The European authorities could . . . allow for Ireland to undertake a temporary fiscal stimulus to get their economy growing again. That is the most feasible, practical alternative to continued recession.
Instead, the European authorities are trying what the IMF . . . calls an "internal devaluation". This is a process of shrinking the economy and creating so much unemployment that wages fall dramatically, and the Irish economy becomes more competitive internationally on the basis of lower unit labour costs. . . .
Aside from huge social costs and economic waste involved in such a strategy, it's tough to think of examples where it has actually worked. . . .
If you want to see how rightwing and 19th-century-brutal the European authorities are being, just compare them to Ben Bernanke, the Republican chair of the US Federal Reserve. He recently initiated a second round of "quantitative easing", or creating money -" another $600bn dollars over the next six months. And . . . he made it clear that the purpose of such money creation was so that the federal government could use it for another round of fiscal stimulus. The ECB could do something similar -- if not for its rightist ideology and politics.
For Ireland, Douthwaite recommends a modified form of quantitative easing he calls "deficit easing." He explains:
Both approaches involve central banks creating money. With quantitative easing, the new money is generally used to buy securities from the banking system, thus providing the banks with more money to lend. Unfortunately that is where problems have been arising in the US and the UK. Because the public has been unwilling to borrow, or the banks have been unwilling to lend, quantitative easing has not increased the supply of money in circulation in the US, where M3 began to decline in the second half of 2009 and was still falling a year later. . . .
Deficit-easing avoids this "won't-borrow-won't-lend' bottleneck by giving the new
money to governments to spend into use, or to pass on to their citizens to reduce their
own debts or to invest in approved ways.
The U.S. Federal Reserve may be considering a similar approach. So says Professor David Blanchflower, a former member of the Bank of England's Monetary Policy Committee, who stated on October 18 that he had been at the Fed in Washington for one of its occasional meetings with academics.
"Quantitative easing remains the only economic show in town," he said, "given that Congress and President Barack Obama have been cowed into inaction."
What will the Fed buy with its quantitative easing tool?
" They are limited to only federally insured paper," said Blanchflower, "which includes Treasuries and mortgage-backed securities insured by Fannie Mae and Freddie Mac. But they are also allowed to buy short-term municipal bonds, and given the difficulties faced by state and local governments, this may well be the route they choose, at least for some of the quantitative easing. "
The Fed could buy short-term municipal bonds from the states, easing the states' budget crises. It could set up a facility for bailing out the states at very low interest rates, along the lines of those facilities set up to bail out the Wall Street banks.
A similar plan might be pursued in the eurozone. The European Central Bank (ECB) has already engaged in something equivalent to "quantitative easing." In a post titled " ECB credit easing by buying debt from Greece and Spain analogous to Fed buying California and Illinois munis ," Ed Harrison remarks: