Tuesday, October 14, 2008

The Socialist Abstention

The Socialists abstained on the bank rescue vote today. This despite Hollande's statement that the plan was "technically sound" and Jean-Marc Ayrault's declaration that he couldn't imagine his party voting against the plan. Later he said he meant this literally: the party didn't vote against, it abstained.

One could imagine a defense of abstention, but not the one the Socialists gave. They complained that the plan contained no provisions for responding to the impending recession. I suppose that someone at rue Solférino thinks this makes it seem as though the PS is defending "workers." This is to take voters for fools. People may be wary of a plan that they don't fully understand (does anyone?), but they know the difference between an emergency and legislation-as-usual. Hollande and Ayrault essentially conceded that the situation was urgent, so that the party's abstention can only be interpreted as a refusal to share responsibility for navigating in the storm. This is a decision that will haunt them for some time to come.

Big French Banks Claim No Need of Capital

France's biggest lenders--BNP Paribas, Crédit Agricole, and SocGen--say they don't need any infusion of new equity from the government. In the U.S., some big banks did not want to participate in the Treasury plan, but Paulson insisted on the grounds that if some banks held out, participating banks would be stigmatized as less sound, precipitating runs on their funds. Will this logic obtain in France? Or were Paulson's fears misplaced?e

Hypotheses

Following up the previous post, I offer the following hypotheses to explain why a divided, decentralized Europe achieved a coordinated policy response more quickly and easily than the centralized United States.

1. To borrow a page from Alexander Gerschenkron (Economic Backwardness in Historical Perspective), there are sometimes distinct advantages to being late. Europe, which at first thought it might be largely spared in the current maelstrom, had the opportunity to observe U.S. (and British) mistakes in dealing with it.

2. Europe had the advantage of a convergence point modeled on the actions taken by Gordon Brown. Brown initially made the same errors as Paulson but did not share Paulson's ideological priors: (partially) nationalizing the banks allowed a New Labour politician to indulge Old Labour instincts.

3. A near-consensus had emerged among economists that something like the Brown plan--government purchase of an equity stake in banks plus loan guarantees--was much superior to the Paulson plan. The backing of experts mattered, though the experts often hedged their positions with considerable doubt and uncertainty, and how could they not, since so many facts remain unclear.

4. Europe's problem is more narrowly circumscribed than America's. In addition, the clash between Merkel and Sarkozy probably helped the Brown plan, since it came from neither of them. Furthermore, Merkel's initial opposition to coordinated action seems to have collapsed when she realized the size of the Hypo Real Estate failure--a German problem that might be too big for Germany to solve.

5. The existence of so many transnational banks subject to regulators in different countries (Fortis is a case in point) made some kind of coordination inevitable.

6. For Europeans, (partial) state ownership of banks is nothing new.

7. European politicians of all stripes are more deferential to economic technicians than some American Congressmen, so the possibility of a legislative revolt against the emergency measures by the executive was limited.

8. Europe's crisis is not complicated by the politics of a presidential election.

9. The political leadership in the UK, France, Germany, and the EU is more competent and economically literate than the U.S. president and is not handicapped by lame-duck status, although it is noteworthy that Brown and Sarkozy were able to lead forcefully despite low approval ratings and that Merkel came round despite losses by the right in recent regional elections.

ADDENDUM: I should say that the U.S. might have come to the new Treasury plan without the European example; things were already moving in that direction. But once Europe decided to guarantee deposits and interbank loans, the U.S. really had no choice; assets would have flown to safety in Europe without similar guarantees here. I suppose this could have been done without the equity infusion, but that would have been foolhardy. The fateful step that has yet to be taken is the acquisition of voting shares in the banks; the preferred shares to be acquired under the Paulson plan will be non-voting. And the exit strategy remains to be defined, so the U.S. government may be in banks far longer than it will remain in Iraq.

Some or all of these points may be wrong, but they provide a basis for discussion.

A good narrative of the process leading to accord can be found here.

Prisoners Escape their Dilemma

The sudden rescue of the banks and miraculous rebound of the Bourses contains an element of mystery. How is it that Europe, with its divided leadership, was able to achieve coordination so quickly, whereas the U.S., with decisive power concentrated in the Federal Reserve and Treasury, has struggled for months to do the same and has finally arrived, it seems, only by copying the European model? To be sure, the fundamental problem was, and remains, more concentrated and intractable in the U.S., where the housing bubble was most severe, where interest rates were kept low for so long, and where the solution will therefore require more than just a recapitalization of the banks and guarantees of deposits and interbank loans. Still, the contrast is remarkable, and the process that led to this weekend's actions will no doubt occupy political scientists for years to come.