Piecemeal Approach to Euro Cuts Europe to Pieces

For a quick and clear explanation of the mess that is Europe, check out “Why the Bailout In Spain Won’t Work,” Andrew Ross Sorkin, NYT.  Some excerpts:

“By now, it should be apparent that the [Spanish] bailout has failed — or is at least on its way to failing.

“Indeed, it now appears that the bailout could make things in Spain worse, not better.  And market indicators for the next domino in line for a bailout, Italy, point in the wrong direction.

“This was bound to happen.  That’s because bailing out the banks in each European country individually is a fool’s errand.

“Experts often cite — wrongly — that TARP, the Troubled Assets Relief Program that pumped $700 billion into the banking system in the United States, arrested the financial crisis in 2008.  TARP, to some degree, has become the model for Europe.

“But we forget history:  TARP was only one component of the bailout.  Perhaps more important — consider it the unsung hero of the financial crisis — was the government’s unilateral moves to raise the amount of money the Federal Deposit Insurance Corporation could insure, increasing the account limit to $250,000 from $100,000 and fully backstopping the entire money-market industry.

“Investors and bank customers who were considering taking their deposits and running in 2008 no longer had reason to do so….

“That is not the case in Europe.  Customers of Spanish banks still have reason to worry about the solvency of their banks — and their country — making it reasonable for them to take their money from Spanish banks and send it to banks in safer countries like Germany.  Indeed, the bailout makes it less likely Spain can pay back its debts because the new loan of up to $125 billion was just added to its huge debt pile.

“As a result, it could be argued that it would be irresponsible for an individual or company, which has a fiduciary duty to shareholders, not to move its money out of Spanish banks.

“Ultimately, the only real way to begin to ensure the safety of the banks in Spain — and all of Europe — is to create a euro zonewide deposit guarantee system….

“Oddly enough, such a deposit guarantee would probably be pretty cheap.  The psychological effect of such a guarantee would most likely insure the solvency of more banks than the guarantee would ever have to pay out.

“Of course, there a catch.  A euro zonewide deposit guarantee would require agreement from all 17 member countries, which is something the leaders there seem incapable of reaching….

“And here’s another problem with a euro zonewide deposit guarantee:  Unless you believe the euro is going to remain the standard…even the guarantee might not be enough, unless the guarantee holds for all currencies.  For example, if a Spanish bank customer is worried that his euros might one day turn into pesetas — even with a deposit guarantee in place — he might well move his money.”  Emphasis added.

I encourage you to read the whole column.  I think we know whose side Mitt is on here.

We’re going to look back and wonder why solutions like this weren’t put in place before everything fell apart.  In hindsight, it will look so obvious and so easy compared to all the fallout.

 

 

 

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