Obama Vs. Europe: The Week's Most Important Economic Showdown

[Kurt_and_Hunter]

Obama Vs. Europe: The Week's Most Important Economic Showdown
by Simon Johnson

The G20 plot so far is as follows. When the financial crisis really hit home around the world, last October, leading European governments cast around for someone to blame, as well as a way to name and shame that person/country--they remain eager to hide the role of their own willful lack of preparation and pervasive regulatory failures. The obvious culprit was the United States, and the means was convening a first-ever G20 heads of government meeting in Washington. In the words of the French delegation, "We put the bell on the American cat."

But where were the policies designed to lead us out of the crisis? These were not forthcoming from the European side or, back in November, from the outgoing American administration. Even today, the European position is that we should clamp down on regulations, ignoring the fact that the crisis was due not to a lack of regulation but rather the failure of regulators to stand up to powerful banks. And clamping down on credit today is a sure way to deepen the recession. Think about it: Will banks lend more or less if there is a government bank supervisor breathing down their necks?

The Obama administration has countered with an aggressive push towards more fiscal stimulus around the world. This is not a crazy idea under the circumstances, but--perhaps due to lack of time--the diplomatic ground work was not done, and the European response is a cacophony of "no" in a variety of accents.

All of this leaves us with just one major topic around which there can be agreement: the IMF. And the nature of this agreement comes down to how much money the IMF can lend out to countries that are under pressure or already in deep water. You may like or hate the IMF (full disclosure: I was its chief economist through August 2008), but remember this--when everything goes really bad, if you can't borrow from the IMF, then things get much worse. IMF lending capacity currently stands at a mere $250 billion (no typo), an insufficient amount in a world of trillion dollar problems, and it can only be increased if member countries agree. (snip)

http://www.tnr.com/politics/story.html?id=694235dc-12f9-4e4d-8007-63bad0b6a35b