America’s Mistakes Will Save Europe
In Everett, an idyllic town 40 km from Seattle, not one of the 104,000 residents seems concerned with the crisis in Greece. The violent conflicts between police and protesters in the streets of Athens, the ever-increasing tension between European governments and the fears of the financial market do not resound in the clean, tiny streets of this little village in the northwest USA, where at one time they filmed Twin Peaks, the David Lynch movie.
However, perhaps the inhabitants of Everett should pay more attention to Greece and to the fate of the Euro. Especially when they go ice-skating or attend a concert — thanks to the contortions of global finance, Everett's ice rink and auditorium were financed by Dexia, a Franco-Belgian bank that could suffer enormous losses on billions in Greek bonds.
To recap: a little lost city of the United States depends on a French and Belgian bank, which depends on the economic health of a country 1,000 km away, which in turn depends on political and economic accord between 17 nations and the Central European Bank. Welcome to international finance — like The Eagles’ famous Hotel California, once you go in, you can never leave.
In the USA, the case of Everett is not unique. From Californian high schools to New York primary schools and even O’Hare, Chicago’s huge airport, economies on both sides of the Atlantic are now inexorably linked by the tentacles of European banks, whose ambitions were greater than their competence. “We are all Greek now,” a banker told me the other day, and he was not kidding: globalization of the flow of capital and commerce ensures that the tremors of Athens will be felt on Wall Street and in many streets, ice stadiums and concert halls around the United States.
In the USA, the Greek tragedy and its effects on the real economy of the country are cumbersome reminders of the financial crisis of two years ago — a nightmare flashback just like in the films of David Lynch. Replace Lehman Brothers with Greece, the Federal Reserve with BCE and Citigroup, and Goldman Sachs with the Société Générale, Dexia and Deutsche Bank, and the situation is almost identical: a country on the edge of a cliff, a global economy that watches with bated breath, and investors who run towards the exits despite the mellifluous words of politicians and central bankers.
The Lehman wound has still not healed in Washington’s corridors of power and Wall Street’s “drawing rooms.” Many of the authors of that extremely costly mistake — the men and women who decided to refuse help from the government for Lehman, jeopardizing the world economy — are still in the control rooms. Tim Geithner, head of the Federal Reserve Bank of New York during the crisis, is now President of the Treasury; Ben Bernanke remains head of the Fed; the super-lawyers and big bankers of Wall Street, such as John Mack, head of Morgan Stanley, and Lloyd Blankfein of Goldman Sachs, are all still there. And they remember well the consequences of their actions — or non-action — in that weekend of fire in mid-Sept. 2008, and they have no intention of reliving it with a subtitled modern Greek soundtrack.
The paradox of USA-Europe relations in such a difficult time is this: the reason that the Americans feel capable of giving advice to the Europeans is that they themselves committed sensational blunders during “their” crisis. Clearly, the American authorities do not see it this way. From their point of view, the fact that their actions (narrowly) avoided another Great Depression is to be celebrated and held as an example for others.
It is this intellectual arrogance (and selective memory of the events of 2008) that led Geithner last week to pick up the red telephone and call his European colleagues, urging them to get moving and not to delay aid to Greece and to European banks. “We have experience in these situations,” a senior official of the American Treasury told me, “we know very well what to do and the Europeans are dilly-dallying.” The last sentence is the one true thing he said. The Brussels-Paris-Frankfurt “Bermuda Triangle” has blocked every decision on the Greek crisis, leaving the country and investors in open water.
Whatever happens now, it is already too late to save Greece from default and from years of hard fiscal reform and social instability; in the face of absconding governments, the market has decided — it is enough to look at how much interest the government of Athens has to pay on its debt.
The real battle now is to save the Euro, avoiding infection from Greece to Portugal to Ireland and, worse still, to Spain and Italy. It is this possibility that truly frightens investors and should make populations shudder from Everett to Eboli.
America has something to offer the unfortunate European leaders: its mistakes in times of crisis. Remembering the delays and hesitations of the Bush administration, the Fed and Congress (which caused the market to collapse when it rejected the first version of TARP, the injection of 700 billion dollars to save the bank) could help Brussels and Frankfurt take note of the situation and take action.
The action in this case would consist of opening the purse strings, saving Greece from bankruptcy with a European fund and convincing banks and investors to renegotiate their bonds. It would not be cheap, but the alternative — doing nothing while the situation becomes impossible in other countries at risk — is much more costly.
