So, more drugs to deal with our collective lack of growth. The Bank of England’s Funding for Lending extension is welcome: the scheme lasts longer than before, contains extra incentives to lend to cash-strapped small and medium-sized enterprises and has been widened to include non-bank sources of credit, including financial leasing corporations. And after some remarkably soggy eurozone data – including purchasing manufacturers index figures suggesting that the German economy is not quite as dynamic as Bayern Munich – investors are increasingly hopeful that the European Central Bank will come to the rescue, buying up equities as if the dark clouds are about to lift.
There can be no doubt that the drugs on offer from central banks can shift markets. But can they also shift economies? That, surely, is the big public policy question. In the immediate aftermath of the financial crisis, the answer was a decisive “yes”. Faced with rapidly melting confidence and a serious lack of liquidity, central banks stepped in to prevent what might otherwise have been a second great depression. The answer now is not so obvious. It is not so much that the drugs don’t work. Rather, they are acting more as pain killers than as antibiotics. They make some of us feel a bit better but the economic results are, to say the least, disappointing. Even in the US, which has done better than most, the pace of recovery is distinctly limp by historical standards.
This is not to criticise the actions of central banks. The Funding for Lending Scheme is better than nothing. An interest rate cut from the ECB would doubtless be welcomed. The Bank of Japan’s actions have already provoked a major change in sentiment. Without a sustained recovery in economic activity, however, the danger is simply that central banks are pumping up asset prices and creating a bigger and bigger gap between financial hope and economic reality.