A simple cure for eurozone problems, requiring only one law

by on September 27, 2011 at 1:19 am in Economics | Permalink

Give the United States Federal Reserve System the power to create euros at will, at its discretion, subject to no outside checks.  This power may last for a specified number of years or who knows, maybe forever.

The Fed’s incentive is not exactly to maximize European social welfare, but it is probably close enough.  The Fed’s incentive is to prevent contagion from spreading to the United States and its banking system.  Toward this end it would create euros and distribute them to various European banking systems, or lend them out, do more swaps, etc.  It would help Europe but in a fairly balanced way, in particular the Fed probably would not “screw over” the major U.S. allies on the Continent, namely France and Germany.

Bernanke has a track record of dealing with severe financial crises, no?  And is he not insulated from the worst of European politicking and gridlock?  Foie gras and feta probably would not sway him, and the EU would have to agree to this only once.  No further plans need be announced and no coalition governments will have further checks.  Stock markets would rise immediately.

Conservatives might not mind if the Fed “wrecked the European economies with inflation.”

This law need not preempt other European initiatives, if those initiatives were to prove desirable.  The ECB would be ceding no powers whatsoever and it would not have to modify its charter.

Forget about the dual mandate, we need Dual Central Banks.

Such a rescue operation is not without historical precedent.

And while we’re at it, let’s give the ECB the power to create dollars! (just kidding folks…or am I?)

Alistair Cunningham September 27, 2011 at 1:36 am

Um, what incentives are there for European governments to agree to this?

Zac September 27, 2011 at 1:40 am

What about Bernanke’s incentive to keep the dollar cheap by running tight monetary policy in Europe?

Or are we over thinking this :)

Great idea though…

Nylund September 27, 2011 at 12:11 pm

That was my thinking too. If I were the ECB, I wouldn’t worry about Bernanke inflating away Europe’s currency, but just the opposite in order to help US exports (at the expense of Europe’s). I guess the idea is that both the Fed and the ECB could print Euros so the Fed couldn’t unilaterally create a tight money policy since the ECB could offset it by printing more.

Buck Farmer September 27, 2011 at 1:41 am

Let’s pair it with Robin’s suggestion that the U.S. just ape whatever the British NHS approves as covered procedures.

Zach September 27, 2011 at 2:43 am

Theoretically, the Fed has an incentive to maximize American social welfare, too. It doesn’t mean they can.

ThomasT September 27, 2011 at 3:11 am

Meh, the idea is great of course but why go with the Fed when you could just as well have the Reserve Bank of Zimbabwe do the job?

Cahal September 27, 2011 at 3:44 am

Do people like you actually think referencing Zimbabwe when printing money is brought up, and North Korea when someone suggests a government policy, is actually a real argument?

lewy14 September 27, 2011 at 5:10 am

Do people like you actually think “government policy suggestions” like this are in any sense real, as opposed to the “Modest Proposal” genre satire they so obviously are?

ThomasT September 27, 2011 at 5:26 am

@ lewy14: I think Cahal actually makes a great point here. The very fact that someone who is obviously able to write a complete sentence can still have no grasp whatsoever on the irony in the OP, let alone my reply, and can really think the post is a serious proposal is a testament to the futility of arguing policy in public. To think that he is most likely an above average voter in one our glorious democracies makes me laugh and cry at the same time. A grimacing dance of apes, indeed.

James A Donald September 29, 2011 at 12:29 am

Krugman and others have argued that the problem is lack of credibility in inflation targeting – that people doubt the fed’s will to debase the currency. The bank of Zimbabwe would credibility in this regard.

prior_approval September 27, 2011 at 10:26 am

Well, strange as this may seem, the U.S. seems to be focusing on euro problems in a way that is striking. Almost as if all this talk from American sources was meant as a way to distract from something else. Something that just might be a bit closer to home, possibly. Maybe along the lines of containment? Because anybody keeping up with recent European elections has noticed a certain, how should one say it?, disgust with entrenched interests. Whether it be the left in France winning its biggest victory in two generations, the Greens kicking over 60 years of CDU rule in Baden-Württemberg, or the Pirate Party winning almost 10% of the vote in Berlin – the core of the eurozone looks like democracy in action.

But instead of looking at the results of financial mismagement on an epic and global scale, resulting in the logical conclusion of ensuring that the people responsible no longer be in charge (anyone want to make a bet about Sarkozy being re-elected?), it is important to keep the distractions coming.

