Best... Day... Ever

Yes, the Dow Jones average had its largest single-day point gain yesterday, with news of a “new bailout” that involves the government directly investing in various troubled banks. The Bush administration announced the plan yesterday, which involves $250 billion on top of the $700 billion already funneled to financial firms, as well as additional guarantees of bank transactions from the FDIC. Bush himself argued that the move is “essential so that the free market can continue to function,” though grumbling from some conservative allies suggested that the government might essentially be destroying the free market in order to save it. The markets gained back about a third of what they lost last week.

Of course, the untold story if you read US newspapers and websites is that the markets weren’t necessarily reacting to something the US government did… the markets these days are global, and the huge groundswell was already building through the day around the world. It began because European leaders agreed on their own bank protection plan, which the US plan basically copied. The Europeans had no compunctions on what they were doing, calling this a “re-nationalization.” The big winner appeared to be French President Nicolas Sarkozy, who managed to get the various interested parties to stop yelling at each other long enough to broker a deal.

The European leaders emphasized that “no bank will be allowed to fail,” and vaguely implied criticisms that the expensive US bailout was both late-arriving and ineffective. The French Financial Minister basically said that she would never have let Lehman Brothers fail on her watch. If you take a look at the history of the past couple decades, European nations have a varied history with nationalized banks, ranging from the catastrophe that was France’s governmental involvement with Credit Lyonnais to the unqualified success of the Swedish nationalization of its financial industry. However, this is different from those past experiences because it involves every EU nation rather than individual nations acting on their own. It seems to be what many economists were calling for all along and has certainly had the success in drawing a market reaction that the initial reveal of the so-called “Paulson Plan” did not.

One interesting aspect of this crisis may be the continued emergence of the EU as a modern superpower. Many in the United States still think of ourselves as the world’s only superpower, but that’s certainly not the case in an economic sense, and that may be the most important one. The EU and China have made massive strides in recent years, to the point where the EU economy may be smaller but better managed, and the Chinese economy is large enough for that nation to start running foreign policy based on monetary aide. I asked a week or so ago what the big change that comes out of the current financial crisis will be, and it may end up being American recognition of the EU as a collective power on the world stage.