We are in “July 2008” again, but this time it isn’t the investment banks melting down but the Euro-zone countries led by Greece. The EU and ECB intervention can be compared to the actions of Hank Paulson and Ben Bernanke in the months leading to the collapse of Lehman: back then, you will recall, the Fed and the Treasury Department had arranged the takeover of Bear Stearns and the U.S. government was investing in “the twins” – Fannie Mae and Freddie Mac – and preparing to make them full wards of government. “If you have a bazooka in your pocket and people know it, you probably won’t have to use it,” Paulson had told the Congress. But the panic continued unabated.
Now the EU and ECB have been waving a bazooka. But now as then everyone knows it is a borrowed one: the funds the EU is prepared to marshal are based on more debt and more borrowing. Now as then there is no psychological relief from the policymakers being on the case – there is just frantic concern from market participants that the problem may be beyond repair. In short, the sovereign debt crisis in Europe is going to get a lot worse.