How does Berkeley professor Brad Delong feel about what’s going on in Europe?
He’s freaking out:
Time to Spread Foam on the Runway: The Federal Reserve Needs to Act Now to Firewall Off the Eurocrisis
I have been complaining for some time now that Reinhart and Rogoff think that the time is always 1931 and that we are always Austria–that the great fiscal crisis is about to erupt and send us lurching down toward Great Depression II.
Well, right now guess what?
The time is 1931, and we are Austria.
The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip. The Federal Reserve Needs to do so now.
Professor Delong cites professor Paul Krugman, who is also freaking out:
This is the way the euro ends.
Not with a bang but with bunga-bunga.
Seriously, with Italian 10-years now well above 7 per cent, we’re now in territory where all the vicious circles get into gear — and European leaders seem like deer caught in the headlights. And as Martin Wolf says today, the unthinkable — a euro breakup — has become all too thinkable.
So Europe’s in denial. That leaves the Fed.
Professor Delong wants the Fed to buy up all European bonds so US banks don’t begin to freak out about the losses they’re going to take on those bonds and suddenly stop lending to conserve capital to prepare for D-Day.
(There’s an answer to Europe, by the way: The ECB–or the Fed–can offer unlimited capital to the banks on the condition that they voluntarily restructure (write-down) the debt of every troubled European country to levels that the ECB agrees are reasonable. Then the ECB, or Fed, can provide capital that is senior to all other bank capital, thus reducing the risk that taxpayers will get hammered. That would resolve the crisis. But given the egos and cultures and countries and laws involved, it won’t happen until the world is about to end.
The more likely answer is that the ECB will suddenly be forced into a gigantic bailout in which it “monetizes” huge amounts of debts issued by the troubled countries and keeps interest rates down. This won’t fix the problem–it will just extend it. But it will allow Europe to do what it has done since the beginning: Keep its head stuffed in the sand.)
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