I'm feeling curiously optimistic this morning which has me
thinking it may be time for a CAT scan.
But I can actually see a way that things don't turn out so
bad for the world.
First, to deal with the wolf closest to the sled, the
Europeans will have to get their act in order. While they have thus far
resisted this tooth and nail, I've heard some modestly encouraging rumblings
from folks in the center of the negotiations. I want to point out the people
with whom I have been speaking are not terribly optimistic themselves. But they have offered a few crumbs of optimism
for those of us who starved for it to scarf up.
First, in the words of one participant, European leaders have
begun to work themselves through "the stages of grief associated with the
crisis. First, even just a few weeks ago, they were purely in denial. Then,
they entered a phase of denial in which it was clear they didn't even believe
their own denials. Finally, last week we entered what might be called the
‘silly ideas' phase. And I am hopeful that means now we can get down to serious
ideas."
What kind of ideas? Coming up with a program that takes a
big chunk, perhaps $250 billion, of ESFS money and uses it as "equity" in
funding a "firewall" that might then include a trillion or so capital available
to the ECB in the event a big economy -- Italy or Spain -- stumbles. The plan
would also need other elements such as Europe dealing with the structural
issues associated with achieving something like monetary union and a
recognition that no firewall can protect against all threats, especially those
that could be associated with a fixation on austerity. Governments in Europe
need to focus on getting growth restarted in places like Spain or Italy or
bigger problems are inevitable. A final element of an effective plan would then
include a significant recapitalization of the IMF which currently is not funded
properly to deal with the new forms of risk and contagion which confront global
markets.
At some point, banks will need to pay for the insurance
policies they are expecting their governments to provide for them and whether
that is done by a Tobin tax or some levy on non-deposit liabilities, grappling
with that issue will be key to winning political support for further government
involvement. And while countries and the IMF are at it, they ought to start to
tally what sovereign exposures are to those "implied liabilities", their
unwritten but real "obligation" to bail out the too big to fail institutions
that are the nuclear charges set at the fault lines of the global economy.
That might in turn trigger a recognition that we will not be
well and truly out of the woods of this crisis until we demand more transparency
from these banks in terms of their liabilities (including counter-party risks
in all manner of derivative transactions), regulations that enforce responsible
provisions for dealing with those risks, and perhaps even globally agreed upon
limits on the size and activities of such institutions.
But one step at a time. While the insiders with whom I spoke
were only cautiously optimistic that progress might be made on putting together
an interim solution-firewall for Europe -- or to be more accurate, while they
did not outright dismiss the possibility -- they did emphasize that there was a
long way to go, the Germans and the French were not playing nicely with each
other, and there were deep cultural barriers to even having an intellectually
honest conversation among the players about what ails them.
Still, since the focus is optimism, another encouraging sign
were the glowing reports I have been hearing of the work that both new IMF
Managing Director Christine Lagarde and U.S. Treasury Secretary Tim Geithner having
been doing trying to hammer some sense into Europe's fiscal policy pygmies. No,
not pygmies ... lemmings. Well, blundering action-phobic bureaucrats. (The
problem, according to a friend, is "lots of leaders, not enough leadership.") By
one account, about a third of the progress made during the last few weeks is
due to circumstance, the growing direness of the situation, and the rest is due
to the compelling arguments and forceful interventions of Lagarde and Geithner.
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