By Simon Johnson
Eighteen months ago, on October 24, 2008, Peter Boone, James Kwak and I published an opinion piece in the Guardian (UK), “Start by Saving the Eurozone“. We argued that the recession would put a great deal of pressure on the eurozone, because of flaws in its design.
Our proposals for addressing these issues, and preventing a broader global crisis, included:
“2. Create a European Stability Fund with at least €2tn of credit lines guaranteed by all Eurozone member nations and potentially other European countries with large financial systems such as Switzerland, Sweden and the UK. This fund should provide alternative financing to member countries in case market rates on their government debt become too high. This will prevent a self-fulfilling cycle of rising interest rates. The fund should be large enough to have credibility; countries could access the fund automatically, but should then adopt a 5-year program for ensuring financial stability, subject to peer review within the Eurozone.”
It’s unfortunate that policymakers – in Washington, Brussels, and pretty much everywhere else – ignored this suggestion until just now. But this tells you a great deal about what it takes to change any part of our economic system. It’s only in the face of great crisis and the potential breakdown of financial markets that US and European authorities are willing to act.
The good news is that change happens. The bad news is that because leading governments are unwilling even to seriously discuss difficult economic scenarios (“too radical”, “don’t rock the boat”, “powerful interests are opposed”), when they bring in new policies there is a great deal of improvisation and major mistakes are entirely possible. “Change only when we must” is a dangerous approach – see Hank Paulson in September 2008 (Lehman allowed to fail; AIG “saved” after a fashion; TARP proposed without any oversight, etc.)
And this is exactly why our seriously dysfunctional megabanks – in the US and in Europe – are not being “fixed”. When the crisis breaks, people like Tim Geithner and Larry Summers say it would be too dangerous to even fire some boards of directors, let alone change CEOs in top banks. The anti-crisis improvisations focus in Europe – as they did under Mr Geithner’s direction here – on “just save the big banks, as is.”
But after you save the banks, they again become so politically powerful that they fight hard to block serious reform. They already turned back the effort to really limit their scale – the Brown-Kaufman amendment, defeated last week. And now they are striving to prevent effective restrictions on their scope – the Merkley-Levin amendment (supported in principle by Paul Volcker, the White House, and the president, coming up this week): press release; amendment text; WSJ story.
If you don’t fix the system now, you’ll have another major crisis – and then you likely won’t fix the system again.