The crisis in Europe continues to dominate market headlines and now, at long last, is getting a hearing in Congress.
Beginning today, the House Committee on Government Reform and Oversight is holding a 2-day hearing entitled "What the Euro Crisis Means for Taxpayers and the U.S. Economy."
Judging by the published agenda and the committee's mandate, the thrust of the hearings will be on the issues of the Fed's role in aiding European banks and America's support for the IMF, which is likely to play a bigger role in future European bailouts.
These are important topics and political hot-buttons for many Americans. But the far more critical issue -- especially given the acute crisis in Europe -- is the economic impact of what's happening in Europe.
According to Goldman Sachs, further upheaval in the eurozone could cut as much as 1% from U.S. GDP in 2012. Considering the U.S. economy is already running at a subpar rate, that could mean the difference between an economy growing puttering along (but growing) vs. one that's at stall speed, greatly increasing the risk of another recession.
"A reduction in the lending of foreign banks to U.S. counterparties could have a meaningful impact on U.S. growth," Goldman's chief economist Jan Hatzius writes.
Specifically, Hatzius is worried that if European banks curtail their lending to U.S. banks, that, in turn, would put further strain on the availability of credit here, making it harder for businesses to expand and consumers to get loans.
A separate but related factor: Goldman estimates U.S. banks are exposed to $1.8 trillion of counterparty risk from European banks, which is equal to 3.3% of all U.S. debt outstanding.
In a related but separate development: The OECD this week warned of a potential "funding crisis" in 2012 for developed countries, where borrowing is expected to exceed $10.5 trillion next year. Much of that borrowing is to refinance or rollover outstanding debt, a normally smooth process that could very much become difficult if the European banking system goes into cardiac arrest.
As we saw in 2008 with subprime and this year with Greece, the idea that a crisis in Europe could be "contained" is very much wishful -- and foolish- - thinking.