Barry’s Other New BFF

Aside from Bill, Barry has another BFF, Mario.

The head of the European Central Bank, Mario Draghi, announced today that the bank will buy lots and lots of bonds from struggling euro zone countries to help reduce their borrowing costs, especially Italy and Spain.   Draghi in effect drew a line in the sand, saying “The euro is irreversible.”

One country voted against the bond-buying plan.  That’s right — Germany.

Do I think this will save the euro?  No.  But it means there won’t be a big panic between now and our election.

It also seems as if Israel won’t attack Iran between now and November 6, although Bibi is not exactly another BFF.

Looks as if Barry has everything under control.  He just has to get through the debates without checking his watch or sighing and rolling his eyes.

Fifty Shades of Sado-Monetarism

From “Another Bank Bailout,” Paul Krugman, NYT:

“Most notably, last week the European Central Bank declined to cut interest rates. This decision was widely expected, but that shouldn’t blind us to the fact that it was deeply bizarre. Unemployment in the euro area has soared, and all indications are that the Continent is entering a new recession. Meanwhile, inflation is slowing, and market expectations of future inflation have plunged. By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts. But the central bank won’t move.

“And that doesn’t even take into account the growing risk of a euro crackup. For years Spain and other troubled European nations have been told that they can only recover through a combination of fiscal austerity and ‘internal devaluation,’ which basically means cutting wages. It’s now completely clear that this strategy can’t work unless there is strong growth and, yes, a moderate amount of inflation in the European ‘core,’ mainly Germany — which supplies an extra reason to keep interest rates low and print lots of money. But the central bank won’t move.

“Put all of this together and you get a picture of a European policy elite always ready to spring into action to defend the banks, but otherwise completely unwilling to admit that its policies are failing the people the economy is supposed to serve.

“Still, are we much better? America’s near-term outlook isn’t quite as dire as Europe’s, but the Federal Reserve’s own forecasts predict low inflation and very high unemployment for years to come — precisely the conditions under which the Fed should be leaping into action to boost the economy. But the Fed won’t move.

“What explains this trans-Atlantic paralysis in the face of an ongoing human and economic disaster? Politics is surely part of it — whatever they may say, Fed officials are clearly intimidated by warnings that any expansionary policy will be seen as coming to the rescue of President Obama. So, too, is a mentality that sees economic pain as somehow redeeming, a mentality that a British journalist once dubbed ‘sado-monetarism.’

“Whatever the deep roots of this paralysis, it’s becoming increasingly clear that it will take utter catastrophe to get any real policy action that goes beyond bank bailouts. But don’t despair: at the rate things are going, especially in Europe, utter catastrophe may be just around the corner.”  Emphasis added.

And that utter catastrophe may put Mitt in the White House.  Catastrophe squared!

The End of the Euro?

From “A Power Vacuum Is Choking the Euro Zone,” Tyler Cowen, NYT:

“Since December, the European Central Bank has lent more than a trillion euros to euro-zone banks, but that has bought no more than few months of peace.  It isn’t clear how much more can be done.  It probably is about time to judge the euro zone as a failed idea — and rarely is it wise to double down on failed ideas.

“What is most disturbing is that the euro-zone nations are democratic, protective of basic liberties, and have advanced intellectual and research communities.   The final lesson of this debacle is that smart nations with noble motives can make very big mistakes.  And that should concern us all.”

While the Storm Clouds Gather, Far Across the Sea…

Once again (see WWI, WWII), we will get dragged into Europe’s mishegas and suffer for it.  In a global economy, the Atlantic Ocean really is just a pond, or maybe just a puddle.

From “Europe’s Economic Suicide,” Paul Krugman, NYT:

“The question then was whether this brave and effective action [the European Central Bank’s making money available to banks late last fall] would be the start of a broader rethink, whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head in the first place.

“But they didn’t.  Instead they doubled down on their failed policies and ideas.

“Consider the state of affairs in Spain, which is now the epicenter of the crisis.  Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent…, and the youth unemployment rate over 50 percent.  This can’t go on — and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher.

“[T]he prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

“This is, not to mince words, insane.  Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen:  such programs push depressed economies even deeper into depression.  And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.

“The Continent needs more expansionary monetary policies, in the form of a willingness…on the part of the European Central Bank to accept somewhat higher inflation;  it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it.

“What we’re actually seeing, however, is complete inflexibility.

“Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy — and their society — off a cliff.”  Emphasis added.

The lamps are going out all over Europe, and we shall not see them lit again in President Obama’s first term, which may make it his only term.  He’s not just facing Mitt, he’s facing Merkel.

Germany Is Leading Europe Off a Cliff

Predictions for 2012 are all over the map, but one area where there is consensus is that Europe is heading for a recession.*  The question is how deep it will be and how much it will affect the U. S. (and President Obama’s re-election).

The Europeans are grimly following Germany’s Angela Merkel off the cliff of austerity, rather than using short-term stimulus to promote growth, which will lead to further contraction of economies in Greece, Italy and Spain.

I agree 110% with Charles Wyplosz, an economics professor in Geneva:  “We’re going straight into a wall with this kind of policy.  It’s sheer madness.”

I also agree with Julian Callow, the chief European economist for Barclays, when he talks about the wimpiness of the European Central Bank:  “Europe is going about this the hard way.  It’s not really using the central bank to alleviate these pressures in a dominant way.”

Once again, Germany is messing with the rest of Europe and with us.  Obama has more to fear from the Germans than the Republicans.

*See “Austerity Reigns Over Euro Zone As Crisis Deepens,” by Nelson D. Schwartz, NYT