Throughout modern economic history, every major financial crisis has been followed by premature abandonment—if not reversal—of the very stimulus policies necessary for sustained recovery. If the world is not to repeat that mistake, the Federal Reserve and the European Central Bank (ECB) must engage in further monetary stimulus, which today means purchasing additional government securities in large quantities. The economic outlook has turned out to be as grim as mainstream forecasts predicted, due to the nature of the recession, the cutbacks in government spending and the simultaneity of problems across the Western world. Sustained high inflation is not a threat in this environment. The urgent problem is that investment has been held back over uncertainty about the future and the large overhang of private-sector debt. Alleviating general financial problems and restoring investor confidence is what monetary stimulus does. Central bankers have a duty to make economic conditions better when they can, and must not hold back out of fear of being misperceived. Reluctance of the independent ECB to visibly cooperate with elected officials and buy bonds is bringing the euro area to the brink of disaster.
For more details, see my op ed in the New York Times.
See also to my October speech “How to do more” [pdf] from which this was drawn.