Monday, November 28, 2011

Dean Baker calls on Fed to intervene in EZ by guaranteeing sovereign debt

Yes, you read that right.

Fortunately, the Fed has the tools needed to prevent this sort of meltdown. It can simply take the steps that the ECB has failed to do. First, and most importantly, it has to guarantee the sovereign debt of eurozone countries. The Fed simply has to commit to keep the interest rate yields on debt from rising above levels where it risks creating a self-perpetuating spiral of higher debt leading to higher interest rates, which in turn raises the deficit and debt. (emphasis added)
Read the whole op-ed at Al Jazeera
by Dean Baker
(h/t Kevin Fathi)


beowulf said...
This comment has been removed by the author.
beowulf said...

Now that's interesting. Baker's quite correct that the Fed can do this (they probably need an OK from Tsy since foreign policy is the President's bag). Essentially they'd be buying Euros with dollars.

The interesting part is since it would depress the value of the dollar, it would inevitably lead to China buying back up the dollar to maintain their export industries (an overvalued dollar makes Chinese imports cheaper).

It'd be simpler if China cut out the middleman and simply bankrolled Europe itself, but since the bill for this is going to China anyway, I guess there's no harm if Bernanke bought up Europe at firesale prices.

dave said...

how about the powers that be intervene right here in the states? all we here about is the deficit and the debt. asses

Anonymous said...

you mean .... dialling up foreign currency liabilities? No thanks.


Matt Franko said...

I think to in reality do this, the US would HAVE to be running a significant trade surplus with the Eurozone.... where the Fed could change out the US exporters from their Euros gained by trade to the Fed's USDs, then the Fed would have the Euros to be able to buy the European govt securities....

If Joe Firestone can ever set up another Teach-In, it HAS to be mandatory attendance for Baker, Galbraith, Krugman, and Stiglitz.

dave said...

no, they could start with warren moslers ideas.

beowulf said...

If Joe Firestone can ever set up another Teach-In, it HAS to be mandatory attendance for Baker, Galbraith, Krugman, and Stiglitz.

A fake jury summons should do the trick, otherwise... I'm skeptical.

mike norman said...

This guy Baker is a master at making you think he is finally catching on, then leaving you dumbfounded at how little he really understands.

Matt Franko said...

Bill Mitchell responds to this:

"When you’ve got friends like this – Part 8"

Part 8!


Tom Hickey said...

Actually, I am surprised that a self-identified progressive would propose the US underwriting the EZ, when such a proposal would be mightily unpopular not only with progressives but most Americans.

However, in extremis, I would not be surprised if the Fed will resorts to some ploy like this and doubles down in a martingale strategy on the presumption that it cannot run out of dollars and that the dollar will not collapse since other CB's will have to support it in their own interests. Governments have enormous power if they decide to use it, and the US is the big kahuna.