Can the US afford to bail out Europe?

The global economic recession has taken its toll on the West. The growing fissures of socio-economic disparities have sparked protests that are not only limited to Greece, but have enveloped more than 900 cities of the developed world at the same time. Policy makers and economists were arrogant over the infallibility of their own self created theories. What they failed to take into account was the simple fact that economic paradigms are formed with the knowledge of the expected and not the unexpected. Therefore most of their observations turned out in ways that weren’t really anticipated and unfortunately even today, the unexpected, the blasphemous behaviour of the free market will not in reality go on to change economic paradigms.
The global economic recession can be attributed very simply to one inherent flaw of the developed world. ‘Hubris’ or according to the Merriam Webster dictionary ‘exaggerated pride or self confidence’. At the end of the day, what none of them realised is that capitalism is like a struggle between individuals, a tug of war, an attempt to gain control over scarce resources. It is like boxing perhaps, or poker, a softer restrained form of private warfare. In this context, let us analyse a surprising development on the Euro front, comprising of a meeting of a few of the worlds most influential central bankers. To say, that the outcome of the meeting was even more surprising would be an understatement. In recent developments, it has come to the fore that the US central bank, the Federal Reserve has promised to bail out the Euro, from the US tax payers money, and that too very cheaply. The Fed, has promised the ECB of an unlimited supply of the American taxpayers money.
What is most surprising though is, at this crucial juncture where a double dip recession is on the cards, the policy of the Federal Reserve and the Obama administration do not fail to surprise the average Joe. According to Shan Saeed, a senior financial market expert, after analysing the 3 month US treasury bills, the investor received a rate of return on those bills of 0.0 per cent. In other words, ‘the US government is perfectly content paying investors absolutely nothing for the privilege of taking and using investor’s money.’ In theory, the actions of the US administration will go on to stimulate the economy, in reality it punishes those who save. Whoever said saving is bad for the economy? US debt has reached alarming levels of almost $15 trillion, add to that the lowered predictions of GDP growth rate of 1.6 to 1.7 per cent from the previously anticipated growth rate of 2.7 to 2.9 per cent.
Following the rendezvous, currency markets and traders are full of optimism about the euro. While such reassurances are fleeting to say the least, the only probable loser of such an arrangement seems to be the dollar that has considerably weakened compared to other currencies. The reason, for this weakening of the dollar is more than apparent. Following an announcement, from the ECB, the Bank of Canada, the Bank of Japan, Swiss National Bank, the Bank of England and the Fed, it has been learnt that the lions share of the European bail out money will be provided by the US federal reserve.
“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” read a statement following the meeting. After China’s interest in bailing out the eurozone waned, and there were speculations floating about a possibility of the Fed bailing out European banks as it did for the American banks following the crisis in 2008. This speculation did meet strong denial from the Obama administration, however after the Monday meeting with top European Officials, European Council President Herman Van Rompy and European Commission president Jose Manuel Barroso, President Obama certainly found a new found interest in Europe with an intriguing statement, that the European debt imbroglio is of ‘huge importance’ for the US and that his administration was ready to play its part in keeping Europe afloat.
As is the case with all things American, no other details were given over what he really meant by playing ‘our part’ probably because he wouldn’t want to get into trouble with the American taxpayers who are increasingly unhappy with the way things are being governed at the present moment in time. However the Fed announced this deal two days later, why? Because the Fed is everybody’s daddy, they really aren’t accountable to the Congress or anyone else.
What was learnt of the agreement is, that the FED extends lending to the ECB, that will transfer money to the illiquid European banks. The lending is two times cheaper, in effect the American taxpayers will be bailing out Europe that too almost free. Details of the agreement? Well, the ECB must pay the Fed a private sector overnight lending rate plus 0.5 per cent point that they previously paid in addition to 1 per cent point.
Following this deal, I almost imagined the Fed standing on a hill and laughing out loud, chuckling as it said, ‘Hey taxpayers, who’s your daddy now?’

The writer is News Editor, Profit. For comments and queries email at ali.rizvi7957@ gmail.com