The Feehery Theory

The Fed, the ECB and La Dolce Vita

Posted on July 8, 2013

Strangozzi is the characteristic pasta of Umbria, Tuscany’s hot sister.

Hearty and rustic like the Umbrians who conceived it, strangozzi is best enjoyed with an oil and garlic sauce and shaved truffles that flourish beneath the region’s rich black soil.  The dish is suited to the rhythms of the Umbrian lifestyle, deceptively simple and punctuated by the daily riposo (nap).

Beneath this seeming simplicity lies a healthy suspicion of government and its beneficences. Strangozzi also is sometimes called strozzapreti (strangle priests), a wry reference to the gluttony of their their long-ago clerical overlords (they would consume enough of the pasta to choke themselves) that dates to the centuries when the region was subject to the papacy. Distaste for authority is baked into the Umbrians’ daily bread. They make it without salt, it is said, because Pope Paul III in 1539 levied a tax on salt, prompting a failed uprising in the Umbrian city of Perugia.

But if they chafed under papal rule, Umbrians are no more fond of the governments that popular sovereignty has produced.

Those governments have long enjoyed unusually cozy relationships with Italian banks.  Their symbiosis now threatens both. Italian government debt stands at 127 percent of GDP, and Italian banks hold a large share of that debt. This precarious arrangement survives only because the European Central Bank (ECB) is determined to sustain it.

A year ago, interest rates on Italian 10-year bonds rose above 6 percent and were headed toward unsustainable levels.  Default loomed as a possibility, something that would have sent the government and banks alike into chaos and potentially precipitated a breakup of the euro.



Enter ECB President Mario Draghi. “The ECB is ready to do whatever it takes to preserve the euro,” Draghi proclaimed. “And believe me, it will be enough.”

The ECB's decision to take Italian debt onto its balance sheet has been enough to support government borrowing and preserve Italian banks, but it has done little to resuscitate the economy. Italy is in recession. Its unemployment rate in May stood at 12.2 percent and is headed higher.  Youth unemployment is a national scandal: 38.5 percent for people under 25.  The state of Italian business is parlous.  160 of its largest corporations have been driven into “special crisis administration.” Many small businesses are starved for credit, while others struggle to repay existing loans.

The street-level reality is that la dolce vita isn’t always so dolce these days.

Modern monetary policy, though great for governments and stock portfolios, never seems to do much to improve living standards at the street-level. So long as governments have access to cheap credit in bond markets and stock prices rise, central bankers congratulate themselves on their successes. Economic stagnation and high jobless rates are not understood as signs of policy failure. Instead they are taken as signals that central bankers should double down on their interventions.

Thus does a faltering economy and the most persistently high rates of unemployment since the Great Depression inspire the Federal Reserve's successive rounds of quantitative easing.

One wonders how long this self-reinforcing cycle of stagnation can continue. Government borrowing remains high. Public debt as a percent of the overall economy is at a post-World War II peak.  At some point, it would seem, investor confidence in U.S. government debt would erode, as it did for Italian debt in 2012.

But perhaps not. By conjuring credit, central bankers have so far also conjured confidence. Perhaps that can continue forever.  For as long as it lasts, political leaders can avoid tough questions about the sustainability of our current fiscal path. Such serious discussions can wait for domani (tomorrow).

And, as Italians well know, domani never comes.

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Doug Badger is a former partner in The Nickles Group, a lobbying firm.  Prior to that, he was Deputy Assistant for Legislative Affairs to President George W. Bush.  He helped develop President Bush’s proposal for a Medicare prescription drug benefit and health savings accounts.  He has also served as Chief of Staff to the Senate Republican Whip and to the Republican Policy Committee and held senior positions at HHS and the Social Security Administration. He has recently retired and lives with his wife, Debbie, in Ashburn, VA, where he writes a blog called Doug's Brief Case.