Making something out of nothing: A turning point for Europe's standing in the world?

It was Europe's time to shine, and shine it did.

Europe's leaders should be lauded for their joint efforts to infuse banking systems with cash by nationalising important and responsible financial intermediaries - and without the tired partisan – albeit pre-election - bickering exhibited in Washington. Europe's response to the still-unfolding financial crisis is not only a vindication of sorts of Europe's steady financial acumen, it illustrates the strength of common purpose borne out of a common market. Interdependence, in this case, brought all parties to their best. And it was Gordon Brown's and Chancellor Angela Merkel’s schemes, not President George W. Bush's, that are setting an example.

Still, questions remain for whether the efforts to recapitalise banks address the underlying problem that created the mess. Flooding cash into a banking system that did not behave the last time money was cheap is like giving a drug addict even more of a fix. Still, leaders also understand the reality that, for the sake of households and businesses, the economy can't quit cheap cash “cold turkey.” Now, there is but one certainty: it's the risk analysts and credit rating agencies who will have any kind of job security in the credit-crunched months ahead.

Greenspan and Bernanke: Did they have a choice?

Much has been said about the lack of an evolved regulatory system to keep up with the evolution in financial markets, namely with investment banks and other non-depository lenders.

From my view as a layman, the biggest threat I see to the economy of the future is one in which the central bank has no effective control, a subject I hope to study further here in London. And I fear that while liberalized financial markets have allowed the United States and other countries to finance debt spending at low rates and encourage economic growth with freely flowing capital, central bankers may be losing the ability to predict and stop a collapse. Now, they are effective only when they mobilize in a reactive, not proactive, response.

For example, former Federal Reserve Chairman Alan Greenspan was forced to cut rates precipitously following September 11, 2001 and the concurrent recession. Greenspan was widely lauded as being an economic mastermind for his stewardship of the dot-com economy and the response to 9/11.

But it's now clear that his successor, Ben Bernanke, is dealing with the lagged impact of Greenspan's policies of loose credit in the waning years of Greenspan's term. Historically low interest rates contributed to the housing bubble that, in case you missed it, is blowing up.

To Greenspan's credit, he frequently criticized President Bush's deficit spending, the cause of the expansion of the United States' national debt and widening current account shortfall (and thus reliance on debt to sustain economic growth). But I don't think it is fair to blame Bernanke for the current crisis. He is simply dealing with the lagging effects of his predecessor's policies.

The key is -- did either Greenspan or Bernanke have a choice to make the interest rate decisions they made? Greenspan had no choice but to loosen credit after 9/11, and also to finance a growing debt that was rooted in a reckless fiscal policy. Bernanke has experienced much of the same; he has no choice but to offer this or that bailout, or extend credit to banks or companies, even if their executives still indulge in California resort retreats, to keep the system solvent. And now we have a power-in-waiting in China, which holds half a trillion dollars in American debt. What options do central bankers have? Are they merely guiding a system that is already on auto-pilot and out of their control?

The wheel keeps on spinning...

Some more news today:

On the heels of Germany's announcement over the weekend to guarantee all private savings, and potentially based on the bailout precedent set by the United States last week, the British government announced a massive bailout to help the banking system.

Meanwhile, the Nikkei average in Japan experienced its biggest drop since 1987, and Iceland is approaching bankruptcy. I guess that means no more Bjork...

Credit Crunch: The world's new soggy cereal

OK - I have some catching up to do. Like many of my self-initiated assignments, this blog started off with a momentous roar and then retreated with a whimper. Maybe it's that while I try to adjust to a new school and new city, the world is encountering new challenges each day that a word written about it in one minute is outdated the next.

We now know that the financial crisis is cascading to Europe, like a massive fan "wave" at a college football game. This really is the test of our time, perhaps more devastating than 9/11 in both its real economic and psychological impacts -- and the numbers are starting to come out as to what the impact on households will look like. It took America a couple of years to recover from 9/11, and it will likely take a lot longer when all the dust settles and the Congress settles on permanent legislation to regulate the evolving financial sector.

In one hour, the American presidential candidates will spar for the second of three times before Nov. 4, and for the first time since Gov. Sarah Palin accused Sen. Barack Obama of "palling with terrorists." It's an outrageous but certainly answerable claim, considering her source was The New York Times, which, undoubtedly to the dismay of the Obama campaign, Gov. Palin (or her speechwriters) most likely was reading for the first time when the article appeared.

Those are my "brain droppings" (RIP George Carlin) for now. Check back for a couple write-ups soon on recent lectures I attended here at the LSE. This truly is an amazing place; 160 countries represented, and lectures and professors that cover almost everything under the sun.