Ben Bernanke doesn’t want to rescue the United States from an escalating European financial crisis, but he says he’ll try. That makes the Federal Reserve Board chairman a rare—and possibly unique—policymaker on either side of the Atlantic: one with both the means and the will to beat back the flames of Athens now threatening to burn the global economy back to recession.
In other words, the Fed’s “lender-of-last-resort” power could be America’s best hope for avoiding a double-dip.
“It is a bit frustrating,” the Fed chairman said. “Obviously, the key decision makers in Europe are the European leaders and economic policymakers there, and ultimately it’s their responsibility to find solutions to this very difficult problem.”
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But, he added later, the Fed stands “ready if necessary to provide whatever support the financial system needs and the broader economy needs in case things should worsen.”
Greece’s sovereign-debt woes could ravage Europe’s financial system by week’s end, American officials fear. The Greek government could fall over the question of whether to put a new bailout agreement up for a national referendum. The deal includes more of the austerity measures that have drawn violent protest across the country. If it goes to voters, Greek default could appear inevitable, markets could panic, and lenders across the continent could seize up à la Wall Street in 2008 after Lehman Brothers failed.
Most economists expect that the contagion would spread and threaten the U.S. financial system as well—unless someone intervened.
American officials would unanimously prefer that “someone” to be European. At this week’s G-20 meeting in France, Obama administration officials are pressing Europe’s leaders to take immediate steps—using money from Europe, not borrowed from China—to safeguard Spain, Italy, and other vulnerable euro-zone nations from Greek contagion.
But European officials, and the European Central Bank, continue to bicker over who should foot the bill for their planned stability fund. “The Europeans are used to acting in a slow, deliberate manner,” David Gordon, head of research for the Eurasia Group, told a Senate subcommittee hearing on Wednesday. The crisis, he added, “has begun to speed up beyond Europe’s ability to handle it.”
“It’s not an optimistic picture,” said Sen. Jeanne Shaheen, D-N.H., who led the hearing.
Congress is in no mood to bail out Europe. Obama’s Treasury Department has a few tools, at best, at its disposal to avert catastrophe.
Which brings us back to the Fed, and Bernanke, who beleagueredly signaled at a press conference on Wednesday that he is prepared to act if no one else will.
He said that support could specifically include reprising the Fed’s lender-of-last-resort role for banks crippled with bad European debt. It would also likely include further measures to ease monetary policy and stimulate growth in the U.S. economy—measures that the Fed declined to take on Wednesday but that Bernanke said the central bank remains open to.
Economists tracking Europe closely say that the Fed is the natural, and perhaps only, U.S. fire line against a spreading crisis.
“The Fed needs to stand ready to do anything and everything in its power to prevent a meltdown in Europe from hurting the U.S.,” including a third round of quantitative easing, buying more mortgage-backed securities, and providing emergency liquidity to banks, said Nariman Behravesh, chief economist at IHS Global Insight.
Fed officials “certainly have the will” to act, said Jacob Funk Kirkegaard, a research fellow at the Peter G. Peterson Institute for International Economics, because they know “that if you have a paralyzed banking and financial system, you can kiss any prospect of economic growth good-bye.”
Bernanke said that he views growth—or the lack thereof - as the Fed’s biggest post-recession failure. Throughout the press conference, he parried questions about when exactly the central bank might accelerate its efforts to stimulate economic expansion and job creation. He repeatedly hinted that he’d like Congress to pass fiscal stimulus, just as he’d prefer European leaders to firewall their own debt problems. The former is almost certainly not going to happen. The latter is looking grimmer by the day. Bernanke’s last resort looks more and more like America’s only one.
This article appears in the Nov. 3, 2011, edition of National Journal Daily.
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