Pumping billions into troubled economies has become the usual practice for the world central banks seeking to plug huge budget holes. Such an out of the box monetary strategy, generally known as ‘easy money’ may create another crisis, experts worry.
Since the financial crisis kicked off in 2007, the biggest central banks have injected above $11tn into the world financial system, the Wall Street Journal (WSJ) calculated. As recoveries by troubled economies are slow to come, more billions are in the pipeline to be pumped into government bonds, mortgages and business loans.
In the framework of its quantitative easing initiative, the US Federal Reserve has bought $40bn worth of mortgage – backed securities. The Bank of England also joined the club and agreed to inject billions of pounds into businesses and households. The European Central Bank, in turn, decided to keep interest rates low for the countries in trouble. The Bank of Japan, facing deflation, is purchasing about $1.14tn in government bonds, corporate debt and stock.
"These emergency measures could have undesirable effects if continued for too long," Jaime Caruana, general manager of the Bank for International Settlements, told WSJ.
"Will history decide they did too little or too much? We don't know because it is still a work in progress," said Kenneth Rogoff, an economics professor at Harvard and co-author of a book, "This Time Is Different," that examines financial crises over eight centuries. "They are taking risks because it is an experimental strategy." ...