Why the US Economy Recovered Faster than Europe from the 2008 Crisis

The Federal Reserve: The Biggest Scam In History
The Federal Reserve: The Biggest Scam In History (Photo credit: CityGypsy11)
The reason is simple and everyone knows it (including economists): quantitative easing. That's what the Federal Reserve has been doing - and done twice since 2008, spending hundreds of billions of $$$ to buy bonds (Treasury bills) thus automatically pumping money in the economy and helping to jumpstart it. And that's what the European Central Bank (ECB) has NOT done - or done very little of it: just €212 billion (some $ 260 billion). 

Peanuts compared to the Fed!

So it should come as no surprise that the crisis in Europe has lingered on, indeed has grown explosively while things in America are looking (a little) better - and it might go on this way provided the whole world (and international trade) is not taken down by a European implosion...Not to mention the other four reasons threatening the world economy according to Mr. Doom (see the first article below about Nouriel Roubini's predictions - all frighteningly likely). 

English: Nouriel Roubini, Turkish economist, p...
English: Nouriel Roubini, Turkish economist, professor of economics at the Stern School of Business, New York University. From the Confederation of Norwegian Enterprise conference, 2009. ‪ (Photo credit: Wikipedia)
This is also why the IMF, in a recent report highly critical of the Eurozone policies, called on establishing a stronger monetary union to break the tide stemming from what it diplomatically described as the "adverse links between sovereigns, banks and the real economy" that have grown "stronger than ever". It warned of an economic slow down accompanied by a high risk of deflation (25% by 2014), and told the ECB to engage in quantitative easing or else...

What's this business of "adverse links"? Put in simple words: European government finance their deficits with bonds (what the IMF calls "sovereigns") that are snapped up by banks (lately national banks rather than foreign) that finance themselves from the ECB at super low interest rates (less than one percent). Thus they are able to fill up with bonds that give them returns many times higher (in the 6% area and more) than the cost of the money they borrowed. And they do this rather than lend to local businesses ("the real economy"): it's a sure way to fill their coffers and achieve the reserve levels required of them by European regulators. 

In short, a vicious circle.

Quantitative easing, since it turns the Central Bank into a major bond buyer, can break the said vicious circle. Banks will find the Central Bank is competing with them, hence, with more buyers in the bond market, rates on bonds will inevitably drop and become less enticing. That will force them to turn elsewhere to make money and (hopefully) start lending to business, which is what they really should have been doing all along.

But quantitative easing makes people uneasy and fiscal disciplinarians (like the Germans and the Republican Tea Party) downright furious. They see it as reckless pumping of money that causes inflation - for them, it's a scam, it's immoral, it's something that destroys the future of our children. Moreover when the ECB was established, it was meant to fight inflation, not deflation.  

So will the ECB listen to the IMF's advice?

LONDON, ENGLAND - MAY 22:  Christine Lagarde, ...
LONDON, ENGLAND - MAY 22: Christine Lagarde, the Managing Director of the International Monetary Fund, addresses a press conference in the Treasury on May 22, 2012 in London, England. A report on the IMF's annual assessment of the UK economy has recommended that the Treasury consider measures to improve its current economic weakness such as Quantitative Easing and cutting interest rates. (Image credit: Getty Images via @daylife)

But there's something else at work here: the ECB is also mandated to defend the stability of the Euro - thus if prices will slow down significantly, as they may well do, particularly in the so-called European southern periphery (read: Greece, Italy, Spain etc), the ECB may well have to engage in quantitative easing, whether it likes to or not.

Because worse than inflation is deflation: when consumer prices fall, investment prospects collapse, sales slow down, businesses close down and unemployment soars. Whatever advantage to the consumer may derive from lower prices simply evaporates.

Which brings me to my last point: sovereign debt is NOT the equivalent of a private household debt - whatever the Germans and the Tea Party say. There's no moral payback for keeping it in balance year in, year out. To think of it that way is wrong. But to never balance the budget is also wrong. You should be a fiscal disciplinarian in good times, not in bad times. When things are going well, that's when you should call on governments to balance their budget. Otherwise no. It's the government's role to ensure stability of the currency and limit economic downturns and the pain of unemployment. 

