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.

Irish Pockets Are Deep

If you thought we had it bad here in the US with the money possibly being given to shore up our own financial system, check out what the government of Ireland just did. That nation has guaranteed 400 Billion euros worth of assets in six of the nation's largest banks. To put that in perspective, that is several times Ireland's GNP.

Now, to be fair, this is not quite the same thing as is being proposed in America. For one thing, it's not actual money at this point. Irish Prime Minister Brian Cowen said "I have not given any money to any bank." This essentially seems to me to be the Irish creating their own emergency version of the Federal Deposit Insurance Commission (FDIC), in case one or more of the banks ends up failing. Ireland, by the way, is already officially in a recession, though the fact that we're not here in the USA points to the problems one gets when one starts using semantics that were made up a century ago.

Still, considering how much money this involves, it strikes me that basically the Irish financial system will be still be very messed up if a major bank fails, just in a different way. Yes, the depositors at the bank will get to keep their savings, but the Irish public will then be left with a heckuva bill. And what if it's more than one?

This brings me to a point I have been wanting to make about the situation here in the States. One of the reasons I have trouble buying this idea that we're on the verge of "another Great Depression" is because of the FDIC, which was made in response to the last Great Depression. What happened in 1929 was that, when the banks failed, people who had their money in those banks lost everything they had. Now, if a bank fails, as happened this week with Washington Mutual, the depositors don't lose their money because it's backed up (up to $100,000 per account) by the FDIC.

So even if banks start failing left and right, it won't hit the average Oklahoman the way it did in the Great Depression because they won't suddenly have "zero dollars," as Mastecard might say. The way it will affect everyone comes in terms of a lack of credit available, which may in turn lead to job losses. However, this is a definite step down in terms of degree.

As for Ireland, good luck with all that. The move has actually caused some controversy already within the EU. The French Finance Minister has said other member states should have had advance notice. After all, if you're going to do something with huge amounts of a currency, it's going to affect everyone who uses said currency. The European Union Competition Commissioner (I wonder what the equivalent USA job title would be?) basically said the same thing. In the meantime, President Sarkozy of France invited EU members to Paris this weekend for talks on the continuing world financial crisis.