Unconditional bailouts as per 2008 are not the answer. Keynesian economics believes we should succumb to transparent losses, and develop new regulatory frameworks that prevent governments and businesses sinking so deep into debt-riddled quagmires. Regulations should restructure too-big-to-fail organisations into smaller organisations. Liquidation of firms should not be feared. These are big statements, ruthless ones, but ones where future leaders of governments and organisations should take heed of.
Europe is most definitely “on the brink” of a serious economic crisis that could involve widespread defaults or significant inflation or both. At the same time, Bank of America shares this week fell to their lowest in two years; with other large banks under pressure, there is a legitimate fear of rerunning the parts of the financial crisis of 2008-9.
For Europe, a beautiful region the envy of every other continent to travel and be submerged in esethicism, is confronted with deep crisis with potential cataclysmic effects. As recently as 2008/09, there were three kinds of government support available to the American and European economies when such systemic financial trouble hit. But all three traditional forms of bailout are now much harder to pull off.
1. First, over the last 30 years interest-rate cuts and other forms of expansionary monetary policy became standard practice in the face of potential financial market disruption. Therein lies a problem. The globes interest rates have been slashed since 2008 in most crises-laden parts of the globe. Despite the The European Central Bank (ECB.) has room to cut rates — but both the ECB and the Federal Reserve fear that inflation may soon return. If inflation returns due to prices soaring, yet people not spending, it falsifies the whole rationale of interest rate cuts.
2. Second, after the initial monetary policy response in 2008, it was fiscal policy that took the lead in preventing global economic free fall — with significant attempts to provide countercyclical stimulus in the United States, much of Western Europe, and China. Now the european zone faces a series of fiscal crises. Further stimulus is out of the question — the issue in Europe is who will do what kind of austerity and how fast.
3. Third, in 2008/09, monetary and fiscal policies were complemented by government capital injections directly into United States and European banks. New legislation introduced has made this harder to achieve and with recent commitments by Congress to seize injections of cash without consequences.
Therefore the worst financial-sector problems are in Europe. Countries are stricken with immense debt that is not repayable without austerity from the entire European region. The problem with this region is they recently did not include default events in 2010 in their stress testing of financial health that now appear inevitable. Such mismanagement is no coherent financial sector policy within the euro zone.
What are the policy options now? The people in charge of European policy would clearly prefer to do nothing or postpone dealing with the underlying issues. This is a bad idea as it puts markets in charge — and these markets are panicked.
The Europeans have to decide, once and for all, which governments will restructure their debts and which will be protected — to an unlimited degree — by the European Central Bank. A full-scale bank recapitalisation program is required, along with management changes at almost all major European financial institutions.
If the Europeans fail to get a grip on their economic situation, the cataclysmic financial crisis might start impacting on the tangibly beautiful.
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