He says

So there is a reasonable case that what we’re seeing in Italy is a self-fulfilling crisis trying to happen, in which fear of default is precisely what leads to default. And that’s exactly the kind of case in which intervention could short-circuit the crisis. Let the ECB buy lots of Italian bonds, in effect guaranteeing a low interest rate, and the possibility of default fades – which in turn means that further intervention isn’t needed. It’s certainly worth a try.

While I’m at it, a further note: a country with the same level of debt as Italy, but with its own currency – and with debt in its own currency – would not face the same kind of crisis.

I agree with his stance on Italy. I am not sure that the situation is any different in Greece, however. Ultimately, whether or not as institution is solvent is not key to its functioning. Its whether or not it is liquid.

You can operate a bank, a country, a corporation or household in insolvency so long as they are liquid. Indeed, many corporations and households spend most of their time in insolvency.

We call a household “underwater” when they are insolvent as mortgage seller, but if we held the household to more serious capital standards and forced them to mark the house to distressed sale value, then the majority of households would be underwater.

Anyway, this is a digression from my larger point that even Greece’s problems could have been held in check if it had a central bank willing to keep them in check.

We might have been in for some serious devaluation and a bout of inflation, but indeed, that should have turned on the export spigot, a lead to a surge in the Greek economy. However, Greece is under the Euro and the ECB decided that it would rather not take on the job of being a Central Bank but instead strangle the European Periphery.

Now, it seems this morning that the ECB may have changed its mind. Central banking may be a useful vocation after all and perhaps intervention will be helpful.

For Greece this is too late but for the world lets hope its not too little.