- Written by Bill Bonner, Founder and President, Agora Inc.
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The world is in crisis. Can central bankers save the day?
The Dow fell 64 points yesterday. Gold dropped by $9/oz.
Mr. Market is losing confidence in Mario Draghi's willingness to do "whatever it takes" to save the euro (and keep asset prices afloat). In fact, he's starting to doubt that Mario has "whatever it takes" in the first place.
Which makes us wonder: What does it take?
Haven't the central bankers put their hearts and souls into it? Haven't they pulled out all the stops... plugged in all their tools... and called in all their experts?
Didn't they give it a good college try? A major Ivy League effort?
You can hardly fault them. They've tried just about everything -- except what works.
As for Draghi, it's not the spirit that is lacking. It is the means. He may well want to hoist European markets (just like Ben Bernanke did in the U.S.) with an open-ended "put option" that undergirds both the stock and the bond market. Then maybe Draghi, too, will be declared a "hero."
Trouble is, "what it takes" is the authority to print an unlimited amount of currency. That way, lenders are sure they will get their money back. No question about it.
But that is something Draghi doesn't have. So far at least, the Finns and the Germans haven't gone completely mad. They cling to a few old verities. Such as: It's a bad idea to print huge quantities of paper money and give it to people with sunnier weather and shadier finances.
Sooner or later, though, the Northern Europeans will probably get with the program. Because, if they don't, major banks... and even sovereign nations... in Europe will go belly-up. Even in the freezing north, policymakers won't want that on their resumes.
But even if Draghi had the authority to conjure up as much cash as he wanted, he'd still be in trouble. The old cash trick works once or twice. Then it begins to lose its magic -- when people realize that it doesn't get the job done.
That's the hole Ben Bernanke is in now; it's the one Mario Draghi is aiming for. Once in it, it's hard to get out gracefully. You can print money: You can't print a real recovery.
"Heat Rises on Central Banks," The Wall Street Journal reported yesterday.
This week, both the European Central Bank and the Fed are in the spotlight. Draghi promised a big bazooka last week. Now investors want to see him hoist it to his shoulder and pull the trigger. If he doesn't, they're going to be disappointed. And Draghi will look like an idiot.
"The more news comes out," writes Yves Smith at Naked Capitalism, "the more it looks like Mario Draghi's pledge that the ECB would do all it would take to save the euro was a bluff."
Back in the USA, Ben Bernanke is still a hero to most people. As far as they can tell, he saved the U.S. from a terrible depression. No matter that the U.S. needed a depression to eliminate its outsize debts. And no matter that if we had been allowed a quick, sharp depression following the crash of 2008, we would now probably be in full recovery mode.
But for the moment, Bernanke still wears his hero's medals proudly. The Dow is still over 13,000. And growth is still positive -- though barely.
Still, taking the world as a whole, and central bankers as a group, things don't look so good. Europe is in recession. Japan is heading toward recession. And so, it appears, is the U.S. China is just slowing down... but could tip into a dangerous period of debt deleveraging at any time.
As for Britain, The Economist reports:
The British economy continues to get smaller. New data from the Office of National Statistics (ONS), released this morning, show that GDP fell by 0.7% in the second quarter of 2012 compared to the first quarter of the year. This adds another bad data point to cap a terrible five years.
So, central bankers are feeling the yearning masses cry out to them. "Touch us! Heal us!" the crowd implores.
But what can they do? What does it take? Is the situation hopeless?
Tune into tomorrow!