Will America Pay for Europe’s Bailout?

October 3rd, 2011 at 12:00 pm David Frum | 39 Comments |

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In my column for CNN, I discuss what sort of bailout Europe will need when it finally confronts the full scale of its debt crisis:

It’s been obvious for some time now what has to be done to avert the bank run: a European Super TARP, a version of the Troubled Asset Relief Program that was used to bail out Wall Street in 2008

The European Union will have to assume responsibility for the debt of southern European countries. In return, the EU will have to take control of the finances of those countries — cutting their spending and raising their taxes.

The debt assumed by the EU will have to be serviced somehow. That means the EU will need its own revenue stream sufficient to pay for and ultimately retire the southern European debt.

In other words, what we’re looking at is:

– A transfer of Greek and other southern European debt to all the people of Europe.

– Big government spending cuts especially in southern Europe, but also everywhere else.

– Higher taxes everywhere to support the southern European debt.

– All of it imposed by unelected bureaucrats in Brussels.

How’d you like to be the politician who has to explain that to the voters of Bavaria? So now you see why action is so slow.

The trouble is, the longer the action takes, the more expensive it gets — and the less likely the action is to be successful.

If the action comes early and if it is decisive and orderly, then it may be possible to force creditors to eat some of their losses. But in a panic, governments will not have time or leeway to negotiate. They’ll face a starker alternative: pay in full or default, the same stark alternative the United States faced back in the fall of 2008, which led to unappealing actors such as Goldman Sachs being made whole in backroom deals at the expense of the taxpaying public.

And if markets get the idea that the politicians of northern Europe will flinch from the Super TARP, then the bank run could start very fast.

Click here to read the full column.

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39 Comments so far ↓

  • blowtorch_bob

    Why not. After all it was Goldman Sachs and the boys who slapped together these deals, had their pals over at Moodys stamp em with triple A ratings, and sold them to unsuspecting buyers.

    • paul_gs

      Maybe lots of people on the left believe GS is the devil but they really aren’t the bad guy in the financial crisis no matter how many times the claim is made.

      But progressives always need their strawman . . . .

      • balconesfault

        First, I’m not sure you know what the meaning of the term “strawmen” is.

        Second, how do you conclude that Goldman-Sachs weren’t bad actors during the economic meltdown?

        These were not just firms out there making certain investments available to motivated buyers. Instead, Goldman-Sachs were clearly on the front line of creating, packaging, and heavily marketing the worst of the financial instruments that were unleashed on the marketplace, trading on both their long-standing good name and the ratings they browbeat a semi-captive ratings industry into providing.

        Then, they turned around and placed heavy bets against the success of the same instruments they created and marketed.

        To say that Goldman Sachs was not one of the bad actors in this whole debacle sets an extraordinarily low bar on the concept of “good actor”. Hell, it’s like digging a hole in the ground to place the bar in.

        • paul_gs

          GS has always played both sides of an investment. That’s what they do.

          Secondly, GS didn’t sell a single crappy mortgage. Not one.

          Finally, GS got out of sub-prime investment years before most other players. GS was (and is) one of the smart players.

        • balconesfault

          Secondly, GS didn’t sell a single crappy mortgage. Not one.

          Goldman Sachs bought up plenty of loan portfolios containing crappy mortgages, and then sliced and diced them in ways that made the risk completely uninterpretable by the investment community … and there’s plenty of evidence that ratings houses felt pressured to push the ratings on these products higher if they wanted to get future business.

          And then Goldman-Sachs went around the world and heavily marketed these securities based on those ratings.

          I really believe that Goldman Sachs knew they were selling products with significantly higher risk than their customers were aware of. Call that what you will.

        • ottovbvs

          “GS has always played both sides of an investment. That’s what they do.”

          Correct. And they’ve just had pay a several hundred million dollar settlement to get out from under what was at least unethical if not strictly illegal conduct. This hardly conduces to making them a strawman villain. They are a villain alright in any moral sense. Of course GS didn’t sell crappy mortgage they weren’t in the mortgage business but if you think they had no connection with the mortgage debacle you’re either incredibly stupid (doubtful) or just disingenous.

        • paul_gs

          Buying and selling mortgages is a legitimate business. And there is no indication whatsover that GS pressured ratings agencies unduly. GS also got out of mortages several years before all the other big players because they are smart and saw increasing risk.

          There are plenty of villains in the financial scandal, however GS is not one of them.

        • balconesfault

          http://www.bloomberg.com/news/2011-04-13/moody-s-s-p-caved-to-mortgage-pressure-by-goldman-ubs-levin-report-says.html

          The subcommittee released e-mails showing UBS, Lehman Brothers Holdings Inc., Citigroup Inc., Bear Stearns Cos., Morgan Stanley, Goldman Sachs, JPMorgan Chase & Co. and Nomura Holdings Inc. all pressured the ratings companies to loosen standards for assessing certain securities or make exceptions.

