Another Revere : “Europe’s debt crisis and Keynes’ green cheese solution”
This one is from RWER contributor Thomas I. Palley. To read it in full you will have to click the link at the bottom of page to the Financial Times.
Europe’s debt crisis and Keynes’ green cheese solution
By Thomas I. Palley
The great German physicist Max Planck remarked that “science advances one funeral at a time.” The situation is worse in economics, which is subject to regress, as happened when the valuable but imperfect insights of Keynesianism were supplanted by the ideological blinkers of neo-liberalism.
The effects of this regress have again been on display in the confused discussions and policy responses to Europe’s sovereign debt crisis. The fact is that countries which borrow in their own currency and control their money supply will never default because they can always issue the money needed to repay their debts.
For such countries, central banks should respond to speculative debt crises with “bear squeeze” tactics that have them buy existing debt. In this fashion, countries can buy back debt below par value, in effect repaying it on the cheap. It is what the European Central Bank should have been doing on behalf of its member countries.
Not only does a bear squeeze assist debt reduction, it also punishes speculators and lowers interest rates, enabling countries to refinance on favourable terms. In a sense, this is what the Bank of England and the Federal Reserve have been doing on behalf of their respective governments by buying gilts and treasuries. Though such policy does increase the money supply, this is desirable at a time of big demand shortage and excess capacity when inflation is a distant danger.
The eurozone has cheated itself of these benefits because of the neo-liberal design of the ECB. That design ignores the fact that having central banks act as the government’s banker and to help manage the national debt was one of the original reasons for the establishment of central banks. This is no accident as neo-liberalism intentionally aimed to sever the fiscal – monetary policy link, but in doing so it discarded an essential tool of macroeconomic management.
The most damaging aspect of the crisis is the global boost it has given to the arguments of those advocating fiscal austerity. That is a cure which will almost certainly kill the patient by causing deep recession that lowers tax revenues and aggravates budget difficulties, while also causing bankruptcies that threaten an already weakened banking sector.