Cahal September 28, 2011 at 7:51 am

I think I have become so jaded by the internet that I am unable to see a joke.

Alistair Cunningham September 27, 2011 at 3:14 am

Yes, I fail to see how this idea is any better than some random institution (such as, oooh, I don’t know… how about the ECB?) do the job.

c8to September 27, 2011 at 3:18 am

i was waiting for a tyrone post but thought the content would be a bit different!

c8to September 27, 2011 at 3:19 am

there’s also a mixed metaphor in here…bank governers in glass houses shouldn’t throw euro’s from helicopters..?

Right Wing-nut September 27, 2011 at 10:32 am

sweet!

David Merkel September 27, 2011 at 4:03 am

You have to be joking, right?

Nik September 27, 2011 at 4:12 am

Why can’t the ECB just do it?

Michael G Heller September 27, 2011 at 5:13 am

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. There is no finer investment for any community than putting milk into babies. If the human race wishes to have a prolonged and indefinite period of material prosperity, they have only got to behave in a peaceful and helpful way toward one another. We must build a United States of Europe. Perhaps it is better to be irresponsible and right than to be responsible and wrong. But however beautiful the strategy, you should occasionally look at the results.

W.C.

Claudia September 27, 2011 at 7:57 am

Goodness Michael, you woke up “on the right side of the bed” today. I usually find your comments a little dark, but I agree with much (not all) of what you said here. The Euro will succeed if Europeans are committed to something more than a common currency. The US is united by way more than the dollar. And recovery in the US will happen when Americans start to work past their differences. I was thinking that we need a positive shock like the 2002 Oakland A’s (yes, I liked Moneyball on many levels). We need something that the American people (regardless of where they get their news…me the Daily Show) can rally behind. I am optimistic that Americans will find that cause, just like I believe that consumers will shop again (when they can). Why? Because stuff is fun and as much as possible, life should be fun.

Michael G Heller September 27, 2011 at 11:43 am

Claudia,

If those words seem out of character it’s because they were spoken by Winston Churchill. I should have put them in quotation marks but it’s a medley and I got confused. When I was a little boy in Berkley California we used to pledge allegiance to the flag. Then when I went to England we recited the words of Winston Churchill.

I probably just have a strange sense of humor. Fortunately, unlike Winston Churchill, the black dog never darkened my day for a minute longer than it takes to read the FT morning edition.

About positive thinking (I agree). With the help of a useful piece of legislation employed by 30-40% of married couples I now have the luxury of waking up either side of the bed as and when I choose. It’s fun, but I suppose not a completely satisfactory state of affairs. However I do not like shopping. If more people did not like shopping would there be fewer or more recessions? I guess that depends on whether or not they use a credit card.

ladderff September 27, 2011 at 6:22 am

What’s really being said here is that the results are in from the grand Enlightenment experiment of self-government. Summary: total failure, unable to withstand socialism and Keynesianism. I’ve been thinking for a while that we should humbly invite the Queen to rule us at her merciful pleasure, because we’re clearly not fit to do it.

Neal September 27, 2011 at 6:42 am

Ironically, self-government only works as long as we have enough knowledge to govern ourselves. As soon as we specialize, however, we give up knowledge writ large. Instead of having informed citizens, we have ideological partisans.

Claudia Sahm September 27, 2011 at 8:01 am

Note California’s attempt at self-government via propositions and all the havoc that has ensued.

Andrew' September 27, 2011 at 6:50 am

I think Greenspan is available.

David Ellis September 27, 2011 at 7:16 am

When all you have is a hammer …

Robbie September 27, 2011 at 7:27 am

Surely a necessary condition for this is a European leadership that favors looser monetary policy, if we had that there’s no reason to think the ECB wouldn’t provide that.

anon September 27, 2011 at 7:41 am

Love the image and the line preceding.
Hah!
Tyrone IS now co-writing.

Neal September 27, 2011 at 7:42 am

Hey now, let’s be fair — any rescue operation in the tradition of American bailouts of Europe needs to include a massive Russian component as well.

OP September 27, 2011 at 12:04 pm

Hear, hear!

Bill September 27, 2011 at 7:45 am

Couldn’t you reach the same result by establishing a basket of currencies within the IMF and giving it the right to expand or contract either a universal currency or a particular currency?

But, why would you want to cede sovereignty?

TallDave September 27, 2011 at 8:01 am

An amusing notion, thanks for sharing.

Ralph r September 27, 2011 at 8:58 am

Since the Brits were in DDay too why not let the bank of England print euros?

