Clark’s take on the Federal Reserve and Europe

CLARKONOMICS: The Federal Reserve has taken no action on interest rates, effectively signaling that they’re holding back on any further economic stimulus efforts in case they have to jump in to help bail out Europe.

It’s become increasingly clear in Europe that the emperor has no clothes. The idea that somebody would ride in on a white horse to rescue the European economies and the euro is, so far, not happening. Any expectation today of a real plan of action that is beyond just talk has fallen through.

Meanwhile, the U.S. economy is softening with disappointing car sales, manufacturing rates going down, and consumer confidence dropping. At the same time, personal savings rates are going up indicating that people are worried about what will happen in their own lives because of what’s going on in the larger economy.

But the Federal Reserve said they won’t do anything right now. If the U.S. economy goes into recession, they will, of course, do everything they can to try to prop up the economy.

So this is a pretty iffy moment in the short term.

What difference does Europe make in your life? The reality is many U.S. companies do enormous business in Europe. When European sales go into a tailspin, it impacts things here.

The Federal Reserve has to hold back its firepower right now because the reality is we will have to be part of bailing out Europe if it comes to that. That’s just the truth.

Yet this is not the end of the world, so don’t get overly alarmed. The difference this time is we know what the mess is, we just don’t know how to clean it up. We need to use tools in the right way to do the least harm and provide the most help to try to get capitalism going again.