In theory sounds a sensible suggestion with the added bonus that Republicans will hate it.

Let the whole thing go bankrupt and clear out the system. We will have a few years of real pain but then we can move on.

Bailing out bankrupt nations has never worked.

Uh huh, here comes Fed swaggering up the dusty track,with his shiny pistols twinkling in the sun, to save the wor...., I mean American pensions.

"The European Central Bank has stubbornly refused to act as lender of last resort, but the eurozone economy is too big to fail"
*
Uh, sorry, but our window's closed. Bank holiday and all that. Why don't you try that nice Mr. Hu down the street?

There are other deep pockets in the world that can provide the guarantees of eurozone sovereign debt, which will be needed to prevent disorderly defaults and the resulting freeze-up of credit.

Seems you just don't get it. Sticking plasters will not work. Capitalism needs badly readjusting so the feral elite pay their way.

Greece, Spain, Italy, Portugal are not governed in the same way as the USA, uk (we know our place) or Germany. Politicians are more louche even than our own.
Baker is wrong on two counts: a) imagining that the bailout will be followed by more stringent management of these economies by their elected Governments, b) that the Fed ECB or Uncle Tom Cobly get their money back

Depends what the pain is. Pain might mean economic depression; it might mean war. It's happened before after all, and we shouldn't make the mistake of thinking half a century or so without one is the norm. Its the exception...

Bailing out bankrupt nations has never worked.

I don't suppose you've heard of the Marshall Plan?

But the Eurozone crisis is a myth.
What we actually have, is another banking crisis, the austerity measures are simply to save the banks, again.
Since 1971, since we stopped valuing our currency against gold, we have lived in a fiat currency system. In such a system, currency has no intrinsic value whatsoever. The only thing that gives our currency it's value, that stops it being worthless bits of paper, is the fact that all our taxes have to be paid in a certain currency, in our case, pounds, this creates demand for the currency, because we have no choice, we have to use it.
Governments are the monopoly issuer of currency, whether pounds, Euro's or Dollar's, therefore governments can never run out of money. People always assume that we pay taxes and buy Government bonds so the Government can spend. Wrong. It's the other way round. The money to pay taxes and buy bonds has to be issued, ie spent, by the Government first. Spending is the prior act in a fiat monetary system; taxing and borrowing are following acts. In effect, the government is only taxing what it has already spent, and it’s only borrowing back money that it has already spent. It doesn't need the banks to lend it money nor you and I to pay taxes to get more money, Governments are not constrained in their spending by a need to raise revenue.
Government 'borrowing' is a con.

That involves a passing acquaintance with history and reading, it's far easier for some to make things up.

Dean Baker seems to fail to grasp that continuously using layer upon layer of credit to fuel economies creates successively more fragile and vulnerable economic conditions.

Pushing up nominal GDP makes no sense when it is solely a direct result of creating debt....... it is a fine example of pushing on a string .... like a man trading water a lot of activity going nowhere and will eventually having exhausted all their energy vanish from sight ............ or oil of course.

The USA seems to have forgotten the Savings & Loan bailout which was a micro-event compared with the likely collapse of the edifice of debt being created.

Baker should think now of what will happen to AMR in Chapter 11, that is the future for the USA, UK and the Eurozone.

Sorry that was in response to Gusset's comment on the 'Marshall Plan'.

it's moreSocialist (like Baker) bullshit usually ......... Socialism fails when it runs out of other peoples' money

ANOTHER "too big to fail" entity? (Sigh.) I know the phrase "With great power comes great responsibility" was originally penned by a comic-book artist rather than a guy with an econ degree, but that doesn't mean it isn't true; I certainly find it preferable to "With great power comes NO responsibility," which is the implied mantra of anyone who'd say "Too big to fail" without being ironic.

The collapse of the eurozone would be a disaster for economies that are still reeling from the collapse of the housing bubbles in the United States and elsewhere.

