We’ve passed banks, savings & loans, and assorted financial institutions in France over the last couple of weeks, and have detected no lines queuing up to withdraw deposits. It was the same early this year, when Societe Generale famously lost some 5 billion Euros when a young trader overstepped his authorized gambling of tens of billions in a volatile market.
Early on – that is, when the US sub-prime crisis finally started to directly affect European banks mere weeks ago – a strange thing happened: a president appeared on national TV and spoke reassuringly to his audience. President Nicolas Sarkozy may be childishly hyperactive and may have an overly developed liking for bling and glitz, but he is an avowed capitalist. On that there can be little doubt. So his jawboning reassurance that no French citizen would lose a Euro cent should their bank fail – beyond the already guaranteed 70,000 Euros per account – came as welcome balm to worried depositors. France’s deposit guarantee has now been echoed by a number of other European governments.
Contrast this with our dithering MBA President, whose inaction in the first year and a half of the US sub-prime crisis guaranteed that when action finally came, in the form of the $700 billion bailout, it would be both massive and of questionable value. We know what the $700 billion will NOT do (allow people to stay in their homes or to get them back), but there’s very little confidence in what the hundreds of billions are supposed to accomplish – or in whose pockets they will eventually wind up. And, as Paul Krugman says today in the NYT, even Treasury Secretary Paulson is having second thoughts about how and where to apply the $700 billion. (Update: congratulations, Dr. Krugman, on your Nobel Prize in economics!)
Certain American practices and ideas make their way across the Atlantic when prudence would dictate that they stay where they are. In the real estate game, I wish, for example, that cheap wood frame housing had stayed in the US, where American habits of frequent moves, fixer-upper starter homes, and built-in obsolescence seem to be an established pattern. In France and throughout much of Europe, houses were built to last: cement, brick, or stone walls, tile or slate roofs. People saved, built, and bought, and borrowing was a serious affair, with no thought of your local bank manager selling off your mortgage to “Joe’s Discount Sub-Primes” on Wall Street.
There’s no guarantee that Sarkozy’s jawboning about guarantees will work any magic. Contrary to mantras recounted in the French media by “experts,” France is not surrounded by virtual walls of financial security, like Asterix’s Gaulois village against Rome’s encroachment. It is very much a global player, with large inflows and outflows of investment, both financial and tangible. At least Sarkozy, in his current role as President of the EU Council until the end of 2008, has a larger stage on which to attempt to inspire confidence.
Charismatic Sarkozy had the sense to invite the stolidly uncharismatic Gordon Brown to yesterday's Eurozone summit in Paris, tribute to the former Chancellor of the Exchequer who has gotten kudos from a wide variety of analysts, including Wolfgang Munchau ("Brown Offers Europe a Lesson in Leadership") in the Financial Times: "The UK bank recapitalisation scheme was the first useful contribution politics has made since the crisis broke out 14 months ago."
But there's no guarantee - despite the hundreds of billions in guarantees - that the markets will settle down. Martin Rowson's cartoon in today's Guardian captures it well: Monday morning in the asylum, with world leaders readying the aspirin for the inmates.
When and if the financial dust settles, we will hear much about the future of market capitalism, and some will paraphrase Churchill's defense of democracy to say that "capitalism is the worst form of economy except all those other forms that have been tried." Perhaps. But one thing will be abundantly clear: laissez faire is over, in fact and as a theory. Government is good again.