Tuesday, October 14, 2008

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.

3 comments:

kirkmc said...

What stuns me is how they are able to commit so much money (they're talking about potential guarantees of 1.6 trillion euros) without any hue and cry from either individuals or politicians. Granted, there's no presidential election going on, which has certainly added to the brouhaha in the US, but it seems like here no one cares about the extent of the deal. Even in a single country like France, 360 billion is a huge amount of money. Watching the news, even LCI, I've seen very little criticsm or even analysis of this.

And, of course, the useless-as-ever Socialists are going to abstain from the vote. Because they don't want to vote against it, and they want to be able to say they didn't vote for it...

Kirk

Leo said...

Kirk, I do agree that the absence of serious analysis, let alone criticism, is stunning. It's an additional proof of the weakness of our media and the low profile of our academic community.
But let's not get carried away by the numbers.

Quoting from memory, out of the 360 billion, "only" 40 are for bank re-capitalization, meaning real and quick cash infusion, the balance being for guaranteeing inter-bank lending (for a commission) which will be expended only when defaults occur. My sense is that those huge numbers are an "effet d'affichage" designed to schock and awe the market players.

I agree with Art's points relative to the transatlantic differences. But there is more to it: Paulson had to start earlier and under pressure made 2 mistakes (ah, the benefit of hindsight for an armchair economist): letting Lehmann go belly up and coming up with the wrong 700 billion plan. I quickly concede that there were numerous US economists who demonstrated it was ill advised and suggested measures like George Brown followed by other European leaders implemented 2 weeks later.

Boz said...

The other difference one must take into account is that unlike Sarkozy, neither Paulson nor Bush can steamroll anything through Congress. They almost failed to get the original $700 billion plan through, can you imagine if they flat-out said two weeks ago that we should effectively nationalize all major banks? Although they were effectively given the leeway to do this, if it had been presented this way back then, there would have been an all out revolt on the Republican (and perhaps even Democratic) bench.