Economies are reeling because the housing bubble was an unsustainable mess from the get-go, and re-inflating it will only postpone the pain. Promoting the continuation of a bubble to avoid "disaster" makes as much sense as encouraging an addict to keep up his addiction to avoid withdrawal symptoms: "If I give up heroin the withdrawal effects will surely suck. And Heaven forbid I accept the fact 'I have painted myself into a corner, and cannot get out of it without some short-term misery'; no, the smart thing to do is just keep shooting heroin day after day, rather than accept the notion "The short-term suffering of withdrawal will pay off in the long run, once I've kicked this habit."

Or, to limit myself to economic analogies: if you have a kid who's understandably upset because of her enormous student-loan debt, why not encourage her to go BACK to school and FURTHER in debt for yet another degree? That way, her debt payments will be put in abeyance while she's still in school. This makes perfect sense if you're willing to completely overlook the fact "The longer she puts off dealing with her debt problems, the worse those problems will become."

It's moreSocialist (like Baker) bullshit usually ......... Socialism fails when it runs out of other peoples' money

So who's money are we running out of?

n the case of the Federal Reserve Board, a purchase of a few hundred billion dollars of sovereign debt, coupled with guarantees on the debt of Italy, Spain and, possibly, other indebted countries, will have far more impact in supporting growth than any other policy that it is currently contemplating. And, as the promoters of the Tarp and other bank bailouts endlessly repeat, we will make money on the deal.

Once it is known that Fed is standing behind these countries debt, their interest rates will fall, causing bond prices to rise. This will allow the Fed to resell its holdings at a profit.

Is the USA really in any position to start lending "a few hundred billion dollars"?

It would be a good idea to lend if the countries causing all the problems had balanced budgets but that is far from the truth.

This is like one alocoholic borrowing some money to buy some wine who then passes it over to another alocoholic who cannot afford to buy some himself.

re: moretorybullshit

I wish I could recommeny you post a million times, because you are the ONLY person on CIF that I have ever read other than myself, who understands MONETARY SOVEREIGNTY!

On 08/20/1971 when Nixon took the U.S. out of the Bretton-Woods agreement, the need for both Federal taxes, Federal borrowing, and Treasury bills became OBSOLETE on that day.

If you don't understand moretorybullshit's post, and the concept of MONETARY SOVEREIGNTY, here are some links:

Overview

Explanation

Myths

Inflation

Solutions

Absolutely, the banks and the capitalist system is only with us today due to being bailed out with other peoples money (ours).

Sadly, everybody is now "too big to fail", and too big to be accountable for their foolish actions.

Everybody but the ordinary person, that is. Nobody cares about the little guy pushed into bankruptcy court after his job got sent overseas. The manager who did it got a tax break and a bonus for this "job creation".

jon7671, 5 December 2011 5:28PM
Bailing out bankrupt nations has never worked.

Gusset:- I don't suppose you've heard of the Marshall Plan?

The Marshall Plan was to enable devastated countries to rebuild their industries and provide good to their populations.
Today there is no plan to rebuild industries to provide goods or services- China, India, et all are providing them ....... it is quite different.

Today the aid to the banks is to enable the populations in USA,UK & Eurozone to keep buying imported goods & services and most of all buying dramatically overpriced real estate....... which ordinarily they couldn't afford .........

there is no money left. Europe is broke and bailing it out will only make the US even broker than it already is.

You made the mess, you have to live with the consequences. Socialism-riddled "subject" who can't read or write but expect somebody else to take care of their every whim.

So bail out yourselves

Thanks.
I've often brought this up on CiF, only to get the response that I must be either stupid or a moron.
People can't grasp that banks just create money out of thin air, and then charge interest on it.
Mainly because it sounds ridiculous, and of course, it is!

re: WurzelGummidge

Both the UK and the US are MONETARY SOVEREIGNS!

They both cannot go bankrupt and they both can afford to pay any bill denominated in their own currencies.

You like most everyone do not understand that ALL fiat money is debt based notes, and the idea that governments are in "debt" is a relic from when governments were not MONETARY SOVEREIGNS and actually had "debt"

What the LIERS are calling a $15 trillion dollar "debt" today for the U.S. is simply the difference between the outstanding treasury debt notes and the currency debts notes!

You and the others may believe that just because I have 200 pennies instead of 2 one dollar bills puts me $2 in "debt", but not me, because I know they are the same fucking thing, just like treasury debt notes and currency notes are the same fucking thing!

I'm with MoreToryBullshit.

Excellent, lucid post !!

Promoting the continuation of a (property) bubble to avoid "disaster" makes as much sense as encouraging an addict to keep up his addiction to avoid withdrawal symptoms:

Credit :- the heroin of the masses...... the something for nothing magic dust

Baker is just saying "Hey! have some more, don't stop spending, accelerate"

The Greeks, Italians etc (plus our own politicians, will just say:
"Thank you Uncle Sam, we'll be very good hehehe .......& soon be back for more".

because I know they are the same fucking thing, just like treasury debt notes and currency notes are the same fucking thing!

You know, I think that is a debasement of the "F...." word

What DB suggests is a way of easing liquidity - which is needed. But the crisis we are in is a crisis of solvency, not liquidity. There is simply too much debt sloshing around the markets, and too many of the people who own those IOUs are worried that they may never be repaid.

Even the fiscal treaty that we'll be hearing about in the next few days won't directly help the solvency problem. There will still be the same amount of debt. What there will be, hopefully, is a way of spreading the market risk across the 17 eurozone nations, which should keep bond yields low and thus enable some investment in jobs - what Europe (and the US) needs more than anything. Without a lot more jobs, soon, the future looks too bleak to contemplate.

If the EU is going to coordinate action on anything, it should be on ways of generating jobs, and they should have the US and China round the table too.

Again, I am with MoreToryBullshit. Full Marks to Crit as well.

terriblelyricist- and they CAN't get paid in full. At least not in Constant Dollars ( or Euros) or whatever. They have to taake less than face value-much less. or we have to inflate the debt away.

Both the UK and the US are MONETARY SOVEREIGNS!

They both cannot go bankrupt and they both can afford to pay any bill denominated in their own currencies.

That's what Weimar Germany thought -- can't go bankrupt, CAN pay any bills denominated in their own currencies. So they turned on the printing presses to produce money with nothing to back it, which is why today, any history book with a name like How the Nazis Rose to Power includes the iconic photograph of a German housewife burning money because it was cheaper than buying firewood or coal. It's why my stamp collection contains some uncanceled stamps with a face value of billions of Deutschemarks, which was just barely enough to cover the cost of mailing a one-page letter across town.

Not that the US and UK are quite as bad off as Weimar Germany; the US and the UK still possess most/all of the resources they once used to create genuine wealth for their countries. Problem is, neither of our two countries appears willing to take on the actual hard work such wealth creation would require. It doesn't look like the Eurozone countries are willing to do that, either.

If I want to improve my own financial situation I need to earn actual money, not just write a bunch of IOUs to myself. I can easily produce a genuine notarized document saying "Jennifer promises to pay Jennifer five million dollars upon reaching retirement age," but I'd be a delusional fool to hold up that document as proof that I'm on track for a comfortable retirement.

re: StephenStafford

When it is said that the United States has a $15 triIlion dollar national debt, where do you believe that number comes from and how is it calculated?

Go ahead: it'll mean that you take ujp some of Europe's debt for us.

this crisis is the outcome of one set of failed policies layered on top of another set of failed policies.

Failed policies are made by failed minds trying to save what they consider theirs.

You mean actual work, as opposed to flipping houses?

Silly articles that you link to. Or rather, quite interesting and clever in many ways, but I think very naive about the consequences of what is proposed around "monetary sovereignty".

- If money is created by the governments to pay off its debts, this will be inflationary. Whether it is "sustainable" or not is irrelevant - the inflation would effectively reduce assets owner by savers to allow government spending to work. If the government spends 40% of GDP each year, and creates it as new money, they would need to create 66% of the total amount of money in circulation each year - before we get into issues about price expectations and whatnot. It would just be calamitous.
- The government can simply cancel all its bond debts by pressing a few buttons. But why would anyone ever lend to them again?

So the problem may not be directly fiscal for some countries - they can pay their debt, always - but that was never the whole concern. If you treat the government as anything too far from a normal economic entity, like a company or a person, and allow it to amend assets and create money at will to ensure it never has to tax or borrow, the system will certainly collapse in on itself.

Anyway, as the Eurozone countries don't have monetary sovereignty, I don't think the point is relevant to this discussion?

Excellent comment. Spot on. But the heroin analogy doesn't work. Many people are prescribed heroin at a maintenance dose for many years, decades even, without much trouble - the worst thing is the constipation. Heroin is hardly toxic at all, unlike alcohol (or debt), and huge numbers of people take alcohol regularly, and harmlessly, for life! So perhaps the analogy might be reversed - what is the safe, maintenance dose of debt?

re: JenniferAbel

The only STUPID Weimar Germany comparison.

1. Gemany was not a MONETARY SOVEREIGN!

2, Germany did get high infflation because they printed a bunch a money first, they had high inflation because they had to send all their gold to the Allies, and printed a bunch of money as a result!

I provided a link in my priot post labeled "inflation" to address that silly Germany comparison because I knew it was coming.

The recent Federal Reserve audit by GAO, showed that the Federal Reserve created over $16 TRILLION dollars between Dec 2007 thru Jul 2010, so where is the inflation?

The amount of money that a MONETARY SOVEREIGN can create without inflation is determined by the amount of money needed by the economy at 100% employment and at 100% production capacity, because any more money after that point has nowhere else to go other than to drive prices up.

Nobody in their right mind would believe that we are anywhere close to that point, hence the $16 trillion dollars that the Federal Reserve gave to banks all across the globe could have instead been spent on our infrastructure, schools, and jobs programs and eliminated the recession in a heartbeat!

If you want to understand how economics works in a post 08/20/1971 world, you can either read the links I posted, or spend years like I did trying to figure out for yourself the information in the links, or you can remain ignornt, the choice is yours!

And yet, the Bank of England is about to print £75 billion, out of thin air, to 'boost' the economy.

What the LIERS are calling a $15 trillion dollar "debt" today for the U.S. is simply the difference between the outstanding treasury debt notes and the currency debts notes!

You and the others may believe that just because I have 200 pennies instead of 2 one dollar bills puts me $2 in "debt", but not me, because I know they are the same fucking thing, just like treasury debt notes and currency notes are the same fucking thing!

I don't get your analogy. I agree that dollars and T-bills are basically the same, but the US government doesn't hold T-bills - its creditors do. So if the US government borrows $100, then spends $100, it is left on the wrong end of $100 of T-bills held by the creditors. So it is in debt for $100. It has no assets. The act of borrowing itself is cash-neutral - it is the spending that creates the net deficit.

Sure, the US government can pay the debt by creating some more money. Or it can decide not to pay the debt at all. Each have serious consequences, and aren't generally to be relied on. So the $15 trillion debt exists because the US government has decided that working on the basis of borrowing is a much saner way of managing public finances than this "something for nothing" monetary sovereignty meme.

And yet, the Bank of England is about to print £75 billion, out of thin air, to 'boost' the economy.

Indeed, and look at the inflation rate.

Do that for the whole debt, and just imagine where we'd be.

re: Westmorlandia

If money is created by the governments to pay off its debts,

What part of the fact that every dollar is already "debt" can you not understand?

I ask you the same question I asked already:

When it is said that the United States has a $15 triIlion dollar national debt, where do you believe that number comes from and how is it calculated?

If you can't answer that question, then how can you possibly understand anything about econmics and the concept of what the word "debt" means for a monetary sovereign countries versus what it means for me, you, cities, counties, states, and non-monetary sovereign counties?

Once you answer that question or admit that you don't know I will explain further, but I will simply be pointing out that the economists Roder Mitchell and Warren Moseler have already pointed out in the links that you obviously didn't read.

I'll put it another way for you:

Why would a government printing 100 billion be dangerously inflationary, yet borrowing 100 billion, which puts exactly the same amount of money into the system, isn't?

If you want to understand how economics works in a post 08/20/1971 world, you can either read the links I posted, or spend years like I did trying to figure out for yourself the information in the links, or you can remain ignornt, the choice is yours!

Here's one thing everyone needs to understand about how economics works, pre- or post-1971: you cannot create wealth with an economic bubble; you can only create the illusion of wealth. And whether you're dealing with economics or any other aspect of human existence, if you confuse illusions for reality, sooner or later you'll come to a bad end.

