This week, Timothy Geithner made comments in the financial media regarding how he thought Europe would get out of the mess they are in.
“I think you’re going to see them draw on the lessons of our crisis, draw on the lessons of things that worked here in the United States,” Geithner said in a Bloomberg Television interview today in Washington. “I think you’ll see that reflected in some of the choices they make.”
God help them if they do. Unless they learn by doing the opposite. Three years on after the 2008 meltdown in the US financial system, does Geithner really think anything has changed at all? Are the financial firms under any more regulation? Have the banks been restrained at all? If he thinks the answer to either of those two questions is yes, he’s more deluded than I thought. Or captured by the very industry he’s supposed to be regulating. Nothing has fundamentally changed the financial world since the crisis. Banks are still holding tons of bad debt on their balance sheets, praying the economy will turn around. Consumer credit is largely a joke. Housing starts are a disaster. The real economy of the US is stillborn. Any lessons the Europeans can learn from us would be examples of what not to do.
When Obama was elected, he had the mandate to make sweeping changes to how things are done. Coming into office during the crisis gave him almost carte blanche ability to fix the problem. Instead, we threw trillions of dollars down the tubes bailing out banks that have since resumed extravagant management bonuses and continued to chase yield in highly risky investments. Instead of nationalizing the biggest banks and treating them as utilities, Obama and Geithner and crew took the money of the real economy in the US and handed it to Wall Street. Three years later, we are seeing what that bought us: zero job growth, a financial industry that still makes up 30-40% of GDP and the rich of Wall Street getting richer while America languishes.
On top of that, the lessons of the US are so drastically different from what is going on in Europe that it’s ludicrous to suggest they learn from us. They tried to create a monetary union without a corresponding political union and have discovered that won’t work. Or if they haven’t admitted it yet, they soon will possibly by the force of the bond market. The issues of the countries in Europe are not unlike the issues of the states and municipal governments in the US where they are constrained in their response to financial catastrophe. To suggest Europe react in the way the US did to the 2008 crisis is to fundamentally misunderstand what is causing Europe’s troubles.
The United States can always pay off any dollar denominated debt at any time by printing more money. This gives us the flexibility required to negotiate when things go south. The countries of the EU do not have this luxury since they signed onto the monetary union of the euro. When the debts of Greece come due, Greek politicians can’t devalue their currency by printing more of it to pay off the debts. Their only possible response is the one we’re seeing, that of austerity and devaluation at the cost of decades of low wages and growth. The citizens of Greece rightly see this as a bad move. To fix the problems in Europe, the EU members will need to have some way of unifying their fiscal policy across member states. Based on the responses we’re seeing from Germany, good luck with that ever happening.
From the beginning, it felt like the members of Obama’s financial team were under-experienced and unable to see how to effectively navigate us out of this crisis caused by years of easy money. Now, those same team members are making suggestions to the rest of the world on how to handle their own problems, problems that are sufficiently different in kind as to make comparison unwise. Our only hope is that not only do they ignore our advice but find a way to solve their problems before the financial world solves the problems for them via a market collapse. These days, it’s seems like that hope is named either Slim or None and both are on their way out of town.