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Opinion

Rate cuts are not enough -- governments must ramp up spending now

Politicians need to support central banks' monetary moves with fiscal boosts

| Japan
Governor Haruhiko Kuroda said the Bank of Japan will buy ETFs " twice as much as before" in a news conference on Mar. 16: it is not enough, though.   © AP

Better late than never, Bank of Japan. That is the best we can say about Governor Haruhiko Kuroda finally taking Tokyo off autopilot and stirring it into action on Monday now the risks from coronavirus to Japan's -- and the world's -- economy are surging.

It is not enough, though. The time of monetary freelancing has passed. While we are starting to see a coordinated -- or at least simultaneous -- international response from central banks to an economic foe that leaders have not confronted in decades, without government intervention in the form of major spending, 2020 will make the financial crises of 1997 and 2008 look quaint. Importantly, this must all be consistent.

My point here is not to sound alarmist; I will let Goldman Sachs do that for me. Chief Goldman economist Jan Hatzius reckons U.S. gross domestic product will contract by 5% in the second quarter. Though Hatzius thinks GDP may do better in the second half of 2020, no one really knows -- least of all today's crop of central bankers.

The trouble with the rate cuts of the last 24 hours is they smack of "hitting the panic button," as analysts at Fitch Solutions put it. The Fed cut rates by a percentage point back to almost zero and the Reserve Bank of New Zealand cut 75 basis points to 0.25%. The Bank of Korea cut from 1.25% to 0.75%. The BOJ expanded its asset-purchasing efforts targeting stocks, corporate bonds and commercial paper by more than $100 billion.

Yet policymakers still largely seem to be playing catchup, though a video conference of G-7 leaders on Monday was welcome. They need a more proactive footing -- and looking back at Asia's 1997-98 crisis should give them some good ideas.

During that time, contagion spread fast from Thailand, South Korea and Indonesia to Wall Street and the City of London. By late 1997, Yamaichi Securities, one of Japan's biggest brokerages, collapsed. In August 1998, the turmoil had Russia defaulting on bonds, which crashed the Long-Term Capital Management hedge fund.

That period is far from analogous to today. Then the contagion was of the financial-panic kind, not a respiratory illness blanketing the globe. But now markets face both challenges at once, cooperation of the kind the globe mustered two decades ago is desperately needed.

While far from ideal, bailouts from the International Monetary Fund, augmented with buy-ins from major governments, helped Asia recover in the late 1990s. A pact among 14 top Wall Street institutions helped recapitalize Long-Term Capital.

By 1999, Time magazine was celebrating the "Committee to Save the World" on its cover. It featured Fed Chairman Alan Greenspan, Treasury Secretary Robert Rubin and his deputy Lawrence Summers, showing exactly how monetary and fiscal policies needed to work together in a crisis -- except now it needs a committee from around the world, not just the U.S.

Alan Greenspan, left, and Robert Rubin appear before the Senate Banking Committee on Capitol Hill in June 1998, showing how monetary and fiscal policies needed to work together.   © AP

The Fed's March 15 rate surprise would have packed more punch if coupled with a fiscal spending surge. For years now, U.S. President Donald Trump promised an infrastructure boom. Why not unveil one in conjunction with aggressive Fed action? A rate cut by the Bank of England and an expansionary budget from the U.K. government last week provided a timely model for dual action.

Kuroda should cajole Prime Minister Shinzo Abe's team to cobble together a bigger stimulus plan and implement bold reforms to increase innovation. Yet Kuroda also should take the BOJ's regional status out for a ride and get Asian peers on the phone. A joint commitment to do whatever it takes to stabilize growth and, perhaps, collective rate actions would bolster confidence among businesses, households and investors.

Kuroda should cajole Abe's team to cobble together a bigger stimulus plan and implement bold reforms to increase innovation. (Photo by Masaru Shioyama) 

With global rates at or near zero for most of the biggest economies, monetary policy has lost much of its raw potency. It helps to support asset prices and cheer investors. But like any stimulant, it loses effectiveness over time and requires bigger doses. With ultralow rates, fiscal jolts are now more important to pump fresh energy in economies.

Such energy could come in form of old-school public works spending -- investing in massive expansions of health services, for example. But in today's traumatized environment, monetary and fiscal policy makers would be wise to act in conjunction, both to get broad attention, but also so that one demand-increasing lever plays off the other.

The question now is how soon a global recession, or worse, will take hold, and this makes collective action more important with each passing day. Coordination is needed both domestically and internationally from banks and governments.

In much of Asia, there are still reasonable amounts of monetary ammunition. On Monday afternoon, the Reserve Bank of India had 515 basis points to cut from. Bank Indonesia has 475 basis points, the Philippines has 375 basis points.

Asia's most open, trade-reliant economies also have some room to maneuver. Taiwan's benchmark rate is 1.375%, for example.

Yet rate cuts would get more traction if central banks announced their authority in unison and with fiscal programs too. Getting Asia's peers on the same page could just save Asia's markets.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

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