I think most people believe that there is 15 trillion dollars lying around in some bank vault somewhere.

The original downturn came about because the ECB, like the Fed and the Bank of England, chose to ignore the buildup of enormous housing bubbles

Remind us, please:
what housing bubble was it that caused Greeks to stop paying taxes, yet take and spend more and more money from their government?

Or caused the farce that was the Italian...ahem...government?

You're right.
All fiat monetary systems end in disaster, much like this one is undergoing, due to the instability of the whole mirage.
We have always gone back to a commodities based system, and we will once again.

By "pay off debts", I simply mean transfer money (as bank account credit) to the bondholders that it has said it is going to transfer money too. A government's debt is the amount of money it has said it will transfer to the people holding the bonds it has issued.

I understand that money is different for governments. Please believe me, I do. But while that does technically give the government some extraordinary options, in fact those options are fairly calamitous in themselves. They are no easy solution to anything.

Once it is known that Fed is standing behind these countries debt, their interest rates will fall, causing bond prices to rise. This will allow the Fed to resell its holdings at a profit.

Assuming of course that the dollar/Euro exchange rate allows you to make a profit.

The key point is that if the ECB still lacks the competence to manage the eurozone economy, then the Fed and other central banks will have to step in. The eurozone is too important to the world economy to allow it be destroyed by Europe's incompetent central bankers.

The story of rumplestiltskin

There were three interational credit rating agencies and they could turn straw into gold

yes American bad debt magically turned into AAA+ investments and they traded the false gold in Europe

But after all the sales were complete Rumplestiltskin shouted "I think the European banks have got lots of bad debt (now Rumplestiltskin was turning gold back to straw)

But then the politicians turned banking debts into gold again - yes they gave the banks our money and traded it for the the American straw

And so the straw became soveriegn debt

And by magic and control of the media and politicians all over Europe the American banks became magically solvent again - as Europe's politicians rammed through transferring american banking debt on to the Tax Payers of Europe

American banks are making billions, Rumplestilkskin is making billions, bankers are making billions in bonuses - and by careful planning American debt has been converted to European Sovereign Debt

And with a little crystal ball we can look in to the future - and Merkel and Sarkozy and Cameron and Clegg all left politics and joined the boards of the companies who made billions by them conning their people and selling out their countries and committing treason

And the bankers and the polticians and the credit rating agencies all lived happily ever after.

re: Westmorlandia

You don't understand my anology because you don't understand why T-Bills became obsolete in 08/20/1971.

You INCORRECTLY believe that the government pays its bills the way we do by first subtracting money from our bank accounts and adding the money to the payees bank account.

I CORRECTLY understand the government pays its bills by adding money to the payees bank accounts and WITHOUT subtracting the money from the government's bank account at the Federal Reserve.

For the record this is not "speculation" on my part, because I wrote many of the computer programs that the government uses to do it!

The links I posted explain all of this, but for the sake of you and the others who for whatever reason don't want to read them I will explain.

Lets take China for example.

1. China takes $1 trillion dollars of currency and buys a T-bill.

2. That $1 trillion dollars does not go into the Federal governments bank at the the Federal Reserve to be spent, it is posted against a Treasury balance sheet account and that currency is remover from circulation and is destroyed just like the money you pay in taxes is!

3. The Treasury department creates at $1 trillion dollars of T-bills and posts that against a Treasury balance sheet account and China's account with the Treasury.

4. When the T-bill matures, the Treasuty department destroys the $1 trillion dollars of T-bills in China's treasury account, and adds $1 Trillion dollars plus interest into China;s bank account at the Federal Reserve.

5. Notice the net change in the money supply in only the interest after it is all said and done!

It should be OBVIOUS that this entire process in not needed since the government, and only exists because the laws that require we use T-bills were not repealed when we became a MONETARY SOVEREIGN.

I repeat - The links I posted explain all this stuff in great detail and with charts and stats to back everything up, why don't you read them before commenting so that you have a CORRECT understanding of how things actuallt work, and not the way you think they work!