Central banks on both sides of the Atlantictook extraordinary monetary-policy measures in September: the long awaited “QE3” (the third dose of quantitative easing bythe United States Federal Reserve), and the European Central Bank’sannouncement that it will purchase unlimited volumes of troubled eurozonemembers’ government bonds. Markets responded euphorically,with stock prices in the US,for example, reaching post-recession highs.

Others, especially on the political right, worried that the latestmonetary measures would fuel futureinflation and encourage unbridled governmentspending.

In fact, both the critics’ fears and the optimists’ euphoria are unwarranted. With so muchunderutilized productive capacity today, and with immediate economic prospectsso dismal, the risk of serious inflation isminimal.

Nonetheless, the Fed and ECB actions sent three messages that should havegiven the markets pause. First, they were saying that previous actions have notworked; indeed, the major central banks deserve much of the blame for thecrisis. But their ability to undo their mistakes is limited.

Second, the Fed’s announcement that it will keep interest rates atextraordinarily low levels through mid-2015 implied that it does not expectrecovery anytime soon. That should be a warning for Europe, whose economy isnow far weaker than America’s.

Finally, the Fed and the ECB were saying that markets will not quicklyrestore full employment on their own. A stimulus is needed. That should serveas a rejoinder to those in Europe and Americawho are calling for just the opposite – further austerity.

But the stimulus that is needed – on both sides of the Atlantic – is a fiscal stimulus.Monetary policy has proven ineffective, and more of it is unlikely to returnthe economy to sustainable growth.

In traditional economic models, increased liquidity results in morelending, mostly to investors and sometimes to consumers, thereby increasingdemand and employment. But consider a case like Spain,where so much money has fled the banking system – and continues to flee asEurope fiddlesover the implementation of a common banking system. Just adding liquidity,while continuing current austerity policies, will not reignite the Spanisheconomy.

So, too, in the US,the smaller banks that largely finance small and medium-size enterprises havebeen all but neglected. The federalgovernment – under both President George W. Bush and Barack Obama – allocatedhundreds of billions of dollars to prop up themega-banks, while allowing hundreds of thesecrucially important smaller lenders to fail.

But lending would be inhibited even if the banks were healthier. Afterall, small enterprises rely on collateral-basedlending, and the value of real estate – the main form of collateral – is stilldown one-third from its pre-crisis level. Moreover, given the magnitude ofexcess capacity in real estate, lower interest rates will do little to revivereal-estate prices, much less inflate another consumption bubble.

Of course, marginal effects cannot be ruledout: small changes in long-term interest rates from QE3 may lead to alittle more investment; some of the rich will take advantage of temporarilyhigher stock prices to consume more; and a few homeowners will be able torefinance their mortgages, with lower payments allowing them to boostconsumption as well.

But most of the wealthy know that temporary measures result only in a fleeting blipin stock prices – hardly enough to support a consumption splurge. Moreover, reports suggest that few of thebenefits of lower long-term interest rates arefiltering through to homeowners; the major beneficiaries, it seems, arethe banks. Many who want to refinance their mortgages still cannot, becausethey are “underwater” (owing more on theirmortgages than the underlying property is worth).

In other circumstances, the USwould benefit from the exchange-rate weakening that follows from lower interestrates – a kind of beggar-thy-neighborcompetitive devaluation that would come at the expense of America’s trading partners. But,given lower interest rates in Europe and theglobal slowdown, the gains are likely to be small even here.

Some worry that the fresh liquidity will lead to worse outcomes – forexample, a commodity boom, which would act much like a tax on American andEuropean consumers. Older people, who were prudent and held their money ingovernment bonds, will see lower returns – further curtailingtheir consumption. And low interest rates will encourage firms that do investto spend on fixed capital like highly automated machines, thereby ensuringthat, when recovery comes, it will be relatively jobless. In short, thebenefits are at best small.

In Europe, monetary intervention hasgreater potential to help – but with a similar risk of making mattersworse. To allay anxiety about government profligacy, the ECB built conditionality into itsbond-purchase program. But if the conditions operate like austerity measures –imposed without significant accompanying growth measures – they will bemore akin to bloodletting: the patient mustrisk death before receiving genuine medicine. Fear of losing economicsovereignty will make governments reluctant to ask for ECB help, and only ifthey ask will there be any real effect.

There is a further risk for Europe: If the ECB focuses too much oninflation, while the Fed tries to stimulate the US economy, interest-ratedifferentials will lead to a stronger euro (atleast relative to what it otherwise would be), undermining Europe’scompetitiveness and growth prospects.

For both Europe and America,the danger now is that politicians and markets believe that monetary policy canrevive the economy. Unfortunately, its main impact at this point is to distractattention from measures that would truly stimulate growth, including anexpansionary fiscal policy and financial-sector reforms that boost lending.

The current downturn, already ahalf-decade long, will not end any time soon. That, in a nutshell, is what theFed and the ECB are saying. The sooner our leaders acknowledge it, the better.