Outlook: G7's band aid solution won't work

WHAT DO world leaders mean when they talk about "co-ordinated action" to deal with the crisis in the international economy? Financial markets would like to think it means a synchronised cut in interest rates across the G7 countries; certainly that is what is required to put a convincing floor under Western equities right now.

Unfortunately, it is already plain as a pikestaff that this is not going to happen, not in the immediate future at least. Politicians can presumably still hope to influence the level of interest rates, but they no longer determine them. And the central bankers who do are sticking religiously to their brief, which in most cases is to keep the lid on domestic inflation.

Thus Eddie George, Governor of the Bank of England, was unable to hold out any more than the hope that interest rates have peaked at this week's TUC conference. Hans Tietmeyer, his German counterpart, was more intransigent still. Monetary policy in euroland was just fine, he said, and there would be no cuts. So that appears to be that, for four of the G7 at least.

As for the remaining three, there's no chance of a cut in Canada while the currency remains so weak. And in Japan, rates are already as low as can be without getting into the cloud-cuckoo-land of having to pay the borrower for the privilege of lending to him.

In the end, of course, the only one that really matters is the US. But even here official thinking on policy has yet to shift significantly away from the old priority of controlling inflation to dealing with the new threat of deflation. If Alan Greenspan, chairman of the Federal Reserve, has changed his thinking, he was offering few clues to it in his Congressional testimony last night.

There are, of course, other things world leaders can do to counter the present threat to the international economy beyond cutting interest rates or introducing capital controls. Gordon Brown, the British Chancellor, has been full of them during his visit to Japan. Mr Greenspan was similarly on message during his testimony last night. They could, for instance, bolster the IMF with fresh funds. If Republican opposition in the US continues to frustrate this process, bilateral loans to crisis-torn regions might be possible. There is already talk of such action in the event of the crisis snowballing in Brazil. There are also alternative ways of adding liquidity to markets.

Regrettably, set against the battering ram of interest-rate policy, none of these solutions offer more than a band-aid approach to the problem. It is the job of central bankers to stand above often-exaggerated predictions of disaster and make a considered judgement on these matters, but over the last month, the odds on the emerging markets contagion spreading to the US economy do seem to have shortened significantly. Given the seriousness of the position, it would be unwise of the Fed to test the point.

As George Soros, the international speculator, neatly put it in his testimony earlier this week to the US House Committee on Banking and Financial Services: "Financial markets are peculiar in this respect: they resent any kind of government interference, but they hold a belief that if conditions get rough, the authorities will step in." For the time being that presumption is proving a long way from the truth.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
tvGame of Thrones season 5 ep 4, review - WARNING: contains major spoiliers!
Arts and Entertainment
tvThe C-Word, TV review
Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Danny Jones was in the Wales squad for the 2013 World Cup
rugby leagueKeighley Cougars half-back was taken off after just four minutes
Life and Style
The original ZX Spectrum was simple to plug into your TV and get playing on
techThirty years on, the ZX Spectrum is back, after a fashion
Tiger Woods and Lindsey Vonn are breaking up after nearly three years together
peopleFormer couple announce separation in posts on their websites
Life and Style
Google celebrates Bartolomeo Cristofori's 360th birthday
techGoogle Doodle to the rescue
Arts and Entertainment
Haunted looks: Matthew Macfadyen and Timothy Spall star in ‘The Enfield Haunting’
tvThe Enfield Haunting, TV review
The Mattehorn stands reflected in Leisee lake near Sunnegga station on June 30, 2013 near Zermatt, Switzerland
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living