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Central Bankers: Economic Depression Averted, But Debt Crisis Remains

Bold action by central banks and national governments staved off a global economic depression during the financial crisis of 2008 and 2009, but at a tremendous cost nations will struggle to overcome. That is the conclusion of a panel of trans-Atlantic central bankers that recently convened in Washington.

First the good news: after contracting slightly in 2009, global economic output is expected to grow more than 4 percent this year, according to the International Monetary Fund. With a fledgling recovery gaining strength, it is easy to forget how close major industrialized nations came to economic collapse less than two years ago, an outcome that almost surely would have triggered a worldwide depression rivaling the Great Depression of the 1930s.

In short, the pain, havoc, and economic devastation could have been far worse, according to the head of the U.S. Federal Reserve Bank of Dallas, Texas, Richard Fisher. Addressing central bankers from Europe and elsewhere, Fisher said central banks and national governments averted catastrophe through aggressive intervention.

"We did our job. A significant phase [crisis] has been passed through with as little harm done as conceivably could have been done under the circumstances. And I believe we pulled the economy back from the abyss."


To combat a crippling credit freeze, central banks slashed interest rates and pumped cash into credit markets. To combat a severe economic slowdown, governments of major economies sharply boosted spending to stimulate activity.

Jurgen Stark, executive member of the European Central Bank, said the combined response proved a success. "It has to do to a large extent with the stimulus measures taken by governments, and by the very vigorous response of central banks on the crisis. But this has a price," he said.

Price to pay

That price, according to Stark, is crushing debt. "Most governments in the advanced economies will exit from the recession with the highest deficits and the highest debt-to-GDP [gross domestic product] ratios recorded in times of peace," he said.

Stark said the debt burdens are unsustainable. He said massive fiscal deficits will constrain economic growth and job creation, increase inflationary risks, boost interest rates, and reduce private investment in productive enterprises.

That warning was echoed by Richard Fisher of the U.S. Federal Reserve. "This is of great concern to us at the central bank," he said. "We spend too much money, and we take in too little of it in the United States."

But trimming deficits is the job of elected officials, and Fisher had a blunt message for them. "The bottom line: it is now time for our fiscal authorities to do what fiscal authorities are paid to do, why they were elected to Congress: bring about some balance. And that will be a very tough battle," he said.

As in many countries, America's elected officials are loathe to raise taxes or cut spending, particularly when the economy is weak and millions are out of work. U.S. President Barack Obama has proposed a freeze on non-entitlement domestic spending, while awaiting recommendations from a bipartisan commission tasked with charting a course to a balanced federal budget. In the meantime, the U.S. federal deficit exceeded $1 trillion last year, and is projected to do so again this year.