The Federal Reserve is oft described as setting monetary policy for the world.
Bank of Canada Governor Mark Carney concedes there is a limit to how far Canadian interest rates can deviate from those set by the Fed. Others complain the Fed's decision to create more than $2-trillion to purchase mortgage-backed securities and Treasuries stoked inflation abroad, forcing central banks to adjust accordingly.
The Fed's outsized influence on the rest of the world is at best met with resignation. Just as often, it's met with outright anger. Nevertheless, a couple of Washington-based economists say the U.S. central bank should ignore this sentiment and ride to the rescue of Europe.
In a statement Monday, Dean Baker and Mark Weisbrot, the co-directors of the Center for Economic Policy Research, say the Fed should get back into the money creation business to buy Italian and Spanish bonds.
"The failure of the (European Central Bank) to act creates the need for the Federal Reserve to act as part of its mandate to promote full employment in the United States," Messrs. Baker and Weisbrot write. "The Fed's intervention will put an end to the vicious cycle that has sent Italian and Spanish bond yields soaring, which in turn has increased their borrowing costs and made financial markets increasingly skeptical that their debts will be paid."
The strength of the proposal is as a trigger for thought about the way the world works. There is no way the Fed would unilaterally purchase European debt in the current political environment, even if it would ease the strain on the European financial system.
Such a move would dramatically undermine the authority of the ECB, which is resisting a big sovereign bond purchase to keep pressure on politicians to adjust their budgets. Nor would the Fed court further outrage in Congress with a move that would be interpreted -- rightly or wrongly -- as using U.S. taxpayers' money to bail out Europe. The Fed still is dealing with the fallout from saving Wall Street during the financial crisis, a cause that won't be helped by this Bloomberg News analysis that shows banks earned an estimated $13-billion (U.S.) in profits while taking advantage of the Fed's low-interest loans.
While unrealistic, the proposal of Messrs. Baker and Weisbrot raise a couple of important questions. One is how long should the rest of the world sit back while Europe sorts out is problems? The second is why is it that the Fed is always expected to come to the rescue?
On the first, Messrs. Baker and Weisbrot are convinced that the ECB's stubbornness risks driving the world economy into another recession. "It is possible the threat of Fed action would move the ECB to act on its own," they write. "But in any case, the stakes are too high for the U.S. economy for the Fed to sit on the sidelines. The rest of the world, much of which is already feeling the effects of instability in the euro zone, would also be likely to support and appreciate the Fed action."
What Messrs. Baker and Weisbrot seem to miss is that a cavalry charge led by Ben Bernanke would have the effect of letting the politicians once again avoid making difficult decisions. The Group of 20 leaders had it within themselves to calm the European debt crisis this month at their summit in Cannes, France. They have the money, and they have the vehicle: the International Monetary Fund. Yet they chose to do nothing, hiding behind the excuse that Europe has the resources to solve its own problems.
This approach of tough love could turn out to be the right strategy. European leaders do appear to be finally getting their acts together. But if the situation worsens, it's not the Fed's job to save the day. Central banks have done extraordinary things over the past few years; controversial things that have cost them a good deal of credibility. If the world economy needs more saving, it might be time for the leaders to, well, lead.