Our most precious asset is our hypothetical ability — for which we have no evidence, but in which we nonetheless believe — to deal more easily with a hypothetical future problem. And rather than endanger this precious asset, we refuse to act on the intense problem we have right now.
— Paul Krugman (Princeton University), saying what the ECB is really thinking
Contrast the still-shrinking economies of Europe with the stirrings of recovery in the United States, and you feel lucky to be an American and a beneficiary of President Obama’s stimulus.
— Nicholas D. Kristof (New York Times)
We’re one step closer to ensuring that the birthplace of democracy becomes a form of national indentured servitude.
— Marshall Auerback, on Greece (Levy Economics Institute of Bard College)
The EU is not lending money to Ireland, Greece, and Portugal to help those nations’ citizens. The EU is lending those nations money because if they don’t those nations and their citizens and corporations will be unable to repay their debts to banks in the core. That will make public the fact that the core banks are actually insolvent. When the Germans and French realize that their banks are insolvent the result will be “severe banking crises and a return to recession in the core of the eurozone.” The core, not simply the periphery, will be in crisis. The ECB and the EU’s leadership would be happy to throw the periphery under the bus, but the EU core’s largest banks are chained to the periphery by their imprudent loans.
— William K. Black (University of Missouri-Kansas City)
Me, May 2010:
If you’re going to have one central bank, you need a vehicle other than monetary policy to relieve regional disparities.
Paul Krugman, January 2011:
[Making] the euro work is more feasible than I used to think. True American-style labor market integration isn’t…going to happen. But more fiscal integration could.
Now let’s see how long it takes them to admit my other conclusion:
You need to design the system so it has time to adapt to isolated changes without a negative ripple effect.
Economists Oliver Hart and Luigi Zingales have proposed a regulatory system that anticipates banks’ distress based on their credit default swap prices and restructures their debt before bondholders are in panic mode. In 2001, U.S. Treasury Secretary Paul O’Neill proposed an international bankruptcy court that could serve the same purpose for sovereign debt.
The global economy is wound pretty tightly these days. Maybe it’s time to make it a little safer for the occasional error.