Tags: Rubin | Eurozone | bailout | ECB

Rubin: ECB Is Right to Require Policy Action for Bailouts

Thursday, 16 Aug 2012 09:42 AM

Former U.S. Secretary of Treasury Robert Rubin says the European Central Bank (ECB) is correct in requiring countries asking for bailouts to implement monetary policy actions.

“An effort by the ECB to keep pace with capital flight would, in time, lead to ruinous inflation and an even more massive crisis,” Rubin writes in the Financial Times. “No serious central bank would carry monetary expansion to that level.

“More broadly, the loss of central bank credibility with respect to long-run inflation is a matter of paramount importance for any financial system.”

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

Countries in the eurozone have reacted slowly to the crisis, notes Rubin.

“The issues facing these leaders are complex,” he says. “But sheltering them from pressure to act only increases the likelihood of continuing failure to do what is needed. And the longer the crises go on, the deeper the holes, the stronger the measures ultimately required, the harder it is to regain confidence and the higher the probability of failure in some form.

“In the words of a major money manager, ‘the cost of doing nothing is not nothing,’” says Rubin, acknowledging that this is also true in the United States.

Money without policy simply does not work, he says, and “if there is broad-based capital flight, no amount of money is enough.”

“Today, capital flight could include all forms of eurozone credit assets — sovereigns, private sector debt, bank deposits, bank wholesale funding and so on — sold in what would become a vicious cycle,” he writes.

“It could include a sharp depreciation of the euro against other major currencies — not as a policy measure to increase exports, but rather as a reinforcing part of the crisis.”

Spanish banks borrowed a record 402 billion ($496.44 billion) euros from the ECB in July, which was 10 percent more than the 365 billion euros they borrowed in June, while Italian banks held 283 billion euros in ECB funds in July compared with 281 billion in June, Reuters reports. Italy and Spain are the eurozone's third and fourth largest economies and are struggling to fund their budget deficits and debt obligations.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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