Political Leaders, Central Banks Should Stop the Stampede: View
The downgrade triggered panic selling around the globe on Monday, leading to demands for more collateral from investors, who sold still more shares to meet the margin calls. The resulting drop in equity prices, coming on top of last week’s more than $4 trillion plunge in global stock market value, will probably dampen consumer confidence and increase the chances of another recession.
With fear begetting more fear, and with U.S. and European economies in a precarious state, government leaders on both continents have only one sane path: to prevent recession and restore faith in the financial system. This is easier said than done, particularly in an American election year. But here’s how we can get started.
To begin, congressional leaders in both parties should name within days -- and not wait for the Aug. 16 deadline -- the 12 members of the supercommittee called for in the recent debt- ceiling accord. To hasten the process, Senate Majority Leader Harry Reid of Nevada and Senate Minority Leader Mitch McConnell of Kentucky should name the Senate’s Gang of Six to the panel. That group, composed of three Democrats and three Republicans, proposed shaving $3.7 trillion from the national debt over 10 years, including $1 trillion in tax increases.
The plan, which won broad bipartisan support when it was released in mid-July, could quickly become the supercommittee’s recommended course with just one more vote, presumably from a Democratic House member named to the panel. If so, the supercommittee would more than double the 10-year, $1.5 trillion debt-reduction package mandated by the debt-ceiling agreement.
The road map should not recommend fiscal policies that could stunt economic growth in the short term. That means the panel should avoid calling for immediate spending cuts or tax increases. If anything, it should boost government spending over the next two years if growth continues to be anemic or the economy shrinks. After that, the committee should lay out in fine detail how the U.S. can stabilize or reduce its debt load over the next decade. The blueprint should include an overhaul of corporate and individual taxes as well as entitlements such as Medicare and Social Security.
To help stimulate the stalled economy, President Barack Obama and his congressional allies will insist on reauthorizing as much as 99 weeks of unemployment benefits, an extended coverage period due to expire at the end of this year. But with evidence mounting that almost two years of unemployment compensation isn’t helping people get jobs -- and with household debt still hanging over consumers, especially those with homes worth less than their mortgages -- a better option may be to reduce the principal on underwater home loans.
One route is through Fannie Mae and Freddie Mac, the mortgage-finance companies that own or guarantee most U.S. mortgages and are in turn taxpayer-owned. The U.S. Treasury Department could direct the companies to reduce the principal for underwater borrowers who are paying their mortgages and would probably stay current with such a writedown. In return, homeowners who benefit should give up a portion of any profits they get from selling the home, an approach called shared appreciation.
With political paralysis stopping elected officials from acting swiftly on both sides of the Atlantic, central banks have had to step up their interventions. Most notably, the European Central Bank on Aug. 8 began buying battered Italian and Spanish government bonds, expanding its own balance sheet and driving down sovereign-debt yields. For the past three weeks, investors have doubted that Europe’s leaders would prevent the problems of strapped governments from infecting the entire euro area. The ECB’s move appears to have helped for now, though it may tarnish the bank’s reputation for independence.
In times of crisis, imperfect solutions are unavoidable. The Federal Reserve, having just completed its own government bond-buying campaign, should signal after an open-market committee meeting Tuesday that it will do more to prevent a double-dip recession. With a bloated balance sheet, the Fed is hobbled but not powerless. It could indicate a willingness to buy more U.S. Treasuries, offer to keep its key interest rate near zero for a specific timeframe, or pledge not to sell the government bonds it holds for a definite time period.
On Monday afternoon, Obama tried to bring some measure of peace to our summer of financial discontent. It was not a particularly effective performance. Calming an anxious globe takes more than one man, though. Given the panic that’s welling, he could use some help.
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