U.S. News

Europe's Woes Could Cause US Recession: Former Fed Gov.

If Europe's financial problems continue they could lead to a U.S. recession, Columbia University economics professor Frederic Mishkin warned Tuesday.

Unlike investor Jim Rogers, who told CNBC earlier Tuesday the U.S. has more serious problems than Europe, Mishkin says this is an "internationally interconnected" world.

"The start of the U.S. financial crisis was BNP Paribas. So it was a French bank that started the ball rolling in August 2007," Mishkin told CNBC. "The real danger is if Europe’s financial system starts to belly-up, we will be directly impacted. That’s actually the scary part of the scenario right now."

There is already stress in European interbank lending markets, he said, and "if that spills over to the U.S., and the U.S. financial system started to have bad effects, that would drive us into another recession. The danger from a blowup in Europe is very real."

America's Money Mood

Mishkin said Europe's bank stress tests were "incredibly important" in revealing what was going on inside the banks and forcing them to recapitalize. The biggest difference between Europe and the U.S., he said, is that U.S. regulators want to make sure banks "have enough capital to withstand negative shocks," Mishkin said.

"It’s obvious at some point the Greeks can’t pay back this debt, it’s going to be restructured and you have to prepare for it," he said "They’ve been unwilling to do so."

Mishkin, a former Federal Reserve Board governor, said the Fed's "Operation Twist" shows the Fed is moving toward creating a long-term strategy on the U.S. economy. The quantitative easing , or QE2, bond-buying program, by contrast, "was not couched in a long-term strategy...and therefore it reeked of discretion. That’s one of the reasons it was criticized so heavily and was very problematic."

However, he warned, if the U.S. economy worsens the Fed will have to engage in even more aggressive expansionary policies.

"They need to do that in the context of explaining to people how that fits into a long-run perspective for the way monetary policy is going to be directed," Mishkin said. "One of things I've learned from last 10 years of central banking is how useful it is for central banks to communicate about what their long-run objectives are and how they’re gonna meet them. That’s something the Fed very much needs to do."