In his most recent blogpost, liberal economist Brad DeLong writes that he has long criticized some of his more conservative peers for endlessly saying “the time is always 1931 and that we are always Austria,” referring to Creditanstalt, the Austrian bank whose bankruptcy is widely held to have led to the domino-like bank failures of the 1930s Great Depression.
Reacting to the current crisis in Europe, DeLong, a U.C. Berkeley professor and former Clinton administration Treasury official, rather frantically admits we’ve arrived in Austria in 1931. His sense of urgency unmistakable, he writes:
“The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip.”
It remains to be seen whether Fed Chairman Ben Bernanke heeds DeLong’s recommendation, and whether such a move would be sufficient to protect the American economy from Europe’s financial contagion, but it does underscore the gravity of Europe’s, and the world’s, economic crisis.
Saxo bank chief economist Steen Jakobsen, quoted in a recent blogpost by Mike Shedlock, bracingly and succinctly describes today’s economic problem: “the world has [a] major funding gap.” There simply isn’t enough money in the world, or rather, there isn’t enough dumb money in the world.
Jakobsen cites estimates from independent trading houses that Spain and Italy’s combined funding needs total 400 billion to 500 billion euros over the next two to three years.
The Europeans seem to think there is just one source for a funding need that large: China. Within hours of the eurozone leaders’ Greek rescue summit two weeks ago, French President Nicolas Sarkozy reached out to his Chinese counterpart for financial support of the European Financial Stability Facility, the Eurozone’s main bailout vehicle. But the Chinese poured ice water on the investment merit of this idea in an interview China’s sovereign wealth fund gave Al Jazeera this week. The Also Sprach Analyst blog transcribes a most telling part of that interview with the fund’s economist Jin Liqun:
“Labour laws are outdated … incentive systems are totally out of whack … why should some [eurozone] members’ people have to work until 65 or longer, whereas in some other countries they are happily retired at 55, languishing on the beach? This is unfair … Chinese people are working very hard…”