As much as I would like to write about all of the other crazy things that are going on, the European banking thing is the gift that keeps on giving.
Now of course, the Obama administration is stepping up efforts to push Europe to deal with this debt crisis, so that he won’t have to just 5 months prior to the election. Actually, what he is trying to avoid is dealing with the pressures on the US banking system as they build to a crescendo more like 3 months prior to the election.
If the clowns in the Romney camp had any brains, they would be building a huge media plan focused on “How Obama got us into this mess.”
So, hoping to avoid a similar disaster to 2008, the administration is holding private meetings, urging officials in the 17-nation euro zone to take swifter action to calm markets, reassure depositors about their banks’ health, and prevent some of Europe’s largest countries from suffocating under high borrowing costs and weak economic growth.
They think that the lessons learned from the 2008 financial crisis includes acting quickly and decisively to stabilize the financial system and prevent investor panic.
As an example, the administration wants Europe to use the continent’s rescue fund— now around €700 billion ($866 billion)—to provide assistance to governments struggling with soaring borrowing costs. Allowing the rescue fund to directly recapitalize banks, instead of forcing the struggling governments to borrow first from the rescue fund, would help prevent bank failures and enable the banks to continue lending, which would help support economic growth, the officials believe. Under this approach, the governments wouldn’t have to boost their own debt loads by borrowing from the fund.
How this works, by the way, is that the U.S. yells directly at the International Monetary Fund, in which it is the largest shareholder. The IMF has been urging Europe to use the rescue fund for that purpose, but the idea is opposed by Germany because they rightfully fear they will be left holding a huge bag of defaults.
The administration has also pushed Europe to build a larger rescue fund, or so-called firewall, believing a bigger war chest would ease investors’ concerns about governments beyond long-troubled Greece. But, that won’t work this time as investors are now much more cynical than they were in 2007, and they no longer trust governments to get their bailouts right.
And, to further complicate the situation, (as we have faithfully reported here) risks are rising that the financial turbulence in Spain—Europe’s fourth-largest economy—could deepen even before Greek voters go to the polls in two weeks to decide their fate in the currency union.
On Wednesday, Mr. Obama and leaders from Germany, France and Italy held an hour-long videoconference to discuss the euro-zone crisis, following up on a meeting of the Group of Eight major advanced economies hosted by the White House just one week ago.
These meetings were planned before Spain’s borrowing costs shot up this week. But they underscored the administration’s rising worry about how the euro-zone crisis could drag down the weak U.S. recovery for the third straight spring.
In a Gallup poll released Thursday, 71% of Americans said they are at least somewhat concerned about the effect of the European financial crisis, but only 16% said they understood the danger to the US markets . The data suggested worries could rise as the troubles weighed on U.S. markets and gained more attention in the U.S. Among the 16% of people who said they are paying very close attention to the news about Europe’s financial situation, 95% said they are concerned. Unfortunately, that still means only 15% of the US population is concerned about this very serious and impossibly huge disaster waiting just off-shore.
What those 15% fear is that a cascading crisis across the European banking system, triggered by Spain, or Greece, or another unseen banking revelation, could cross the Atlantic and hit the U.S. financial system. As we said in a prior post, we have a $39 billion KNOWN exposure to the European banks. Almost any result imaginable will translate into less business investment and hiring and less bank lending, triggering yet another, and deeper recession.
I love him, but this one will belong exclusively to Obama. Better act NOW.