Another Bank Bailout - Paul Krugman/NYT [View all]
Another Bank Bailout
By PAUL KRUGMAN - NYT
Published: June 10, 2012
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Oh, wow another bank bailout, this time in Spain. Who could have predicted that?
The answer, of course, is everybody. In fact, the whole story is starting to feel like a comedy routine: yet again the economy slides, unemployment soars, banks get into trouble, governments rush to the rescue but somehow its only the banks that get rescued, not the unemployed.
Just to be clear, Spanish banks did indeed need a bailout. Spain was clearly on the edge of a doom loop a well-understood process in which concern about banks solvency forces the banks to sell assets, which drives down the prices of those assets, which makes people even more worried about solvency. Governments can stop such doom loops with an infusion of cash; in this case, however, the Spanish governments own solvency is in question, so the cash had to come from a broader European fund.
So theres nothing necessarily wrong with this latest bailout (although a lot depends on the details). Whats striking, however, is that even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spains workers and more than half its young people jobless.
Most notably, last week the European Central Bank declined to cut interest rates. This decision was widely expected, but that shouldnt blind us to the fact that it was deeply bizarre. Unemployment in the euro area has soared, and all indications are that the Continent is entering a new recession. Meanwhile, inflation is slowing, and market expectations of future inflation have plunged. By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts. But the central bank wont move.
And that doesnt even take into account the growing risk of a euro crackup. For years Spain and other troubled European nations have been told that they can only recover through a combination of fiscal austerity and internal devaluation, which basically means cutting wages. Its now completely clear that this strategy cant work unless there is strong growth and, yes, a moderate amount of inflation in the European core, mainly Germany which supplies an extra reason to keep interest rates low and print lots of money. But the central bank wont move.
Meanwhile, senior officials are asserting that austerity and internal devaluation really would work if only people truly believed in their necessity...
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More:
http://www.nytimes.com/2012/06/11/opinion/krugman-another-bank-bailout.html?_r=2