Europe Needs a Functional Lender of Last Resort
Nick Rowe:
Worthwhile Canadian Initiative: The Lender of Last Resort: What Paul Krugman is saying about Ireland and the Eurozone is not wrong. But he keeps missing the most important point. And it's bugging me. Sure, the scale (H/T anne via Mark Thoma) of Ireland's bank guarantees is much bigger than the US's TARP, as a percentage of GDP, and that matters. And sure, the Eurozone is less of an Optimal Currency Area than the US, and that matters too. But the lender of last resort matters more. The US has an effective lender of last resort. The Fed has the political authority to print as many US dollars as are needed. The only effective limits are the risks of inflation and moral hazard. The Eurozone does not have an effective lender of last resort. The individual Eurozone countries do not have their own central banks. The ECB lacks the political authority to print as many Euros as are needed.
Suppose you abolished the US Federal government. So you needed all 50 State governments to agree before the Fed could act as lender of last resort to one of those State governments. And suppose some of those US State governments had as much debt as Greece, or were bailing out their banks like Ireland. Think all 50 State governments would agree on anything? I don't...



J. Bradford DeLong's Blog
- J. Bradford DeLong's profile
- 90 followers
