Europe's Banks Get Money For Nothing

A blog about business and economics.
Nov. 30 2011 10:13 AM

Central Banks Aim Bazooka Of Cheap Dollars At European Banks

I published a column yesterday about some relative recent academic research which suggests that deleveraging by European banks could have a drastic contractionary impact on credit conditions in the United States. One possible solution to that, being implemented today by the Federal Reserve Bank in coordination with other major central banks, is to drastically lower the price that foreign central banks have to pay to obtain dollars. Then those central banks can pass the cheap dollars on to the banks they supervise. Will this work? Is it fair? Is it a good idea?

THE GOOD: In terms of credit conditions in the United States, this should work. Foreign banks hold about half the dollars in circulation, and they make loans based on those holdings. Those loans largely go to American households or firms operating in the United States since this, at the end of the day, is where you buy things with dollars. If they started hoarding dollars instead of using them as the basis for loans, that would have thrown a ton of sand into the gears of the American economy.

Advertisement

THE BAD: This appears to be driving the Euro/Dollar exchange rate up which is going to make the underlying economic problems in Spain, Italy, Greece, Portugal, and even France worse. There's still a need for the European Central Bank to target sovereign debt yields and for Germany to consider buying more stuff as an appealing alternative to bailouts. Meanwhile it continues to be the case that both the Fed and the ECB would do well to start adopting more growth-oriented targets for medium-term monetary policy. All these sporadic "emergency" actions leave everyone scratching their heads about the future.

THE UGLY: As with the Federal Reserve's secret lending to American banks in late 2008 actions of this sort raise fundamental issues about fairness. Handing out cheap money to European banks will help bolster them, which will help stabilize the economy. But the exact same logic applies to all sorts of distressed institutions in the world today. Where's the free money for American municipalities? Where's the free money for debt-constrained households? Beyond the operational details, where's the targeting of full employment? In its November meeting, the Fed's Open Market Committee rejected NGDP targeting as too risky and unorthodox to be worth trying even though it might create millions of new jobs. Then European banks run into trouble, and suddenly nobody cares about being risky and unorthodox.

At the end of the day the conjunction of these kind of actions with continued inability to return us to full employment makes it all but inevitable that the "End The Fed" crowd's voices are going to grow louder. The world's central banks badly need to wake up and realize that it's time to go "all in" on doing everything the possibly can to solve the developed world's demand shortfall. 

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Foreigners

More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

iOS 8 Comes Out Today. Do Not Put It on Your iPhone 4S.

Why Greenland’s “Dark Snow” Should Worry You

Three Talented Actresses in Three Terrible New Shows

The Human Need to Find Connections in Everything

It’s the source of creativity and delusions. It can harm us more than it helps us.

Jurisprudence

Happy Constitution Day!

Too bad it’s almost certainly unconstitutional.

The Ungodly Horror of Having a Bug Crawl Into Your Ear and Scratch Away at Your Eardrum

My Father Was James Brown. I Watched Him Beat My Mother. Then I Married Someone Like Him.

  News & Politics
Weigel
Sept. 17 2014 12:02 PM Here It Is: The Flimsiest Campaign Attack Ad of 2014, Which Won’t Stop Running
  Business
Business Insider
Sept. 17 2014 1:36 PM Nate Silver Versus Princeton Professor: Who Has the Right Models?
  Life
Outward
Sept. 17 2014 1:59 PM Ask a Homo: Secret Ally Codes 
  Double X
The XX Factor
Sept. 17 2014 1:26 PM Hey CBS, Rihanna Is Exactly Who I Want to See on My TV Before NFL Games
  Slate Plus
Slate Fare
Sept. 17 2014 9:37 AM Is Slate Too Liberal?  A members-only open thread.
  Arts
Brow Beat
Sept. 17 2014 1:01 PM A Rare, Very Unusual Interview With Michael Jackson, Animated
  Technology
Future Tense
Sept. 17 2014 12:35 PM IOS 8 Comes Out Today. Do Not Put It on Your iPhone 4S.
  Health & Science
Bad Astronomy
Sept. 17 2014 11:18 AM A Bridge Across the Sky
  Sports
Sports Nut
Sept. 15 2014 9:05 PM Giving Up on Goodell How the NFL lost the trust of its most loyal reporters.