Mitt Romney’s Ridiculous Comparison of US to Greece
By John Carney
Dec 21 (CNBC) — I realize that Republicans want the United States to accumulate less debt. That’s a fine policy position to take. I’m somewhat sympathetic to the idea that debt can drag down the economy.
But there’s no need to start saying crazy things like the U.S. is about to become Italy or Greece if Obama is elected for another term. This simply isn’t in the cards.
The problems faced by Greece and Italy are nowhere near comparable to those faced by the United States. We have far more dynamic economies — and far lower tax rates — than those countries. More important, our government can indirectly self-finance by having the Federal Reserve buy Treasurys on the secondary market.
As we’ve seen, the Fed has an unlimited balance sheet, something that Greece and Italy do not enjoy.
Our government will never run out of money. Greece and Italy can definitely run out of money.
So it’s a shame to see Mitt Romney, the Republican frontrunner for president, spouting this nonsense.From The Hill:
Mitt Romney said that the United States would experience a financial crisis similar to that of Greece or Italy if President Obama were elected to a second term, and hit rival Newt Gingrich’s plan for the federal judiciary as unconstitutional during an interview Monday night with Fox News’s Bill O’Reilly.
“I think we hit a Greece-like wall. I think before the end of his second term, if he were re-elected, there’s a very high risk that we would hit a financial crisis that Greece or Italy have faced,” Romney said.This is worse than ignorant. It is actually malfeasant. Having one of the leading politicians in the country talk like this can only induce further economic panic.
(Hat tip: Warren Mosler)
Daily Archives: December 21, 2011 @ 6:03 pm (Wednesday)
Romney: US could face ‘financial crisis’ like Greece, Italy if Obama is reelected
In case you had any respect whatsoever for Romney’s understanding of monetary operations and fiscal policy.
In fact, no one has been invoking Greece since the S&P downgrade when interest rates went down, and pundits from both sides pointed out the difference is we ‘print our own money.’
Romney: US could face ‘financial crisis’ like Greece, Italy if Obama is reelected
By Justin Sink
Dec 20 — Mitt Romney said that the United States would experience a financial crisis similar to that of Greece or Italy if President Obama were elected to a second term, and hit rival Newt Gingrich’s plan for the federal judiciary as unconstitutional during an interview Monday night with Fox News’s Bill O’Reilly.
“I think we hit a Greece-like wall. I think before the end of his second term, if he were reelected, there’s a very high risk that we would hit a financial crisis that Greece or Italy have faced,” Romney said.
“I think it’s also very possible that we would continue to see very high levels of unemployment. I think you would see industry in this country, entrepreneurs, big and small, decide to go elsewhere, to take their investment dollars to other nations. This president has put together the most anti-investment, anti-growth and anti-job series of policies that I’ve seen since Jimmy Carter,” he added.
another look at the LTRO
The initial rate on the 3 year LTRO was reported to be ‘fixed’ at 1%, but turns out it adjusts with the policy rate and will be an average of the policy rate over the three year term.
So it doesn’t fix rates for the banks, it just ensures funding at the policy rate. Which makes sense, as the bank’s cost of funds is the policy instrument of the ECB.
Also interesting is how in the case of bank defaults the member nations guarantee the bank deposits. But those member nations get their funding from bond sales. And with the weaker ones that means bond sales to the ECB. So in that sense, the ECB is backing bank deposits. Which means when it provides liquidity and takes collateral, should the bank subsequently realize losses, causing the ECB to realize losses on the funds provided to the bank for liquidity, the member nation would then sell bonds to the ECB to get the funds to pay for the loans it got from the ECB.
Again, it all comes down to the ECB writing the check. And it all works from a solvency point of view when the ECB writes the check. And the ECB writing the check introduces a serious moral hazard issue. Hence the (over) emphasis on austerity.
quick look at the 489 billion euro LTRO
When it comes to CB liquidity operations, as previously discussed, it’s about price- interest rates- and not quantities of funds. In other words, the LTRO is an ECB tool that assists in setting the term structure of euro interest rates. It helps the ECB set the term cost of funds for its banking system, with that cost being passed through to the economy on a risk adjusted basis, with the banking system continuing to price risk.
So what does locking in their funds via LTRO do for most banks? Not much. Helps keep interest rate risk off the table, but they’ve always had other ways of doing that. It takes away some liquidity risk, but not much, as the banks haven’t been euro liquidity constrained. And banks still have the same constraints due to capital and associated risks.
To it’s credit, the ECB has been pretty good on the liquidity front all along. I’d give it an A grade for liquidity vs the Fed where I’d give a D grade for liquidity. Back in 2008 the ECB was quick to provide unlimited euro liquidity to its member banks, while the Fed dragged its feet for months before expanding its programs sufficiently to ensure its member banks dollar liquidity. And the FDIC did the unthinkable, closing WAMU for liquidity rather than for capital and asset reasons.
But while liquidity is a necessary condition for banking and the economy under current institutional arrangements, and while aggregate demand would further retreat if the CB failed to support bank liquidity, liquidity provision per se doesn’t add to aggregate demand.
What’s needed to restore output and employment is an increase in net spending, either public or private. And that choice is more political than economic.
Public sector spending can be increased by simply budgeting and spending. Private sector spending can be supported by cutting taxes to enhance income and/or somehow providing for the expansion of private sector debt.
Unfortunately current euro zone institutional structure is working against both of these channels to increased aggregate demand, as previously discussed.
And even in the US, where both channels are, operationally, wide open, it looks like FICA taxes are going to be allowed to rise at year end and work against aggregate demand, when the ‘right’ answer is to suspend it entirely.