ICYMI: Time is up writes American Enterprise Institute (AEI) economist John Makin who notes that:

• Patterns of financial stresses continue (4 crises since March 2008/Bear Sterns)
• Markets have concluded that governments and central banks are out of bullets to fight economic weakness
• Policymakers must "acknowledge" and "preempt" these crises instead of "downplaying" and "reacting"

John Makin can be reached at jmakin@aei.org or through researcher Daniel Hanson at daniel.hanson@aei.org or 202.862.5883. For additional help, or other media inquiries, please contact Veronique Rodman at vrodman@aei.org or 202.862.4871

The full text of Makin's piece is copied below:

"How many times can we do this? Here's the pattern. Markets get spooked by weak economic numbers and bad news on some financial institution(s) (U.S. 2008) or a sovereign borrower (Europe 2010-12) and stocks sell off, threatening a self-reinforcing cascade into crisis. Then, central banks inject more funds into the banks, be it QE or Operation Twist or the promise of lower rates for longer in the U.S. or more lending by the central bank to stressed commercial banks (LTRO) in Europe. Congress extends/fails to terminate fiscal stimulus in the U.S. Markets rally. The economy picks up and financial sector stress eases for a while, but then economic weakness and financial stress returns and the process begins all over again.

This scenario has played out four times since the March 2008 Bear Stearns crisis: the September 2008 Lehman crisis; the spring-summer 2010 Greek crisis and U.S. deflation scare; the summer 2011 U.S. debt ceiling debate fiasco and worsening Greek crisis that spilled into autumn; and now the May-June 2012 crisis with a global growth slowdown appended to a Greek-Spanish financial crisis in Europe.

The message is now clear. The economy/financial sector boost from more policy stimulus has become smaller and less durable. Markets have concluded that central banks and governments are out of bullets to fight economic weakness and financial contagion: Witness the market’s disappointment to Bernanke's June 7 pledge to Congress to act if necessary if conditions in the economy and markets worsen further--only not until the Fed’s next scheduled meeting on June 19-20. We’ve heard this before. And the ECB assured us after their June 6 meeting that they are waiting and watching--as the situation worsens.

This lack of urgency is especially frightening at a time when markets fear that even when/if there is a policy response, it won’t provide any lasting relief from economic weakness and financial contagion.

A necessary--though not necessarily sufficient--condition to stem this latest crisis is for policymakers to acknowledge its newly acute nature and start talking about using a new policy protocol. Congress needs to implement a preemptive fix for the fiscal cliff--now--by agreeing to delay any tax increases. The Fed and the ECB need to work together to preempt bank runs and attendant deflation threats by pledging to increase the size and scope of asset purchase programs. "Acknowledge" and "preempt" are the key words here to replace the current regime of "downplay" and "react."

Many will say, with some justification , that there is nothing really new here, save the "acknowledge" and "preempt" approach. Fair enough. Those with better ideas should step forward. But please do it now. We are out of time.

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