The Fed vs. The ECB

Why is the deficit and debt situation here in the United States different than much of Europe? Simple, we have the Federal Reserve, and they have the European Central Bank.  Don’t get us wrong, we have some serious decisions ahead of us to reduce our long term deficit and pay down some debt, but there is one thing we have on our side: time. Not a lot, but enough.  Through quantitative easing programs, the Fed has lowered US borrowing costs to the point where it doesn’t hurt as much as it should.  If the Fed decided to sell their $1.65 trillion of US marketable securities, interest rates would surely rise, closer to historical norms.  Instead of paying slightly less than 3% on US federal debt, rates could be closer to 4%, 5%, or even 6%.  Total interest payments could balloon from $0.5 trillion to nearly $1 trillion and exacerbate our deficit problem.   The United States would essentially look like Europe, but the Fed has stopped this from happening, for now.  These actions have granted our government the time get our fiscal house in order – well potentially, but that is a conversation for another time.  
  

What about Europe? Well, needless to say, the ECB did not implement a quantitative easing program comparable to that of the Fed. The result: many European countries are out of time, yields are rising, and healthy counties (Germany) are forced to bailout the weak (Greece, Italy, and Spain).  In fairness to the ECB, they did announce the purchase of some Italian and Spanish debt, but not nearly the scale that is required.  Remember, the Fed holds over 10% of US public debt.  If the ECB had acted early enough with a sizable program, Greece may not be paying 35% interest on its debt – well, it’s doubtful that even Zeus himself could have prevented Greece from going bankrupt.  But the ECB could help lower Italian bond yields below their current 7%, lower Spanish bond yields below 5%, and stabilize the yields of Germany and France.  It’s not too late to act.  A sizable quantitative easing program initiated by the ECB would buy time, and allow countries to implement deficit reduction measures in a responsible manner.  The current path of bailouts and draconian budget cuts will surely force Europe into recession and make the problem worse than it currently is.  Plain and simple: The European Central Bank needs to step in, become the lender of last resort, and save Europe (and possibly the world) from another economic catastrophe.

Some interesting books on the Fed and the ECB:
In FED We Trust: Ben Bernanke's War on the Great Panic
The Fed : The Inside Story How World's Most Powerful Financial Institution Drives Markets
Macroeconomic Policy Coordination in EMU?: A critical assessment of ECB policy
The Ecb and the Euro: The First Five Years
Stabilizing an Unstable Economy
The Federal Reserve System: A History