Leading Article: There is no magic bullet

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The Independent Online

Charles Bean, the Deputy Governor of the Bank of England, probably wishes he had chosen his words a little more carefully. No one wants to hear from one of the stewards of our economy that he and his colleagues have their "fingers crossed" that things will improve, or that the slowdown is likely to "drag on for some considerable time". What people want in turbulent economic times is precision and a plan, not airy fatalism.

But the problem is that Mr Bean was merely articulating the prevailing view, not just of the Bank of England, but of the world's central bankers. The annual meeting of the heads of national monetary policy in Jackson Hole, Wyoming (where Mr Bean made his comments), has rarely met in more fraught international circumstances. The banking crisis has combined with a sharp economic slowdown in Western economies and a global spike in commodity prices.

And the heads of the central banks have never been less sure about what to expect next from the global economy. The chairman of the US Federal Reserve, Ben Bernanke, has described the inflation outlook as "highly uncertain". The former deputy governor of the Bank of Japan, Yutaka Yamaguchi, has spoken of "exceptional uncertainty". Peter Fisher, a former Fed official, urged his fellow attendees to "admit to be puzzled". Some believe that the major danger is inflation. Others have an inkling that rising prices will soon give way to a serious bout of deflation. Some judge that the credit crunch is almost over. Others expect yet more banks to go bust. But no one is apparently willing to make any firm predictions either way.

This uncertainty has been reflected in the diversity of policy responses from central banks. The Federal Reserve has cut interest rates sharply since last summer. The Bank of England has followed, but on a much lesser scale. The European Central Bank has raised rates. And it is too early to tell which has been the correct response. Output has shrunk in Europe and ground to a halt in Britain. But lower rates have not stemmed the collapse of the American housing market nor delivered the US from recession.

The idea that there is an economic "magic bullet" that might restore our economies to health is, sadly, a fantasy. Mr Bean's choice of words might have been infelicitous, but the sentiment it reflected was wholly realistic.