That Europe depends on Mario Draghi and the European Central Bank (ECB) to combat deflation and to drag the EU into more rapid economic growth is a manifestation of political dysfunction – an inability to implement fiscal reform has meant dependency on monetary policy. On Thursday, Mr. Draghi said he hopes the measures he has taken will give time for the “structural reforms” he has advocated in the past. Europe’s political leaders, however and like ours, are caught in the web of unrealistic promises regarding healthcare and pensions. Like politicians going back several decades, they have chosen to leave the hard choices for future generations.
Typically, sharp and deep recessions have been followed by complementary sharp and steep recoveries. Stephen Moore wrote in the June issue of The American Spectator: “…if our economy had grown as fast under Obama as it did during the first five years of the Reagan recovery, American GDP would be more than $2 trillion larger today.” But not this time. In part that was because the fiscal crisis necessitated consumer and financial institution deleveraging. But, slow growth has also been a consequence of a failure to enact tax and regulatory reform. In fact, in the U.S. taxes have risen and regulation has become more severe. According to the Americans for Tax Reform, there have been 21 federal tax hikes since Mr. Obama took office. The Federal Register of Regulations shows 13,000 final rules that were published between 2009 and 2013.
In the U.S., fear of rising deficits obscured the necessity for tax reform. Lobbying by special interests, along with ObamaCare and a more aggressive EPA, killed any possibility of regulatory reform. Because central bankers were willing to attempt innovative and creative means of addressing the financial crisis, politicians were able to duck behind the skirts of their non-elected, central banker brethren. The failure, in 2010, of the Simpson-Bowles Commission is exhibit A.
The Federal Reserve (and the Treasury) took drastic measures at the height of the crisis in the fall of 2008. TARP (Troubled Asset Relief Program), a Treasury plan, was initially aimed at removing low-quality, non-performing loans from the balance sheets of banks. Besides lowering rates to near zero on December 16th of that year, the Federal Reserve began engaging in quantitative easing – the direct purchasing of Treasuries and mortgage securities, the purpose being to keep longer term rates down. Last Friday Mario Draghi had the ECB cut its main refinancing rate from 0.25% to 0.15%. He also said the bank would charge banks 10 basis points for parking cash at the Central Bank. The ECB also announced a “funding for lending” program (TLTRO) – a tool designed to encourage bank lending. Finally, they announced a plan to buy asset-backed securities, an asset category not widely used in Europe.