Counterparties: Slouching towards crisis
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The Center on Budget and Policy Priorities has a report out concluding that talk of a fiscal cliff is misguided and counterproductive. The CBPP prefers the idea of a fiscal slope: that’s more accurate, they say, because the “economy will not immediately fall off a cliff into recession the first week in January if the policy changes mandated by current law take effect”.
The aim of this well-intentioned re-characterization is to discourage the idea that any action, regardless of long-term effects, is preferable to the disastrous Jan 2 consequences that inaction would bring. Still, cliff or slope, the medium-term consequences are the same.
As we’ve seen with the jobs crisis, the longer that a crisis continues, the more that the Fed, Congress and the president can delay action or make do with partial measures. The European crisis has had a similarly long fuse – and an equally hodgepodge response, full of half-measures and hopeful waiting.
In hindsight, perhaps we were lucky in the fall of 2008 that every leg of the crisis unfolded before Asian markets opened on Sunday night New York time. When shocks happen quickly, they’re perceived as being more severe. With unemployment and the euro, by contrast there has been plenty of time for policy makers to get comfortable with a status that would be utterly unacceptable if we got there overnight. A penchant for reacting to crises only if they’re sudden is something we can do without on any number of issues. Particularly in fiscal policy, because the CBO’s latest projections tell us that whether it’s a cliff or a slope, we’ll end up in recession either way. – Ben Walsh
On to today’s links:
German officials float European bad bank as an alternative to euro bonds – NYT
Lagarde responds to Soros: Euro zone needs a master plan, not a deadline – Reuters
“The risk premium says Spain doesn’t have the market door open” – Reuters