European leaders are attempting to beat back a growing economic crisis, and President Obama is urging them to take cues from America, circa 2008.
As Ben Rhodes, the administration’s deputy national security adviser for strategic communication, told reporters at the G-20 summit in Cannes, France, on Thursday: “What the U.S. has is a significant amount of experience in dealing with a financial crisis where we took very aggressive and robust action to rescue our financial sector and to help rescue the global economy back in 2008 and 2009. And we’ve been sharing that experience.”
Not everyone believes the American model is worth copying. Federal lawmakers are making no plans to repeat those aggressive and robust actions in the event that Europe’s woes go viral and threaten the U.S. financial system with another ’08-style catastrophe.
It appears more likely that, if a new financial crisis provokes any response from Congress at all, it could be a deep round of federal budget cutting—an austerity plan that would, in effect, be the opposite response to the American experience that Obama is touting abroad.
Economists warn that the European drama, rooted in Greece’s sovereign debt problems, could spread across the continent and into the United States if eurozone officials fail to contain it. That would be an all-too-familiar nightmare for a fragile U.S. recovery: Fallout from Europe could generate the same “financial squeeze” and economic free fall that followed the collapse of Lehman Brothers in 2008, said Dean Baker, co-director of the Center for Economic and Policy Research.
Congressional leaders do not appear to be preparing for that situation. National Journal asked staffers in Democratic and Republican leadership offices in the Senate and the House on Thursday whether contingency plans were being drawn up in the event of a Europe-spurred financial crisis; none of the offices indicated that leaders were even discussing the issue.
House Speaker John Boehner, R-Ohio, told NJ that when he met with Treasury Secretary Timothy Geithner earlier this week to discuss Greece, the prospect of congressional action to respond to a worst-case-scenario crisis did not come up.
Few staffers see any congressional appetite for a second version of the 2008 TARP bailout of financial institutions, which American voters across the political spectrum loathe. Republicans have turned vehemently against the sort of fiscal stimulus that Obama made the centerpiece of his administration’s early 2009 efforts to stop a national recession from deteriorating into another Great Depression.
Many Republicans, in Congress and on the campaign trail, are laying the groundwork for an austerity push in the face of another crisis—on the theory that the best way to avoid Greece’s fate is to balance the federal budget and reduce America’s own debt load.
“We’re heading toward the same problems you see in Greece today unless we begin to get these deficits and debts under control,” Sen. Rob Portman, R-Ohio, a member of the super committee charged with cutting the federal budget deficit by more than $1 trillion over the next 10 years, told reporters on Thursday.
In Iowa this week, Texas Gov. Rick Perry, a GOP presidential candidate, said Europeans “have to learn the same thing that we’ve got to learn here in America: quit spending money that you don’t have, and that’s what the European Union is finding out, is that they have people in office who don’t have the courage to say no.”
Obama clearly rejects that view—he has spent the last two months pushing Congress to pass new fiscal stimulus regardless of what happens in Europe. His urgency figures to grow if the Greek situation escalates and American growth falters again.
Adam Hersh, an economist at the Center for American Progress, says it’s mostly likely that there won’t be any response to an escalating crisis in the United States, except through international financial institutions and diplomacy. Congress is divided, he said, and the administration won’t want to take up the political fight.
The 2012 election will provide cross currents to complicate the issue. Obama's reelection chances will plummet if the economy drops back into recession, but he is well aware of how unpopular bailouts are, not only among conservative activists but also with the Occupy Wall Street protest crowd and liberal groups.
Many economists say the Federal Reserve should lead the response. “The Fed is the ultimate insurance instrument here for the United States to try to avoid the spillover effects—or mitigate the spillover effects—from a deterioration in Europe,” said David Gordon, director of global macro analysis at the Eurasia Group. The Fed could announce a third round of quantitative easing, which would be a “reasonably potent weapon” to combat another recession in the United States, Gordon said.
Other economists warn there are limits to monetary stimulus. “We need to have Congress take a look at” battling a crisis, said former Fed governor Mark Olson, co-chair of Treliant Risk Advisors. “That should be our country’s first priority.”
Ironically, recent strengthening in the U.S. economy could be working against Congressional planning for another crisis. Third-quarter gross domestic product growth, reported last week, exceeded expectations, and the Federal Reserve noted on Wednesday that household spending and business investment had picked up.
While the Fed significantly lowered its outlook for growth in the coming years, it also said it doesn’t expect the economy to contract, barring any significant shocks—like a spreading European debt crisis.
Sue Davis, Rebecca Kaplan and Dan Friedman contributed.