Any time you talk about a contagion, it’s sensible to ask: where did the infection come from? The European debt crisis may look like it started in Greece, but really it began with the Stability and Growth Pact, the final framework of the European Monetary Union (EMU) that gave us the euro. That agreement is just too rigid to allow for the kind of fast, coordinated action necessary in a crisis. And because it launched the joint currency without any kind of federal transfer system, it made the new currency unsustainable. The euro’s founding framework thus contained the seeds of instability.

What’s really surprising about recent developments is that the imbalances in the euro-zone have caught the world by surprise. The recent trillion-dollar rescue package calmed the markets, at least for now, but it also highlights the level of imbalances in Europe. The fact that this rescue package took the better part of four months to construct underscores that the monetary and fiscal institutions in the euro-zone are not conducive to a single currency. The euro bailout is the product of what a federal government could construct in days. The austerity measures that will accompany the program at the hands of the IMF and a politically reticent Germany will do little more than choke off growth and fuel political discontent in Greece. While that may make investors happy for now, faith will quickly shake when protests rock reforms or stagnant numbers surface among the PIIGS.

The level of the required bailout should raise more concerns than it ameliorates, as investors look around at where risk is held. The popular recent analogy to U.S. toxic assets is not a perfect one, especially as the euro-zone has fewer institutions capable of stepping in to calm markets. At the end of the day, Europe has put its currency union ahead of its political union. Until Europeans are willing to cede greater autonomy to a federalized body (a development as likely as the formation of an EU soccer team), this process of fear and bailout is doomed to repeat itself. The question is whether the next of the PIIGS to follow Greece to the slaughter will be too-big-to-save.

The good news on U.S. employment is that we added 290,000 nonfarm jobs in April. The bad news is that unemployment rose as well, to 9.9%, because more people entered the labor force and many more returned to seeking work.

So unfortunately, the employment picture remains grim, with a level of unemployment we might have found horrifying just a couple of years ago. Many of us agree that the government has a role to play in creating more jobs, but nobody is paying much attention to the best kinds of jobs Washington should create.

As it turns out, they’re not the kinds of high-paying jobs most of us would want. But they are the kind that would help the most people—and get taxpayers the biggest bang for their buck.

How can the government accomplish these twin goals? My Levy Institute colleagues Rania Antonopoulos, Kijong Kim, Thomas Masterson, and Ajit Zacharias studied this question and came up with a surprising answer. The best jobs for Washington to create don’t involve repairing bridges and digging subway tunnels, worthy as those initiatives may be. Nor do they involve wind power or other green technologies, although those too are fine undertakings.

No, the best jobs government could possibly create are what we’ll call “social sector” jobs—roughly speaking, work taking care of people. We’re talking about home health-care aides, child-care workers—relatively low-skill, low-wage work that nonetheless is fantastically cost-effective, hugely important, and a highly equitable use of government funds. continue reading…

The Washington Post reports that, testifying before a panel investigating the financial crisis, Henry Paulson “cautioned against overreaching on financial overhaul legislation now before Congress that he said could stifle innovation in the markets.” Well, we certainly wouldn’t want to do that! After all, financial innovation has been great for the economy right? Maybe not, but as Yves Smith notes, it has certainly been good for the finance sector and for financial innovators, as both empirical and theoretical studies argue. This suggests to me that Paulson, former head of Goldman Sachs, may not be thinking of the good of the society as a whole when he worries about the impact of financial regulation.

That being said, I don’t think any financial regulation coming out of Congress is likely to have much bite. Indeed, the Federal Reserve may have already had the regulatory power to avert the crisis but failed to exercise it, according to Bill Black (this post lays out his argument with links to video of his testimony on Lehman Brothers). This should come as no surprise, since the regional Federal Reserve boards are elected by bankers. Tom Ferguson points out that Obama was the candidate of finance, getting more of his early donations from them than any other candidate. If finance owns Congress (as Dick Durbin memorably said), the Federal Reserve and the White House, where is effective financial regulation realistically going to come from? continue reading…