Clash of Central Banks

by John M. Curtis
(310) 204-8700

Copyright Feb. 7, 2010
All Rights Reserved.                    

              Meeting in the remote Arctic Canadian outpost of Iqaluit, Nunavut, finance ministers and central bankers from the G-7, including the U.S., Japan, Germany, Britain, Italy and Canada, are trying to deal, once again, with a brewing global financial crisis.  Brought about this time by the impending insolvencies of Greece, Spain and Portugal, the G-7 hopes to avert another global economic meltdown.  While there’s no indication yet that China and India are also at risk, the European Union faces crushing economic burden to bailout Greece, and possibly Spain and Portugal.  Representing the U.S. in a remote Canadian tundra village of 7.000 inhabitants, Treasury Secretary Tim Geithner and Federal Reserve Board Chairman Ben S. Bernanke met with their G-7 counterparts to plot strategy in a gathering storm.  Bernanke has led the way averting a major U.S. financial crisis.

            Working with former Fed chief Paul Volcker, Geithner urged the U.S. Congress to enact tough new regulations reinstating provisions of the 1933 Depression-era Glass-Steagall Act, preventing bank holding companies from engaging in risky stock market investing.  Banking reform was at the top of the agenda for finance ministers hoping to prevent a repetition of the U.S. financial meltdown that left banks without cash near insolvency.  Finance ministers also dealt with the Haitian cataclysm that left up to 25% of the 9.8 million population homeless.  European Union central bankers were concerned about Greece, turning recently to the International Monetary Fund for a possible bailout.  EU officials warned Greece that it could not expect a bailout from the European Central Bank.  With the U.S. Fed bailing out banks, it put pressure on the European Central Bank to follow suit.

            Portuguese’s parliament defeated a government austerity plan that would have cut expenses and reduced debt to a manageable fraction of Gross Domestic Product.  Portuguese debt expanded to 13% of GDP, 10% more than recommended by European Central Bankers.  Currently U.S. budget deficits represent at over 10% of GDP, stand at around $1.57 trillion for a GDP not to exceed $14 trillion.  Unlike ECB, Bernanke has expanded the money supply to prevent insolvency of major U.S. financial institutions and individual states.  European Central Bankers can’t ignore Greece, Portugal or Spain, pawning them off the IMF.  When the EU went to the euro Jan1, 1999 16 of the EU’s 27 countries adopted the currency.  Less powerful economies like Greece, Portugal and Spain, paid a heavy price financing public debt on an overvalued currency, now facing insolvency.

            European Central Bankers can’t ignore the fundamental unfairness of expecting less economically vibrant economies to make it without financial help.  Whether it harms Europe’s prosperous economies, like Germany, France, Italy, Netherlands, Belgium, etc., European Central Bankers are obligated to print more euros to bail out the weaker economies. Like the U.S. where the Fed was forced to print more money to bailout states and financial institutions, European Central Bankers will be forced to devalue the euro.  Bailing out Greece, Portugal, Spain or any other EU state is the obligation of the EU Central Bank, not the IMF, World Bank or any other institution designed for third world development or debt relief.  “I think we have to be very mindful of the failure or potential failure of domestic economies,” said Canadian Finance Minister Jim Flaherty, pushing the EU Central Bank to act.

            European Central Bankers should take a lesson from Depression Era expert Fed Chairman Ben S. Bernanke, who defied conservatives and followed the tradition of the Franklin Delano Roosevelt, printing whatever money was needed to prevent another Great Depression.  EU Central Bankers must devalue their currency enough to bailout EU nations in need of immediate cash infusions.  While Bernanke won a new four-year term under duress Feb. 3, he faced withering criticism from conservatives for his monetary policy, keeping interest rates at historic lows and providing liquidity to U.S. financial institutions.  British Treasury Chief Alistair Darling urged the U.S. Fed to control risky stock market investing that sent international banks into chaos.  Beranke and Geithner are facing stiff Wall Street opposition to restricting derivative trading that affects international banking.

            European Central Bankers need to do whatever is necessary to bailout member states facing financial insolvency.  It’s not less developed countries faults that the overvalued euro placed their economies at risk of insolvency.  No international banking institution designed to help third world economic development should bailout or lend money to EU states:  That remains the responsibility, like in the U.S., of its central bank.  Greedy European countries, like Germany and France, have blocked EU central bankers from adopting monetary policy comparable to the U.S. and Britain, providing adequate stimulus to maintain the solvency of member states.  If the EU is really fair to all its member states, the richer countries must share the burden and pay the price to save more stressed economies.  European Central Banker must follow their U.S. British counterparts and cough up the money.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.