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)
Europe has lost its implicit claim to be the best source of serious people with the experience needed to run the international monetary system.
— Jeffrey Frankel (Harvard University)
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.
I promised you my take on Greece, and my take you shall have. Here’s my latest post on the Sun-Sentinel blog. It continues my work building up to a coherent framework (and hopefully a book) on international law. If you’re interested in learning more about tight coupling in financial markets, check out Richard Bookstaber’s A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. If you’ve been following our “Best of the Week” series, you should be very familiar with the Hart/Zingales proposal; I’ve linked to it several times. Here’s the most recent reference. As always, before you do any of that, don’t forget to check out my post.