Tuesday, June 12, 2012
How Not to Solve a Crisis
New York Times
June 11, 2012
There is a delicious moment in the HBO film Too Big to Fail when Christine Lagarde, then France’s minister of finance, calls Hank Paulson, the U.S. Treasury secretary. It’s September 2008, and Lehman Brothers has just imploded after the government refused to bail it out. Panic is in the air.
“Hank,” she scolds him. “How could you let Lehman fail? What on earth were you thinking?” She pleads with him to save A.I.G., which appears to be the next domino poised to fall. “This is not just an American problem,” she concludes. (Note: I served as a consultant on the movie.)
Oh, the irony! Here we are, more than three-and-a-half years later, during which time the euro zone has repeatedly flirted with financial catastrophe. Lagarde now leads the International Monetary Fund, which exists, in large part, to help countries survive such catastrophes. Yet neither she nor anyone else in Europe has been willing or able to do more than use Band-Aids to stanch the bleeding.
A euro-zone meltdown, if it comes to that, would be devastating to the already battered economies of Europe, leading to widespread credit contraction, mass unemployment and depressed economies across the Continent. But it would undoubtedly take a toll on our economy as well — and it would be a huge blow to President Obama’s re-election prospects. To paraphrase Lagarde, this is not just a European problem.