          UBS told S&P that grading securities the bank was selling more conservatively might shift business to Moody’s and competitor Fitch Ratings, according to Levin’s findings.

          In another case, a Goldman Sachs banker objected to a rating decision S&P made on a collateralized-debt obligation called Abacus 2006-12, according to an e-mail released by the panel.

          S&P director Chris Meyer at first “pushed back” then “suggested an exception could be made if it were limited to the CDO at hand,” the committee said.

          “no indication whatsover”?

          Ummm … bullshit.

        • paul_gs

          Objecting to a rating is acceptable and I expect that would happen all the time. Yet there remains no evidence that GS ever unduly attempted to influence a ratings agency.

        • ottovbvs

          paul_gs

          I thought you were merely disingenuous but apparently you really are fairly stupid. First you say there no attempt to pressure the ratings agenciec. Evidence is produced and you just deny it.

          http://www.bloomberg.com/news/2010-07-20/goldman-sachs-settlement-with-sec-for-550-million-approved-by-u-s-judge.html

          What was it you said again:

          “There are plenty of villains in the financial scandal, however GS is not one of them.”

          I guess that’s why they had to pay a $550 million settlement because they were totally blameless.

  • zaybu

    With the gridlock we have in Congress, it’s unrealistic to think that the US will bail out Europe. It might turn out that the European model simply doesn’t work. But to fix it would require major changes, which won’t happen fast enough. And if Europe’s economy goes down, the US will follow. The prospect for the world economy is very dim.

  • dugfromthearth

    I don’t think Frum understands what is going on

    “A transfer of Greek and other southern European debt to all the people of Europe.”

    The debt is owned by the German and French banks. This is not a question of transferring the debt from Greece to the people of Europe, this is a question of bailing out the German banks so they do not suffer from a default.

    This is simple self interest for the wealthy in Germany to have the German people pay for their mistakes. It has nothing to do with helping out the people of Greece.

    • paul_gs

      Bailing out the banks probably benefits the average German more then it does the rich German.

  • Rob_654

    My understanding is that some of America’s biggest financial firms such as Goldman Sach’s had their greedy little hands all over these deals in Europe that helped lead to this disaster.

    So where will Sach’s, Moody’s and other US companies be now that their money making schemes – oh yes, of course, they will be counting the money that they made from the deals (prior to them blowing up) – being sure to keep the bonuses going for a “job well done” and will hand over the losses to the American Taxpayer once again to bail them out.

    Because after all we can never expect the “Job Creators” to assume responsibility for their actions.

    • paul_gs

      Your “understanding”? How about some facts? Europeans mucked things up almost completely by themselves.

  • Graychin

    Europe needs to do what America did, and what Republicans criticize Obama for having done?

    That’s quite an assertion coming from a tribal Republican like Mr. Frum!

    • Banty

      Really unfair, being as Mr. Frum has been voted off the tribal island. He’s hardly a “tribal republican”. YOU get to post here without a bazillion dittoheads hooting at you, for one thing.

      • balconesfault

        Frum is tribal in the sense that while he might criticize some of the more extremist Republicans, he never does so:

        a) without also tossing in some kind of criticism, either in the form of a false equivalency or simply a gross mischaracterization, of Democratic Party policy or Obama personally

        b) with any hint of suggestion that he’d ever vote for a Democrat versus the people he calls out for being incompetent, stupid, or crazy in his criticism

        • Banty

          I contend those are not reasonable requirements for him being “not tribal”. They don’t even make sense. Why would you practically require he be a Democrat? I don’t.

        • balconesfault

          I don’t insist he be a “Democrat”. For example, Bruce Bartlett clearly is not one – but you can read detailed criticisms of the GOPs economic policies by Bartlett that never once toss in the “but Democrats do …” line that Frum seems to compulsively include.

          Furthermore, if you’re committed to vote for a candidate from your party who you disagree with on 75% of issues, when they’re running against a candidate from the opposition party who you agree with on 75% of the issues, that’s kind of a definition of tribalist behavior.

          If Frum justified this by claiming it important to expand the GOP caucus in order for the current GOP agenda to succeed, that might even make some sense. But for the most part, Frum is OPPOSED to the current GOP agenda, which is kind of the point of this site – to change the current GOP agenda.

  • D Furlano

    IMHO you assumptions are totally incorrect. The ECB can fund anything it needs to without the effects that you describe. The only effect would be inflation if the ECB overloaded the economy with funds. And at this point that isn’t even a remote possibility.

    You offer no analysis just some hyperbolic rhetoric about debts and deficits. Economics and finance are the only disciplines that I know of that you can make the most asinine comments and no one holds you to what is said.

