When you owe the bank a little, they own you. When you owe the bank a lot you own them. Every seasoned lender knows the borrower holds the power when both parties understand the bank cannot afford the borrower’s failure. The loan documents still read as if the bank holds the cards, but the Musky is setting the drag on the reel. I don’t understand all the intricacies of what the IMF, The US Federal Reserve Bank and the US Treasury did last week to bail out Europe. The meaning behind the sketchy public statements is difficult to decipher, but it is clear that financial markets were at least temporarily reassured. In the absence of a more direct explanation, I have concluded that the Obama administration, the Treasury and the Federal Reserve Bank have decided that Europe is Too Big to Fail. Rioters in Athens have stood down the Germans because everyone knew the rioters have the power to end the dream of European Union. The US government without Congressional action has revealed to both Athens and Berlin that we cannot afford the collapse of the European idea.
Until last week it seemed that European nations were engaging in necessary tough discussions about how to integrate economically while maintaining the pretense of national sovereignty. The very idea of Europe and the viability of the Euro seemed in play. The focus was on the German’s ability to control the irresponsible Mediterranean countries without resorting to the historical Teutonic approach to disorderly neighbors. Since everyone is a little touchy about Germans bossing them around, the idea was that the French and the Germans would pretend to like each other enough so that German financial and political muscle could be served up with French table manners. As tough as all this was, it really seemed that Europe was finally getting down to the core question of what kind of union Europe really is. Germany was coming to terms with the reality that Italy and Greece are Too Big To Fail without bringing down the European banking system and currency. Angela Merkel was having trouble explaining to German voters and taxpayers that they really were going to have to pay for Greek hairdressers to retire at 50. Thanks to the IMF and the Americans it will not be necessary for Europe to make these hard choices at this time.
The European idea was always to create enough economic interdependency that political integration would become inevitable. I can’t escape the conclusion that we have just made a major commitment to economic interdependency with Europe that will increase pressure for closer political integration. I love Europe, but I shudder at how the American people will react when they are presented with a hasty choice between economic collapse and even closer integration with Europe. It used to bother me when I would hear Europeans talking bad about the US. When I lived there, I realized how much the different European nations hate each other. When nations are so close together, they find it more congenial to complain about the US than to focus on how much they loath each other. Even with all of our political rancor, we are a close knit family compared to Europe.
Whenever a governmental entity takes a position intended to move markets, there are parties on the other side of the trade. We know that Greek entitlement recipients and German taxpayers benefited from this trade, but who else won? Speculators had all kinds of financial bets on Europe’s future. Private fortunes are made and lost every time public entities decide to move markets. Who won on this trade? Poor John Corzine wasn’t wrong to go long on Europe; he just needed enough capital to hold the position one more month. With governments driving markets, no wonder politics has become such a high-stakes contact sport.