Tuesday, September 4, 2012

Europe Needs a Sheriff

In "Too Big Too Fail," Andrew Ross Sorkin's play-by-play account of the 2008 financial crisis, Sorkin includes a scene that seems slightly out of place: a phone call between Hank Paulson and Steve Schwarzman, the CEO of Blackstone Group. The phone call is not, like most recounted in the book, a call to arrange a multi-billion dollar merger or report impending bankruptcy, and Schwarzman himself is only a minor player in the crisis, but in that call he gives Paulson an invaluable piece of advice:

 "You have to approach what you’re doing from the perspective of being a sheriff in a western town where things are out of control, and you have to do the equivalent of just walking onto Main Street and shooting your gun up in the air a few times to establish that you’re in charge because right now no one is in charge!"

Thankfully, our sheriff is unlikely to be Clint Eastwood

Like frontier towns, economies can behave well or behave badly. The townspeople of a well-behaved economy obey the law, trade fairly, and trust that their neighbors will repay their debts, keeping faith that even if a bad harvest means a missed payment, their neighbor will do the best he can to keep his word. Contrary to the myth of the Wild West, there is evidence that well-behaved towns like these actually existed, built on a commitment to community that in uncertain times and uncertain places was essential to survival.

 In a badly behaved economy, the townspeople make threats in the saloon and carry guns everywhere they go to ensure that debts, monetary or otherwise, are paid. Ruffians tussle in the street and every house has a secret hoard and a getaway horse. Towns like these don't last long: sooner or later, they end up full of ghosts.

Europe is behaving badly. Neighborly trust has evaporated, the strong are arming themselves for self defense, and the PIGS are begging in the saloon for a bit of slop. The PIGS are penniless and (perhaps I take the metaphor too far) their cattle are suffering, and the entire town will regret when the herd comes to market sickly and underfed. Greece borrowed unwisely, yes, but the evaporation of credit is hurting Europe far more than a fiscal default.

The team of US Marshalls (Ben Bernanke, Tim Geithner, and the rest) has kept this town in better order the town on the other side of the river, but they too are losing authority. Today I received a message from Marc Chaikin that said “Bernanke has spoken. And the markets shrugged.” Come time of trouble, I’m afraid this sheriff won’t be able to keep the peace.

 If there's one thing I know about Westerns, it's that the "sheriff" is rarely who you would expect. Maybe it's a mysterious lone gunman who rides into town and shoots the bad guy, restoring order and letting the town get back business as usual. Maybe it's a former criminal who's seen the error of his ways and chooses to step up and do what's right. Maybe it’s the underdog, a blunderer who no one expects anything of.

When trouble came in 2008, Hank Paulson was not the sheriff. The US Secretary of the Treasury is an important post, yes, but dealing with a banking crisis is more naturally the responsibility of the chairman of the Federal Reserve, and could have just as easily been Sheila Blair, the chairwoman of the Federal Deposit Insurance Corporation (FDIC), or Christopher Cox, the chairman of the Securities and Exchange Commission (SEC), or even President George W. Bush. Paulson became the sheriff because he accepted the task, and he was one who saved the world from a second Great Depression (even if he didn't save it as well as perhaps he could have). Paulson did not have the powers of a sheriff, he had cell phone and a will, which he used to maneuver several mergers and push a giant bailout through Congress, the shots that the economy needed to hear to settle down.

Analysts have gone on and on about how Europe is in trouble because the European Union does not have appropriate mechanisms in place for dealing with a crisis. It's true. When times were good the happy town forgot to appoint a sheriff, and now that times are bad, they don't where too look. So who will be Europe’s sheriff? Angela Merkel? Mario Draghi? A key investor, playing the role Warren Buffet has sometimes played in US markets? Or an unknown, about to be appointed or elected in a PIGS’ political tinderbox? Whoever you are, I hope you step up soon, because that town needs some help.

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