Central bankers coming to the rescue - maybe

From the US to Japan, hopes for averting recession rest with interest-rate mechanics.

They don't have the flair of a James Bond or Fox Mulder, but two of the world's central bankers will attempt to save the world this week from the perils of faltering economies and plunging stock-market prices.

Federal Reserve Chairman Alan Greenspan and his less-than-flashy fellow policymakers meet in Washington tomorrow, when they are expected to cut short-term interest rates by at least half a percentage point.

Half a world away, in a session at least as significant, the Bank of Japan's Policy Board under Governor Masaru Hayami meets today. Businesses, investors, and politicians are counting on the central bank trimming its key interbank lending rate to zero from 0.15 percent, the lowest in the world.

Even more noteworthy, the bank may also decide to print money to revive Japan's dormant economy. For years, the bank has been avoiding aggressive expansion of the money supply as a way to reinflate the economy.

In praise of printing money

"It's about time," says Milton Friedman, the Nobel prize-winning dean of monetary economists.

He urges Japan's central bank, in fact, to quit tinkering with interest rates altogether and concentrate on "printing money" by buying large amounts of existing Japanese government bonds - or even US dollars or debt.

The extra money feeding into individual bank accounts and swelling commercial bank reserves will, after nine months or so, stop Japan's current deflation and revive its economy and depressed stock market, asserts Mr. Friedman, now at the Hoover Institute in Palo Alto, Calif.

Other economists, however, argue that the creation of new money when interest rates are already so low is like "pushing on a string" - useless.

"It's a desperate measure," says William Cline, an economist at the Institute of International Finance, a Washington group representing the world's largest financial institutions. "But maybe it ought to be tried."

Such a move could even backfire, says Clyde Prestowitz of the Economic Strategy Institute in Washington. Japanese consumers, he says, could be "spooked by the knowledge their government is printing money" and spend less.

Economists frequently point to Japan's "structural" problems. Its banks, for example, are regarded as financially shaky (see story, Page 6). A credit-rating agency last week warned it may downgrade its assessment of 19 lenders.

If Japan's economy revives, the improvement would be felt in the US. When Japan's stock market plunged to new lows last week, prices on Wall Street dipped the next day. When stocks in Tokyo lifted, US blue-chip stocks rebounded a bit.

No superheroes in Europe

Even as central bankers in the US and Japan don their superhero capes, their counterparts in Europe continue their mild-mannered ways.

So far, there's no need for a dramatic rescue. Though slowing a bit, Europe's economy is doing fine. Indeed, it could take on the role of "global locomotive" - the part so recently held by the US economy, suggests Mr. Cline.

Britain's economy is especially vigorous. Unemployment there last month hit its lowest level in 25 years. Given such good news, Bank of England policymakers may leave interest rates unchanged when they meet April 4 and 5, economists speculate.

The European Central Bank (ECB), which serves the 12-nation euro area, is expected to wait for further economic slackening before easing monetary policy. If Europe's growth in output falls below a real 2.8 percent, the ECB may trim interest rates about one-third as much as the Fed in the US, says Cline.

The Fed, meanwhile, faces mixed economic signals at its meeting tomorrow. The stock market has tanked. Industrial production was down decidedly. OPEC moved to prop up oil prices. But on the bright side, consumer expectations revived slightly, and the producer price index was tame in February.

Many Fed watchers expect a 0.75 percentage point rate cut.

Friedman, for his part, argues that any Fed rate cut is unwise. The US money supply is already growing too rapidly, he says, and so the country is in danger of "stagflation," a combination of low growth and high inflation.

(c) Copyright 2001. The Christian Science Monitor

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