The chief economist for one of the world's largest banks is warning that recovery from the next recession will present "titanic problems" for policy makers.

HSBC chief economist Stephen King warned in a note to investors that unlike the 2008 recession, there is a lack of "policy ammunition" to jump start the economy out of a downturn.

Business Insider:

In a note to clients Wednesday, he warns: "The world economy is like an ocean liner without lifeboats. If another recession hits, it could be a truly titanic struggle for policymakers."

Here's King (emphasis added):

Whereas previous recoveries have enabled monetary and fiscal policymakers to replenish their ammunition, this recovery — both in the US and elsewhere — has been distinguished by a persistent munitions shortage. This is a major problem. In all recessions since the 1970s, the US Fed funds rate has fallen by a minimum of 5 percentage points. That kind of traditional stimulus is now completely ruled out.

King notes that this far into the recovery, there's a lack of "traditional policy ammunition." For instance, Treasury yields have not risen, the budget deficit is not falling, and welfare payments are still on the rise.

The fact is, interest rates can't get any lower, so this traditional means of goosing the economy to get it going again is not available. And with budget deficits still tickling a half trillion dollars, the government is extremely limited in how much stimulus they can supply via federal spending.

And the Federal Reserve's ridiculous monetary policy of keeping interest rates near zero despite evidence that the program is not working as intended, is likely to cause trouble in the economy when interest rates begin to climb this summer:

Something is wrong. The monetary stimulus theory behind zero interest rates is not playing out in reality. Where's the economic growth? This mystery will not be solved by former Fed prima donnas refusing to acknowledge that American citizens and their representatives in Congress have every right — indeed, Congress has a constitutionally mandated responsibility — to call to account those who have been appointed to the task of regulating U.S. money.

No one is accusing anyone of less-than-noble intentions or less-than-heroic efforts in utilizing central bank powers to influence economic outcomes. But when monetary authorities themselves are repeatedly stymied by less-than-optimal results, it's time to consider changing course. An accountable Fed would accept the notion that its monetary stimulus strategy needs to be examined because it has not delivered anticipated results, by the Fed's own projections, within a reasonable time period.

Maybe the problem stems from the Fed's enhanced regulatory scrutiny over banks' lending decisions in the wake of the crisis. Overregulation may have had an especially inhibiting effect on community banks. Before the Dodd-Frank bank regulation law passed in 2010, an average of more than 100 new banks opened each year; in the five years since 2010, only one new bank has opened. Fear of violating regulations has caused many hometown banks to reject loan applications from traditional customers — with the result that small business lending has been dampened. And that factor alone is a blow to economic growth.

Then, too, the normal money multiplier has not been functioning properly due to banks' massive buildup of excess reserves, which have gone from $1.9 billion in August 2008 to a staggering $2.6 trillion currently. A study issued by the Cleveland Fed in February states that banks now find it "both easier and more attractive" to hold excess reserves than make loans. Why? Fed policies have altered the terms of the trade-off; the marginal benefit of holding reserves has increased because the Fed now pays interest on them, while the marginal cost in terms of forgone interest on loans has decreased under the low-rate conditions engineered by the same Fed.

The Fed's "Quantitative Easing" plan, where it bought about $80 billion a month in bonds did absolutely nothing to grow the economny. It only grew the reserves of the big banks who turned around and rather than increasing the number of loans, is actually loaning less than in 2010. 

Yet, the Fed continues to ignore the reality of their policies. It appears that the next economic downturn (Obama may be able to make the waters recede but he hasn't figured out how to defeat the business cycle) will be even worse than the last one.