By Dean Baker
By Dean Baker and Mark Weisbrot
We welcome the Fed’s action, in conjunction with other central banks, to reduce the costs of borrowing in dollars for European banks.
The market response shows that Fed intervention in European financial markets can work. This was an important step to avoid a potentially more severe financial crisis at this moment.
However, this action does not come close to resolving the current financial crisis in Europe, nor its contagion to the United States. In fact, it does not even ‘kick the can down the road’ to the degree that previous moves by the European authorities during the past 18 months were temporarily able to do.
“The acute crisis remains because Italian borrowing costs remain at unsustainable levels, and can shoot further upward at any time. Until there is central bank intervention to lower these interest rates, and to keep them down, the current financial crisis in Europe will not be resolved.
The contagion from this crisis has already slowed world economic growth, including U.S. growth. This week the OECD reported that the euro area already appears to be in a ‘mild recession’ and lowered its forecast for U.S. GDP growth for next year to 2.1 percent, from 3 percent in May. Forecasts for growth in China, India, and Brazil were also lowered significantly.
We therefore repeat our call for the Fed to intervene directly in sovereign European bond markets, especially Italy, to lower interest rates on these bonds. Such intervention would be costless to American taxpayers, as the Fed’s quantitative easing since 2008 has been. But a U.S. recession caused by financial crisis in Europe would be very costly and could throw millions of Americans out of work. The risk of such a recession remains high.
It is therefore within the Fed’s mandate, which includes promoting full employment in the United States, to take these further steps to help prevent a worsening financial crisis in Europe, and the resulting damage to the U.S. economy.
Dean Baker and Mark Weisbrot are Center for Economic and Policy Research Co-Directors