I.Makingthemostofborrowedtime.PDFVIP

I. Making the most of borrowed time Six years ago, in mid-2007, cracks started to appear in the financial system. Little more than a year later, Lehman Brothers failed, bringing advanced economies to the verge of collapse. Throughout the ensuing half-decade of recession and slow recovery, central banks in these economies have been forced to look for ways to increase their degree of accommodation. First they lowered the policy rate to essentially zero, where it has been ever since in the United States, United Kingdom and euro area. (And where it has stood in Japan since the mid-1990s!) Next, these central banks began expanding their balance sheets, which are now collectively at roughly three times their pre-crisis level – and rising. Originally forged as a description of central bank actions to prevent financial collapse, the phrase “whatever it takes” has become a rallying cry for central banks to continue their extraordinary actions. But we are past the height of the crisis, and the goal of policy has changed – to return still-sluggish economies to strong and sustainable growth. Can central banks now really do “whatever it takes” to achieve that goal? As each day goes by, it seems less and less likely. Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances. And, most of all, central banks cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics both want and expect. What central bank accommodation has done during the recovery is to borrow time – time for balance sheet repair, time for fiscal consolidation, and time for reforms to restore productivity growth. But the time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private