Source: Keith Hennessey, Posted Dec 7, 2011
About: Keith Hennessey
This post is for Americans who know nothing about the debt crisis in Europe. I am going to try to provide a big picture framework and draw attention to what I think should matter most to Americans. If you have expertise in this topic I hope you’ll help me improve my analysis. This topic is somewhat new for me.
I think of the European debt crisis in three layers:
- national debt crises in several European countries;
- a structural crisis of the Eurozone; and
- potential banking crises in Europe and the U.S.
At the same time the U.S. Fed is requiring the biggest banks to test a scenario in which U.S. GDP declines eight percent and the unemployment rate jumps to 13%. I hope they are also requiring the American banks to prove they can survive if their European counterparts fail or if liquidity suddenly dries up. These stress tests, and corrective actions demanded of any American banks that fail the tests, are the most important thing American policymakers can do now to protect the American economy from the worst case scenarios in Europe.
From an American economic self-interest perspective, this bottom layer of the European debt crisis is by far the most important. If events in Europe could cause American banks to fail, American policymakers need to know this and deal with it before disaster strikes.
(Hat tip to the students in my Stanford Business School class who have been helping me learn and think about the European crisis and how to explain it.)