J. Daniel Wright September 27, 2011 at 9:00 am

Can you please expand on this? Where in history is there precedent for this? Why would the ECB be willing to give up power? How would the Fed being allowed to print Euros help the Eurozone?

I’m intrigued but in the dark.

Meegs September 27, 2011 at 9:13 am

This could work, but is about as likely to be adopted as a higher inflation target.

Bill September 27, 2011 at 9:18 am

Your comment: We need dual central banks.

We already have this in the form of central banks and the IMF serving as a coordinator.

Except they do not have blue helmets.

Robert Speirs September 27, 2011 at 9:25 am

“Bernanke has a track record of dealing with severe financial crises, no?” What do you mean by “dealing with severe financial crises”? Is that the same as “making severe financial crises worse” or have I found myself on some other planet where the history is exactly opposite to the one I’m familiar with?

vHuman September 27, 2011 at 9:29 am

There’s just a little problem : in most european countries, creating money requires the Parliament clearance. This is why the € will never be like the $.

Andrew Macdonald September 27, 2011 at 9:31 am

This reminds me of the horse race riddle:

“A king had two sons. The king was getting very old and he didnt know who to give his kingdom to. So he got his sons together for a horse race. He said Whoevers horse crosses the finish line last gets my kingdom. So they both started out very slow until they came to a man on the side of the road. He asked why they were riding so slow. They told him their story and the man gave them two words of advice. After hearing these words they took off as fast as they could. What were the two words of advice?”

Yancey Ward September 27, 2011 at 10:42 am

They should exchange horses?

Noah Yetter September 27, 2011 at 10:47 am

“Ruling sucks.”

Yancey Ward September 27, 2011 at 10:57 am

That is probably better advice.

TallDave September 27, 2011 at 12:37 pm

“Kill your brother and throw his corpse over the line.” Oh, wait, too many words.

prior_approval September 27, 2011 at 9:42 am

Best satire site on the web.

mgoodfel September 27, 2011 at 10:12 am

Why don’t we just nuke a couple of large cities in Europe? The rebuilding efforts would make them rich.

Nylund September 27, 2011 at 12:19 pm

I realize this is in jest – a play on the broken windows fallacy – but what if you changed it from “rebuilding that which has been destroyed” to simply building new stuff along side the old?

mgoodfel September 27, 2011 at 3:15 pm

I believe that’s called “bridges to nowhere” and has been tried in Japan.

How about admitting you have a lot of bad debt and writing it off? If that kills a bank, so be it. No business has a guarantee of future existence. And if loans become hard to get, the government can charter a new bank. Putting a few billion euros in a new bank would be cheaper than these endless bailouts, and not have the moral hazard.

Jeff Yager September 27, 2011 at 10:28 am

Wow, the “Shadow Bankers Rule the World” crowd would have a field day with this. I’d be in favor of it just to see those people’s brains melt.

Yancey Ward September 27, 2011 at 10:44 am

Exactly how did Bretton Woods work?

jdelano September 27, 2011 at 11:54 am

Guys–clearly this is SATIRE. Nobody could possibly be stupid enough to imagine that Fed would willingly steer the global economy into hyperinflation, dethrone the dollar as the WRC, and force the west into an open war of unprecedented magnitude with China. That would just be insane. This is for comedic value only.

Kevin September 27, 2011 at 1:27 pm

What’s to keep the ECB from buying all the Euros the Fed issues? I guess I missed the joke somewhere…

genauer September 27, 2011 at 4:27 pm

how about tyler screws his own economy ?
i would visit his grave

jk September 27, 2011 at 7:48 pm

Europe’s still freeloading at least in the military sense. Obama continues to build his predecessor’s untested, most likely to have cost overruns, Missile Defense Shield for the richest regional economy on earth on behalf of the US taxpayer (at the benefit of the US military industrial complex).

NAME REDACTED September 28, 2011 at 2:41 am

Most countries favor their producers over their consumers. This is why they tend to inflate their currencies. Its the problem of special organized interests usually trumping diffuse general interests in a representative democracy.

NAME REDACTED September 28, 2011 at 2:39 am

While I can never see this happening I wonder:
What if this was taken to its extreme, and a country wasn’t allowed to produce its own currency.
If it did:
Would political pressure to favor producers over consumers within a country make that country underproduce currencies for its trade partners?

Ronald Brak September 28, 2011 at 3:34 am

The Australian treasurer might be out of a job soon. Put him in charge of both the US dollar and the Euro.

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