Economies have become interconnected but most central banks haven't kept up. Tom Sowanick is CIO of Clearbrook Research, part of Clearbrook Financial, a Princeton, N.J.-based wealth-management service provider.

In a period of financial instability and uncertainty, most central banks are paralyzed because of the rigidity of inflation targeting. The G-7 said over the past weekend that it was braced for individual and collective action to ensure financial stability and avoid recession. Trouble is, the threat of recession has escalated (at least in the U.S.), credit markets remain frozen, and risk aversion is still at an extreme level.

This is a perfect storm for global intervention. Unfortunately, the G-7 failed to produce anything more than words, leaving me scratching my head as to how bad things will have to get before a coordinated set of rate cuts are delivered.

Dead dragons

Inflation targeting is the main culprit for the central banks' lack of action. The U.S. and Japan are the only members of the G-7 that are not encumbered by inflation targeting. So it isn't surprising that the Federal Reserve has eased 325 basis points since last September, while the Bank of England and Bank of Canada have eased 50 basis points and the European Central Bank and the Bank of Japan haven't moved an inch. It's clear that the Fed is more flexible than central banks that focus mainly on fighting inflation.

Unfortunately, this rigidity may exacerbate our problems because a coordinated set of actions by central banks would send a calming message to financial markets and investors. At some point, coordinated rate cuts will happen -- but only after huge opportunities have come and gone.

Idle chatter

Remember: we are entering our sixth month of financial-market turmoil and so finance ministers have had plenty of time to take action.

By putting off central-bank coordination, the risk of currency dislocations surfaces, as in the case of the generally weak U.S. dollar. Commodity prices rise as a result of a weak dollar and this can serve as a catalyst for rising inflation in dollar-linked economies.

We like to talk about globalization, but we seem unwilling to act as if the world has advanced very far on that front. Economies have in fact become global but, as far as I can tell, our economic policies haven't.

In fact, the G-7 is a relic in the new global environment. Perhaps the perfect central bank is one that is transparent, communicates clearly, and is flexible as needs periodically re- quire. The value of a central bank is measured during periods of turmoil and uncertainty, not during tranquil periods.

By that measure, the G-7 failed us last weekend. -FWR

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