My American Enterprise Institute colleague Desmond Lachman is an international economist who has — unfortunately — been spot on with his forecasts for the United States and Europe over the past few years.
He told me a year before the 2008 meltdown that we were headed for a fall, and he told me a year before the Greek collapse about the Euro crisis that loomed.
Now he is even gloomier, saying we face a serious crisis in European banks — and providing the startling information that the direct exposure to European banks by U.S. money-market funds amounts to more than $1 trillion, a staggering 45 percent of the sector’s assets, and that U.S. banks have exposure in European banks of $1.2 trillion.
If European banks, many of which are faltering right now, have to take a serious haircut from Greece’s troubles, they will be in crisis mode. Several other European countries will move to Code Blue if Greece defaults. And there are few signs that voting publics in Germany, France or other eurozone countries are prepared to continue to bail out any or all of them.
The bottom line for the United States: A European banking crisis means a truly serious blow to our already weak economy.
Lachman is one of the economists who say now is not the time for applying medium- or long-term fiscal reform to our short-term need to stimulate to avoid the worst case, which is more than a double-dip recession — it is a global depression. In an ideal world, we would couple sound short-term policy with a real commitment to longer-term debt reduction.
Perversely, perhaps, that grim reality gives me a bit more hope than I had before about the prospect for a breakthrough from the Joint Committee on Deficit Reduction.
If anyone can understand these dilemmas, and the strong inter-relationship between the European situation and our own economy, it is Sen. Rob Portman (R-Ohio), who has been both a budget director and a trade representative in addition to his service in the House and Senate. The same is true for Sen. John Kerry (D-Mass.), chairman of the Foreign Relations Committee.
Of course, the temptation to let partisan politics take over, leading to even more gridlock, remains high. On Sunday, Politico published the following chilling quote about President Barack Obama’s jobs plan: “‘Obama is on the ropes; why do we appear ready to hand him a win?’ said one senior House Republican aide who requested anonymity to discuss the matter freely. ‘I just don’t want to co-own the economy by having to tout that we passed a jobs bill that won’t work or at least won’t do enough.’”
In other words, denying the president a political victory trumps doing something that may help the economy and create jobs — even when it involves policies that have previously been touted by Republicans.