09/29/2011 10:51 EDT | Updated 11/29/2011 05:12 EST

Governments Powerless to Prevent Another Recession

The more you hear about the extraordinary efforts that governments around the world are taking to promote economic growth, the less confident you can be in the result.

With the clock ticking on a Greek default, members of the European Monetary Union are considering sweetening their bail out pot for a second time since the summer. The problem, however, is a bigger bail out pot in Europe is not going to save Greece, whose economy is expected to contract at about 5% for a second consecutive year. It is just going to make the write offs that much bigger for German taxpayers and French banks when the inevitable default finally occurs.

Nor is the U.S. Federal Reserve Board's latest policy gimmick, 'the twist', likely to prove any more effective in breathing new life into a stagnating economy than the measures to prevent a Greek default. The move, a throwback to an earlier attempt in 1961, has the Federal Reserve Board selling short-term securities to buy ones with longer dates up the yield curve. The goal, much like that of the Fed's earlier tranches of quantitative easing, is aimed at bringing down long-term interest rates to resuscitate a moribund housing market.

But with long dated Treasury yields already near record lows, it is not the cost of mortgages but the lack of jobs that stands in the way of Americans buying more homes. Without jobs, U.S. households are no more likely to buy homes than Greek households are to pay taxes. Other than potentially weakening the U.S. dollar, it is a classic case of a central bank trying to push on a string. And in this particular case, the greenback perversely strengthened, most notably against gold, leaving the Federal Reserve Board with nothing for its efforts.

With government deficits at record highs and interest rates already held to record lows, it is becoming increasingly obvious that European or North American governments have run out of policy options to sustain growth. Our economies appear to be heading inexorably into another recession, and there doesn't seem to be anything our governments can do anymore to prevent it.