Krugman Blasts Fed

From  “The Great Abdication,” Paul Krugman, NYT:

“Ben Bernanke…has warned in particular about the damage being done to America by the unprecedented level of long-term unemployment.

“So what does the Fed propose doing about the situation?  Almost nothing.  True, last week the Fed announced some actions that would supposedly boost the economy. But I think it’s fair to say that everyone at all familiar with the situation regards  these actions as pathetically inadequate — the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.

Why won’t the Fed act?  My guess is that it’s intimidated by those Congressional Republicans, that it’s afraid to do anything that might be seen as providing political aid to President Obama, that is, anything that might help the economy.

“None of this should be happening.  As in 1931, Western nations have the resources they need to avoid catastrophe, and indeed to restore prosperity — and we have the added advantage of knowing much more than our great-grandparents did about how depressions happen and how to end them.  But knowledge and resources do no good if those who possess them refuse to use them.

“And that’s what seems to be happening.  The fundamentals of the world economy aren’t, in themselves, all that scary; it’s the universal abdication of responsibility that fills me, and many other economists, with a growing sense of dread.”  Emphasis added.

The Fourth Reich Is Upon Us

From “Conspiracy Theories Fly As Europe Struggles,” Floyd Norris, NYT:

Imagine for a moment that two decades ago, a newly unified Germany set out to take over the European Continent, as the previous unified Germany had tried and failed to do half a century earlier.  This time it would use money, not guns, to accomplish the goal.

“There is, let me hasten to note, no evidence of any such conspiracy.  But if there had been, things might have played out more or less as they have.

“Conceivably, Germany learned three things from the 1992 experience [when Germany’s raising of interest rates forced other European countries to do the same, hurting their economies], and mapped out a course with those lessons in mind.  First, absent fixed exchange rates, its export-oriented companies faced the risk of periodic competitive devaluations from the rest of Europe.

“Second, a currency union could help German exports if the euro’s value were held down by less competitive economies.

“Finally, if Germany adopted a low-interest-rate policy, and superlow rates arrived in European nations accustomed to high rates, banks could open the credit spigot and create a debt-financed boom in much of Europe.  That would invite a mushrooming of imbalances.  Ultimately, deeply indebted countries would face a crisis, one that they could solve only if they acquiesced to German policies and surrendered a large part of national sovereignty.

“The endgame may be approaching.  Troubled countries are facing an increasingly clear choice.  They can stay in the euro zone, and face years of endless recession.  They can abandon the euro, perhaps bringing catastrophe but giving them the freedom to devalue their new currencies.  Or they can accept the German offer:  Surrender sovereignty.  Accept German leadership and domination of a unified Europe.  Then we will bail you out.”  Emphasis added.

Are the Three Stooges Running Europe?

That $125 billion bailout that was supposed to help stabilize Spain is just accelerating the downward spiral.  The money, which went to the Spanish government so they could bail out their banks, rather than directly to the banks, of course adds to Spain’s overall debt.

So Moody’s has now downgraded Spanish debt to one step above junk.  Spain’s cost of borrowing, which the bailout was supposed to bring down, has jumped to 6.96% for the ten-year bond.

As that rate rises, so do Mitt’s chances of winning.  The pain in Spain generates cheers, not tears, in Boston.  They’re crying in the White House and Chicago, but for themselves, not the Spaniards.

Piecemeal Approach to Euro Cuts Europe to Pieces

For a quick and clear explanation of the mess that is Europe, check out “Why the Bailout In Spain Won’t Work,” Andrew Ross Sorkin, NYT.  Some excerpts:

“By now, it should be apparent that the [Spanish] bailout has failed — or is at least on its way to failing.

“Indeed, it now appears that the bailout could make things in Spain worse, not better.  And market indicators for the next domino in line for a bailout, Italy, point in the wrong direction.

“This was bound to happen.  That’s because bailing out the banks in each European country individually is a fool’s errand.

“Experts often cite — wrongly — that TARP, the Troubled Assets Relief Program that pumped $700 billion into the banking system in the United States, arrested the financial crisis in 2008.  TARP, to some degree, has become the model for Europe.

“But we forget history:  TARP was only one component of the bailout.  Perhaps more important — consider it the unsung hero of the financial crisis — was the government’s unilateral moves to raise the amount of money the Federal Deposit Insurance Corporation could insure, increasing the account limit to $250,000 from $100,000 and fully backstopping the entire money-market industry.

“Investors and bank customers who were considering taking their deposits and running in 2008 no longer had reason to do so….

“That is not the case in Europe.  Customers of Spanish banks still have reason to worry about the solvency of their banks — and their country — making it reasonable for them to take their money from Spanish banks and send it to banks in safer countries like Germany.  Indeed, the bailout makes it less likely Spain can pay back its debts because the new loan of up to $125 billion was just added to its huge debt pile.

“As a result, it could be argued that it would be irresponsible for an individual or company, which has a fiduciary duty to shareholders, not to move its money out of Spanish banks.

“Ultimately, the only real way to begin to ensure the safety of the banks in Spain — and all of Europe — is to create a euro zonewide deposit guarantee system….

“Oddly enough, such a deposit guarantee would probably be pretty cheap.  The psychological effect of such a guarantee would most likely insure the solvency of more banks than the guarantee would ever have to pay out.

“Of course, there a catch.  A euro zonewide deposit guarantee would require agreement from all 17 member countries, which is something the leaders there seem incapable of reaching….

“And here’s another problem with a euro zonewide deposit guarantee:  Unless you believe the euro is going to remain the standard…even the guarantee might not be enough, unless the guarantee holds for all currencies.  For example, if a Spanish bank customer is worried that his euros might one day turn into pesetas — even with a deposit guarantee in place — he might well move his money.”  Emphasis added.

I encourage you to read the whole column.  I think we know whose side Mitt is on here.

We’re going to look back and wonder why solutions like this weren’t put in place before everything fell apart.  In hindsight, it will look so obvious and so easy compared to all the fallout.