If there is a lesson that the USA of 2008 can impart to the Europe of 2011, it is that optimism is not a good policy during a financial crisis. One must always expect the worst when there are billions at stake, especially if, as in the case of Greece, the patience of investors is wearing thin.
As the inhabitants of Everett well know, skating on too-thin ice is not a good idea.
However, perhaps the inhabitants of Everett should pay more attention to Greece and to the fate of the Euro. Especially when they go ice-skating or attend a concert — thanks to the contortions of global finance, Everett's ice rink and auditorium were financed by Dexia, a Franco-Belgian bank that could suffer enormous losses on billions in Greek bonds.
To recap: a little lost city of the United States depends on a French and Belgian bank, which depends on the economic health of a country 1,000 km away, which in turn depends on political and economic accord between 17 nations and the Central European Bank. Welcome to international finance — like The Eagles’ famous Hotel California, once you go in, you can never leave.
In the USA, the case of Everett is not unique. From Californian high schools to New York primary schools and even O’Hare, Chicago’s huge airport, economies on both sides of the Atlantic are now inexorably linked by the tentacles of European banks, whose ambitions were greater than their competence. “We are all Greek now,” a banker told me the other day, and he was not kidding: globalization of the flow of capital and commerce ensures that the tremors of Athens will be felt on Wall Street and in many streets, ice stadiums and concert halls around the United States.
In the USA, the Greek tragedy and its effects on the real economy of the country are cumbersome reminders of the financial crisis of two years ago — a nightmare flashback just like in the films of David Lynch. Replace Lehman Brothers with Greece, the Federal Reserve with BCE and Citigroup, and Goldman Sachs with the Société Générale, Dexia and Deutsche Bank, and the situation is almost identical: a country on the edge of a cliff, a global economy that watches with bated breath, and investors who run towards the exits despite the mellifluous words of politicians and central bankers.
The Lehman wound has still not healed in Washington’s corridors of power and Wall Street’s “drawing rooms.” Many of the authors of that extremely costly mistake — the men and women who decided to refuse help from the government for Lehman, jeopardizing the world economy — are still in the control rooms. Tim Geithner, head of the Federal Reserve Bank of New York during the crisis, is now President of the Treasury; Ben Bernanke remains head of the Fed; the super-lawyers and big bankers of Wall Street, such as John Mack, head of Morgan Stanley, and Lloyd Blankfein of Goldman Sachs, are all still there. And they remember well the consequences of their actions — or non-action — in that weekend of fire in mid-Sept. 2008, and they have no intention of reliving it with a subtitled modern Greek soundtrack.
The paradox of USA-Europe relations in such a difficult time is this: the reason that the Americans feel capable of giving advice to the Europeans is that they themselves committed sensational blunders during “their” crisis. Clearly, the American authorities do not see it this way. From their point of view, the fact that their actions (narrowly) avoided another Great Depression is to be celebrated and held as an example for others.
It is this intellectual arrogance (and selective memory of the events of 2008) that led Geithner last week to pick up the red telephone and call his European colleagues, urging them to get moving and not to delay aid to Greece and to European banks. “We have experience in these situations,” a senior official of the American Treasury told me, “we know very well what to do and the Europeans are dilly-dallying.” The last sentence is the one true thing he said. The Brussels-Paris-Frankfurt “Bermuda Triangle” has blocked every decision on the Greek crisis, leaving the country and investors in open water.
Whatever happens now, it is already too late to save Greece from default and from years of hard fiscal reform and social instability; in the face of absconding governments, the market has decided — it is enough to look at how much interest the government of Athens has to pay on its debt.
The real battle now is to save the Euro, avoiding infection from Greece to Portugal to Ireland and, worse still, to Spain and Italy. It is this possibility that truly frightens investors and should make populations shudder from Everett to Eboli.
America has something to offer the unfortunate European leaders: its mistakes in times of crisis. Remembering the delays and hesitations of the Bush administration, the Fed and Congress (which caused the market to collapse when it rejected the first version of TARP, the injection of 700 billion dollars to save the bank) could help Brussels and Frankfurt take note of the situation and take action.
The action in this case would consist of opening the purse strings, saving Greece from bankruptcy with a European fund and convincing banks and investors to renegotiate their bonds. It would not be cheap, but the alternative — doing nothing while the situation becomes impossible in other countries at risk — is much more costly.
If there is a lesson that the USA of 2008 can impart to the Europe of 2011, it is that optimism is not a good policy during a financial crisis. One must always expect the worst when there are billions at stake, especially if, as in the case of Greece, the patience of investors is wearing thin.
As the inhabitants of Everett well know, skating on too-thin ice is not a good idea.
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