All that Bernanke & Co. did yesterday was to lower the dollar-financing cost for banks in Europe, where inter-bank lending is locking up — for good reason. But Europe’s problem is not its banks and their access to dollars. Europe’s banks are in trouble because European government bonds are in trouble, and European government bonds are in trouble because European governments are in trouble. European governments are in trouble because they spend too much money. The Fed can’t change that, and hasn’t tried.
The question is: What is the Fed thinking? Is it looking out for the United States, or is it looking out for the banks?
The generous interpretation of the Fed’s action goes like this: The Fed hasn’t really risked anything — it’s just making it easier for them to borrow from one another, because a European banking crisis would cause a 2008-style credit crisis worldwide. With U.S. economic indicators improving modestly, the main worry of U.S. policymakers right now is economic events outside our own borders. The Fed can’t work out the Europeans’ finances for them, but it can soften the blow to international credit markets, and thereby do a service to the American economy.
The ungenerous interpretation of the Fed’s action goes like this: Everybody knows the jig is up, but lo these many years after the 2008 crisis, trillions in bailouts later, the banks are still in weak shape, we haven’t really reformed our financial rules, there’s insufficient transparency to really know what kind of shape everybody is in, and the world’s biggest banks just got downgraded on Tuesday. We’re buying time and hoping for the best, and giving all our favorite bankers an extra little margin of error to get their acts together before the big kaboom gets heard ’round the world.
I’m open to either interpretation, and to other interpretations.
But here is what is beyond debate: Europe has not solved its fiscal problems. Europe shows no sign of being on the verge of solving its fiscal problems. Europe shows no sign that it wants to solve its fiscal problems. If Ben Bernanke is having “in for a penny, in for a pound” thoughts, he needs to think again: We do not have the resources to bail out Europe, and nobody has the resources to bail out the United States.
Congress should make it clear — today — that the Fed’s mandate does not extend to bailing out Europe’s banks and Europe’s governments. This is especially true after the secrecy and unaccountability with which it conducted the $7.7 shadow bailout on top of TARP.
Thursday, December 1, 2011
'Is The Fed Pursuing Our Intrest Or Bank's Intrest?'
Kevin D. Williamson: