By Simon Johnson
The eurozone financial situation continues to worsen. The latest idea from the eurogroup of finance ministers is apparently to have the European Central Bank make a massive loan to the International Monetary Fund, which would then turn around and lend to countries like Italy. This is a bizarre notion. If the IMF takes the credit risk of a mega-loan to Italy – e.g., an amount around the $600 billion mark, greater than the fund’s current lending capacity – this would represent an unprecedented and unacceptable risk to the IMF’s shareholders, including U.S. taxpayers. If the IMF does not take this credit risk, what’s the point? The ECB should provide financial support directly to Italy, if that is the goal.
But that goal increasingly seems both to be the only idea of officials and the last failed notion of a fading era. More bailouts and the reinforcement of moral hazard – protecting bankers and other creditors against the downside of their mistakes – is the last thing that the world’s financial system needs. Yet this is also the main idea of the Obama administration. Treasury Secretary Tim Geithner told the Fiscal Times this week that European leaders “are going to have to move more quickly to put in place a strong firewall to help protect countries that are undertaking reforms,” meaning more bailouts. And this week we learned more about the underhand and undemocratic ways in which the Federal Reserve saved big banks last time around. (You should read Ron Suskind’s book, Confidence Men: Wall Street, Washington, and the Education of a President, to understand Mr. Geithner’s philosophy of unconditional bailouts; remember that he was president of the New York Fed before become treasury secretary.)
Is there really no alternative to pouring good money after bad?
In a policy statement released this week, Governor Jon Huntsman articulates a coherent alternative approach to the financial sector, which begins with a diagnosis of our current problem: Too Big To Fail banks, Continue reading