Central Bankers Urge Governments to Keep Global Economic Expansion Intact

Central bankers gathered at an annual retreat in Jackson Hole, Wyoming, this weekend had a message for political leaders: monetary policy alone can’t keep the global expansion going.

Federal Reserve Chairman Ben S. Bernanke urged adoption of “good, proactive housing policies” to reverse the depressed U.S. real estate market and warned lawmakers to avoid steps that may hurt short-term growth. Ewald Nowotny of the European Central Bank Governing Council said euro-area governments should expand the powers of their regional bailout fund.

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Bernanke said at the annual conference of policy makers and economists, sponsored by the Kansas City Fed.

The call to arms ended a month in which the Fed and the ECB raced to shield their economies from fiscal tightening and strengthen a world economy that is losing momentum. Reports this week may underscore the challenges faced by policy makers: U.S. payroll growth probably slowed in August, and confidence in Europe’s economy fell to its lowest since April 2010, economists forecast. Fed policy makers will meet for two days in September instead of one so they can discuss options for spurring growth.

Warning of a “dangerous new phase” for the world economy, International Monetary Fund Managing Director Christine Lagarde told the forum that risks have been aggravated by “a growing sense that policy makers do not have the conviction, or simply are not willing, to take the decisions that are needed.”

‘Twin Perils’

“Fiscal policy must navigate between the twin perils of losing credibility and undercutting recovery,” said Lagarde, who took the helm of the IMF in July.

Bernanke told the conference that the U.S. central bank still has a “range of tools” it could use to help the economy if needed, although he stopped short of signaling that the Fed would embark on a third round of government bond buying.

‘Only Game in Town’

“It’s a difficult burden central banks are carrying because of the constraints of fiscal policy,” Diane Swonk, chief economist at Mesirow Financial Holdings Inc., said in an interview in Jackson Hole. “The Fed and other central banks realize they are the only game in town.”

The policy makers met for three days to discuss ways to bolster long-term economic performance. They gathered as banks from UBS AG to Citigroup Inc. cut their forecasts for global expansion and predicted the Fed, ECB and Bank of Japan will keep benchmark interest rates at or near record lows through 2012.

Recession Odds

Harvard University Professor Martin Feldstein, who attended the conference, told Bloomberg Television there are “better than even” odds of another U.S. recession, while Stanford University’s John Taylor called it a “recovery in name only.” Allen Sinai, president of Decision Economics, said the chance of a global slump is 30 percent.

The dilemma for policy makers is that four years to the month since the start of the global credit crisis they have fewer remedies to aid the faltering expansion. Government budget deficits are high and interest rates are already at or near record lows.

A paper presented at the conference by economists from the Bank for International Settlements concluded that governments start to impair economic growth when their debts reach about 80 percent to 100 percent of gross domestic product, levels now witnessed in all of the Group of Seven countries.

Kansas City Fed President Thomas Hoenig told Bloomberg Television that there is a limit to how much more the Fed can help the economy, saying, “We can’t do it all.”

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