What will it take to fix a European Union troubled by heavy debts and internal friction? The story of the U.S., which celebrates its 235th year of independence on July 4, offers a parable that Europe’s leaders might find instructive.
In the late 18th century, financial troubles threatened to tear apart the newly formed union. In many ways, the crisis was not unlike the one Europe is now trying to contain with a second bailout of Greece.
After the Revolutionary War, the huge debts of states such as Massachusetts and South Carolina were strangling an already depressed economy. A farmers’ rebellion against rising taxes brought the young nation to the brink of its first civil war. Faith in U.S. credit fell so low that veterans were selling government IOUs for as little as 15 cents on the dollar.
Much like today’s Europe, the U.S. lacked a federal executive branch with the power to manage the crisis. But its first Treasury secretary, Alexander Hamilton, had a proposal that went far beyond what anyone in Europe is now considering. His plan: Have Congress authorize the federal government to take responsibility for some $25 million in states’ debts -- the equivalent of about $2 trillion in today’s economy -- and to raise the money to pay them.
The plan had some flaws, and Hamilton was fully aware of them, according to biographer Ron Chernow. The government would be rewarding speculators who had bought the debt at a discount, and fiscally strong states would effectively be bailing out weak ones.
Fire the Fed, Let OPEC Run U.S. Economic Policy: Caroline Baum
The running commentary on the U.S. economy can be reduced to two main themes. The first is that monetary and fiscal policies have run out of bullets. The second is that oil prices are responsible for our current malaise.
If that’s the case -- if the Federal Reserve is impotent, the federal government is broke and oil prices are responsible for the economy’s ebbs and flows -- why not put OPEC in charge of economic policy?
Seriously, if you believe that soaring oil prices, which are cutting into household budgets and sapping consumer spending, are the main problem, why risk the unintended consequences of zero percent interest rates -- for an extended period -- when the Organization of Petroleum Exporting Countries could achieve the same kind of stimulus by opening the pump jacks?
You’re probably thinking, she’s kidding, right? Yes, I am. Influencing the demand for goods and services by manipulating the overnight interbank rate (the Fed’s bailiwick) isn’t the same thing as managing the supply, and the price, of oil. However, a reasonable person reading the analysis of why the U.S. economy is where it is today might be tempted to conclude the two are interchangeable.
Clearly President Barack Obama is sympathetic to the view that oil makes the world go round (and may impede his re- election). Last week, the president announced the release of 30 million barrels of oil from the nation’s Strategic Petroleum Reserve, a storehouse designed for use in the event of true emergencies.