    Why can’t the ECB just issue funds and maintain a debt for as long as it needs? There is no logical answer to that question becasue it can as long as inflation is not an issue.

    • ottovbvs

      DFurlano: I largely agree. This is a mixture of truisms and hyperbole. Yes in the long run there have to be some transfer payments from Northern members of the Eurozone (principally Germany) to the south but since it’s they who have been the main beneficiaries of cash balance shifts this is not entirely illogical. But none of this is being “imposed” by European bureaucrats in Brussels. The process (as a cursory reading of the press over the last few months would indicate) is very much being dictated by the leading powers (who have the most to lose) in the Eurozone, principally Germany and France. As to whether the US is involved in this process we probably will be as we’re the lead player in the world bank and a major one in the IMF. American banks have some exposure to this problem (ask Morgan Stanley) so it behooves us to bail water out of the lifeboat just like everyone else.

  • zaybu

    Who is with me in predicting a double-dip recession/depression?

    • D Furlano

      I think a better measure will be unemployment. Lets be honest – it is not beneficial for either party to have a recession. But high unemployment is good for the Republicans.

      • zaybu

        I’m going with the standard definition of two down quarters of GDP for a recession. Right now, GDP is growing at a measly 1.2%. By next spring, it’s forecast to drop to a turtle pace of 0.5% growth. Considering the dark cloud hanging over Europe, I’m saying that the likelyhood of a double-dip recession/depression is much greater than 50%.

        • zaybu

          I’m not sure when that study was made. It reads:

          “The recovery in the United States has gained strength over the past 6 months and shows signs of becoming more self-sustaining. Significant gains in levels of manufacturing and services activity, business investment have helped to improve conditions in U.S. labor markets (employment has been growing by more than 115 thousand per month since March 2010, and the unemployment rate dropped to 9.1 percent as of May 2011). Following a relatively weak weather-influenced first quarter GDP results, and some flagging in the pace of the recovery in the second quarter, GDP growth is expected to pick up in the second half of the year, with whole year gains of 2.6 percent in 2011 and 2.9 percent in 2012, and with growth easing to 2.7 percent by 2013.”

          The 2.6% for 2011 is not what is happening. Most estimates of GDP growth for 2011 are around 1%.

        • D Furlano

          England has been stumbling along for 4 quarters (it can last like this for years) and I not seen any reports that shows the US economy heading into negative territory.

        • ottovbvs

          “I’m not sure when that study was made.”

          It’s the current one. Looks like the forecast was actually made in June 2011.

        • zaybu

          ottovbvs: It’s the current one. Looks like the forecast was actually made in June 2011.

          That was revised to 1.3%. I don’t see how we’re going to get to 2.6% by the end of this year.

        • ottovbvs

          “That was revised to 1.3%. I don’t see how we’re going to get to 2.6% by the end of this year.”

          All I’m doing is providing information from the WB home page. I’m not expressing an opinion on it one way or the other.

    • zaybu

      The questions: how long would that take before every government approves? And more importantly, will the Germans go for it?

      • D Furlano

        They are effectively out of options.

      • ottovbvs

        One can pose these rhetorical questions all day long. The answer is we don’t know. However, on the whole I don’t consider the German govt or indeed the govt’s of most major European countries to be particularly irrational and therefore assume some how or another they will muddle through to an appropriate response if for no other reason than that the re-election of the principals probably depends upon it. At the end of the day this is sausage making and trying impose tidy theoretical constructs upon it is not a particularly rewarding or illuminating activity.

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  • hisgirlfriday

    I hope this doesn’t come across as flippant, because I’m actually trying to pose a serious question here, but can someone at Frum Forum write a piece spelling out exactly why it’s actually in America’s interest for a still-strong euro to exist?

    I mean aside from the fact that we want European economic stability to ensure the overall economy doesn’t slip into global depression/global war like what happened in the chaos of the early 20th century. Now that’s a big reason to want a strong euro. I’m not disputing that…

    But that said, isn’t there something of an upside for America if the euro does fall apart?

    Because hasn’t the U.S.’s greatest source of strength and economic security in the world over the last several decades been the dollar hegemony as the world’s reserve currency? And hasn’t our strength and economic security been threatened precisely at the same time we’ve lost currency power to the euro?

    And also, I can’t help but wonder what would happen to the foreign capital hiding out in the Eurozone right now. If the Eurozone collapses, wouldn’t that be a good incentive for multinationals to bring that money back home to avoid the coming currency craziness and higher taxation to come out of Europe’s implosion, even if the U.S. doesn’t cough up a big repatriation tax benefit?

    Just wondering.

  • ottovbvs

    “been threatened precisely at the same time we’ve lost currency power to the euro?”

    How have we lost currency power to the Euro? It presents no serious threat to the dollar as the world’s reserve currency. You only have to look at current exchange rate movements to realize that.