As central bank powers weaken, governments need to step up

WHILE this year's market correction has been blamed on oil price declines and China's botched attempts to control its stock market as well as its currency, there is an alternative explanation. Traders are turning pessimistic because they no longer have faith that central banks can give confidence to the global economy.

The world has experienced more than seven years of near-zero interest rates. Global economic growth, however, has slid from 5 per cent a year before the financial crisis to just 2-plus per cent a year, confounding expectations for a quicker recovery. Hopes for future growth are built into stock prices. If that growth is not forthcoming, it is only natural that stock prices will fall to reflect new realities.

Low interest rates can only help prevent a crisis from getting worse. They will not induce indebted consumers and businesses to borrow to invest in projects that might never generate a return. Some economists argue that cheap money is deflationary in nature, spurring investments in low-return projects that contribute to a situation of overcapacity. As money floods into various nooks and crannies around the world, only asset bubbles will form.