Berlau: European Worries Might Be Overblown

Wednesday, 13 Jun 2012 12:30 PM

By Forrest Jones and Kathleen Walter

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The European debt crisis may be raging but don't expect it to seriously roil U.S. markets, says John Berlau, director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute.

U.S. markets may actually benefit from the crisis as shell-shocked Europeans seek safe harbor across the Atlantic.

"My take is that the fears of Europe might be overblown," Berlau tells Newsmax.TV in an exclusive interview.

Story continues below video.



"Europe could have benefits as well as costs for us if it means that people are taking money out of Europe, they can invest in the U.S. That's what happened with the Asian crisis in the 1990s, and that turned out to be, quantitative studies have found, a net benefit to us with all the money invested," Berlau adds.

Eurozone finance ministers recently arranged a $125 billion bailout package for Spain to recapitalize the country's banks.

Investors, meanwhile, remain on edge amid sentiment that while the bailout will bolster the financial sector, Spain will eventually have to pay that money back.

Meanwhile, unemployment rates remain above 24 percent as the economy remains mired in recession.

Yields on the Spanish 10-year note climbed to a record high of 6.82 percent recently, while the yield on Italian 10-year note climbed to 6.27 percent. Bond yields trade inversely from prices, and rising yields reflect a perception of greater risk.

Europe should pursue policies that encourage both growth while streamlining bloated public sectors.

Countries like Greece have accepted bailout money to right their listing economies but agreed to rigid belt-tightening measures such as public-sector layoffs, tax hikes and spending cuts as lending terms.

Criticism is growing that such policies cut into growth and prevent recovery from ever taking root, often exacerbating recession in the process.

"What we should be doing is everything we can, first of all, to encourage Europe to pursue pro-growth policies. That is, to restrain spending and taxes," Berlau says.

Turning to the U.S., Berlau says the country won't tolerate inflationary pressures that would come with further Federal Reserve intervention.

The Federal Reserve will hold its next monetary policy meeting later this month, and talk is growing that weak jobs reports and sluggish growth rates will prompt the U.S. central bank to roll out a fresh round of quantitative easing.

Under quantitative easing, the Fed buys bonds held by banks, injecting them with liquidity in a way to ensure long-term interest rates stay low so investment and hiring will ensue.

Critics say the policy — plus keeping benchmark lending rates near zero — doesn't really work. They say the tactic is printing money out of thin air and plants the seeds for inflation down the road.

"People will expect inflation and they will behave accordingly. If you inflate too much, that can scare off investment," Berlau says.

Policymakers should focus more on slashing regulations that get in the way of growth and job creation.

"I think what we really need is to liberate to stimulate the thousands of pages of regulations from the Obama administration and even from the Bush administration and others," Berlau says.

The Bush administration oversaw the Sarbanes-Oxley Act in wake of a string of accounting scandals a little over a decade ago, while the Obama administration rolled out the Dodd-Frank reform bill in wake of the financial crisis of 2008 and ensuring housing collapse.

"We've proposed at the Competitive Enterprise a no-cost stimulus, liberate or deregulate to stimulate that doesn't cost tax dollars and won't be inflationary."

Fed stimulus, meanwhile, isn't the way to go.

"You have to have a disciplined Fed that doesn't pursue zero interest rates like it has been doing at the cost of other things, and it's really punishing savers — the zero interest rate and other inflationary policies."

Political parties have shown they can muster the political will to do the right thing, as evidenced by the passage of the recent JOBS Act, the Jumpstart Our Business Startups Act, which exempts companies from certain regulations when going public.

Continuing such policies and dismantling regulatory burdens would encourage smaller firms to go public.

"You've got Bernie Marcus, who is a co-founder of Home Depot, saying he never could have gone public if Sarbanes-Oxley, if Dodd-Frank had been in effect."

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