Goldmark: World needs a central bank

Americans should be tracking Europe's long-running financial crisis. We're all connected, and if the European situation gets worse, ours will too.

In Europe, some countries, such as Greece and Ireland, had run up so much debt and such large deficits (d&d) that when the global economic seas got rough, people who invest money got worried that they wouldn't be able to pay up. As to the part about us all being connected, Europeans are quick to note that the global economic crisis was triggered by the American mortgage crisis in 2008. They have a point -- but it was their d&d that made those European countries vulnerable.

Financial trouble spread through weak points in the system. The weak point for Spain, for example -- which had neither budget deficits nor excessive state debt -- was its banks, which were overextended in risky real estate investments.

The countries in trouble had to get bailed out, primarily by the European Central Bank. The ECB refinanced the bonds of the bailees and lent money to the banks on easy terms, essentially turning a lot of privately issued debt into sovereign debt implicitly backed by the ECB. With the bailouts came demands from Germany and others that the bailees impose "austerity" -- the slashing of budgets and benefits.

And the consequences of that austerity have been severe: In Greece, civil unrest, increased unemployment and sharply reduced pensions for senior citizens; in Spain, budget deficits and unemployment that weren't there in the first place.

Where does Europe go from here? The machinery of the European Community can undertake financial rescues, but it has no way to promote economic growth or coordinate fiscal policy; that responsibility remains with the individual countries. So it's not clear how Europe can move forward to build its economies and invest where needed to get people back to work.

There's another big economy that has too much d&d: ours. In the United States, unlike Europe, we have the necessary tools to work down the debt, reduce the deficit and invest in economic growth. But because of political paralysis, we're not doing it. The Republican Party, which controls the House, is on its own austerity rampage, and the president and the House are unable to agree on common measures to reduce the deficit or promote economic growth.

Now let's crank the lens back one notch and look at Europe and the United States together.

Our wisest and most experienced veteran in the area of global finance is Paul Volcker, former chairman of the Federal Reserve Board. He calls the present global crisis "a consequence of incoherent and ineffectual monetary arrangements among independent nation states. . . . In essence, the system lacks both an effective adjustment process and controls on international liquidity."

Translation: There's no way to work out of a financial mess in an orderly way, and no limits on how much debt or new currency can be issued in bailouts.

Volcker continues: "The result has been unsustainable and ultimately destructive economic and financial strains. There are no effective limits apart from a financial breakdown. That is where Europe is today, and that is where we don't want to be tomorrow."

Europe doesn't have the tools to do what's needed. We do, but we're politically unable to use them. Financial regulatory authorities are national -- but the financial system is teleconnected in a single worldwide market of complex transactions, deal-makers, financial lust and fear.

It's time to talk about something that we've barely dared whisper: a strong, international body to play in the global system the role the Federal Reserve plays here in the United States. History sometimes forces difficult choices, and that's where we are now. The international financial system needs a central bank -- not to issue currency, but to help set the rules of the global money game and enforce them.

Peter Goldmark, a former budget director of New York State and former publisher of the International Herald Tribune, is a member of the State Budget Crisis Task Force, co-chaired by Paul Volcker and Richard Ravitch.