The president of the (privately owned) Federal Reserve Bank of Boston said recently that the European Central Bank can and should inflate, so as to solve the crisis. But the Federal Reserve can and should join with other central banks to help the ECB solve the crisis.
This was the first time that a senior FED official has suggested that the FED will print money to bail out the Europeans. Because the FED has this capacity, he said, it should stand ready to use it. I have no doubt that the FED will do just this.
He said that Europe’s crisis is a threat to the U.S. economy. This is accurate. The world is interlinked financially.
The FED says Europe will muddle through unless there is an unexpected shock. Problem: one of these occurs weekly.
He skirted the question of Italy. Europe should handle this.
Later, he added that the Fed is going to be primarily focused on what is happening in the U.S. But by the same token, he noted that if there was a crisis, “I would expect there would be some coordinated activities” between U.S. and European central bankers to ensure “global markets remain liquid.”
He did not predict a crisis. He did not have to. The crisis is obvious to anyone with an understanding of defaults. At some point, large debtors default.
He said there could be “more severe disruptions.” But be assured, he said. The Federal Reserve is watching this closely.
A man in a cabin in the woods that is surrounded by a forest fire is diligent in monitoring events. But the fire gets closer.
Europeans “have the financial capacity if they can get the political will to address the problem.” They do? Then why haven’t they fixed this by now?
“I’m hopeful. Our forecasts assume Europe finds a way to muddle through.” Their forecasts were optimistic in 2007, too.
These remarks were made in an after-speech session. They have been reprinted in several on-line journals.
The FED is not just the lender of last resort in the USA. It is the lender of last resort for Europe, too. There is no legal limit to its ability to create fiat money for bailouts.