Mr Geithner wants his European counterparts to help him maintain the facade that “liquidity” equals creating “money” out of thin air through the issuance of new debt paper and that the financial markets can be kept happy by covering their bets. The financial markets have literally bet the house on the promise that what they are “investing” in is too big to fail – or even go down in price on a long-term basis. The banks want to maintain the facade that they are doing their “jobs” as long as they keep accepting “free” money from their central banks and churning it through those same too big to fail investments. And the central banks, notably the Fed, want to maintain the fiction that “monetary policy” is a permanent road to real wealth. Mr Geithner’s European counterparts are balking at ALL this.
True, thus far they are doing it only in words and talk is notoriously cheap. But there is still no direct equivalent of a TARP program in Europe. There is no equivalent of an all encompassing debt instrument (like a US Treasury) coming out of Europe either. And unlike the US, Europe HAS put the brakes on their deficit spending rather than merely talk about it. The US is concerned that Europe is going into recession. If the US were to follow suit, the result would be identical. European spending is a pale shadow of US spending. ECB President Jean-Claude Trichet has stated that taking the Euro area as a whole, budget deficits are averaging 4.5 percent of GDP – less than half the US situation. No one has denied it.
As long as this disagreement lasts, there is some prospect of the debate reaching its fundamentals. Those fundamentals begin with the proposition that money and debt do NOT mix. The disastrous and decades- long attempt to pretend that they do is now unravelling on BOTH sides of the Atlantic. But only the Europeans are even making the right noises about getting to the heart of this matter. ACTION to fix the system will be prohibitively expensive, but there is no alternative. If there were, then Weimar Germany and modern Zimbabwe would be paragons of financial rectitude and REAL wealth.