By Thomas Cooley, Paganelli-Bull Professor of Business and International Trade, Matthew Richardson, Charles E. Simon Professor of Applied Economics, Sidney Homer Director, Salomon Center for Research in Financial Institutions and Markets and Professor of Finance & Kermit Schoenholtz, Professor of Management Practice and Director of the Center for Global Economy and Business
A finger in the dike won’t solve the euro crisis.
The central banks’ move last week to provide dollar liquidity for the world financial system was greeted by markets with euphoria. But it only underscores the seriousness of the threat of renewed financial paralysis emanating from the euro zone. A new financial seize-up could overwhelm Europe, the United States and many other countries. Far more decisive political action is needed to pull the euro area back from the precipice.
But, what would decisive political action look like?
Here is one example:
In 1790, the fledgling United States government faced a problem that had crucial similarities to the one Europe now confronts. The 13 colonies had emerged from the Revolutionary War with significant debts that were distributed unequally among them.
Alexander Hamilton, the first Treasury secretary, argued strongly for “Assumption” – that the federal government should assume and honor the debts of all the states, financing them by issuing federal bonds and raising tariffs and excise taxes. Virginia, like Germany today, did not have a debt problem of its own, having retired most of it.
Read full article as published on Politico