Yesterday, Paul Krugman, who I respect greatly, wrote a column entitled "The Great Abdication"--the upshot of a key part of the column was the failure of the Federal Reserve Board to act now to pull the country out of a massive employment crisis. But, Krugman neglected to mention an important piece of the Fed's abdication: it's failure to come to the rescue of Europe as well, in particular, Spain.
From the column:
Let’s talk instead about the Federal Reserve. The Fed has a so-called dual mandate: it’s supposed to seek both price stability and full employment. And last week the Fed released its latest set of economic projections, showing that it expects to fail on both parts of its mandate, with inflation below target and unemployment far above target for years to come.
This is a terrible prospect, and the Fed knows it. Ben Bernanke, the Fed’s chairman, has warned in particular about the damage being done to America by the unprecedented level of long-term unemployment.
So what does the Fed propose doing about the situation? Almost nothing. True, last week the Fed announced some actions that would supposedly boost the economy. But I think it’s fair to say that everyone at all familiar with the situation regards these actions as pathetically inadequate — the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.
Why won’t the Fed act? My guess is that it’s intimidated by those Congressional Republicans, that it’s afraid to do anything that might be seen as providing political aid to President Obama, that is, anything that might help the economy. Maybe there’s some other explanation, but the fact is that the Fed, like the European Central Bank, like the U.S. Congress, like the government of Germany, has decided that avoiding economic disaster is somebody else’s responsibility. [emphasis added]
I want to first make a quick point, a compliment to Krugman for pointing out that the Federal Reserve has two responsibilities: price stability and full employment. But, when have you ever heard any Fed Chairman in the past 30 years--or perhaps longer--make it clear that his job is to ensure
full employment. As I have written often (
here for example), Congress has done zippo to force the Fed to pursue full employment, whether under Democrats or Republicans, even though it has the power to demand such action. No one utters the phrase "FULL EMPLOYMENT"--EVAH.
But, I digress. The point today is this: the Fed has the power to intervene in forieng markets--and should do so to stem the disaster sweeping through Europe. I don't mean save the asses of the bankers. I mean save the jobs of millions of people who are impaled in the name of austerity.
Here is what my friends and colleagues Dean Baker and Mark Weisbrot pointed out a few days ago in an unfortunately little commented upon proposal for the Fed to intervene in the Spanish bond market for the good of US workers.:
The financial crisis in the eurozone, now centered on Spain, is contributing to the slowdown in the U.S. economy and opens the possibility of a worse financial meltdown, of the type that followed the collapse of Lehman Brothers in 2008. This could tip the U.S. economy into recession...
...According to press reports, the Fed is currently considering an additional $700 billion of quantitative easing in the United States; the amount necessary for intervention in the Spanish bond market would be a small fraction of this, and possibly have more impact on the U.S. economy. Past actions indicate that private investors would move quickly to buy Spanish bonds on the heels of a central bank intervention. Furthermore, the intervention would come at no cost to the U.S. taxpayer, and the Fed would accumulate foreign assets in its reserve holdings.
U.S. Treasury rates fell to all-time record lows last week, as fear seized financial markets worldwide. More than $100 billion left Spain in the first quarter of this year – nearly 10 percent of Spain’s GDP – and it is likely that capital flight accelerated in April and May. This capital flight worsens the situation of the Spanish banks, as does the fall in the price of Spanish bonds, which are held mostly in Spain. All of this makes the banking and financial crisis worse. The eurozone recession is deepening, and the financial crisis there is affecting many parts of the world economy.
It is possible that action by the Fed would also cause the ECB to intervene. But in any case, it is within the Fed’s mandate and ability to contain this crisis. It should act quickly before there is further damage to the U.S. economy.[emphasis added]
Make it happen.
[note: I am in a time zone far, far away so probably will not get to reply to comments for a number of hours. Have fun]