Since John Maynard Keynes, we know what government policies work, so why not use them? Why repeat the mistakes of the Great Depression?
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Emma Calin said…
You pose a very pertinent question. Indeed why do our leaders constantly repeat the practices and policies that have failed in the past? I believe that the truth is that they always think they are better than all those old guys who got it wrong before. The Euro crisis has revealed the true nature of the European political beast - essentially nationalistic and short sighted. I keep hoping that cometh the hour will mean cometh the man - just as long as he is not foreign! As it is we have cometh the men/women cometh the hours and hours and hours of blame and indecision. I just have the feeling that events will push that trembling collective hand towards the start button on the printing presses. The risk of course is that if too late and the economy has completely stalled you will arrive at the two horsemen of stagflation. The third horseman will have loaded up with oil/fresh water/land and gold and be the other side of the sunset waiting to sting the suckers in the new dawn. Getting it right and getting it on time is the real trick. It's much easier being a Romantic novelist.
Caleb Pirtle said…
I can get more reasonable, understandable, and common sense information on your blog than I can from every so-called news analyst we have in this country. You do have your finger on the pulse of it all.
Jack Durish said…
I beg to differ. The U.S. economy has suffered and is still suffering for imitating the policies that have afflicted European economies. The U.S. only lags behind in its descent to catastrophe because Europe started sooner and made their mistakes on a grander scale.

Am I impressed by the opinions of economists in these matters? No. They are much like weathermen, arguing over the causes of what just happened but lacking the insight to predict what will happen. Thus, their pronouncements about the past are even suspect.

American rose to become the wealthiest economy in the world in all of history on the efforts of individuals who had the liberty to chart their own destiny and the liberty to reap the benefits of their own labor. The American economy was truly the sum of its individual pats. Europe never mastered that paradigm. They always fell back on the collective. Now that U.S. leaders preach collectivism, we are failing.

Listen to our President. "You didn't build that. Someone built it (your business) for you." Sounds almost medieval, doesn't it. Very European, too. It makes me laugh. The man in the White House has no concept whatsoever of what it means to be an American. Even worse, he's ashamed of it.

Unfortunately, we may soon reach the tipping point. Europe may already have passed beyond it and it won't have America to bail it out again.

God help us all.
Great comments, you guys, many thanks! And I enjoy the different points of views, it's really fun! Yes, Emma, getting it right and getting it on time will be the real trick. My hope is that Mario Draghi will do it. It's interesting to note how forceful the IMF has suddenly become with that French woman at the helm...
And Caleb, I'm real glad you enjoy my posts, I try to be as clear as I can.
And of course, Jack, there's no way I'll ever manage to convince you, I know that. I'm with you when it comes to (most) economists: they're like the weathermen, they can't predict the next storm!
But some economists are not so bad - Roubini (read the article I attached, it's an eye-opener) got it right every time, good old Mr. Doom! And when it comes to economic policies, some things are now quite clear. In particular, the monetarists, starting with Friedman, had got it consistently wrong and (among other things) caused Latin America to miss out on a whole decade of growth because of their efforts to follow the advice of the monetarists...And Jack, I wish I had your faith in the results of individuals in America. I'm afraid I just don't. All I see are big corporations and very rich guys (I won't make names) who're trying to take over the government so that they won't have to pay taxes...
Jack Durish said…
I love teasing you. Every one of those "big corporations" started out as the germ of a dream in the mind of an entrepreneur. Indeed, the largest of them are the end of that dream unless, of course, government keeps them on life support (as in General Motors which has cost the grandchildren of American taxpayers, maybe their grandchildren too, an untold fortune and the company is moving to China -- and Chrysler which is now a subsidiary of Fiat - see, even the Italians are benefiting). And, yes, I truly believe that economists could benefit from studying weathermen. They no longer say it's going to rain. They say there's a x% likelyhood of it because we have records that it's rained x% of the time when we've seen conditions like these. The weather is affected by far too many factors, many of which we can't see and measure. Isn't the economy the same. Sure, you can track the "big" factors - money supply, new laws affecting business, etc. - but consumers may respond in ways that no one fathoms any more than one can predict how another person will react the first time you kiss them or the thousandth time you kiss them. There are just too many of these tiny factors beyond understanding that can significantly affect markets and economies. I think economists need a little humility.
CLC said…
Times have changed, Jack. I have sent my life as a small entrepreneur - those that formed the backbone of this society, but that life now is almost impossible. If you can stay in business, you work for nothing,have nothing and end up with nothing to sell for your retirement. Those days of the entrepreneurial stability offered by that class of workers are gone for many classes of work and with it the disappearing middle class.
Jack Durish said…
You won't get any argument from me, Christina. The spiral began with the passage of the Interstate Commerce Act in 1897. It's been a slow process since then, but escalating these days. The government has been destroying the environment that encouraged entrepreneurs. They passed legislation always crafted for the benefit of big business and big labor, and kept both on life support, draining resources that would have been better used by entrepreneurs.

Remember Mark Twain's words, "Loyalty to your country always. Loyalty to your government when they deserve it." They don't deserve it these days.