David McWilliams: A sea change is needed in ECB - or we're sunk
Do you remember Hurricane Katrina in New Orleans? Do you remember the devastation, the debris, the human loss of life? Do you remember the scene of the New Orleans Superdome with thousands of people -- now jobless and homeless -- crammed inside with no sanitation? Well how do you think the government of Louisiana, devastated by a hurricane that cost so much that it would bankrupt the State, was able to rebuild the city?
The United States cavalry rode in to save New Orleans and the State of Louisiana. The President declared a state of emergency, Treasury wrote the cheques and the Federal Reserve credited Louisiana's accounts. They then spent those dollars on cleaning up the city. So the central bank credited the account of the State of Louisiana because emergency economic conditions meant the State needed it. The State issued no bonds; there were no IOUs, except that the deficit of the US rose. There was no effect on inflation.
Louisiana was financed without the people of Louisiana putting their hands in their pockets. This is what is done in the US --where the concept "United" is taken seriously. The Federal deficit rises and the Fed prints dollars and the region in difficulty recovers or at least is helped towards recovery.