In an interesting twist Washington DC-based think tank the Center for Economic and Policy Research is calling on the the US Federal Reserve to intervene in the eurozone sovereign debt market, saying that such buying actions are part of its mandate to promote full employment in the US.
“The risk of a financial meltdown in Europe is significant and growing each day,” they say. “The financial fallout could be bigger than that following the collapse of Lehman Brothers in 2008, and could easily push the U.S. economy into recession. The European authorities are moving much too slowly to contain this risk. The European Central Bank (ECB), especially, is not fulfilling its function as a central bank to act as a lender of last resort in a crisis situation.
The Fed’s intervention will put an end to the vicious cycle that has sent Italian and Spanish bond yields soaring, which in turn has increased their borrowing costs and made financial markets increasingly skeptical that their debts will be paid.
"The Fed’s more than $2 trillion of quantitative easing in the United States has succeeded in lowering long-term interest rates here at no cost to the taxpayer, and has had no measurable effect on inflation. The Fed can embark on a similar program of buying sovereign European bonds, which would also be costless to US taxpayers and merely result in the accumulation by the Fed of foreign reserve holdings. It would be much smaller in size than the domestic quantitative easing that the Fed has carried out to date, and even less likely to impact inflation. On a per dollar basis, it is difficult to envision anything the Fed could do that would have a larger impact on growth and employment in the United States.
"It is possible that the threat of the Fed’s action would move the ECB to act on its own. But in any case, the stakes are too high for the U.S. economy for the Fed to sit on the sidelines. The rest of the world, much of which is already feeling the effects of the instability in the eurozone, would also be likely to support and appreciate Fed action.”
- Euromoney Skew Blog