With the U.S. economy at risk of a dip back into recession, much of Europe experiencing a debt crisis and global financial markets roiled, the world’s governments and central banks have fewer tools than usual to address the problems. But that doesn’t mean they have no options. Here are some actions these entities could consider that may address the problems — though all come with risks and downsides:


What it could do: Democrats suggest using fiscal policy to stimulate the economy, such as with a temporary cut to payroll taxes or new spending on roads and other infrastructure.

Republicans suggest cutting spending and cutting taxes permanently.

How it might help: Democratic approach could leave more money in Americans’ pockets to spend and put the unemployed to work building roads and such.

Republican approach could make businesses more confident and therefore willing to hire and invest.

Pitfalls and risks: Democratic approach would increase the national debt.

Republican approach could weaken the economy by reducing the amount of money flowing through it. Permanent tax cuts could worsen debt problem.


What it could do: There are few actions the White House could take on its own. It could direct Fannie Mae and Freddie Mac, the housing finance companies that are in government conservatorship, to relax rules that restrict the ability of homeowners to refinance their mortgages.

How it might help: People who are current on their payments but whose houses have lost value, and therefore wouldn’t normally qualify to refinance, could be allowed to do so and thus take advantage of very low current interest rates. Those who refinance to a lower mortgage rate would then have more money to spend on other goods and services, or pay down other debts.

Pitfalls and risks: The action would cost money for the U.S. government, both because the government has pledged to cover any losses experienced by Fannie and Freddie, and because the Federal Reserve owns large quantities of mortgage-backed securities issued by the two firms. Also, the companies’ regulator, who is supposed to be independent of the administration, may not allow it.


What it could do: Buy vast new sums of Treasury bonds or other securities with newly printed money, a step known as quantitative easing.

How it might help: Flooding the financial system with more cash would help preserve low interest rates on mortgages and other loans; the stock market and other assets would be expected to rise, and the dollar would stay lower relative to other currencies, making U.S. exporters more competitive.

Pitfalls and risks: Expanding the Fed’s easy money policies could stoke bubbles in financial markets, lead to higher prices for gasoline and everything else, and make the dollar decline in a rapid and disorderly way.


What it could do: Europe’s heads of state could agree to a much broader system of political and economic cohesion to address the debt crisis affecting several of its nations; for example, issuing joint European bonds guaranteed by all nations that use the euro currency and providing explicit guarantees of one another’s debts.

How it might help: The finances of Europe as a whole are in solid shape. The problem is that some states are in strong position (such as Germany, Austria and Finland) while others are weak (Ireland, Portugal and especially Greece). The crisis could be dealt with if the strong countries bail out the weak more explicitly.

Pitfalls and risks: Bailouts are immensely unpopular in the financially strong countries, so leaders who move in that direction may lose their next elections. And bailing out profligate countries could encourage more irresponsible borrowing in the future.

EUROPEAN CENTRAL BANK (central bank for the 17 nations that use the euro currency)

What it could do: Ease monetary policy — by cutting its short-term interest rate target from its current 1.5 percent, or use less conventional methods such as buying vast sums of financial assets with newly printed money.

How it might help: Lowering borrowing costs across the euro zone might simultaneously encourage businesses and consumers to spend more and lighten the load of the nations groaning under large debts.

Pitfalls and risks: It could spark inflation in the future, which is anathema to the ECB.


What it could do: Wean itself off a policy of intervening to keep the value of its currency low and exporters competitive.

How it might help: With the Chinese currency, the renminbi, stronger against the dollar, U.S. exporters would be more competitive in international trade, possibly leading to job creation. The longer-term imbalances that are a root cause of the 2008 crisis would be reduced.

Pitfalls and risks: China would be buying fewer U.S. Treasury bonds, which could make U.S. interest rates spike. Chinese exporters would become less competitive and could slash jobs, leading to an economic downturn in one of the few countries that has continued growing rapidly.