeley after receiving a bachelor’s from Harvard College.

Coincidentally, the two winners, both 68, are jointly teaching a graduate course in macroeconomics at Princeton this semester.

The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel is not one of the original Nobel prizes. It was created in 1968 and is awarded annually “according to the same principles as for the Nobel Prizes,” first begun in 1901.

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News Analysis: In Portugal Crisis, Worries on Europe’s ‘Debt Trap’

So far the markets have taken Europe’s third successive sovereign financial crisis in stride. But many economists are a good deal more alarmed, most notably because the bailout formula European leaders keep applying to their most indebted member nations shows no signs of working.

Greece, Ireland and now almost certainly Portugal have access to hundreds of billions of dollars in emergency European aid to help them avoid defaulting on their debt. But the aid is really just more loans, and the interest rates the countries are paying, if a little lower than what the private market would charge, are still crushingly high. Their pile of debt gets bigger with every passing day.

Moreover, the price of these loans has been a commitment to slash government spending far more drastically than domestic leaders would have the desire or the political power to accomplish on their own. And for countries that depend a good deal on government spending to generate growth, rapid decreases in spending have meant sustained economic stagnation or outright recession, making every dollar of debt that much harder to pay back.

Economists call this “the debt trap.” Escape from the trap generally requires devaluation of the currency, which cannot happen among countries that use the euro as their common currency, or strong economic growth, which none of the three have, or some kind of bankruptcy process, which all three forswear. Add to that the likelihood that all three countries will continue to have unstable governments until they figure a way out, and Europe’s financial crisis has no end in sight.

“What has been missing, in the debate about how countries can restore their finances to some kind of sustainability, is the limit of how much they can cut in a period of austerity,” said Simon Tilford, chief economist for the Center for European Reform in London. “There is a limit of how much any government can cut back spending and survive politically unless there is a light at the end of the tunnel, a route back to economic growth.”

The problems of the weaker countries are not just sovereign debt, but also lack of competitiveness, both in Europe and the larger world. Without the nations restoring competitiveness and selling more goods abroad, which can only come through a longer-term process of reducing wages and taxes to spur private sector investment, economists are not optimistic about prospects for new growth soon.

The crisis in Portugal also raises new questions about whether the European Union will come to grips with the other side of its crisis, which are the banks. Banks in well-off countries like Germany, France and the Netherlands, as well as Britain, hold a lot of Greek, Portuguese and Irish debt. And if these countries cannot pay their debts, they would have to reschedule them, reduce them or default, causing a major banking crisis in the rest of Europe.

That reckoning would require governments to ask their taxpayers to recapitalize the banks, which is exactly what political leaders are afraid to do.

“We have a banking crisis interwoven with a sovereign debt crisis,” Mr. Tilford said. “Europe needs to address both, and it needs to acknowledge that the banking sectors of creditor countries — especially Germany — are not now in a position to handle restructuring and default, and that governments will have to pump money into the banks to recapitalize them.”

In essence, Mr. Tilford said, it is the taxpayers of Greece, Ireland and Portugal who are bailing out German, French and British taxpayers and depositors — not the other way around. The indebted countries are not really getting bailouts, he said, “but loans at high interest rates.” For there to be a real bailout, he said, there would have to be a default.

António Nogueira Leite, a former Portuguese secretary of the treasury and an adviser to the center-right opposition, said that the bailout packages “don’t really take into account the arithmetic of the debt.” The experiences of Greece and Ireland show, he said, “that once austerity sets in, the country doesn’t generate the means to be able to pay for the already incurred debt.”

The Economist magazine this week, in an article about Greece’s problems, said, “The international plan to rescue Greece is instead starting to paralyze it.”

Stephen Castle contributed reporting from Brussels.

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